**As filed with the Securities andExchange Commission on March 14, 2006**

** **

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington D.C. 20549**

 

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** **

**FORM 20-F**

 
| o                                               | **REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)  OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------|-------------------------------------------------------------------------------------------------------|
|                                            | ** **                                                                                            |
| **OR**                                          |
| ** **                                      |
| ý                                          | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**             |
|                                            | ** **                                                                                            |
| **For the Fiscal Year Ended December 31, 2005** |
| ** **                                      |
| **OR**                                          |
| ** **                                      |
| o                                               | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |
|                                            | ** **                                                                                            |
| **OR**                                          |
| ** **                                      |
| o                                               | **SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |
|                                            | ** **                                                                                            |

**Commission file number:1-15050**

----

**BASF AKTIENGESELLSCHAFT**

**(Exact Name of Registrant as Specified in Its Charter)**

**BASF CORPORATION***

**(Translationof Registrant’s name into English)**

 
| **Federal Republic of Germany  (Jurisdiction of incorporation or organization)** | ** ** | **Carl Bosch Strasse 38  Ludwigshafen, GERMANY 67056  (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 ordinary shares of no par value** |       | **New  York Stock Exchange**                   |
|                                                                              |       |                                           |
| **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 for which there is a reporting obligation pursuant toSection 15(d) of the Act:**

**None(Title of Class)**

**Indicate the number of outstanding shares of each of the issuer’sclasses of capital or common stock as of the close of the period covered by theannual report.**

 

**As of  December 31, 2005, therewere 514,379,000 BASF ordinary shares of no par value outstanding.**

 

----

 

**Indicate by check mark if the registrantis a well-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct.**

** **

**Yes ****ý  No ****o**

** **

**If this report is an annual ortransition report, indicate by check mark if the registrant is not required tofile reports pursuant to Section 13 or 15(d) of the Securities ExchangeAct of 1934.**

** **

**Yes ****o  No ****ý**

** **

**Note—checking the box above willnot relieve any registrant required to file reports pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 from their obligationsunder those sections.**

** **

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

** **

**Yes ****ý  No ****o**

** **

**Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):**

** **
| **Large accelerated filer**ý | ** ** | **Accelerated filer**o | ** ** | **Non-accelerated filer**o |
|-----------------------------------|------------|------------------------|------------|----------------------------|

 

**Indicate by check mark whichfinancial statement item the registrant has elected to follow.**

** **

**Item 17****o Item 18****ý**

** **

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

** **

**Yes ****o  No ****ý**

** **

 
| ** ** | *****  | **BASF Corporation is also the name  of a wholly owned subsidiary of the Registrant in the United States.** |
|------------|--------|-------------------------------------------------------------------------------------------------------------|
| ** ** | ****** | **Not for trading, but only in  connection with the registration of American Depositary Shares.**           |

 

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BASFAktiengesellschaft is incorporated as a stock corporation organized under thelaws of the Federal Republic of Germany. As used in this Annual Report, “BASFAktiengesellschaft” refers solely to the ultimate parent company of the BASFGroup. “BASF” refers to BASF Aktiengesellschaft and its consolidatedsubsidiaries.

 

TheConsolidated Financial Statements of BASF are based on the InternationalFinancial Reporting Standards (IFRS) and its interpretations issued by theInternational Accounting Standards Board (IASB). 

 

Thereconciliation of significant deviations to U.S. generally accepted accountingprinciples (U.S. GAAP) is described in Note 5 to the Consolidated FinancialStatements included in Item 18.

 

Thetranslation of euros into dollars has been made solely for the convenience ofthe reader at the noon buying rate of the Federal Reserve Bank of New York (the“Noon Buying Rate”) on December 31, 2005, which was U.S. $1.1842 = €1.00.No representation is made that such amounts in euros could have been or couldbe converted into dollars at that or any other exchange rate on such date orany other dates.

 

**Forward-Looking Information May Prove Inaccurate**

 

ThisAnnual Report contains certain forward-looking statements and informationrelating to BASF that are based on the current expectations, estimates andprojections of its management and information currently available to BASF.These statements include, but are not limited to, statements about BASF’sstrategies, plans, objectives, expectations, intentions, expenditures, andassumptions and other statements contained in this Annual Report that are nothistorical facts. When used in this document, the words “anticipate,” “believe,”“estimate,” “expect,” “intend,” “plan,” and “project” and other similarexpressions are generally intended to identify forward-looking statements.

 

Thesestatements reflect the current views of BASF with respect to future events.They are not guarantees of future performance and involve certain risks anduncertainties that are difficult to predict. In addition, certainforward-looking statements are based upon assumptions as to future events that may notprove to be accurate.

 

Manyfactors could cause the actual results, performance or achievements of BASF tobe materially different from any future results, performance or achievementsthat may be expressed or implied by such forward-looking statements. Thesefactors include, among others:

 

•                  changes in general political, economic andbusiness conditions in the countries or regions in which BASF operates;

 

•                  changes in the laws or policies ofgovernments or other governmental or quasi-governmental activities in thecountries in which BASF operates;

 

•                  changes in the composition of BASF Groupcompanies, joint venture activities, divestitures, and the successfulintegration of acquisitions;

 

•                  increased price competition and theintroduction of competing products by other companies;

 

•                  the ability to develop, introduce and marketinnovative products and applications;

 

•                  the length and depth of product and industrybusiness cycles, particularly in the automotive, construction, electrical andtextile industries;

 

•                  changes in the demand for, supply of, andmarket prices of crude oil, refined products, natural gas and petrochemicals,including changes in production quotas in OPEC countries and the deregulationof the natural gas transmission industry in Europe;

 

•                  the cost and availability of feedstock andother raw materials, including naphtha, and the price of steam crackerproducts;

 

•                  the ability to pass increases in raw materialcosts on to customers;

 

•                  changes in the degree of patent and otherlegal protection afforded to BASF’s products;

 

•                  regulatory approval, particularly in theareas of fine chemicals, agricultural products and plant biotechnology, andmarket acceptance of new products including genetically modified competitiveproducts;

 

2

----

 

•                  unexpected negative results from research anddevelopment and testing of current product candidates;

 

•                  the ability to maintain plant utilizationrates and to implement planned capacity additions and expansions;

 

•                  the ability to reduce production costs byimplementing technological improvements to existing plants;

 

•                  the existence of temporary industry surplusproduction capacity resulting from the integration and start-up of newworld-scale plants;

 

•                  potential liability resulting from pending orfuture litigation, including litigation and investigations relating toantitrust violations in the vitamins business until early 1999;

 

•                  potential liability for remedial actionsunder existing or future environmental regulations;

 

•                  changes in currency exchange rates, interestrates and inflation rates; and

 

•                  changes in business strategy and variousother factors referenced in this Annual Report.

 

Manyof these factors are macroeconomic in nature and are, therefore, beyond thecontrol of BASF’s management. Should one or more of these risks oruncertainties materialize, or should underlying assumptions prove incorrect,actual results may vary materially from those described herein asanticipated, 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**

 
| ** **   | ** ** | ** **                                                                        | **Page**   |
|--------------|------------|-----------------------------------------------------------------------------------|------------|
|         |       | **PART I**                                                                   | ** ** |
|         |       | ** **                                                                        | ** ** |
| **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                                                         | 50         |
|         |       | 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                                                  | 72         |
|         |       | Exchange  Rate Exposure and Risk Management                                       | 77         |
|         |       | Research and Development                                                          | 78         |
|         |       | Commitments                                                                       | 79         |
| **Item 6.**  | ** ** | **Directors,  Senior Management and Employees**                                   | **80**     |
| **Item 7.**  | ** ** | **Major  Shareholders and Related Party Transactions**                            | **92**     |
| **Item 8.**  | ** ** | **Financial  Information**                                                        | **93**     |
| **Item 9.**  | ** ** | **The Offer and Listing**                                                         | **96**     |
| **Item 10.** | ** ** | **Additional  Information**                                                       | **99**     |
| **Item 11.** | ** ** | **Quantitative  and Qualitative Disclosures About Market Risk**                   | **104**    |
| **Item 12.** | ** ** | **Description  of Securities Other than Equity Securities**                       | **116**    |
| ** **   | ** ** | ** **                                                                        | ** ** |
| ** **   | ** ** | **PART II**                                                                  | ** ** |
| **Item 13.** | ** ** | **Defaults,  Dividend Arrearages and Delinquencies**                              | **117**    |
| **Item 14.** | ** ** | **Material  Modifications to the Rights of Security Holders and Use of Proceeds** | **117**    |
| **Item 15.** | ** ** | **Controls and  Procedures**                                                      | **118**    |
| **Item 16.** | ** ** | **A Audit  Committee Financial Expert**                                           | **121**    |
| ** **   | ** ** | **B Code of Ethics**                                                              | **121**    |
| ** **   | ** ** | **C Principal  Accountant Fees and Services**                                     | **121**    |
| ** **   | ** ** | **D Exemptions  from the Listing Standards for Audit Committees**                 | **122**    |
| ** **   | ** ** | **E Purchases  of Equity Securities by the Issuer and Affiliated Purchasers**     | **122**    |
| ** **   | ** ** | ** **                                                                        | ** ** |
| ** **   | ** ** | **PART III**                                                                 | ** ** |
| **Item 17.** | ** ** | **Financial  Statements**                                                         | **F-1**    |
| **Item 18.** | ** ** | **Financial  Statements**                                                         | **F-1**    |
| **Item 19.** | ** ** | **Exhibits**                                                                      | **E-1**    |

 

4

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**PART I**

 

Item 1.            Identity ofDirectors, Senior Management and Advisers

 

Not applicable.

 

Item 2.            OfferStatistics and Expected Timetable

 

Not applicable.

 

5

----

 

Item 3.                                     Key Information

 

**SELECTED FINANCIAL DATA**

 

Thefollowing selected financial data for the years 2005 and 2004 are excerptedfrom the Consolidated Financial Statements of BASF, which have been audited byDeloitte & Touche GmbH, independent accountants during this period.Starting from January 1, 2005 the accounting and reporting of the BASFGroup is performed according to International Financial Reporting Standards(IFRS). Figures for 2004 have been restated accordingly. For furtherinformation, please see Note 3 of Item 18. Selected data are also provided inaccordance with U.S. GAAP for the 2001 through 2005 reporting periods.

 

BASF’saccounting and valuation methods conform to U.S. GAAP to the extentpermissible under IFRS. See Notes 1 and 5 to the Consolidated FinancialStatements in Item 18 for further information. The selected financial datapresented below in accordance with U.S. GAAP for the years 2004 and 2005 havebeen derived from the Consolidated Financial Statements included in Item 18.Data for 2001, 2002, and 2003 have been derived from prior years statements.The reconciliation of the differences between IFRS and U.S. GAAP is describedin Note 5 to the Consolidated Financial Statements included in Item 18.

 

Thetranslation of euros into U.S. dollars for 2005 has been made solely for theconvenience of the reader at the noon buying rate of the Federal Reserve Bankof New York (the “Noon Buying Rate”) on December 31, 2005, which was U.S.$1.1842 = €1.00. No representation is made that such euro amounts could havebeen or could be converted into dollars at that or any other exchange rate onsuch date or any other dates.

 

6

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| ** **                                                                           | ** ** | **2005**                                                                                                             | ** ** | **2005**     | ** ** | **2004**     | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                                                                           | ** ** | **(Million € and Million $, except per share  data and certain other data)** | ** ** |
| **Income  Statement Data**                                                           |       |                                                                                                                 |       |         |       |         |       |
| **IFRS**                                                                             |       |                                                                                                                 |       |         |       |         |       |
| Sales, net  of natural gas taxes                                                     |       | $50,619                                                                                                              |       | €42,745 |       | €37,537 |       |
| Gross profit  on sales                                                               |       | 15,605                                                                                                               |       | 13,178       |       | 11,815       |       |
| Income from  operations                                                              |       | 6,904                                                                                                                |       | 5,830        |       | 5,193        |       |
| *Thereof  special items*                                                             | * *   | *(365)*                                                                                                              | * *   | *(308)*      | * *   | *(37)*       | * *   |
| Financial  result                                                                    |       | 114                                                                                                                  |       | 96           |       | (846)        |       |
| Income before  taxes and minority interests                                          |       | 7,018                                                                                                                |       | 5,926        |       | 4,347        |       |
| Income  before minority interests                                                    |       | 3,752                                                                                                                |       | 3,168        |       | 2,133        |       |
| Net income                                                                           |       | 3,561                                                                                                                |       | 3,007        |       | 2,004        |       |
| Basic  earnings per share                                                            |       | 6.79                                                                                                                 |       | 5.73         |       | 3.65         |       |
|                                                                                 |       |                                                                                                                 |       |         |       |         |       |
| **Balance  Sheet Data**                                                              |       |                                                                                                                 |       |         |       |         |       |
| **IFRS**                                                                             |       |                                                                                                                 |       |         |       |         |       |
| Long-term  assets                                                                    |       | 24,326                                                                                                               |       | 20,543       |       | 20,518       |       |
| Short-term  assets                                                                   |       | 17,914                                                                                                               |       | 15,127       |       | 14,930       |       |
| **Total  assets**                                                                    | ** ** | **42,240**                                                                                                           | ** ** | **35,670**   | ** ** | **35,448**   | ** ** |
| Stockholders’  equity                                                           |       | 20,751                                                                                                               |       | 17,523       |       | 16,602       |       |
| *Thereof  subscribed capital*                                                        | * *   | *1,560*                                                                                                              | * *   | *1,317*      | * *   | *1,383*      | * *   |
| Long-term  liabilities                                                               |       | 11,560                                                                                                               |       | 9,762        |       | 10,372       |       |
| Short-term  liabilities                                                              |       | 9,929                                                                                                                |       | 8,385        |       | 8,474        |       |
| **Total  stockholders’ equity and liabilities**                                 | ** ** | **42,240**                                                                                                           | ** ** | **35,670**   | ** ** | **35,448**   | ** ** |
| ** **                                                                           | ** ** | ** **                                                                                                           | ** ** | ** **   | ** ** | ** **   | ** ** |
| **Capital  Expenditures and Depreciation**                                           |       |                                                                                                                 |       |         |       |         |       |
| Additions to  intangible assets and property, plant and equipment                    |       | 2,988                                                                                                                |       | 2,523        |       | 2,163        |       |
| Amortization  of intangible assets and depreciation of property, plant and equipment |       | 2,846                                                                                                                |       | 2,403        |       | 2,492        |       |
|                                                                                 |       |                                                                                                                 |       |         |       |         |       |
| **Key  Ratios**                                                                      |       |                                                                                                                 |       |         |       |         |       |
| Return on  sales (%) (1)                                                        |       | 13.6                                                                                                                 |       | 13.6         |       | 13.8         |       |
| Return on  assets (%) (2)                                                       |       | 17.7                                                                                                                 |       | 17.7         |       | 13.2         |       |
| Return on  equity after taxes (%) (3)                                           |       | 18.6                                                                                                                 |       | 18.6         |       | 12.9         |       |

 

----

(1)          Return on sales (%) is calculated bydividing income from operations by net sales. This ratio is synonymous withoperating margin.

 

(2)          Return on assets (%) is calculated bydividing income before taxes and minority interests plus interest expenses bythe average amount of total assets of the current and the previous year.

 

(3)          Return on equity after taxes (%) iscalculated by dividing net income, excluding extraordinary income after taxes,by the average amount of stockholders’ equity of the current and the previousyear.

 

7

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| ** **                                    | ** ** | **2005**                                                                                                                                     | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** | **2001**    | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                    | ** ** | **(Million € and Million $, except per share data and certain other data)** | ** ** |
| **U.S.  GAAP**                                |       |                                                                                                                                         |       |        |       |        |       |        |       |        |       |        |       |
| Net income*                                   |       | $3,625                                                                                                                                       |       | €3,061 |       | €1,863 |       | €1,320 |       | €1,716 |       | €5,655 | **         |
| *Thereof  from continuing operations**        | * *   | *3,625*                                                                                                                                      | * *   | *3,061*     | * *   | *1,863*     | * *   | *1,320*     | * *   | *1,716*     | * *   | *(265)*     | ****       |
| Basic  earnings per share*                    |       | 6.90                                                                                                                                         |       | 5.83        |       | 3.39        |       | 2.35        |       | 2.96        |       | 9.38        | **         |
| Income from  continuing operations per share* |       | 6.90                                                                                                                                         |       | 5.83        |       | 3.39        |       | 2.35        |       | 2.96        |       | (0.44)      | **         |
| Diluted  earnings per share*                  |       | 6.90                                                                                                                                         |       | 5.83        |       | 3.39        |       | 2.35        |       | 2.96        |       | 9.38        | **         |
| Stockholders’  equity*                   |       | 21,250                                                                                                                                       |       | 17,945      |       | 17,159      |       | 17,324      |       | 18,040      |       | 18,659      | **         |

 

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*                  Change in accounting policy forinventories – Amounts in accordance with U.S. GAAP for 2001 through 2003restated for the change in accounting for inventories. BASF Group is requiredto comply with the International Financial Reporting Standards (IFRS) for the2005 reporting year due to a mandate by the European Union. In order to capturethis development in the 2004 reporting year, IFRS have been followed to thegreatest extent permissible under German GAAP. As the LIFO method is notallowed under IFRS, inventory valuation has been changed to the average costmethod, which has also been adopted for U.S. GAAP. A change from the LIFOmethod to another method requires a restatement of previously reported financialinformation.

 

**            unaudited

 

**Weighted Average of SharesOutstanding Used in Determining Earnings per Share:**

 
| ** **                  | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** | **2001**    | ** ** |
|-----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Basic  earnings per share   |       | 525,124,659 |       | 548,714,243 |       | 561,886,993 |       | 579,118,368 |       | 602,586,176 |       |
| Diluted  earnings per share |       | 525,124,659 |       | 548,714,243 |       | 561,886,993 |       | 579,118,368 |       | 602,586,176 |       |

 

8

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**REPORTABLE OPERATING SEGMENT DATA**

 
| ** **                               | ** ** | **2005**                                               | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|------------------------------------------|------------|--------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ** **                               | ** ** | **(Million € and Million $)** | ** ** |
| **Chemicals**                            |       |                                                   |       |        |       |        |       |
| Sales                                    |       | $9,596                                                 |       | €8,103 |       | €7,020 |       |
| Income from  operations                  |       | 1,570                                                  |       | 1,326       |       | 1,284       |       |
| *Thereof  special items*                 | * *   | *(192)*                                                | * *   | *(162)*     | * *   | *(93)*      | * *   |
| Assets                                   |       | 7,278                                                  |       | 6,146       |       | 5,219       |       |
| **Plastics**                             |       |                                                   |       |        |       |        |       |
| Sales                                    |       | 13,876                                                 |       | 11,718      |       | 10,532      |       |
| Income from  operations                  |       | 1,202                                                  |       | 1,015       |       | 694         |       |
| *Thereof  special items*                 | * *   | *(19)*                                                 | * *   | *(16)*      | * *   | *(58)*      | * *   |
| Assets                                   |       | 7,862                                                  |       | 6,639       |       | 6,187       |       |
| **Performance  Products**                |       |                                                   |       |        |       |        |       |
| Sales                                    |       | 9,790                                                  |       | 8,267       |       | 8,005       |       |
| Income from  operations                  |       | 1,022                                                  |       | 863         |       | 1,128       |       |
| *Thereof  special items*                 | * *   | *(32)*                                                 | * *   | *(27)*      | * *   | *278*       | * *   |
| Assets                                   |       | 5,759                                                  |       | 4,863       |       | 4,538       |       |
| **Agricultural  Products and Nutrition** |       |                                                   |       |        |       |        |       |
| ***Thereof Agricultural Products***      |       |                                                   |       |        |       |        |       |
| Sales                                    |       | 3,905                                                  |       | 3,298       |       | 3,354       |       |
| Income from  operations                  |       | 806                                                    |       | 681         |       | 602         |       |
| *Thereof  special items*                 | * *   | *12*                                                   | * *   | *10*        | * *   | *(64)*      | * *   |
| Assets                                   |       | 6,106                                                  |       | 5,156       |       | 4,985       |       |
| ***Thereof Fine Chemicals***             |       |                                                   |       |        |       |        |       |
| Sales                                    |       | 2,051                                                  |       | 1,732       |       | 1,793       |       |
| Income from  operations                  |       | (69)                                                   |       | (58)        |       | 56          |       |
| *Thereof  special items*                 | * *   | *(95)*                                                 | * *   | *(80)*      | * *   | *(41)*      | * *   |
| Assets                                   |       | 1,754                                                  |       | 1,481       |       | 1,308       |       |
| **Oil &  Gas**                  |       |                                                   |       |        |       |        |       |
| Sales                                    |       | 9,066                                                  |       | 7,656       |       | 5,263       |       |
| Income from  operations                  |       | 2,854                                                  |       | 2,410       |       | 1,643       |       |
| *Thereof  special items*                 | * *   | *—*                                               | * *   | *—*    | * *   | *(10)*      | * *   |
| Assets                                   |       | 5,797                                                  |       | 4,895       |       | 4,063       |       |
| **Others**                               |       |                                                   |       |        |       |        |       |
| Sales                                    |       | 2,334                                                  |       | 1,971       |       | 1,570       |       |
| Income from  operations                  |       | (483)                                                  |       | (407)       |       | (214)       |       |
| *Thereof  special items*                 | * *   | *(39)*                                                 | * *   | *(33)*      | * *   | *(49)*      | * *   |
| Assets                                   |       | 7,686                                                  |       | 6,490       |       | 9,148       |       |
| **BASF  Group**                          |       |                                                   |       |        |       |        |       |
| Sales                                    |       | 50,619                                                 |       | 42,745      |       | 37,537      |       |
| Income from  operations                  |       | 6,903                                                  |       | 5,830       |       | 5,193       |       |
| *Thereof  special items*                 | * *   | *(365)*                                                | * *   | *(308)*     | * *   | *(37)*      | * *   |
| Assets                                   |       | 42,241                                                 |       | 35,670      |       | 35,448      |       |

 

9

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**Dividends**

 

Thefollowing table lists the annual dividends payable per BASF Share in euros andthe U.S. dollar equivalent for each of the years indicated. The table alsodiscloses the dividend amount per BASF Share for 2005 proposed by theSupervisory Board and the Board of Executive Directors for approval at theAnnual Meeting to be held on May 4, 2006. The table does not reflect therelated tax credits available to eligible taxpayers. See “Item 10. AdditionalInformation – Taxation of Dividends” and “Item 8. Financial Information –Dividend Policy” for further information.

 
| ** **                                 | ** ** | **Dividend Paid for Each** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **BASF Share**                       | ** ** |
| **Year Ended December 31,** | ** ** | **Euro**                                  | ** ** | **Dollar** | ** ** |
| 2005                                       |       | 2.00                                      |       | 2.37 |   |
| 2004                                       |       | 1.70                                      |       | 2.30 |   |
| 2003                                       |       | 1.40                                      |       | 1.76 |   |
| 2002                                       |       | 1.40                                      |       | 1.47 |   |
| 2001                                       |       | 1.30                                      |       | 1.16 |   |

 

Theeuro dividend amounts are translated solely for the convenience of the readerinto U.S. dollars (rounded to the nearest cent) at the Noon Buying Rate on thedividend payment date. For the dividend proposed to be paid in 2006 for theyear ended December 31, 2005, the euro amount is translated into U.S.dollars (rounded to the nearest cent) on the basis of the Noon Buying Rate on December 31,2005 of $1.1842 = €1.00.

 

**Exchange Rate Information**

 

OnJanuary 1, 2002, the euro became the sole legal tender for businesstransactions in Germany and the other eleven countries participating in theEuropean Monetary Union.

 

SinceJanuary 4, 1999, BASF Shares have been quoted in euros on the FrankfurtStock Exchange. Fluctuations in the exchange rate between the euro and the U.S.dollar will affect, among other things, the U.S. dollar amount received byholders of BASF’s ADRs upon conversion by the depositary of any cash dividendspaid in euros on BASF Shares. It will also affect the U.S. dollar equivalent ofthe euro price of BASF Shares on the Frankfurt Stock Exchange, which willaffect the market price of the ADRs on the New York Stock Exchange.

 

10

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Thetable below sets forth, for the periods and dates indicated, the high, low,period-average and period-end Noon Buying Rates for euros expressed in U.S.dollars for one euro. No representation is made that the euro or U.S. dollaramounts referred to herein could have been or could be converted into U.S.dollars or euros, as the case may be, at any particular rate.

 
| ** ** | ** ** | **U.S. Dollar for One Euro** | ** ** |
|------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | ** **                                       | ** ** | ** ** | ** ** | **Period** | ** ** | **Period** | ** ** |
| **Year**   | ** ** | **High**                                         | ** ** | **Low** | ** ** | **Average****(1)** | ** ** | **End** | ** ** |
| 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 |   |
| 2001       |       | 0.9520                                           |       | 0.8370 |   | 0.8909 |   | 0.8901 |   |

 

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(1)          The average of the Noon Buying Rates onthe last business day of each full month during the relevant period.

 

 

Thehigh and low exchange rates for the euro for each month during the previous sixmonths is set forth below:

 
| ** **       | ** ** | **U.S. Dollar for One Euro** | ** ** |
|------------------|------------|--------------------------------------------------|------------|
| **Month**        | ** ** | **High**                                         | ** ** | **Low** | ** ** |
| February,  2006  |       | 1.2100                                           |       | 1.1860 |   |
| January,  2006   |       | 1.2287                                           |       | 1.1980 |   |
| December,  2005  |       | 1.2041                                           |       | 1.1699 |   |
| November,  2005  |       | 1.2067                                           |       | 1.1667 |   |
| October,  2005   |       | 1.2148                                           |       | 1.1914 |   |
| September,  2005 |       | 1.2538                                           |       | 1.2011 |   |

 

TheNoon Buying Rate for the euro on March 1, 2006 was quoted by the FederalReserve Bank of New York at 1.1899 U.S. dollars for one euro.

 

Asof January 4, 1999, the commencement date of euro trading, the Noon BuyingRate for the euro was quoted at $1.1812 = €1.00.

 

Becausea substantial portion of the BASF Group’s revenues and expenses are denominatedin currencies other than the euro, results of operations and cash flows may bematerially affected by movements in the exchange rate between the euro and therespective currencies to which the Group is exposed. For a discussion of theeffect exchange rate fluctuations have on the BASF Group’s business and operationsand also the hedging techniques used to manage the Group’s exposure to such fluctuations,see “Item 5. Operating and Financial Review and Prospects – Exchange RateExposure and Risk Management” and “Item 11. Quantitative and QualitativeDisclosures about Market Risk.”

 

**Risk Factors**

 

BASF’sbusiness, financial condition or results of operations could suffer adversematerial effects due to any of the following risks. While all the risksconsidered material are described below, these are not the only risks BASFfaces. Additional risks not known by BASF or not presently considered materialmight also impair BASF’s business operations.

 

***Certain developments inthe global economy generally may adversely affect BASF’s sales andearnings***

 

Fourmajor economic factors may pose risks affecting BASF’s sales and earnings:1. Oil price developments could be different from estimated tendency todecline, 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, 4. The U.S. interest rate level couldincrease faster and higher than anticipated.

 

11

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Decreasingdemand for chemical products in the United States and Asia, as well as ongoingeconomic weakness in Europe, could consequently have an adverse effect on bothsales and earnings. Those areas that are subject to commoditization, such asBASF’s basic inorganic chemicals, petrochemicals, intermediates and plasticsoperations are particularly vulnerable, whereas BASF’s agricultural, nutritionand cosmetics operations and natural gas trading are less likely to suffer.BASF is also regionally diversified, and therefore less likely to suffer fromweakness in a specific region.

 

***Changes in regulatorycontrols could reduce the profitability of BASF’s current products and coulddelay BASF’s introduction of new products***

 

BASFmust comply with a broad range of regulatory controls on the testing,manufacturing and marketing of many of its products. BASF expects thatregulatory controls worldwide, and especially in the European Union (E.U.),will become increasingly more demanding. The proposed new E.U. chemicals policy(REACH) could require a significant increase in testing for chemical products.These tests could be very cost intensive and time consuming, and could lead toincreased costs and reduced operating margins for BASF’s chemical products. Thenew legislation is not expected to be in force before 2007 in the respectivecountries in Europe.

 

Underthe E.U. Directive on Emission Trading, governments have to impose total CO2 (carbon dioxide) caps on specific energyintensive installations. These caps aim to enable E.U. member states to meettheir Kyoto targets. The National Allocation Plans (NAPs) have been assigned in2004 for the first period from 2005 until 2007. BASF expects to comply withthese targets during the next years. BASF does not anticipate specific capitalexpenditure exceeding the general administration and adjustment costs that theEuropean industry is facing. Significant capital expenditure and possiblelimitations of BASF’s growth strategy could occur, if the allocation situationchanges dramatically after 2007.

 

***BASF is exposed to foreigncurrency and interest rate risks***

 

BASFconducts a significant portion of its operations outside of Europe and istherefore exposed to risks associated with the fluctuations of foreigncurrencies. BASF is subject to interest rate risks in the ordinary course ofits business.

 

Riskmanagement is centralized at BASF Aktiengesellschaft and BASF Group companiesdesignated for that purpose. BASF hedges against financial risks throughderivative instruments such as forward exchange contracts, currency options,interest rate and currency swaps and combined instruments. There can be noassurance, however, that BASF’s hedging strategy will be effective and thatforeign currency and interest rate fluctuations will not adversely affect BASF’sresults of operations. See “Item 11. Quantitative and Qualitative DisclosuresAbout Market Risk” and Note 29 included in Item 18 for additional informationabout the nominal value and market value of BASF’s financial instruments.

 

BASFis also subject to credit risks to the extent that counterparties totransactions may not be able to perform their contractualobligations. Although BASF aims to limit the risk of default by entering intotransactions only with top-rated financial institutions and by adhering to fixedlimits, defaults with respect to significant contracts may adverselyaffect BASF’s operating results.

 

***Significant variations inthe cost and availability of raw materials, energy, precursors andintermediates may adversely affect BASF’s operating results***

 

BASFuses significant amounts of raw materials and energy in manufacturing a widevariety of products. Significant variations in the cost and availability of rawmaterials, energy, precursors and intermediates may adversely affect BASF’soperating results. To control these price and supply risks, BASF purchases rawmaterials through negotiated long-term contracts, with prices that periodicallyfloat. Additionally required purchases on spot markets are made using optimizedprocedures. Supply contracts for the most strategically important raw materialsare negotiated and concluded centrally for the BASF Group. For moreinformation, see “Item 4. Information on the Company – Supplies and RawMaterials.”

 

12

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BASF’sindividual business units constantly monitor changes in their relevant supplymarkets and take action to minimize their risks accordingly.

 

***Cyclicality may adverselyaffect BASF’s operating margins***

 

Theresults of BASF’s Chemicals, Plastics and Performance Products segments areaffected by cyclicality and migration of various industries in which theyoperate, including the automotive, construction, electrical and electronics aswell as the textile industries. BASF’s strategy to deal with these risks is toconstantly expand its cyclically resilient businesses, such as agrochemicals,active ingredients for pharmaceuticals and nutrition, and trading andtransmission of natural gas. In cyclical businesses, BASF seeks to maintaincost leadership. BASF strives to anticipate customer migration tendencies andadjusts to customer industries by continued investment activities in emerginggrowth markets.

 

***The results of BASF’s cropprotection business are dependent on weather conditions and can be affected bylocal and regional economic circumstances***

 

Salesvolumes of BASF’s crop protection products are subject to the agriculturalsector’s dependency on weather conditions. Adverse weather conditions in aparticular growing region could materially negatively affect the results ofoperations of BASF’s crop protection business. Demand for crop protectionproducts is further influenced by the agricultural policies of governments andmultinational organizations. In addition, BASF’s crop protection products aretypically sold pursuant to contracts with long payment terms. These extendedpayment periods make BASF’s crop protection business susceptible to losses fromreceivables during local or regional economic crises and may adverselyaffect BASF’s operating results.

 

***Exploration risk may adverselyaffect the business of BASF’s Oil & Gas segment***

 

Thefuture growth of the exploration and production unit of our Oil & Gassegment is dependent on successful findings. The search for new oil and naturalgas reserves involves certain geological risks that relate to the availabilityof hydrocarbon products and the quality thereof. The exploration and productionindustries are experienced in dealing with these risks diligently. We diversifyour risks through a balanced exploration portfolio.

 

***Failure to develop newproducts and production technologies may harm BASF’s competitive positionand operating results***

 

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 thefuture, will become market-ready and achieve substantial commercial success.

 

***Negative developments inequity and bond markets may make extraordinary contributions to pensionfunds necessary***

 

Thefund assets required to cover future pension obligations are actuariallydetermined using assumptions concerning the expected return on plan assets. Theplan assets are partially comprised of equity investments. Declining returns onequity and bond markets could trigger additional contributions to the pensionplans to cover future pension obligations.

 

***BASF is dependent uponhiring and retaining highly 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 onits continued ability to hire, integrate and retain highly skilled employees.

 

13

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***BASF is subject to therisks associated with the use of information technology***

 

BASFis dependent upon technology for the distribution of information within theBASF Group and to customers and suppliers. This information technology issubject to risks associated with defects, errors, failures and computerviruses. To control potential risks relating to information technology, BASFuses the latest hardware and software and has integrated uniform informationtechnology infrastructures, backup systems, replicated databases, virus andaccess protection, 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 tosecurity 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 controlledprecautionary steps with the help of constantly updated security measures andrecommendations (e.g., travel restrictions, tighter access controls forproduction plants, up-dating of rescue and evacuation plans, emergencyservices, etc.) to protect the company and its employees.

 

***BASF is subject to risksarising from acquisitions 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.

 

***Litigation could harm BASF’soperating results and cash flows***

 

Forfurther information see “Item 8. Financial Information – Legal Proceedings” andNote 27 to the Consolidated Financial Statements included in Item 18.

 

14

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Item4.                                     Information on the Company

 

**HISTORY AND 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.

 

Majorrecent acquisitions and divestitures include the following: On July 20,2004, BASF divested its 30% share in DyStar to Platinum Equity. BASF alsodivested its printing systems business to CVC Capital Partners on November 30,2004. On August 1, 2005, BASF, along with Shell Chemicals, our 50% jointventure partner, sold Basell, a polyolefin joint venture, to Nell AcquisitionS.a.r.l., a subsidiary of Access Industries. BASF acquired the globalelectronic chemicals business from Merck KGaA on April 15, 2005. On October 1,2005, BASF purchased the Swiss fine chemicals firm Orgamol S.A.

 

OnJanuary 9, 2006, Iron Acquisition Corporation, Florham Park, New Jersey, a100% subsidiary of BASF Aktiengesellschaft, announced a cash offer for all theshares of Engelhard Corporation, Iselin, New Jersey, in the amount of $37 pershare. The total cost of the transaction based on the price per share would beapproximately $4.9 billion.

 

OnFebruary 28, 2006, BASF Aktiengesellschaft reached an agreement withDegussa AG, Düsseldorf, Germany, to acquire Degussa’s construction chemicalsbusiness. The purchase price for equity is approximately €2.2 billion plusassumption of liabilities. As a result, the transaction value for BASF iscurrently estimated at approximately €2.7 billion. The transaction, which stillrequires approval from the relevant authorities, is expected to close by themiddle of 2006. See “Item 8. Financial Information” and Note 33 of “Item 18.Financial Statements” for further details.

 

15

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**Major recent capital expendituresinclude:**

 
| **Segment**     |   | **Location**        | ** ** | **Project**                                                  | ** ** | **Projected Annual  Capacity at Completion  of Project (metric tons)** | ** ** | **Start-up/ Projected  Start-up of Operations** | ** ** |
|-----------------|--------|---------------------|------------|--------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **Chemicals**   |   | Caojing, China      |       | Tetrahydrofuran  / polytetrahydrofuran                       |       | 80,000 / 60,000                                                                                      |       | 2005                                                           |       |
|            |   | Antwerp,  Belgium   |       | Expansion steam cracker                                      |       |                                                                                                 |       | 2007                                                           |       |
|            |   |                |       | •       ethylene          |       | 1,080,000                                                                                            |       |                                                           |       |
|            |   |                |       | •       propylene         |       | 650,000                                                                                              |       |                                                           |       |
|            |   |                |       | •       benzene           |       | 280,000                                                                                              |       |                                                           |       |
|            |   | 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**    |   | Antwerp, Belgium    |       | Propylene oxide                                              |       | 300,000                                                                                              | (4)        | 2008                                                           |       |
|            |   | Antwerp,  Belgium   |       | Hydrogen peroxide                                            |       | 230,000                                                                                              | (5)        | 2008                                                           |       |
|            |   | Caojing,  China     |       | MDI  (diphenylmethane diisocyanate)                          |       | 240,000                                                                                              | (6)        | 2006                                                           |       |
|            |   | Caojing,  China     |       | TDI (toluene  diisocyanate)                                  |       | 160,000                                                                                              | (7)        | 2006                                                           |       |
|            |   | Pudong,  China      |       | Compounding  engineering plastics                            |       | 45,000                                                                                               |       | 2006                                                           |       |
|            |   | Kuantan,  Malaysia  |       | Ultradur (PBT)                                               |       | 60,000                                                                                               | (8)        | 2006                                                           |       |
|            |   | Pudong,  China      |       | Polyurethanes  specialties                                   |       | —                                                                                               |       | 2007                                                           |       |
|            |   | Schwarzheide,       |       |                                                         |       |                                                                                                 |       |                                                           |       |
|            |   | Germany             |       | Ecoflex                                                      |       | 6,000                                                                                                |       | 2006                                                           |       |
| **Performance** |   |                |       |                                                         |       |                                                                                                 |       |                                                           |       |
| **Products**    |   | Nanjing, China      |       | Acrylic monomers                                             |       | 160,000                                                                                              | (1)        | 2005                                                           |       |
|            |   |                |       | Acrylic  esters                                              |       | 215,000                                                                                              |       | 2005                                                           |       |

 

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| (1)    | Conducted through a joint venture between Sinopec  Corp., China (50%) and BASF (50%) (capacity reflects total joint venture  capacity).                                                                                                                                                                                                      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                         |
| (2)    | Calculated as butyraldehyde                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                         |
| (3)    | Conducted through a joint venture between Shell  Chemical Company, Texas (60%), BASF (24%) and Total Petrochemicals USA, Inc.,  Texas (16%) (capacity reflects total joint venture capacity).                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                         |
| (4)    | Conducted through a joint venture with The Dow  Chemical Company, Michigan (capacity reflects total joint venture capacity).                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                         |
| (5)    | Conducted through a joint venture with Solvay S.A.,  Belgium, and The Dow Chemical Company, Michigan (capacity reflects total  joint venture capacity).                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                         |
| (6)    | Conducted through a joint venture with Sinopec  Shanghai Gao Qiao Petrochemical Corporation, China; Shanghai Chlor-Alkali  Chemical Co. Ltd., China and the Shanghai Hua Yi (Group) Company, China as  well as Huntsman China Investments B.V., Netherlands (capacity reflects total  joint venture capacity of which BASF has a 35% share). |
|   |                                                                                                                                                                                                                                                                                                                                         |
| (7)    | Conducted through a joint venture with Sinopec  Shanghai Gao Qiao Petrochemical Corporation, China and the Shanghai Hua Yi  (Group) Company, China (capacity reflects total joint venture capacity of  which BASF has a 70% share).                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                         |
| (8)    | Conducted through a joint venture with Toray  Industries Inc., Japan (capacity reflects total joint venture capacity of  which BASF has a 50% share).                                                                                                                                                                                        |

 

16

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**BUSINESSOVERVIEW**

 

**Introduction**

 

BASFis a transnational chemical company that comprises the parent company, BASFAktiengesellschaft of Ludwigshafen, Germany, and 179 consolidated subsidiaries.The company has customers in more than 170 countries and operates more than 100production sites.

 

Forthe year ended December 31, 2005, BASF reported sales of €42,745 million,income from operations of €5,830 million, and net income after taxes andminority interests of €3,007 million. Based on customer location, BASF’sactivities in Europe accounted for 55.6% of BASF’s total sales in 2005; NorthAmerica (which includes the United States, Mexico and Canada) accounted for22.2% of sales; the Asia Pacific region accounted for 15.2% of sales; and theSouth America, Africa, Middle East region accounted for 7.0% of sales.

 

**Structure**

 

BASFhas five separate business segments: Chemicals, Plastics, Performance Products,Agricultural Products & Nutrition and Oil & Gas. Thesebusiness segments encompass BASF’s 12 operating divisions. For financialreporting purposes, the two operating divisions of BASF’s Agricultural Products &Nutrition business segment are separate reportable operating segments:Agricultural Products and Fine Chemicals.

 

EffectiveJanuary 1, 2005, companies in Asia are reported in the region “Asia Pacific.”The African and Middle Eastern companies, formerly reported in the region “AsiaPacific,” are now reported together with the South American companies in theregion “South America, Africa, Middle East.”

 

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 andbackward to find potential efficiencies, but rather examines every input andevery output of these processes. At Verbund sites, BASF uses byproducts ofchemical reactions, which might otherwise have to be disposed of, as rawmaterials for other processes. In addition, many chemical processes releaseheat energy, which BASF converts into steam and then uses to drive otherprocesses within a Verbund site. This allows our Verbund sites to consume lessfossil fuel than would otherwise be required. The close proximity of plants to eachother at a Verbund site also allows the use of pipelines to transportintermediate products, instead of railcars, barges or trucks, thus resulting infurther savings. By reusing byproducts and residual materials, using energy andother raw materials efficiently, and keeping the distances that substances needto be transported to a minimum, BASF reduces the impact on the environment andsaves money. This concept of benefiting from interconnectivity is applied toother areas as well, such as R&D, purchasing, and managing customerrelationships, where globally interactive teams maximize BASF’s productivity.

 

**Group Strategy**

 

Chemistryoffers enormous opportunities. It stands for the future that we are activelyshaping. We are expanding our strengths and making our portfolio more resilienttoward cyclicality and oil price fluctuations. We are concentrating on our coreactivities: in our chemical businesses, in agricultural products and nutrition,and in oil and gas. We are innovative and act sustainably to ensure that wewill still be the world’s leading chemical company in the future.

 

Innovationsare crucial for profitable growth. We are therefore strengthening our globalresearch and development activities. We have combined the importanttechnology-driven issues of the future in five “growth clusters”: energymanagement, raw material change, nanotechnology, plant biotechnology and white(industrial) biotechnology. Interdisciplinary cooperation is the key tosuccess.

 

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Wewant to use the potential offered by these broad-spectrum technologies to openup new and attractive business opportunities for our customers and ourselves.For example, we are already one of the world’s leading companies in the fieldof nanotechnology, which we use in many applications such as polymerdispersions, pigments and catalysts.

 

BASFis one of the world’s leading companies with regard to research and developmentin the field of plant biotechnology. We aim to shape this attractive market ofthe future using our powerful technology platform. Our research activities inthis area focus on more efficient agriculture, improved nutrition, and plantsas “green factories” to produce specific chemical substances. By expandingwhite biotechnology, we aim to use our expertise in the areas of enzymecatalysis and fermentative manufacturing processes to develop new products andprocesses outside the current key areas of fine chemicals and intermediates.

 

***Four guidelines for ourfuture***

 

Fourstrategic guidelines describe BASF’s path to the future:

 
| • | Earn a premium on our cost  of capital    |
|--------|-------------------------------------------|
|   |                                      |
| • | Help our customers to be  more successful |
|   |                                      |
| • | Form the best team in  industry      |
|   |                                      |
| • | Ensure sustainable  development           |

 

Wealign our activities with these four guidelines. They are inextricably linkedwith one another, and their combination makes us successful.

 

***Earn a premium on our costof capital***

 

Weearn a premium on our cost of capital to increase the value of BASF. To achievethis goal, we have been expanding on our value-based management strategy. EBIT(earnings before interest and taxes) after cost of capital is the keyperformance and management indicator for our operating divisions and businessunits. We measure every business decision and our performance on the basis ofhow it influences earnings after cost of capital in the short and long term. Asa result, all of our employees help us to improve cost structures, use ourcapital more efficiently and grow profitably.

 

TheBASF Group must achieve an EBIT of 10% on its operating assets to satisfy thereturns expected by providers of equity and debt, and to cover tax expenses.The cost of capital percentage before interest and taxes of 10% corresponds toa weighted average cost of capital (WACC) of approximately 6% after taxes. TheWACC calculation is an internationally recognized method of determining acompany’s cost of capital. The return desired by shareholders and the interestrates on debt capital are determined and weighted according to their share oftotal capital. We calculate our cost of equity on the basis of the market valueof BASF shares. The cost of capital percentage is reviewed annually. EBIT aftercost of capital is calculated by subtracting income taxes for oil productionthat are noncompensable with German taxes (see Note 10 of Item 18) and the costof capital from BASF Group’s EBIT. Finally, EBIT for activities not assigned tothe segments is added, since this is already provided for in the cost ofcapital percentage.

 

***Help our customers to be moresuccessful***

 

Weare present wherever our customers are. We invested early in growth markets andare now active in all important markets worldwide. In order to grow profitably,we need to understand our customers’ businesses as well as our own and offerunique value propositions. To achieve this, we need the best employees who workclosely with our customers to identify their needs and come up with intelligentsolutions. We then select the best business models suited to our customers’needs. This ensures the success of our customers and our own success.

 

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***Form the best team inindustry***

 

Wecan remain at the forefront in the long term only if we have the best team inindustry – our highly qualified and dedicated employees. We offer local andinternational development opportunities and pay linked to individual andcompany performance to attract the best specialists worldwide. We greatly valuepersonal development, self-learning and managers who act as role models. Ourdialogue-oriented management culture plays an important part in thisregard. It is shaped by our values and by BASF’s Leadership Compass. As aglobal company, we build on the professional and cultural experience of each ofour team members. This diversity helps us to better understand our customers’needs. In this way, we can develop the best ideas for our products andsolutions to make our customers even more successful.

 

***Ensure sustainabledevelopment***

 

ForBASF, sustainable development means combining long-term economic success withenvironmental protection and social responsibility. The necessary strategiesare developed and monitored by BASF’s Sustainability Council and implementedwith the support of regional networks. In 2005, we decided to focus on four keyareas – climate change and energy, renewable raw materials, corporate socialresponsibility, and Responsible Care®. We systematically identify risks andopportunities in these four areas.

 

Sustainabilityconsiderations are important criteria when developing new products andprocesses. We combine our expertise in this area in our Expert ServicesSustainability, thus contributing to the sustainable success of our customers.

 

**CHEMICALS**

 

**Segment Overview**

 

TheChemicals segment produces a wide range of products, from basic petrochemicalsand inorganic chemicals to higher-value intermediates, allowing BASF to fullyexploit the benefits of its Verbund. The segment is organized into theInorganics, Petrochemicals, and Intermediates divisions. Key information isprovided in the following table:

 
| ** **                      | ** ** | **2005**             | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------------------|------------|----------|------------|
| ** **                      | ** ** | **(Million €)** | ** ** |
| Sales to  third parties         |       | 8,103                |       | 7,020    |       |
| Percentage  of total BASF sales |       | 19%                  |       | 19%      |       |
| Intersegmental  transfers       |       | 3,826                |       | 3,395    |       |
| Income from  operations         |       | 1,326                |       | 1,284    |       |
| Capital  expenditures           |       | 639                  |       | 601      |       |

 

Theproducts are sold to a multitude of industries including the chemical,construction, automotive, electrical, electronics, detergents, colorants,coatings, health and nutrition industries. Although most of the segment’s salesare to external customers, 32.1% of the segment’s total sales areintersegmental transfers to other BASF operations for the manufacture ofhigher-value products. The products manufactured for captive use include manybasic and intermediate chemicals.

 

TheChemicals segment 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, Louisiana;Freeport, Texas; Kuantan, Malaysia; and our newly constructed site at Nanjing,China (a 50% joint venture with our partner SINOPEC), which became operationalin 2005. In addition, we have dedicated chemical operations near our customersto foster closer relationships with them: for example, our production oftetrahydrofuran and polytetrahydrofuran in Caojing (China, Asia) or ourplasticizer production in Pasadena (Texas, NAFTA).

 

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Theprincipal raw materials used in the Chemicals segment are naphtha, natural gas,butane, propane, sulfur and salt. The segment purchases approximately 5% of itsraw materials from other BASF operations. Natural gas, a key raw material forthe Chemicals segment, is acquired both through BASF’s joint venture WINGASGmbH and from external sources. All other principal raw materials are purchasedfrom external sources. BASF does not rely on any dominant supplier for the rawmaterials of its Chemicals segment.

 

**Segment Strategy**

 

TheChemicals segment focuses on the supply of cost-efficient standard chemicalsfor internal demand and on offering a broad range of intermediate and higheradded-value products to external customers. Success factors for the Chemicalssegment are cost leadership, economies of scale, leading process technology andefficient production processes. 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 our costs of  production for our standard products                                                                                                                                                                                                                                                                                                                                   |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                          |
| • | Expand our Verbund with  new products: In Europe, BASF is constantly identifying new opportunities to  expand its Verbund, such as the start-up of the new cyclohexane production  plant in Ludwigshafen in the fourth quarter of 2005.                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                          |
| • | Adapt our product  portfolio to market demand: In North America, BASF is restructuring its  plasticizer business with new production facilities at its site in Pasadena,  Texas to ensure a more robust supply of plasticizers to its North American  customers.                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                          |
| • | Expanding existing  businesses in high growth regions: In Asia, BASF expanded its electronics  chemicals business by setting-up a new business unit in Hong Kong. This  global business unit for electronic materials combines BASF’s existing  businesses in electronic chemicals with the acquired electronic chemicals  business of Merck KGaA, Darmstadt, Germany (April 2005). |

 

BASF’sChemicals segment aims to grow profitably by advancing its global productionactivities. At the new Verbund site in Nanjing, China, BASF started productionwith its joint venture partner Sinopec in June 2005. At our Verbund sitein Kuantan, Malaysia, which is operated with our joint venture partnerPETRONAS, the butanediole complex started operation in 2004. The output of thisplant will also be a main precursor for our new polybutyleneterephthalate (PBT)plant to be started up mid 2006 with our joint venture partner Toray, Japan.

 

**Research and Development**

 

In2005, the Chemicals segment invested approximately €114 million in research anddevelopment. Research activities are focused on the development of improved ornew production processes as well as on the development of innovative products.We concentrate on extending our product range with new customer-orientedproducts and applications.

 

WithHexamoll® DINCH, we have developed an innovative type of plasticizerwhich is especially suited for sensitive products such as toys, medical devicesor food contact applications. After completing the various regulatoryprocedures, we introduced Hexamoll® into numerous sensitiveapplications during 2005.

 

Inclose collaboration with JGC Corporation, Japan, we are currently developing anew technology for removing and storing carbon dioxide (CO2 )contained in natural gas with the goal of reducing processing costs by 20%. Thejoint effort, sponsored by the Japanese Ministry of Economy, Trade andIndustry, was started in 2005 and will run for eight years. BASF also providesthe gas treatment technology in an R&D project of the European Union forthe capture of CO2 fromcombustion gases in power stations.

 

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Anotheradvance in the Chemicals segment’s product innovations is our portfolio ofionic liquids with the brand name BasionicsTM, for which BASF received the 2005“IChemE Award” from the Institution of Chemical Engineers (IChemE), the Britishassociation of chemical and process engineers. To further advance theseproducts, BASF has set up a research partnership with the University of Alabamato study the dissolution and processing of cellulose by means of ionic liquids,such as for use in fiber manufacturing.

 

**Products**

 

TheChemicals segment has the following major product lines:

 

***Inorganics division***

 

*Inorganic Specialties*

 

BASFoffers a wide range of inorganic specialties which includes carbonyl ironpowder, hydroxylamine free base, hydroxylammonium sulfate, boron specialtiesand BASF’s innovative Catamold® lineof products for powder injection molding of metal and ceramic components. TheCatamold® line is especially suited formanufacturing tiny, intricate devices such as watch casings and orthodonticappliances. BASF sells these products globally to manufacturers in the automotive,construction and medical sectors, among other industries.

 

*Electronic Materials*

 

BASFproduces inorganic specialties in electronic grade, such as hydroxylamine freebase for use in manufacturing semiconductors, light-emitting diodes, and flatand plasma screen displays.

 

*Inorganic Chemicals*

 

BASFproduces inorganic chemicals, which are the starting materials forsuperabsorbers, fertilizers, and other high-value chemicals. The products rangefrom basic chemicals such as chlorine, sodium hydroxide, nitric acid andsulfuric acid to inorganic salts such as sodium and potassium alcoholates toammonium salts. More than half of these products are for captive use withinBASF’s Verbund. The remaining products are sold primarily to other chemicalcompanies.

 

*Glues and Impregnating Resins*

 

BASFoffers a wide variety of tailor-made adhesives for the wood products industry.These adhesives are used to bind together the particles, fibers and strandsfound in all types of particle boards. In addition, BASF producesimpregnating resins, which are used to manufacture decorative paper andlaminated flooring. BASF is also a producer of glues and impregnating resin rawmaterials such as ammonia, formaldehyde, methanol, urea and melamine. Europe isthe primary market for this group of products.

 

***Petrochemicals division***

 

*Cracker Products*

 

BASFproduces the entire range of cracker products from ethylene and propylene tobenzene and C4 cuts. Of these, propylene is the mostimportant starting product for BASF’s value-adding chains. Benzene is usedcaptively, while the residues from benzene extraction are sold as gasolinecomponents. Butadiene is used captively to produce dispersions and ABS(acrylonitrile-butadiene-styrene) and is also sold in the merchant market.Isobutene (a C4 hydrocarbon) serves as thestarting material for the polyisobutene value-adding chain of gasolineadditives and as the basic building block in vitamin synthesis. In Europe, alln-butenes are used in the synthesis of plasticizers and detergent alcohols.Higher olefins are marketed to the adhesives industry.

 

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*Alkylene Oxides and Glycols*

 

Ethyleneoxide derived from ethylene is used mainly to produce surfactants,ethanolamines, glycols and glycol ethers. Ethylene glycol is a product used inantifreeze by the automotive industry and for the production of fibers, filmsand PET (polyethylene terephthalate) plastic bottles by polyestermanufacturers. Propylene oxide is synthesized from propylene and serves as abase for a wide variety of products, including hydraulic fluids, solvents andpropylene glycol.

 

*Solvents*

 

BASFoffers a wide range of oxygenated, halogen-free solvents that are used todissolve other chemicals and facilitate chemical reactions. BASF is the world’slargest producer of oxo alcohols and is also a major producer of acetates,glycol ethers, glycol ether acetates and specialty solvents such ascyclohexanone. BASF sells most of these products globally, primarily to thecoatings, pharmaceuticals and cosmetics industries.

 

*Plasticizers and Plasticizer RawMaterials*

 

BASFmanufactures standard and specialty plasticizers, which are used in chemicalprocesses to make rigid plastics flexible. BASF also sells the plasticizerprecursor phthalic anhydride for use in dyestuffs and unsaturated polyesterresins, and markets plasticizers based on higher alcohols. Our newest specialtyproduct is the plasticizer Hexamoll® DINCH,used for sensitive applications.

 

***Intermediates division***

 

*Amines*

 

BASFis among the world’s top three producers of amines, which are principally usedto make detergents and cleaning products, process chemicals, agriculturalproducts, and pharmaceuticals. BASF offers approximately 140 different aminesworldwide. Key products include ethanolamines, ethyleneamines, alkylamines,alkylalkanolamines and various specialty and aromatic amines. Several chiralintermediates are of increasing importance for pharmaceuticals and agriculturalproducts. As gas treatment technology we offer aMDEA®, short for activated methyldiethanolamine,for the removal of acid gases like hydrogen sulphide and carbon dioxide.

 

*Butanediol and its derivatives*

 

BASFis the world’s largest manufacturer of 1,4-butanediol, which is a chemicalbuilding block for products such as polyesters and polyurethanes. Itsderivatives are used to manufacture products ranging from fibers to paints andinclude tetrahydrofuran, PolyTHF®, gamma-butyrolactone andN-methylpyrrolidone.

 

*Polyalcohols and Specialties*

 

Polyalcoholssuch as 1,6-hexanediol (HDO®) and neopentylglycol (Neol®) are mainly usedas raw materials for a wide range of coatings. In addition, BASF offersspecialties like carbonates and various special acetylenics, such asvinylmonomers and alkylpyrrolidones.

 

*Acids and Specialty Intermediates*

 

Thisproduct group comprises both commodity acid products and specialty intermediateproducts. Carbon acids such as formic acid, propionic acid and 2-ethylhexanoicacid can be used to manufacture preservatives for the feed and food industriesas well as auxiliaries for textile and leather applications. Specialtyintermediates, such as derivatives of phosgene including acid chlorides andchloroformates, glyoxal and its derivatives, glutaraldehyde, and various otherchemicals such as formamide and triphenylphosphine are often used in themanufacture of paper, polymers, textiles and leather products.

 

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**Division Information**

 

**Inorganics**

 

BASF’sInorganics division manufactures about 750 products of which approximately 55%are used captively. The remaining amount is sold to external customersworldwide in a broad range of industries.

 

In2005, the Inorganics division’s sales to third parties were €1,017 million.Thereof, Europe accounted for 67%; Asia Pacific for 21%; North America (NAFTA)for 9%; and South America, Africa, Middle East for 3%.

 

TheInorganics division expanded its business with electronic materials bysetting-up a new global business unit (based in Hong Kong), which encompassesthe acquired electronic chemicals business of Merck KGaA, Darmstadt, Germany.The acquisition was closed in April 2005 and includes Merck’s productionsites and distribution centers for high-purity chemicals in Taiwan, Malaysia,China, Singapore, France, the Netherlands and Germany. Through the acquisitionof these new activities, BASF has become a leading supplier of electronicchemicals for the rapidly growing semiconductor and flat screen industries. Thebusiness acquired from Merck helps to develop BASF’s electronic chemicalsbusiness and significantly strengthens BASF’s market position in Europe andAsia.

 

TheInorganics division competes on the basis of strong customer relationships,comprehensive product service and price. In the market for specialty products,the division also competes based on its ability to offer innovative products,such as electronic grade chemicals, catalysts and powder injection moldingproducts. The Inorganics division sells its products primarily through BASF’sown sales force.

 

TheInorganics division’s main competitors include Arkema, Norsk Hydro and Gentek.In the market for catalysts, the division’s main competitors includeSüd-Chemie, Criterion Catalyst & Technology Company, and Procatalyse,while in the market for glues and impregnating resins, Nordkemi and Arkema areamong BASF’s competitors.

 

**Petrochemicals**

 

ThePetrochemicals division sells more than 200 products and represents the firststep in BASF’s Verbund approach to integration for the company’spetrochemical-based, high-value products.

 

In2005, the Petrochemicals division’s sales to third parties were €5,084 million.Thereof, North America (NAFTA) accounted for 52%; Europe for 37%; Asia Pacificfor 9%; and South America, Africa, Middle East for 2%.

 

ThePetrochemicals division sells products through BASF’s own sales force as wellas through wholesalers. Specialty chemical and other chemical companies are theprimary external customers of this division, some of which are also competitorsof BASF. Steam crackers, the core of the petrochemicals division, mainly supplyproducts for captive use within the company, although BASF does maintainpositions in the merchant markets for olefins to ensure high capacityutilization. Approximately 40% of the division’s sales are to other BASFdivisions.

 

ThePetrochemicals division produces commodities that are subject to strongcyclicality in pricing. Changes in raw materials prices have an almostimmediate effect on the division’s financial performance. Competition in themarket is based on strong customer relationships, comprehensive productservices and price.

 

BASFconsiders Celanese, Degussa, Dow Chemical, Eastman Chemicals, ExxonMobilChemical, Formosa Plastics Corporation, INEOS, SABIC, Sasol, Shell Chemicalsand SINOPEC to be the main competitors of its Petrochemicals division.

 

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**Intermediates**

 

TheIntermediates division manufactures approximately 600 products that are soldworldwide. The customers typically purchase the division’s chemical products asprecursors for their higher-value chemicals such as plastics, polyurethanes,textile fibers, resins, paints, surfactants, colorants, coatings,pharmaceuticals and agricultural products.

 

In2005, the Intermediates division’s sales to third parties were €2,002 million.Thereof, Europe accounted for 51%; Asia Pacific for 26%; North America (NAFTA)for 18%; and South America, Africa, Middle East for 5%.

 

Manyof the Intermediates division’s products are more resilient to economic cyclesthan products in the Chemicals segment’s other divisions, and many are theresult of multi-step production processes within BASF before they are sold toexternal customers. The division additionally sells many of its products withinBASF, with internal transfers accounting for approximately 25% of the division’stotal sales.

 

Thekeys to the Intermediates division’s success are achieving technological andcost leadership, offering customized products and, increasingly, developing aglobal production presence. In 2005, we started up wholly owned plants fortetrahydrofuran and polytetrahydrofuran (PolyTHF®) in Caojing, China.

 

BASFsells this division’s products through its own sales force as well as throughdistributors. BASF is among the top three producers worldwide of the mainproducts of its four strategic intermediates’ business units. In the aminesmarkets, BASF considers its main competitors to be Air Products, Dow andHuntsman. In the butanediol and derivatives market, the company’s major competitorsare ISP Invista, Lyondell, Dairen, Mitsubishi Chemicals and new entrants,especially from China. Eastman Chemical and Ube Industries are considered to bethe main competitors in the areas of polyalcohols and specialties. Finally, themain competitors for BASF’s acids and specialty intermediates business areKemira and Perstorp.

 

**PLASTICS**

 

**Segment Overview**

 

BASFis one of the world’s leading plastics manufacturers and offers one of theindustry’s most comprehensive product ranges. The segment is organized intothree divisions: Styrenics, Performance Polymers, and Polyurethanes. Keyinformation is provided in the following table:

 
| ** **                      | ** ** | **2005**                  | ** ** | **2004** | ** ** |
|---------------------------------|------------|---------------------------|------------|----------|------------|
| ** **                      | ** ** | **(Million €)** | ** ** |
| Sales to  third parties         |       | 11,718                    |       | 10,532   |       |
| Percentage  of total BASF sales |       | 27%                       |       | 28%      |       |
| Intersegmental  transfers       |       | 471                       |       | 677      |       |
| Income from  operations         |       | 1,015                     |       | 694      |       |
| Capital  expenditures           |       | 490                       |       | 473      |       |

 

ThePlastics segment purchases over two-thirds of its raw materials from externalsuppliers. The principal raw materials are benzene, toluene, ethylene,propylene, butadiene, acrylonitrile, cyclohexane, and ammonia. BASF has apolicy of maintaining multiple suppliers for raw materials of its Plasticssegment in order to remain independent from any dominant supplier. However, itcannot be guaranteed that a short-term bottleneck in the supply for aparticular raw material will not occur.

 

Forproducts such as styrene and isocyanates where economies of scale are mostimportant, plants tend to be located at our Verbund sites. However, for highermargin products such as polyurethane systems, plants tend to be regionally locatedto foster closer relations with our customers.

 

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**Segment Strategy**

 

BASF’sPlastics segment seeks to strengthen its position in the styrenics, nylon andpolyurethane value-adding chains of chemistry through the following strategies:

 

•                  *Marketing and selling productsmore efficiently than competitors in key regional markets*: To support this strategic goal, BASF isrealigning its businesses with standard products, specialties and systemssolutions to meet the changed market and customer demands and is introducingnew business models for the respective products.

 

•                  *Establishing efficient businessprocesses for standard products*:In the standard products business, BASF is streamlining its portfolio toinclude only a limited number of product lines combined with appropriatemarketing processes to consistently deliver high-quality products at minimumcosts with maximum reliability.

 

•                  *Increasing sales of selectedspecialty products*: BASF isexpanding its position in the market for specialty products that can be easilyderived from the company’s value-adding chains of chemistry. These have thepotential to generate competitive advantages for both the customers and BASF.

 

•                  *Boosting the efficiency of thecompany’s global production activities*: BASF is shifting production from older or smaller plants to more efficientworld-scale plants that rely on new technologies and offer substantialeconomies of scale. In Asia, the company is continuing to expand its productioncapacities and is building on its well-established base in the region.

 

•                  *Optimizing the regional portfolios*: To increase efficiency significantly, BASFis improving processes and cost structures in Europe and consolidatingbusinesses in North America. In Asia, BASF continues to strengthen its positionas one of the leading global manufacturers of plastics.

 

•                  *Working closely with customers indeveloping new 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.

 

•                  *Using e-commerce more extensivelyas a distribution channel*:BASF’s sales through e-commerce channels such as our proprietary PlasticsPortalincreased by more than 50% to over €3 billion in 2005. BASF expects that salesvia these distribution channels will continue to increase in the future.

 

**Research and Development**

 

In2005, the Plastics segment spent approximately €135 million on research anddevelopment activities. We consider R&D to be a key element in ensuring thelong-term success of our Plastics segment. Our R&D activities are focusedon manufacturing processes and product development, including systems solutionsfor customers.

 

Weseek to improve existing manufacturing processes and also to develop new cost-effectivemanufacturing alternatives. A good example of this is the new hydrogen peroxideto propylene oxide (HPPO) technology. Together with Dow, we developed thisinnovative process, which generates only the end product propylene oxide (PO)and avoids co-products. This process is a highly cost-effective method toproduce PO, and plants using this technology require a significantly lowerinvestment compared to those based on conventional PO production processes. Theconstruction of a world scale plant using this process is scheduled to begin in2006 at our Antwerp Verbund site.

 

Inproduct development, we work together with customers in order to developinnovative new products and improvements to our existing products. By workingwith customers from the start, we can ensure that the results of our effortsare marketable. For example, our Ultradur® High Speed has been wellreceived by the market as it allows our customers in the automotive andelectronics industry to reduce their manufacturing costs by reducing productiontimes.

 

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**Products**

 

ThePlastics segment contains the following significant product lines:

 

***Styrenics division***

 

*PS (Polystyrene)*

 

BASF’spolystyrene products range from rigid and transparent general-purpose plasticsto high impact-resistant grades that customers shape using injection molding,extrusion and blow molding. Primary applications include packaging andhousehold appliances.

 

*EPS (Expandable Polystyrene)*

 

BASFsells expandable polystyrene under the brand names Styropor® andNeopor®. The advantages of expandable polystyrene include heatinsulation, high compressive strength, shock absorption, low weight, andmoisture resistance. Primary applications include building insulation and packaging.

 

*XPS (Extruded Polystyrene)*

 

BASFsells extruded polystyrene under the brand name Styrodur®. It is agreen, extruded, rigid polystyrene foam that is made using environmentallyfriendly carbon dioxide as a blowing agent. Styrodur® offersheat insulation, low water absorption, and compressive strength. The primaryapplication is building insulation.

 

*SAN (Styrene AcrylonitrileCopolymers)*

 

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.

 

*ABS(Acrylonitrile-Butadiene-Styrene Copolymers)*

 

Terluran®is the trade name for BASF’s top styrene copolymer plastic. It offers superiorsurface quality, mechanical properties and chemical resistance. Primaryapplications 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 with rubberto make it resistant to weathering, aging and chemicals. Primary applicationsinclude exterior automotive components, electrical and electronic equipment.

 

*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 include hygiene andcosmetic product containers as well as medical equipment housings.

 

*MF (Melamine Resin Foam)*

 

BASFsells melamine resin foam under the brand name Basotect®. It is a flexiblefoam material that absorbs sound and offers high heat resistance and good flameretardant attributes. Primary applications include automotive components and soundproofingmaterials.

 

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***Performance Polymersdivision***

 

*PA (Polyamide) and Intermediates*

 

Ultramid®and Capron® are the trade names for BASF’s engineering plasticsbased on nylon 6, nylon 6,6 and other copolymers. They offer toughness andstrength as well as both heat and chemical resistance. Primary applicationsinclude automotive engine intake manifolds and flame retardant plastics forelectrical components such as switches.

 

Ultramid®is also the trade name for BASF’s base resin of nylon 6 and 6,6 sold in the fibersand extrusion market. Primary applications include carpets and textiles as wellas films for food packaging.

 

Intermediatesinclude caprolactam for nylon 6 and adipic acid and hexamethylenediamin fornylon6,6.

 

*PBT (Polybutylene Terephthalate)*

 

Ultradur®is the trade name for BASF’s engineering plastic based on PBT. It features highstiffness, strength, dimensional stability, and heat and aging resistance.Primary applications include electrical connectors and automotive components.

 

*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 most importantfeatures of Ultrason are stiffness and resistance to water and oily substanceseven at high temperatures. Other important features include electricalinsulation properties and dimensional stability. Primary applications includeautomobile oil circulation systems, headlight reflectors, microwave dishes, andmedical equipment.

 

***Polyurethanes division***

 

*MDI (DiphenylmethaneDiisocyanate)*

 

MDIis a versatile isocyanate that can be used to make flexible foams as well assemi-rigid and rigid polyurethane plastics. Primary applications includefurniture interiors, automotive components, and shoe soles.

 

*TDI (Toluene Diisocyanate)*

 

TDIis an isocyanate used primarily in the manufacture of flexible foams. Primaryapplications include foam cushions for furniture and automotive components.

 

*Polyether Polyols*

 

PolyetherPolyols are combined with isocyanates to make virtually all polyurethaneproducts, other than those made with polyester polyols. Primary applicationsinclude rigid and flexible foams.

 

*Polyester Polyols*

 

PolyesterPolyols are combined with isocyanates to make primarily semi-rigid polyurethaneplastics. Primary applications include cable sheathing and shoe soles.

 

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*Polyurethane Systems*

 

BASF’sworldwide polyurethane systems group offers tailor-made polyurethane productsfor a wide variety of applications. BASF develops ready-to-use, tailor-madepolyurethane systems for customers. Automotive OEM (original equipmentmanufacturer) suppliers comprise a significant customer group for polyurethanesystems. OEM suppliers make seats, steering wheels, fenders and dashboardsusing BASF’s polyurethane systems.

 

*TPU (Thermoplastic PolyurethaneElastomers)*

 

TPUis sold under the trade name Elastollan® and is based on bothpolyether polyols and polyester polyols. It is supplied in granular form tocustomers who use it primarily to make flexible plastic cable coverings.Customers for these products are primarily in the automotive and cable and wireindustries.

 

*Cellular Elastomers*

 

CellularElastomers are sold under the names Cellasto®, Elastocell®and Emdicell® and are shock-absorbing, rigid plastics. Microcellularpolyurethane parts for antivibration applications are sold, for example, asmolded end products for use as shock absorbers and buffers in the automotiveindustry.

 

**Division Information**

 

**Styrenics**

 

BASFis one of a small number of global producers of styrenics, supplying customersin all major geographic markets worldwide. BASF continues to fine-tune Verbundstructures at its production sites and to carry out backward integration whereappropriate.

 

In2005, the Styrenics division’s sales to third parties were €4,518 million.Thereof, Europe accounted for 44%; Asia Pacific for 27%; North America (NAFTA)for 22%; and South America, Africa, Middle East for 7%.

 

Demandfor styrenics continues to rise due to overall economic growth in bothindustrial and emerging markets. BASF believes that cost-efficient businessprocesses with an appropriate number of products manufactured in highlycompetitive world-scale plants are crucial to ensuring the continuedcompetitiveness of its styrenics products. As a consequence of our continuousprocess of restructuring, the EPS (expandable polystyrene) production in SouthBrunswick, New Jersey, ceased in the second quarter of 2005. The extended plantin Altamira, Mexico now supplies the NAFTA region. With the sale of thepolystyrene business to INEOS Americas, LLC in the USA and Canada, the division’sstrategy was further realigned.

 

Risingvolatility of raw material prices, overcapacities in the market, and pricingpressure from low cost producers, especially in Asia, are leading to reducedmargins. Thus, cost leadership in production and efficient business processesare crucial for BASF to continue to meet the demands of our customers forconsistent quality, reliable supply and competitive prices. BASF is thereforeoptimizing its business models for the standard products PS, ABS and EPS bystreamlining the product portfolio and business processes.

 

Inspecialties, BASF seeks profitable growth by focusing on specific market needsas well as by increasing application development and global sales. Starting in2005, BASF is concentrating specialties in a newly established global businessorganization.

 

TheStyrenics division sells products primarily through its own regional salesforce, supported by BASF technical and marketing experts. The Styrenicsdivision is increasingly relying on e-commerce (BASF’s PlasticsPortal, EDI andVMI) for distributing its products.

 

Theprincipal global competitors of the Styrenics division are Dow and Total. Thedivision also competes in North America with Nova and in Europe with Enichem.In Asia, BASF competes with other regional competitors, such as Chi Mei, Loyaland LG Chem.

 

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**Performance Polymers**

 

BASFis one of the world’s leading producers of engineering plastics, extrusionproducts and fiber intermediates. In 2005, BASF acquired the German compoundingcompany Leuna-Miramid GmbH, which will be integrated into BASF’s engineeringplastics division. BASF Corporation acquired the North American business formajor engineering plastics from LATI USA, Inc., in 2005 as well.

 

In2005, the Performance Polymers division’s sales to third parties were €2,909million. Thereof, Europe accounted for 45%; North America (NAFTA) for 28%; AsiaPacific for 24%; and South America, Africa, Middle East for 3%.

 

PerformancePolymers products are sold worldwide, and more than 85% of the customers areengineering plastics customers. This customer base consists largely ofhigh-performance plastic molder and plastics component manufacturers in theautomotive, consumer electronics, electrical equipment and packagingindustries. These customers often rate product performance and customer supportas important, but prices are becoming increasingly critical to customers inchoosing a supplier.

 

Tocompete effectively in this market, the Performance Polymers division seeks toincrease its preferred supplier status with global customers, many of whomdemand collaboration in developing specific plastics applications. The divisionworks with suppliers to automotive manufacturers to develop specificapplications for parts such as engine components, airbag housings andelectronic connectors.

 

Thedivision’s customers for engineering plastics, particularly in the automotiveindustry, are primarily global companies that demand uniform worldwidestandards for products and services in all major markets. BASF sells engineeringplastics products primarily through its own regional sales force supported byBASF’s technical centers in Germany, the United States and Japan. These centersnot only help customers to develop applications but also independently researchnew markets and applications in which plastics can replace more conventionalmaterials such as metal. In Asia, the division is expanding its sales force tobuild on its solid position in the market.

 

Thelarge-volume markets for caprolactam and other fiber intermediate products arecharacterized by 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, particularly in China.

 

ThePerformance Polymers division sells products primarily through its own regionalsales force, supported by BASF technical and marketing experts. The division isincreasingly relying on e-commerce as a channel for distributing its productsand operates its own website, PlasticsPortal.com.

 

Majorglobal competitors of the Performance Polymers division are Celanese, DSM,DuPont, General Electric, Lanxess, Rhodia, Solutia and UBE.

 

**Polyurethanes**

 

BASF’sPolyurethanes division is one of the world’s three largest producers ofpolyurethanes: important specialty plastics used to produce a wide spectrum ofrigid, flexible, foamed and compact components for consumer products.

 

In2005, the Polyurethanes division’s sales to third parties were €4,291 million.Thereof, Europe accounted for 37%; North America (NAFTA) for 30%; Asia Pacificfor 27%; and South America, Africa, Middle East for 6%.

 

BASFoffers over 3,500 customized polyurethane solutions. These products, the vastmajority of which are sold to external customers, are used to make a variety ofautomotive parts, including bumpers, steering wheels and instrument panels.BASF’s polyurethanes can also be found in household goods, such as mattressesand upholstery, and in sports equipment, such as in-line

 

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skates and athletic shoes.The fashion industry is increasingly using BASF’s polyurethanes, particularlyto manufacture synthetic leathers.

 

Tobuild on its strong relationships with customers, the Polyurethanes division isexpanding its regional activities, focusing above all on the Asian market. InCaojing, China, BASF commenced construction of an integrated manufacturingfacility for MDI and TDI with its local and international joint venturepartners that is scheduled to come onstream in 2006. BASF also expanded thecapacity of its MDI plant in Antwerp, Belgium, in 2005.

 

Forpolyurethane systems and special elastomers, strong relationships with leadingindustry customers are crucial because of the highly individualized nature ofthese products. To strengthen its relationships with customers, BASF hasestablished a global network of system houses. System houses are productionsites that work closely with customers to provide products specially formulatedfor individual needs. The Polyurethanes division currently has 27 system housesaround the world in locations near customers. BASF will continue to establishor acquire more.

 

Globaldemand for all polyurethane products is expected to continue growing fasterthan the global economy as the economic expansion continues. The market forpolyurethane basic materials is less cyclical than the market for most otherstandard plastics, primarily because polyurethane basic materials arerelatively specialized. Competition in the market for basic materials is basedprimarily on price, although product quality and technical applicationassistance are also important to customers.

 

Themarkets for polyurethane systems and special elastomers are even less cyclicalthan those for polyurethane basic materials. Competition in the market forpolyurethane systems and special elastomers is based primarily on a supplier’sability to satisfy customers’ technical application needs by providing tailor-madeformulations of isocyanates and polyols and also on a supplier’s ability toaccommodate customers’ just-in-time manufacturing by delivering customizedproducts quickly and at the appropriate time.

 

Themain competitors of the Polyurethanes division are Bayer, Dow, Huntsman,Lyondell and Shell Chemicals.

 

**PERFORMANCE PRODUCTS**

 

**Segment Overview**

 

BASFis a leading global producer of performance chemicals, coatings and functionalpolymers through its Performance Products segment. This segment produces abroad range of high-value chemicals, formulations and integrated chemicalsystems solutions for the automotive, coatings, oil, paper, packaging, textile,leather, detergent, sanitary care, construction and chemical industries.

 
| ** **                      | ** ** | 2005                 |       | 2004  |   |
|---------------------------------|------------|----------------------|------------|-------|--------|
| ** **                      | ** ** | **(Million €)** | ** ** |
| Sales to  third parties         |       | 8,267                |       | 8,005 |   |
| Percentage  of total BASF sales |       | 19%                  |       | 21%   |   |
| Intersegmental  transfers       |       | 352                  |       | 291   |   |
| Income from  operations         |       | 863                  |       | 1,128 |   |
| Capital  expenditures           |       | 347                  |       | 304   |   |

 

ThePerformance Products segment purchases approximately 50% of its raw materialsfrom other BASF operations and does not rely on a dominant external supplier.The segment’s principal raw materials are propylene, oxo alcohols, butadiene,styrene, ethylene oxide, propylene oxide, naphthalene, aliphatic alcohols,pigments, solvents and resins. The segment’s products often represent the finalstages in many value-adding chains within BASF’s Verbund.

 

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Thebulk of the production for the Performance Products segment is located at ourVerbund sites to take advantage of the efficiencies offered by these sites.However, in certain cases, plants are located near our customers to reducetransportation costs, such as for polymer dispersions, or in the case ofautomotive OEM coating, to meet our customer’s just in time delivery needs.

 

**Segment Strategy**

 

Thekey elements of the segment’s success are:

 

•                  Developing products, chemical systemsolutions, and application technologies that are tailor-made to the specificrequirements of customers and ensuring sustainable development;

 

•                  Introducing new business models, such as the “systemsupplier for coating materials” in the coatings division, in which we assumeresponsibility for the chemical management in customers’ processes;

 

•                  Striving for cost and technology leadershipas well as establishing and expanding regional manufacturing plants witheconomies of scale;

 

•                  Setting up development and applicationcenters to better serve regional customers, particularly in the high growthAsia region; and

 

•                  Systematically controlling costs for standardproducts.

 

**Research and Development**

 

In2005, the segment spent €214 million on research and development activities.The main focus of the segment’s research and development is on innovative andeco-efficient products and system solutions that are tailor-made for theprocesses and technologies of our customers. The goal is to help customers bemore successful in their markets, thus opening growth potential for them andfor BASF. Close cooperation with customers holding leading market positions isof great importance in order to fully exploit the research resources and reducethe time to market. In addition, state-of-the-art application centers and pilotplants, for instance for coatings, paper making, or pressure-sensitiveadhesives, are a key success factor. These plants and application centers serveto deepen our understanding of the customers’ processes and assess new chemicalsystems under real application conditions. In 2005, we established newtechnical application centers in Thane, India for textile chemicals and inShanghai, China for textile and leather chemicals, chemicals for detergents andformulators as well as polymer dispersions.

 

Recentexamples of successful innovations and system solutions include the following: 

 

•                  Developing Belmadur®: aninnovative BASF technology that enhances the quality of domestic wood speciesand enables them to compete with tropical hardwood by providing regenerativeraw materials for a wide variety of applications. We are now working togetherwith partners in the wood industry to develop new applications and markets forthis innovative process.

 

•                  Expanding our range of coating products witha new, complete UV product portfolio for automotive refinishing coatings. As aresult, we will position ourselves at the leading edge of this trend, e.g.,with a new high scratch resistant refinish clearcoat. Car owners benefit fromthe outstanding reflow properties of this clearcoat which allow light scratchesto repair themselves.

 

•                  Launching a new innovative generation ofAcrodur® binders for non-wovens, e.g., as a therm-ocuring binder inthe production process of glass fibers with various applications. These water-basedacrylate resins make moldings ecologically more favorable, since they canreplace the previously used binders such as phenol and formaldehyde resins.

 

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**Products**

 

ThePerformance Products segment contains the following significant product lines:

 

***Performance Chemicalsdivision***

 

*Pigments and Resins for Coatingsand Plastics*

 

ThePerformance Chemicals division offers organic and inorganic pigments, pigmentpreparations, non-textile dyes, process chemicals and resins. Resins are film-formingcomponents used in UV (ultraviolet) curing coatings, urethane systems, andmelamine based coatings. Pigments are insoluble dry coloring materials forpaints, plastics, inks and other special applications. BASF’s pigments andresins are used primarily in automotive, decorative, and industrial paintapplications, as well as in the plastics industry.

 

*Isobutene Derivatives*

 

Isobuteneis the starting material for polyisobutene, the most important component forBASF’s branded fuel additives. Through its highly reactive polyisobutenes, BASFhas established a new standard in the fuel and lubricant additives market. BASFis the only industry supplier with a product portfolio spanning low toultra-high molecular polyisobutenes as well as polyisobutene derivatives.

 

*Surfactants*

 

BASFproduces a wide range of nonionic surfactants based on aliphatic alcohols,ethylene oxide and propylene oxide. Such products are used in detergents andcleaners, textile and leather auxiliaries.

 

*Hydrocyanic Acid Derivative*

 

BASFproduces several chelating agents based on hydrocyanic acid, which serve asprocess chemicals in various industries. Applications include pulpmanufacturing, electroplating, laundry detergents, cleaners and photographicchemicals.

 

*Performance Chemicals forTextiles*

 

BASFoffers textile and dyeing auxiliaries, pigment preparations for textileprinting, and inks for ink-jet printing technology. BASF’s product range coversa wide spectrum of textile applications.

 

*Leather Dyes and Chemicals*

 

BASFis one of the world’s leading producers of leather chemicals and dyes,producing a full range of products for nearly every aspect of the leatherproduction process.

 

***Coatings division***

 

*Automotive OEM (OriginalEquipment Manufacturer) Coatings Solutions*

 

BASFoffers complete automobile coatings solutions as well as extensive technicalsupport to major vehicle manufacturers. All of the world’s leading automobilemanufacturers are long-standing customers of BASF.

 

*Automotive Refinish / CommercialTransport Coatings Solutions*

 

Forthe refinishing of cars and commercial vehicles, BASF offers topcoat andundercoat materials under the well-known brand names Glasurit®, 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.

 

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*Industrial Coatings Solutions*

 

BASFoffers environmentally efficient systems for coating industrial products.Application technologies include precoatings, powder, electro-deposition andliquid coatings that are used on household appliances, commercial vehicles,industrial buildings and radiator components. BASF is the second largest coil coatingsproducer.

 

*Decorative Paints*

 

BASFis the leading producer of decorative paints for interior and exterior use inthe South American market. BASF’s dispersion and building paints are marketedunder the Suvinil® trademark and enjoy a high level of customerrecognition.

 

***Functional Polymersdivision***

 

*Acrylic Monomers*

 

BASFis the world’s largest producer of acrylic monomers, which are sold directly tointernal and external customers in the form of acrylic acid, acrylicesters and special acrylates. Acrylic monomers are used as precursors tomanufacture polymer dispersions for various applications, superabsorbents,detergents, flocculants and fibers for a wide range of industries.

 

*Polymer Dispersions for theAdhesives and Construction Industries*

 

BASF’spolymers products consist mainly of polymer dispersions for the manufacture ofadhesives, paints and finishes, non-woven materials, and chemicals for theconstruction industry. BASF is especially strong in its technical expertise forconstruction chemicals, adhesive raw materials, dispersions for paints andother coating materials.

 

*Paper Chemicals*

 

BASFoffers the paper industry a comprehensive range of chemical products for manyaspects of the paper production process, including the manufacture of untreatedpaper, paper finishing and wastewater treatment. The Functional Polymersdivision’s product range of paper chemicals consists of paper-processingchemicals, paper dyes and polymer dispersions for paper coating.

 

*Superabsorbents*

 

BASFsells superabsorbents globally to the personal hygiene industry, which usesthese products to manufacture diapers and other sanitary care products.

 

**Division Information**

 

**Performance Chemicals**

 

BASFis one of the world’s largest manufacturers of high-value performance chemicals,which the company sells to a broad range of customers worldwide in a widevariety of industries including the plastics, coatings, construction,detergent, automotive, oil, leather and textile industries.

 

BASF’sstrength is its Verbund approach: This gives the Performance Chemicals divisionan advantage over small and medium-sized companies that lack the costadvantages of integration.

 

In2005, the Performance Chemicals division’s sales to third parties were €2,889million. Thereof, Europe accounted for 56%; Asia Pacific for 18%; North America(NAFTA) for 17%; and South America, Africa, Middle East for 9%.

 

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ThePerformance Chemicals division comprises five different businesses: PerformanceChemicals for Coatings, Plastics, and Specialties; for Automotive and OilIndustry; for Detergents and Formulators; for Textiles; and for Leather. Eachbusiness follows its own strategy, focusing on innovative products and systemssolutions for growing markets. The division sells its products globally, withroughly 90% of its products to external customers. BASF’s own regional salesnetwork sells most of the Performance Chemicals division’s products.Distributors sell the remainder of the products, primarily to smallercustomers. In the Asia Pacific region, we are increasing our sales activitiesto meet the needs of the growing markets, especially for the textile andleather industries, which are continuing to relocate their activities fromEurope and North America to Asia. Due to the decreasing markets for textile andleather chemicals in Europe, we are restructuring European productionactivities for these businesses and expanding those in Asia. In addition, weare building a new production plant for coatings raw materials in Caojing,China.

 

BASFviews the detergents industry as one of the division’s most important markets.The company is one of the largest producers of nonionic surfactants. Surfactantsenhance cleansing efficiency and are used, for example, in household detergentsand dishwashing agents as well as in industrial and institutional cleaningapplications.

 

ThePerformance Chemicals division’s principal competitors vary according to industry.However, the most significant competitors of the division are Ciba, Clariant,Shell, Sasol, Dow, Akzo Nobel and Bayer.

 

**Coatings**

 

BASFoffers innovative and environmentally friendly products for the automotiveindustry, including both finishes and refinishes, and for particular segmentsof the industrial coatings market. BASF also sells decorative paints in SouthAmerica for interior and exterior use in residential and commercial buildings.

 

In2005, the Coatings division’s sales to third parties were €2,180 million.Thereof, Europe accounted for 47%; North America (NAFTA) for 25%; SouthAmerica, Africa, Middle East 17%; and Asia Pacific for 11%.

 

BASF’sCoatings division provides customers with innovative high-solid, waterborne andpowder coating systems that reduce or eliminate solvent emissions and areconsidered environmentally and economically efficient. For example, BASF seessignificant growth opportunities for its “Integrated Process II” for automotiveOEM coatings, which is in the market roll-out phase. This innovative systemsimplifies the conventional process by requiring fewer coating layers, thusoffering substantial cost saving potential while reducing the environmentalimpact of auto body painting.

 

Thekey to the division’s success is maintaining preferred supplier status withmajor customers by collaborating with them to develop system solutions, such astailor-made products and services. These system solutions help the division todifferentiate its product offerings from those of its competitors and fosterlasting relationships with customers. As an example, BASF’s Suvinil® line of decorative paints competes in SouthAmerica primarily on the basis of brand recognition, product quality and price.

 

BASFsells products of the Coatings division to customers, particularly those in theautomotive industry, primarily through its own sales force. Third-partydistributors also sell products of the automotive refinish coatings, industrialcoatings and South American decorative paint businesses. The Coatings divisionsells all of its products to external customers.

 

TheCoatings division also uses e-commerce as an important distribution channel, inparticular for its automotive refinish coatings. In North America, customers ofBASF’s automotive refinish technologies business can order products online atbodyshopmall.com. For customers in Europe, the division has established similare commerce portals to sell its Glasurit® and R-M® brands.

 

BASFconsiders DuPont, PPG Industries and Akzo Nobel to be the primary globalcompetitors of the Coatings division, while Nippon Paint Company and KansaiPaint Company are considered to be the division’s key competitors in Asia.

 

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**Functional Polymers**

 

BASF’sFunctional Polymers division is one of the largest producers of acrylic acidand its downstream products, which are mainly superabsorbents and dispersions.In a polymer dispersion, submicron polymer particles are suspended in water.Polymer dispersions are used in a multitude of industries, including themanufacture of paper, decorative paints, adhesives, construction chemicals,non-woven materials, carpets, fibers and plastics. The Functional Polymersdivision also manufactures wet-end chemicals for paper production. The mostimportant customers of the Functional Polymers division are in the paper,construction, adhesive, sanitary care, coatings, and chemicals industries.

 

In2005, the Functional Polymers division’s sales to third parties were €3,198million. Thereof, Europe accounted for 49%; North America (NAFTA) for 26%; AsiaPacific for 16%; and South America, Africa, Middle East for 9%.

 

TheFunctional Polymers division’s strategic goal is to achieve long-term profitablegrowth in all regions and to increase market share in the rapidly growingmarkets in Asia.

 

TheFunctional Polymers division continues to strengthen its position in Asia, thefastest-growing market worldwide. In 2005, BASF completed the construction ofits second Asian Verbund site in Nanjing, China, where the division started theproduction of acrylic acid and its esters in the first quarter. In Shanghai,China, additional capacity for the production of polymer dispersions used aspaper coating binders came onstream in 2005.

 

Thedivision sells approximately 90% of its products to external customers. Thevast majority of the division’s products are primarily sold through BASF’s ownregional sales network. Some smaller customers purchase products throughdistributors.

 

TheFunctional Polymers division continues to develop e-commerce as a distributionchannel for its products. The division is increasingly selling its productsthrough Elemica Holding Ltd., an independent business-to-business e-commercecompany. The division’s participation in WorldAccount, BASF’s integrated globalextranet platform, is targeted at its customers in the adhesive, constructionand paper industries.

 

Acrylicmonomers are predominantly commodities and can therefore be affected bycyclicality. Other products, particularly polymer dispersions for adhesives,paints and non-wovens; superabsorbents; and paper process chemicals, arerelatively resilient to economic cycles and compete primarily on the basis ofproduct innovation and quality.

 

BASF’smain competitor in acrylic monomers and polymer dispersions is Rohm &Haas. Dow and Hercules are BASF’s main competitors in paper chemicals. In thesuperabsorbents business, BASF’s main global competitors are Degussa and NipponShokubai.

 

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**AGRICULTURAL PRODUCTS & NUTRITION**

 

**Segment Overview**

 

Thissegment consists of the Agricultural Products and Fine Chemicals divisions,which are treated as separate reportable operating units. The segment offersopportunities for high returns and is typically more resilient to economiccycles. In addition, the segment includes the activities of BASF Plant Science.Key financial information is provided in the following table:

 
| ** **                      | ** ** | **2005**             | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------------------|------------|----------|------------|
| ** **                      | ** ** | **(Million €)** | ** ** |
| **Agricultural  Products**      |       |                 |       |     |       |
| Sales to  third parties         |       | 3,298                |       | 3,354    |       |
| Percentage  of total BASF sales |       | 8%                   |       | 9%       |       |
| Intersegmental  transfers       |       | 29                   |       | 26       |       |
| Income from  operations         |       | 681                  |       | 602      |       |
| Capital  expenditures           |       | 74                   |       | 100      |       |
|                            |       |                 |       |     |       |
| **Fine  Chemicals**             |       |                 |       |     |       |
| Sales to  third parties         |       | 1,732                |       | 1,793    |       |
| Percentage  of total BASF sales |       | 4%                   |       | 5%       |       |
| Intersegmental  transfers       |       | 28                   |       | 30       |       |
| Income from  operations         |       | (58                  | )          | 56       |       |
| Capital  expenditures           |       | 222                  |       | 153      |       |

 

**Plant biotechnology**

 

BASFis one of the world’s leading companies in the field of research anddevelopment into plant biotechnology. Plant biotechnology is one of the company’sfive growth clusters and BASF plans to provide a further €270 million forresearch in this area in the next three years. We plan to contribute to thisattractive market of the future with our technology platform and anextensive project portfolio. Our activities in plant biotechnology are combinedin our subsidiary BASF Plant Science.

 

Amongother things, we are focusing on crops for improved nutrition and plants asrenewable raw materials – “green factories” – to produce specific chemicalsubstances. This includes plants with optimized constituent components such asoils, proteins, starches, vitamins or fatty acids. Another focus is to usebiotechnology to protect plants from pests and to increase the yield ofimportant crops such as corn (maize), wheat and soybeans. This also involvesdeveloping plants that are more resistant to drought. In 2005, we signed anextensive licensing agreement and research cooperation with the Belgianbiotechnology company CropDesign that we expect to give us a competitive advantage.

 

BASFPlant Science operates an international research and technology platform witha team of approximately 500 highly qualified staff at seven sites in Europe andNorth America. In addition, we cooperate with numerous research institutes,universities and biotechnology companies worldwide.

 

Oursubsidiary Metanomics in Berlin is an important part of this biotechnologynetwork. Metanomics operates a technology platform to identifyagronomically important genes on the basis of metabolic functional genomics.This involves determining the metabolic functions of specific genes in livingorganisms. This information opens up greater possibilities of finding newrelevant genes. By combining bioanalysis and bioinformatics, this platform achievesa high level of precision and performance and thus accelerates our research anddevelopment processes. In addition to the focus on plant research, thisapproach also opens up synergies in the areas of pharmacology, toxicology andnutritional science.

 

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**Agricultural Products**

 

**Overview**

 

TheAgricultural Products division is a leading innovator and supplier offungicides, insecticides and herbicides. The division’s products are used byfarmers to improve crop yields and crop quality and by other customers for usesin non-crop areas such as in public health, structural/urban pest control, turfand ornamental plants, vegetation management, and forestry.

 

Capitalexpenditures in the Agricultural Products division included mainly optimizationmeasures at several sites.

 

**Strategy**

 

TheAgricultural Products division directs major resources at meeting the needs ofthe high-value agricultural markets in Western and Central Europe, NorthAmerica, Brazil and Japan. The division aims to sustain its role as a leadinginnovator by continuing significant research and development activitiesfocusing on fungicides, insecticides and selected herbicides, where it expectsfurther market growth and high demand for innovations. Profitability of the AgriculturalProducts division is driven by:

 

•                  New products from its research pipeline orfrom acquisitions;

 

•                  Alignment of resources as well as product andservice offering to customers’ needs; and

 

•                  Effective management of assets and costs.

 

Thedivision is well positioned for continued profitable growth: We have a significantpresence in core markets, a strong late stage R&D pipeline, a high share ofpatent-protected products and high customer satisfaction.

 

BASFaims to grow profitably through innovation and acquisition, especially with newfungicides and insecticides and in specific applications such as seedtreatment. Products recently launched from the research pipeline include thefungicides F 500® andboscalid.

 

Thedivision continues to implement cost and asset optimization measures in matureor non-core segments. In 2005, it divested its triforine fungicide, its phorateinsecticide, its non-European imazamethabenz herbicide business, and amanufacturing plant in Resende, Brazil.

 

**Major Products**

 

*F 500*®*(pyraclostrobin)*

 

F500® (pyraclostrobin) is a major new fungicidal active ingredient ofthe strobilurin class of chemistry. It is highly effective, safe for cropsand has a favorable toxicological and ecotoxicity profile. As of the end of2005, F 500® hadbeen approved in more than 50 countries for over 100 crops in over 100indications. Products containing F 500® havebeen launched successfully in all regions. Therefore, BASF has updated the 2007sales target for products containing F 500® from€400 million to €500 million, assuming normal agricultural growing conditions.

 

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*Boscalid*

 

Boscalidis one of the most recent active ingredients from our research and is highlyeffective for controlling fungal diseases, especially in fruits and vegetables.With its broad spectrum of activity and crop uses, boscalid will become thebackbone of our specialty crop business and will complement our strobilurinesand other molecules. Launched for the 2003/04 season, it received registrationsin over 40 countries for almost 200 crops in over 100 indications by the end of2005.

 

*Fipronil*

 

Fipronilis an active ingredient of a new class of insecticide chemistry and wasacquired from Bayer CropScience on March 21, 2003. It plays a strategicrole in BASF’s insecticides portfolio. Fipronil puts the Agricultural Productsdivision in a position to strongly participate in ongoing and future shifts indemand towards more modern insecticides. Furthermore, it strengthens BASF’s positionin other attractive market segments, such as structural/urban pest control,turf and ornamental plants. BASF also expects to create synergies between fiproniland its current portfolio, especially in fungicides.

 

*The CLEARFIELD**®** Production System*

 

TheCLEARFIELD® Production System combines herbicide-resistantseeds developed using enhanced plant breeding methods with custom-designedherbicide solutions. CLEARFIELD® cropscurrently being marketed include canola, sunflower, corn, rice and wheat. Becausethe CLEARFIELD® technology does not involve theintroduction of genetic material from other sources, it is characterized asnon-GMO (genetically modified organisms), offering advantages to the growersfor certain markets.

 

**Research and Development**

 

BASF’sresearch and development activities in Agricultural Products cover all threeareas of crop protection: fungicides, insecticides and herbicides. Agrochemicalresearch activities are directed to the discovery of active ingredients witheconomic, biological and ecological advantages. BASF Plant Science conductsresearch in the area of agronomic traits for the division. Developmentactivities are primarily focused on high-value segments in core markets and forcore active ingredients.

 

In2005, research and development spending in the Agricultural Products divisionwas approximately 9% of the division’s sales to third parties.

 

BASFis currently working on developing six new active ingredients and on a newherbicide tolerance project. These inventions are being prepared for marketlaunch and have a peak sales potential of €700 million. Eight additional cropprotection active ingredients with a peak sales potential of €1.2 billion arecurrently being introduced to the market. In 2005, BASF launched the fungicidemetrafenone to the market and reclassified one new insecticide from itspromising discovery pipeline to its development pipeline.

 
| ** **                                                        | ** ** | **Uses**                           | ** ** | **Total Peak Sales Potential** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|
| **Projects  in market launch**                                    |       |                               |       | about €1,200  million     |       |
| 4 fungicides                                                      |       | Cereals, Soybeans, Specialty Crops |       |                           |       |
| 3 herbicides                                                      |       | Cereals, Corn                      |       |                           |       |
| 1  insecticide                                                    |       | Non-Crop                           |       |                           |       |
| **Projects  in development (launch targeted for 2006 and later)** |       |                               |       | about €700  million       |       |
| 2 fungicides                                                      |       | Cereals, Rice, Specialty Crops     |       |                           |       |
| 2 herbicides                                                      |       | Corn, Non-crop                     |       |                           |       |
| 1 herbicide  tolerance                                            |       | Soybeans                           |       |                           |       |
| 2  insecticide                                                    |       | Specialty Crops, Non-crop          |       |                           |       |
| **Total**                                                         |       |                               |       | **about  €1,900 million** |       |

 

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**Markets and Distribution**

 

In2005, the Agricultural Products division’s sales to third parties were €3,298million. Thereof, Europe accounted for 43%; North America (NAFTA) for 29%;South America, Africa, Middle East for 20%; and Asia Pacific for 8%.

 

TheAgricultural Products division markets its products globally, focusing onhigh-value markets. The following table shows sales by product group:

 
| Product Group                                 |       | 2005 Sales           |       |
|-----------------------------------------------|------------|----------------------|------------|
| ** **                                    | ** ** | **(Million €)** | ** ** |
| Fungicides                                    |       | 1,310                |       |
| Herbicides                                    |       | 1,222                |       |
| Insecticides  and other agrochemical products |       | 766                  |       |
| **Agricultural  Products**                    | ** ** | **3,298**            | ** ** |

 

TheAgricultural Products division directs marketing and sales efforts throughmulti-staged marketing channels, which include wholesalers and commercialdistributors.

 

Theglobal market for agricultural products is seasonal, since the main markets forthese products are in the Northern Hemisphere. Sales are higher in the firstand second quarters of the year, when the growing season in North America andEurope is underway. Sales during the second half of the year, driven primarilyby the main growing season in South America, are lower.

 

BASFconsiders the main competitors of the Agricultural Products division to beSyngenta, Bayer CropScience, Monsanto, Dow and DuPont.

 

**Governmental Regulation**

 

Inmost countries, crop protection products (including genetically modifiedplants) must obtain government regulatory approval prior to marketing. Theregulatory framework for crop protection and environmental health products isdirected at ensuring the protection of the consumer, the applicator and theenvironment. The strictest standards are applied in the United States, Japanand Western Europe.

 

Itgenerally takes five to seven years from the discovery of a new activeingredient until the dossier is submitted to the appropriate regulatory agencyfor product approval. The standard time frame for registration of anagricultural product is typically 30 to 36 months.

 

**Fine Chemicals**

 

**Overview**

 

BASF’sFine Chemicals division develops, manufactures and sells more than 1,000different products. The Fine Chemicals division serves steadily growing marketsdriven by a growing world population with increasing needs in healthcare andlifestyle by being a leading supplier of vitamins; carotenoids; pharmaceuticalactive ingredients and advanced intermediates; polymers for thepharmaceuticals, cosmetics and human nutrition industries; aroma chemicals; UV(ultraviolet light) filters; amino acids; enzymes; and non-antibiotic growthpromoters and organic acids for the animal nutrition industry. In all of thedivision’s main product groups except amino acids, BASF is one of the top twosuppliers. With the start of our feed enzyme production in Ludwigshafen,Germany, planned for early 2006, we will strengthen our leading position in theanimal nutrition business. Virtually all of the division’s products are sold toexternal customers.

 

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About60% of the division’s raw material purchases are bulk commodities from externaland internal sources, such as nutrients for vitamin premixes; sugar andmolasses for lysine and pseudoephedrine production; and urea and acetanhydridefor purines. There are currently no restrictions in supply for these commodityproducts. No single product accounts for more than 4% of our total externalpurchases of specialty (non-commodity) raw materials.

 

**Strategy**

 

TheFine Chemicals division aims to achieve superior growth and leading positionsin the markets it serves by leveraging chemical expertise, global presence,reliability of technical service and product quality. The division is focusedon delivering innovative products and customized solutions to the markets itserves. New production technologies are continuously being developed andapplied to reduce costs. The division envisages strong growth in its exclusivesynthesis business for the pharmaceuticals industry, which is still in itsemerging stages.

 

**Products**

 

*Vitamins*

 

BASFis the second largest vitamins producer worldwide, and vitamins account forapproximately one third of sales in the Fine Chemicals division. BASF marketsall of the 13 naturally occurring vitamins. In six of these vitamins, whichinclude the five most significant vitamins C, E, A, B2 andCalpan, BASF has a production position. The Fine Chemicals division sellsvitamins mainly to the human and animal nutrition industries, with a growingpresence in the cosmetics industry.

 

*Carotenoids*

 

Theseare nature-identical products that provide certain health benefits and are alsoused to color foods. This product line includes beta-carotene, canthaxanthineand astaxanthine for the food, feed and nutritional supplement industries forhuman and animal nutrition.

 

*Active Ingredients and AdvancedIntermediates*

 

Themain products in this category are caffeine, pseudoephedrine, theophylline,ibuprofen, povidone iodine and our new isotretinoin. Beverage manufacturersaccount for approximately 80% of the caffeine demand, and pharmaceuticalapplications consume the remaining share. Theophylline and pseudoephedrine areused to treat respiratory diseases. Ibuprofen is used in a variety ofover-the-counter and prescription products to treat mild to moderate pain, andisotretinoin is the standard for systemic acne therapy.

 

*Contract Manufacturing*

 

BASFoffers a range of customized manufacturing and formulation capabilities to theworldwide pharmaceuticals industry. These activities are complemented by flexible,multi-product cGMP plants, in particular at the Minden site in Germany, andBASF’s chemical and biotechnological R&D skills.

 

*Polymers*

 

TheFine Chemicals division sells highly functional polymers for such diverse usesas binders, disintegrants, coatings and solvents for the pharmaceuticalindustry, filtration aids for beverages, ingredients in hair care products suchas hairsprays, styling mousses, gels and hair conditioners for the cosmeticsindustry.

 

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*Amino Acids*

 

Aminoacids, such as lysine, are feed additives that serve as an efficient proteinsource for animal nutrition.

 

*Enzymes*

 

Enzymes,which are proteins that function as biochemical catalysts, are used for animalnutrition to improve feed absorption. BASF’s enzyme product line includesNatuphos®, Natustarch®, and Natugrain®.

 

*Organic Acids*

 

Theseare used as preservatives for grains and compound feeds and more recently asgrowth-enhancing agents. BASF offers a wide range of organic acid products thatsuppress the growth of molds and bacteria. BASF is the leading supplier ofstandard and tailor-made organic acids for the feed industry in Europe andAsia. With Formi®, BASF offers the first non-antibiotic growthenhancer, an alternative to antibiotics that are to be banned in animalbreeding in Europe as of 2006.

 

*Cosmetics Ingredients*

 

Theseare raw materials for personal care products with the major applications beinghair, skin, sun and oral care. The Fine Chemicals division is the world marketleader in UV absorbers for cosmetic applications and offers the full range ofUVA and UVB absorbers.

 

*Aroma Chemicals*

 

Theseare raw materials for flavor and fragrance compounds that are used in manyconsumer products industries such as the food, personal care and the fabricsand home care industries.

 

**Research and Development**

 

Thefocus of the Fine Chemicals division’s R&D activities changed in 2005 fromprocess innovation to product innovation. The major product launches comprisevarious new vitamin and carotenoid formulations, a new conditioning polymer, anew UV filter and a new formulation aid for pharma ingredients. In 2005, theFine Chemicals division spent approximately 4% of its sales to third parties onResearch and Development activities (2004: approximately 5%).

 

Processimprovements – mainly for biotechnological processes – are ongoing to furtherimprove our cost position.

 

**Markets and Distribution**

 

In2005, the Fine Chemicals division’s sales to third parties were €1,732 million.Thereof, Europe accounted for 46%; North America (NAFTA) for 25%; Asia Pacificfor 20%; and South America, Africa, Middle East for 9%.

 

Themain customers of the Fine Chemicals division are global players in the animalnutrition, human nutrition, pharmaceuticals, personal care, and flavors andfragrances industries. A significant percentage of the division’s products aresold in small, specialty volumes and are often tailor-made to meet specificcustomer specifications.

 

BASFsells the majority of its fine chemicals products through its own sales force.Key account managers are assigned to major customers. Through its sales andmarketing departments, BASF works closely with customers to develop systems andsolutions as well as new products. BASF also sells its fine chemicals productsthrough its global e-commerce platform, WorldAccount.

 

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BASF’scompetitive position depends to a large extent on its ability to compete onprice, product quality and customer service. BASF expects the trend towardglobalization and consolidation for both the manufacturing and the consumerindustries to continue. The trend toward commoditization for certain fine chemicals,such as vitamins, is also continuing. Due to the unsatisfactory earnings trend,we have started a restructuring program to improve efficiency in this segment.

 

BASFconsiders its main competitors in the animal nutrition area to be DSM, ArcherDaniels Midland, Novo Nordisk, Adisseo Group, Rhodia, Eisai and new entrantsfrom China. In the human nutrition area, BASF’s main competitors are DSM of theNetherlands and several Asian companies. In pharmaceutical active ingredients,BASF considers Albemarle Corporation, International Specialty Products and FMCCorporation to be its main competitors, as well as a number of Chinese andIndian suppliers. In cosmetics and aroma chemicals, LC United, InternationalSpecialty Products, Millennium Specialty Chemicals, National Starch &Chemical, Givaudan, Symrise and Kuraray are BASF’s main competitors.

 

**Governmental Regulation**

 

BASF’svarious Fine Chemicals products are subject to regulation by governmentagencies throughout the world. The primary emphasis of these requirements is toassure the safety and effectiveness of BASF’s products. Of particularimportance in the United States is the Food and Drug Administration (FDA),which regulates many of BASF’s Fine Chemicals products. The FDA oversees themarketing, manufacturing and labeling of cosmetics (e.g., sunscreen agents),pharmaceuticals (e.g., pharmaceutical active ingredients), foods (e.g., dietarysupplements, including vitamins) and feeds (e.g., vitamins, carotenoids). TheFederal Trade Commission regulates claims made in the advertising of dietarysupplements. Animal health products are also regulated in the United States bythe United States Department of Agriculture and the Environmental ProtectionAgency.

 

Inthe E.U., similar regulatory systems are established on the national level ofdifferent member states as well as on the pan-European government level.Positive lists and negative lists in Europe regulate the usage of varioussubstances in order to ensure consumer safety. Before the substances are addedto these lists, they are subject to a rigorous approval procedure.

 

Incountries other than the United States and those of the E.U. in which BASFconducts business, BASF is subject to regulatory and legislative environmentsthat are similar to or sometimes even more restrictive than those describedabove.

 

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**OIL & GAS**

 

**Segment Overview**

 

BASFconducts the activities of its Oil & Gas segment through its 100%subsidiary Wintershall AG. Wintershall and its affiliated companies are activein two sectors: Oil and Natural Gas Exploration and Production, and Natural GasDistribution and Trading. Key information is provided in the table below:

 
| ** **                                                | ** ** | 2005                 |       | 2004  |   |
|-----------------------------------------------------------|------------|----------------------|------------|-------|--------|
| ** **                                                | ** ** | **(Million €)** | ** ** |
| Sales to  third parties, net of natural gas taxes         |       | 7,656                |       | 5,263 |   |
| Percentage  of total BASF sales                           |       | 18%                  |       | 14%   |   |
| Intersegmental  transfers                                 |       | 723                  |       | 546   |   |
| Sales  including intersegmental transfers                 |       | 8,379                |       | 5,809 |   |
| Royalties                                                 |       | 281                  |       | 243   |   |
| Sales  including intersegmental transfers, less royalties |       | 8,098                |       | 5,566 |   |
| Income from  operations*                                  |       | 2,410                |       | 1,643 |   |
| Capital  expenditures                                     |       | 624                  |       | 388   |   |

 

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*                  Income taxes on oil production in NorthAfrica and the Middle East that are noncompensable with German corporate incometax in the amount of €1,072 million (2004: €668 million) are not deducted fromincome from operations but are reported as income taxes. Please see Note 10 tothe Consolidated Financial Statements included in Item 18.

 

**Segment Strategy**

 

InEurope, the segment strategy is driven by the integration of the Explorationand Production business and the Natural Gas Distribution and Trading business.Our “Gas for Europe” concept is based on the increasing demand for natural gasimports into Western Europe. Thus, one of the key drivers of our upstreamactivities is exploration for and development and production of gas in andaround Europe with our midstream business bringing the gas to market.

 

Wintershallfocuses on building strong alliances with its business partners to develop newprojects. The most prominent examples include our participation with Gazprom,Russia in the Baltic Sea pipeline project, the development of the Achimovformation in the Urengoy field in Western Siberia, and negotiations withGazprom to jointly develop one of the largest undeveloped Russian gas fields,Yushno-Russkoye, in Western Siberia.

 

Inthe Oil and Natural Gas Exploration and Production business, we have increasedproduction by 41% since 1999. This is in line with our long-term objective toincrease production during the current decade by 50%. BASF’s goal is tomaintain a robust ratio of proved reserves to production and a balancedportfolio of assets operated both by Wintershall and by third parties. Toensure the company’s ongoing competitiveness and efficiency, Wintershallfocuses geographically on a limited number of hydrocarbon provinces. These areEurope, North Africa, South America (Southern Cone) and Russia (including theCaspian Sea).

 

TheNatural Gas Distribution and Trading strategy is based on a stronginfrastructure including pipeline and storage facilities that are strategicallylocated for gas imports to and distribution within Germany as well as fortransit to other European countries. Marketing activities are regionallyfocused on Germany, the countries bordering Germany, and the U.K. To supportthe business expansion into other European countries, we have initiatedprojects to build additional storage capacities outside of Germany, such asSaltfleetby in the U.K. and Haidach in Austria.

 

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**Reserves**

 

TheOil & Gas segment’s most significant oil reserves are in Libya andGermany. The most significant natural gas reserves are in Argentina, Germanyand the Netherlands. The Oil & Gas segment’s proved oil and gasreserves and proved developed oil and gas reserves by geographic area were asfollows:

 
| ** **                                               | ** ** | **Germany** | ** ** | **Libya** | ** ** | **Argentina** | ** ** | **The  Netherlands** | ** ** | **Rest of  World** | ** ** | **Total** | ** ** | **Rest of  World  (at equity)** | ** ** |
|----------------------------------------------------------|------------|-------------|------------|-----------|------------|---------------|------------|----------------------|------------|--------------------|------------|-----------|------------|---------------------------------|------------|
| **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 December 31, 2003  Oil (millions of barrels)** |       |        |       |      |       |          |       |                 |       |               |       |      |       |                            |       |
| Proved  reserves                                         |       | 93          |       | 407       |       | 52            |       | 0                    |       | 10                 |       | 562       |       | 14                              |       |
| Proved  developed reserves                               |       | 60          |       | 338       |       | 28            |       | 0                    |       | 10                 |       | 436       |       | 14                              |       |
| **Gas  (billions of cubic feet)**                        |       |        |       |      |       |          |       |                 |       |               |       |      |       |                            |       |
| Proved  reserves                                         |       | 453         |       | 226       |       | 1,463         |       | 253                  |       | 16                 |       | 2,411     |       | —                          |       |
| Proved  developed reserves                               |       | 395         |       | 137       |       | 604           |       | 151                  |       | 16                 |       | 1,303     |       | —                          |       |

 

At2005 levels of production, proved oil reserves would last approximately sevenyears, and proved gas reserves would last approximately nine years. Foradditional information on reserves, please see “Supplementary informationconcerning oil and gas producing activities (unaudited)” included in Item 18.

 

**Exploration and Production**

 

Thenet quantities of oil and gas produced as well as the average sales price andproduction cost (lifting cost) per unit of oil and gas produced in each of thelast three years were as follows:

 
| ** **                                                        | ** ** | 2005        |       | 2004        |       | 2003        |       |
|-------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Oil**                                                           | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Net  quantities produced (millions of barrels)                    |       | 65          |       | 64          |       | 65          |       |
| Average  sales price less royalties (per barrel)                  |       | €34.36 |       | €22.54 |       | €18.90 |       |
| Average  production cost (lifting cost) (per barrel)              |       | €3.42  |       | €3.06  |       | €3.20  |       |
| **Gas**                                                           | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Net  quantities produced (billions of cubic feet)                 |       | 272         |       | 258         |       | 228         |       |
| Average  sales price less royalties (per thousand cubic feet)     |       | €2.44  |       | €2.26  |       | €2.04  |       |
| Average  production cost (lifting cost) (per thousand cubic feet) |       | €0.56  |       | €0.53  |       | €0.57  |       |

 

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Wintershall’stotal gross and net productive wells, total gross and net developed acres andtotal gross and net undeveloped acres (both leases and concessions) as of December 31,2005, were as follows:

 
| ** **                                    | ** ** | **Germany** | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **The  Netherlands** | ** ** | **Rest of  World****(1)** | ** ** | **Total**  | ** ** | **Rest of  World  (at equity)** | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------|------------|---------------|------------|----------------------|------------|---------------------------|------------|------------|------------|---------------------------------|------------|
| **Oil**                                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **           | ** ** | ** **                | ** ** | ** ** | ** ** | ** **                      | ** ** |
| Total gross  productive wells                 |       | 507.0       |       | 72.0       |       | 57.0          |       | 8.0                  |       | 248.0                     |       | 892.0      |       | 12.0                            |       |
| Total net  productive wells                   |       | 240.0       |       | 65.9       |       | 18.2          |       | 8.0                  |       | 12.4                      |       | 344.5      |       | 6.0                             |       |
| **Gas**                                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **           | ** ** | ** **                | ** ** | ** ** | ** ** | ** **                      | ** ** |
| Total gross  productive wells                 |       | 140.0       |       | —     |       | 186.0         |       | 128.0                |       | 9.0                       |       | 463.0      |       | —                          |       |
| Total net  productive wells                   |       | 65.0        |       | —     |       | 46.2          |       | 21.7                 |       | 4.1                       |       | 137.0      |       | —                          |       |
| **Oil and Gas Acreages  (thousand of acres)** | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **           | ** ** | ** **                | ** ** | ** ** | ** ** | ** **                      | ** ** |
| Total gross  developed acres                  |       | 187.5       |       | 41.9       |       | 274.9         |       | 109.3                |       | 75.4                      |       | 689.0      |       | 1.0                             |       |
| Total net  developed acres                    |       | 66.3        |       | 39.9       |       | 67.4          |       | 18.8                 |       | 7.2                       |       | 199.6      |       | 0.5                             |       |
| Total gross  undeveloped acres                |       | 2,937.4     |       | 995.5      |       | 8,683.1       |       | 3,114.5              |       | 15,776.3                  |       | 31,506.8   |       | 5,165.4                         |       |
| Total net  undeveloped acres                  |       | 1,377.0     |       | 407.1      |       | 3,732.4       |       | 846.1                |       | 5,178.5                   |       | 11,541.1   |       | 2,582.7                         |       |

 

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(1) Consolidated activities only

 

In2005, Wintershall spent €492 million for exploration, acquisition andinvestment, compared with €425 million in 2004. Thereof, €239 million was spentin Europe (2004: €199 million), €94 million in South America (2004: €76million), €89 million in North Africa/Middle East (2004: €125 million) and €70million in Russia/Caspian Sea (2004: €25 million).

 

Eitherdirectly or through its subsidiaries, Wintershall was involved in the drillingand completion of 16 exploration and appraisal wells, which resulted in 11successful wells. As of December 31, 2005, Wintershall had begun drillingnine additional exploratory wells.

 

*Europe*

 

InGermany, the offshore field Mittelplate, with approximately 200 million barrelsof proved initial reserves, is the country’s largest known oil reservoir.Wintershall and its 50% partner RWE DEA AG, have completed a pipeline from theoffshore production platform to the onshore facilities and can nowincrease production of this field. This eliminates the need to transport oil throughthe national park “Wattenmeer” via double hull barges, which were usedincident-free for the last 19 years.

 

In2005, Wintershall slightly increased its production of natural gas and crudeoil in the Netherlands by starting up two new gas fields and successfullyrehabilitating an oil field. One additional gas discovery is under development.Wintershall is one of the largest gas producer in the Netherlands. In the U.K.Southern North Sea, Wintershall was awarded six exploration blocks. In Norway,Wintershall farmed into an offshore block operated by Norsk Hydro. Furthermore,Wintershall received shares of 20% each in two offshore licenses during the APA2005 bidding round.

 

*NorthAfrica/Middle East*

 

InLibya, Wintershall operates six onshore oil fields and produces associatednatural gas for local consumption. Production could be increased, compared to2004, by bringing a new oil field on stream. Successful exploration led toadditional hydrocarbon findings. During 2005, Wintershall continued its effortsto tie-in satellite fields to its own pipeline system with the goal of fullyutilizing the associated gas produced. Offshore Libya, Wintershall holds a12.5% interest in the Al Jurf oil field.

 

OnshoreMauritania, two production sharing contracts were signed. In Morocco, twoexploration licenses were relinquished. Exploration drilling in Qatar led to anoil discovery that will trigger appraisal activities in 2006.

 

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*SouthAmerica/Southern Cone*

 

Wintershallproduces substantial volumes of its natural gas in Argentina. The Carina gas fielddevelopment off the coast of Tierra del Fuego has been completed, and the fieldhas been on stream since mid 2005. Production startup of the adjacent Aries gasfield is expected for early 2006. Furthermore, Wintershall continued itsexploration efforts with both operated and non-operated licenses. Explorationactivities offshore Brazil were abandoned in 2005.

 

*Russia/CaspianSea*

 

BASFhas a cooperation agreement with Gazprom that provides a legal and commercialframework for field development projects. Wintershall and Gazprom arecooperating in the development of large gas/condensate fields in WesternSiberia. The first project, the development of the Achimov formation in a part ofthe Urengoy field, reached the operational phase early in 2005. Start ofdrilling is scheduled for early 2006. In addition, Wintershall and Gazprom arenegotiating Wintershall’s participation in the development of the YushnoRusskoye gas field in Western Siberia.

 

Inthe Volga region, the joint venture company Wolgodeminoil, with its partnersWintershall and Lukoil, continued oil exploration and production activities.

 

OffshoreTurkmenistan, Wintershall took a share of 20% in each of two blocks offered bythe operator Maersk in 2005. Part of the commitment is the currentdrilling of the first exploration well.

 

***Risks and opportunities***

 

Ingeneral, oil and gas exploration and production activities require high levelsof investment and entail special economic risks and opportunities. Theseactivities tend to be highly regulated, and companies engaging in theseactivities generally may face intervention by governments in matters suchas:

 

•                  The award of exploration and productionlicenses,

 

•                  The imposition of specific drilling and otherwork-related obligations,

 

**•****     **Environmental protection measures,

 

•                  Control over the development and abandonmentof fields and installations, and

 

•                  Restrictions on production.

 

Crudeoil prices are subject to international supply and demand and other factorsthat are beyond an oil company’s control. Such factors can also affect theprice of natural gas sold under long-term contracts, because in Germany and inmany other countries, natural gas pricing is typically tied to prices of refinedproducts pursuant to a specified time lag. Crude oil prices are generally setin U.S. dollars, while costs may be incurred in a variety of currencies.Fluctuations in exchange rates can therefore give rise to foreign exchangeexposures.

 

Aswith most international oil and gas companies, substantial portions of the oiland gas reserves of Wintershall are located in countries which can beconsidered politically and economically less stable than the OECD countries. Todate, political risks have not significantly affected the Oil & Gassegment or had a material adverse effect on BASF’s financial condition orresults of operations.

 

Whereverpossible, Wintershall arranges capital investment guarantees by the Germangovernment to protect its investments. German government guarantees currentlycover a total investment volume by Wintershall of approximately €625 million,including inventory of raw materials and supplies.

 

Generaluncertainties are inherent in estimating quantities of proved reserves and inprojecting future rates of production and timing of development expenditures.The accuracy of any reserve estimate is a function of the quality of availabledata, reservoir engineering, as well as geological interpretation and judgment.Results of drilling, testing and production after the date of the estimate may requiresubstantial upward or downward revisions. In addition, changes in oil andnatural gas prices could have an effect on the economically recoverablereserves. Accordingly, reserve estimates could be materially different from thequantities of oil and natural 

 

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gas that are ultimatelyrecovered. To reduce uncertainties, Wintershall has used independent,internationally recognized auditors for some years to perform reservesaudits of its major oil and gas fields.

 

**Natural Gas Distribution andTrading**

 

BASFconducts its natural gas distribution and trading activities pursuant to anextensive agreement with OOO Gazexport, a subsidiary of Gazprom. Wintershalland OAO Gazprom established two joint ventures:

 

•                  WINGAS, in which Wintershall has a 65% shareand

 

•                  WIEH, in which Wintershall has a 50% share,although profit distributions are differentiated according to customers andcountries of sale.

 

WINGASowns and operates a large pipeline system in Germany that is more than 2,000kilometers in length and is currently the third largest German natural gastransmission and distribution company. The company also owns and operates thelargest underground natural gas storage site in western Europe with a workinggas capacity of 157 billion cubic feet. In the United Kingdom, the developmentof proprietary gas storage facilities continues as scheduled. The natural gas field“Saltfleetby,” which was acquired in 2004, is going to be converted into a gasstorage facility. In May, WINGAS entered into a joint-venture contract with Rohöl-AufsuchungsAG (RAG) and OOO Gazexport, each partner with 1/3 ownership. According to thecontract, the Austrian natural gas field “Haidach” is going to be convertedinto a gas storage facility.

 

Sofar, WINGAS has invested more than €3 billion. Capital expenditures in 2005totaled €244 million. The main project was the extension of the STEGAL, whichconnects the WINGAS pipeline system with the Czech pipeline system as well asthe Polish network via JAGAL.

 

InSeptember 2005, Gazprom, E.ON AG (Germany) and BASF signed a memorandum ofunderstanding to jointly build the “North European Gas Pipeline” (NEGP).Gazprom will participate with 51%, BASF and E.ON AG with 24.5% each. NEGP willrun from Vyborg in Russia through the Baltic Sea to the vicinity of Greifswaldin Germany where it will be connected with the pipeline systems of WINGAS andE.ON Ruhrgas.

 

Procurementof Russian gas is supplemented by purchases of West European gas. In 2005,WINGAS entered into several procurement contracts with a range of West Europeansuppliers to diversify its procurement portfolio as well as to optimize theoperation of its pipeline systems. Moreover, WINGAS used procurementopportunities at West European trading hubs, such as the National BalancingPoint (NBP) in Great Britain and Zeebrugge in Belgium.

 

WIEHexclusively acts as a trading company, purchasing Russian natural gas andmarketing it to WINGAS and Verbundnetz Gas AG (VNG), a transmission anddistribution company in eastern Germany in which Wintershall has a 15.8% share.WIEH also markets Russian natural gas in central Europe through its whollyowned Swiss subsidiary WIEE.

 

Dueto new European and German legislation, the WINGAS gas transmission divisionwill be spun off into an independently operating company on January 1,2006.

 

Thesales volume of WINGAS, WIEH and WIEE totaled 1,127 billion cubic feet comparedwith 1,037 billion cubic feet the year before. BASF’s consolidated sales volumein 2005 was 797 billion cubic feet, representing a 11% increase over theprevious year’s sales volume of 718 billion cubic feet.

 

WINGAS’sbiggest customer is BASF’s own Verbund site in Ludwigshafen. In 2005, BASFpurchased approximately 102 billion cubic feet for its Ludwigshafen site andother sites in Germany and Belgium. Approximately 29 billion cubic feet weresold to other BASF companies in Germany and Great Britain, and 10 billion cubicfeet were sold to WIEH.

 

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**ENVIRONMENTAL MATTERS**

 

BASFis subject to extensive, evolving and increasingly stringent international andlocal environmental laws and regulations concerning: the production,distribution, handling and storage of our products; the disposal of materials;the practices and procedures applicable to construction and operation of sites;the exploration and production of oil and gas; and the maintenance of safeconditions in the workplace.

 

These Environmental protection and remediation laws and regulationsgovern primarily:

 

•                  The protection of humans and the environmentfrom the harmful effects of dangerous chemical substances;

 

•                  Emissions into the air and other releasesinto the environment; and

 

•                  The purification and discharge of wastewaterand waste management, focusing on waste avoidance and reuse of waste.

 

AlthoughBASF believes that its production sites and operations currently fully complywith all applicable laws and regulations, these laws and regulations haverequired, and in the future could require, BASF to take action to remediate theeffects on the environment of the prior disposal or release of chemicals,petroleum substances, or waste. Such laws and regulations have applied, and inthe future could apply, to various sites, including BASF’s chemical plants, oilfields, waste disposal sites, chemical warehouses and natural gas storagesites. In addition, such laws and regulations have required, and in the futurecould require, BASF to install additional controls for certain emissionsources, undertake changes in its operations in future years and remediate soilor groundwater contamination at current and/or former sites and facilities.

 

BASF’soperating costs for environmental protection totaled €623 million in 2005.These costs are recurring or one-time costs associated with sites or measuresthat are incurred in the avoidance, reduction or elimination of deleteriouseffects on the environment. They include the costs of disposal sites, such aswastewater treatment plants and residue incinerators. They also comprisedifferent levies such as effluent levies and water levies, costs for disposalservices by third parties, monitoring, analyses and surveillance carried out bymobile and stationary units as well as research and development costs forreducing the incidence of residues. BASF spent approximately €78 million in2005 on capital expenditures for pollution control devices and equipment.

 

BASFalso incurs costs to remediate the impact of the past disposal as well as therelease of chemicals or petroleum substances or waste, both at its own sitesand at third-party sites to which BASF sent waste for disposal. Worldwide, BASFhad established provisions of €253 million for anticipated investigation andclean-up costs at such sites as of December 31, 2005, and €204 million asof December 31, 2004.

 

Inthe United States, liability for remediation of contamination is imposedgenerally pursuant to the federal Comprehensive Environmental ResponseCompensation and Liability Act (Superfund) and analogous state laws. Althoughsuch U.S. laws generally allow the recovery of the total cost of cleanup fromany single responsible party, cleanup costs typically are shared among severalresponsible parties at third-party sites where multiple parties sent waste tothe site for disposal, and sometimes at owned or operated sites where apredecessor or other third-party disposed of waste on-site. BASF has been notifiedthat it may be a potentially responsible party at such sites. Theproceedings related to these sites are in various stages. The cleanup processhas not been completed at most sites. The number, potential liability and financialviability of other parties are typically not fully resolved, and the status ofthe insurance coverage for most of these proceedings is uncertain. Consequently,BASF cannot accurately determine the ultimate liability for investigation orcleanup 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. Such liabilities include all costs that are probable and can bereasonably estimated. In establishing these liabilities, BASF considers itsshipments of waste to a site and its percentage of total waste shipped to thesite (in the case of third-party sites); the types of waste involved; theconclusions of any studies; the magnitude of any remedial actions which may benecessary; and the number and 

 

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viability of otherpotentially responsible parties. Although the ultimate liability may differfrom estimates, BASF routinely reviews liabilities and revised estimates, asappropriate, based on the most current information available.

 

BASFhas established and continues to establish provisions for environmentalremediation liabilities where the amount of such a liability can be reasonablyestimated. BASF sets up or adjusts accruals as new remediation commitmentsarise or additional information becomes available. For further information, seeNote 24 to the Consolidated Financial Statements included in Item 18.

 

BASFestablishes provisions for currently known potential soil contamination at BASFsites that are still in operation. In general, investigations into potentialcontamination and subsequent cleanups are only required when a site is closedand the existing production facilities dismantled. Taking into account BASF’sexperience to date regarding environmental matters and currently known facts,BASF believes that capital expenditures and remedial actions necessary tocomply with existing laws and conditions governing environmental protection,exceeding the existing provisions, will not have a material effect on BASF’sconsolidated financial condition or results of operations.

 

Inconnection with the onshore and offshore oil and gas activities conducted byBASF’s subsidiary, Wintershall, BASF is subject to an increasing number ofinternational and national laws, regulations and directives governing theprotection of the environment. In connection with the exploration, drilling,production, storage, transportation and distribution of oil and gas, theseregulations may, among other things:

 

•                  Require permits;

 

•                  Restrict the types, quantities and concentrationof substances that may be released into the environment;

 

•                  Limit or prohibit such activities on landwithin environmentally protected areas; and/or

 

•                  Impose criminal or civil liability forpollution of soil, water and air as a result of such activities.

 

Wintershallperforms environmental impact studies where new oil and gas activities areplanned and complies with environmental protection principles when onshore andoffshore sites are abandoned. Environmental laws and regulations have anincreasing impact on the oil and gas industries and therefore on Wintershall.It is impossible to accurately predict the effect of future developments insuch laws and regulations on Wintershall’s future earnings and operations. BASFcan make no assurance that Wintershall will not incur material costs andliabilities relating to environmental matters.

 

Inrecent years, the operations of all chemical companies have become subject toincreasingly stringent legislation and regulations related to occupationalsafety and health, product registration and environmental protection. Suchlegislation and regulations are complex and constantly changing, and there canbe no assurance that future changes in laws or regulations would not requireBASF to install additional controls for certain of its emission sources, toundertake changes in its manufacturing processes, or to investigate possiblesoil or groundwater contamination and remediate proven contamination at siteswhere such cleanup is not currently required.

 

Inthe area of emissions trading, the BASF Group has been assigned certificatesfor nearly 5 million metric tons of CO2/year for the first trading period(2005-2007) for all of its European sites. In the second trading period(2008-2012), conditions are expected to be stricter due to higher reductiontargets in all E.U. countries, the complete inclusion of chemical plants, andthe extension of the legislation to further climate gases.

 

TheEuropean Union is currently preparing new legislation on chemicals (REACH) thatwill alter the registration, evaluation and approval of chemical substances.The new legislation is not expected to come into force before 2007. It is notyet possible to place a final figure on the associated costs.

 

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**SUPPLIESAND RAW MATERIALS**

 

**Raw materials procurement**

 

The major raw materials thatfeed BASF’s Verbund production sites are hydrocarbon-based raw materials suchas naphtha and LPG (liquefied petroleum gas). These are feedstocks for thesteam crackers that are operated in Ludwigshafen, Germany; Antwerp, Belgium;Port Arthur, Texas and since 2005 in Nanjing, China. BASF monitors the marketfor naphtha, and hedges its exposure by using swaps and options. Otherimportant hydrocarbon-based raw materials are natural gas, benzene andpropylene. For its German operations, BASF primarily sources its natural gasfrom Russia by means of long-term natural gas supply contracts. In the UnitedStates, BASF secures its natural gas requirements based on shorter term supplycontracts related to national sources with various suppliers. Other importantraw materials for BASF include cyclohexane, ammonia, titanium dioxide andmethanol.

 

BASF applies e-commerce as atool to continuously improve the efficiency of its procurement processes. Thishas a positive impact on process times and process quality. BASF uses theelectronic marketplace cc-hubwoo, in which we own a stake, for procuringtechnical goods and services. BASF has integrated the marketplace Elemica inthe purchasing processes for raw materials. Elemica is used as a tradingplatform for chemical products by more than 230 customers and suppliers.

 

BASF has a policy ofmaintaining, when possible, multiple sources of supply for its raw materials.BASF has not experienced any difficulty in obtaining sufficient supplies of rawmaterials in recent years and believes it will generally be able to obtain themat competitive market prices in the future. However, BASF cannot guarantee thatunforeseen developments will not adversely affect its ability to obtain sufficient,competitively priced raw materials in the future.

 

**ORGANIZATIONAL STRUCTURE**

 

BASF Aktiengesellschaft isthe ultimate parent company of the BASF Group. The Group operates in fiveseparate business segments which encompass BASF’s 12 operating divisions. Thebusiness segments are reportable segments except for the business segmentAgricultural Products & Nutrition, which is treated as two reportablesegments, disclosing separately the Agricultural Products and Fine Chemicalsdivisions.

 

Business operations are runby 57 regional and global business units, organized along business or productlines. As profit centers, they are responsible for all business operations –from production to marketing and sales – and their processes arecustomer-oriented.

 

In addition to its operatingdivisions and business units, BASF has three corporate divisions that supportthe Board of Executive Directors in directing the company’s activities, andeleven competence centers that oversee strategic activities and set globalstandards. The corporate divisions are Legal, Taxes & Insurance; Planning& Controlling; and Finance. The competence centers are Global Procurementand Logistics; Information Services; Human Resources; Environment, Safety &Energy; Corporate Engineering; Chemicals Research & Engineering; SpecialtyChemicals Research; Polymer Research; Plant Biotechnology Research;Occupational Medicine & Health Protection; and University Relations &Research Planning.

 

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The following table setsforth significant subsidiaries owned, directly or indirectly, by BASFAktiengesellschaft:

 
| **Name of Company**                               | ** ** | **Percentage  owned (%)** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | ** **                     | ** ** |
| BASF Coatings AG, Münster-Hiltrup, Germany             |       | 100                            |       |
|                                                        |       |                           |       |
| BASF Schwarzheide GmbH, Schwarzheide,  Germany              |       | 100                            |       |
|                                                        |       |                           |       |
| Elastogran GmbH, Lemförde, Germany                     |       | 100                            |       |
|                                                        |       |                           |       |
| Wintershall AG, Kassel, Germany                             |       | 100                            |       |
|                                                        |       |                           |       |
| BASF Antwerpen N.V., Antwerp, Belgium                       |       | 100                            |       |
|                                                        |       |                           |       |
| BASF Española S.A., Tarragona, Spain                   |       | 100                            |       |
|                                                        |       |                           |       |
| BASF Corporation, Florham Park, New Jersey                  |       | 100                            |       |
|                                                        |       |                           |       |
| BASF S.A., São Bernardo do Campo, Brazil               |       | 100                            |       |
|                                                        |       |                           |       |
| BASF Company Ltd., Seoul, South Korea                       |       | 100                            |       |
|                                                        |       |                           |       |
| BASF Petronas Chemicals SDN. BHD., Petaling  Jaya, Malaysia |       | 60                             |       |

 

**DESCRIPTION OF PROPERTY**

 

BASF owns and operatesnumerous production and manufacturing sites throughout the world. The principaloffices of BASF Aktiengesellschaft are located in Ludwigshafen, Germany. Inaddition, BASF operates regional headquarters, sales offices, distribution centersand research and development facilities worldwide. We believe that ourproduction sites are well aligned with both our present capacity requirements,and our future growth strategy. We are constantly evaluating the location, efficiencyand capacity of our plants, and taking action where appropriate.

 

At the heart of BASF’sintegration strategy are its Verbund production sites, which produce a widerange of products. BASF produces approximately 8,000 products, which can varysignificantly in quantity produced and sales price. The following is adescription of our operational Verbund sites and production capacities ofcertain significant products. Capacities are listed in metric tons per yearunless otherwise noted.

 

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| **Segment**                                         |       | **Product**                                    |       | **Production Sites**     | ** ** | ** **               |       |
|-----------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
|                                                |       |                                           |       | **Ludwigs-  hafen,  Germany** | ** ** | **Antwerp,  Belgium**    | ** ** | **Geismar,  Louisiana  and  Freeport,  Texas** | ** ** | **Kuantan,  Malaysia,  and  Nanjing,  China** | ** ** | **Other  Sites** | ** ** | **Total World  Capacity /  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 |   | 2,850,000 | (1)  (10) |
|                                                |       | Propylene                                      |       | x                             |       | x                        |       |   |   | x |   | x |   | 2,310,000 | (1)  (4) (10) |
|                                                |       | Benzene                                        |       | x                             |       | x                        |       |   |   | x |   | x |   | 850,000 | (1)  (10) |
|                                                |       | Butadiene                                      |       | x                             |       |                     |       |   |   |   |   | x |   | 515,000 | (2) |
|                                                |       | Oxo C4 alcohols  (calculated as butyraldehyde) |       | x                             |       |                     |       | x |   | x |   | x |   | 1,320,000 | (3)  (10) |
|                                                |       | Plasticizers                                   |       | x                             |       |                     |       |   |   | x |   | x |   | 395,000 | (3) |
|                                                |       | Ethylene oxide                                 |       | x                             |       | x                        |       | x |   | x |   |   |   | 1,175,000 | (10) |
|                                                |       | Ethanolamines  and derivatives                 |       | x                             |       | x                        |       |   |   |   |   |   |   | 255,000 |   |
|                                                |       | Alkylamines                                    |       | x                             |       | x                        |       |   |   | x |   | x |   | 221,000 | (10) |
|                                                |       | 1,4-Butanediol                                 |       | x                             |       |                     |       | x |   | x |   | x |   | 500,000 | (5)  (3) |
|                                                |       | Polytetrahydrofuran                            |       | x                             |       |                     |       | x |   |   |   | x |   | 194,000 |   |
|                                                |       | 1,6-Hexanediol                                 |       | x                             |       |                     |       | x |   |   |   |   |   | 38,000 |   |
|                                                |       | Neopentylglycol                                |       | x                             |       |                     |       | x |   |   |   | x |   | 145,000 | (6) |
|                                                |       | Formic and                                     |       |                          |       |                     |       |   |   |   |   |   |   | 230,000 |   |
|                                                |       | propionic  acid                                |       | x                             |       |                     |       |   |   | x |   |   |   | 110,000 | (10) |
|                                                |       | Phosgene derivatives                           |       | x                             |       |                     |       |   |   |   |   | x |   | 60,000 |   |
| **Plastics**                                        |       | Styrene and  styrene-based polymers            |       | x                             |       | x                        |       |   |   |   |   | x |   | 5,794,600 | (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                                |       |                          |       |                     |       |   |   |   |   | x |   | 625,000 | (8)  (9) |
| **Performance  Products**                           |       | Organic pigments                               |       | x                             |       |                     |       |   |   |   |   | x |   | 34,500 |   |
|                                                |       | HDI                                            |       |                          |       |                     |       |   |   |   |   | x |   | 10,000 |   |
|                                                |       | Polyisobutene                                  |       | x                             |       | x                        |       |   |   |   |   |   |   | 100,000 |   |
|                                                |       | Nonionic  surfactants                          |       | x                             |       | x                        |       | x |   |   |   | x |   | 420,000 |   |
|                                                |       | Methanesulfonic  Acid                          |       |                          |       |                     |       |   |   |   |   | x |   | 10,000 |   |
|                                                |       | Solventborne  coatings                         |       |                          |       |                     |       |   |   |   |   | x |   | 400,000 |   |
|                                                |       | Waterborne  coatings/  Decorative paints       |       |                          |       |                     |       |   |   |   |   | x |   | 45,000  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 capacityconducted through a joint venture between BASF (60%) and Total PetrochemicalsUSA, Inc. (40%), of: Ethylene 830,000 metric tons, Propylene 860,000 metrictons, Benzene 170,000 metric tons (including operation of metathesis) in PortArthur, Texas.

 

(2)          Includes the total production capacityconducted through a joint venture between Shell Chemical Company (60%), BASF(24%) and Total Petrochemicals USA, Inc. (16%) of: Butadiene 410,000 metrictons in Port Arthur, Texas.

 

(3)          Includes the total production capacityconducted through a joint venture between BASF (60%) and PETRONAS (40%) of: OxoC4 alcohols 250,000 metric tons, Phthalic anhydride 40,000 metric tons,Plasticizers 100,000 metric tons, 1,4-Butanediol 100,000 metric tons, Acrylicmonomers 160,000 metric tons in Kuantan, Malaysia.

 

(4)          Includes the total production capacityconducted through a joint venture between BASF (51%) and Sonatrach (49%) of: Propylene350,000 metric tons in Tarragona, Spain.

 

(5)          Includes 25,000 metric tons through BASFIdemitsu Co. Ltd. – a joint venture in Japan between BASF (67%) and IdemitsuKosan Co. Ltd. (33%) in Chiba, Japan (capacity reflects total joint venturecapacity).

 

(6)          Includes 25,000 metric tons per yearthrough BASF JCIC Neopentylglycol Co. Ltd. – a joint venture in China betweenBASF (60%) and Jilin Chemical Industrial Co. Ltd. (40%) in Jilin, China(capacity reflects total joint venture capacity).

 

(7)          Capacity reflects total joint venturecapacities. These include:

 

•                    550,000 metric tons of styrene monomerthrough a 50-50 joint venture with Shell Nederland Chemie B.V. in Moerdijk,Netherlands;

 

•                    550,000 metric tons of styrene monomerthrough a 50-50 joint venture with Shell Eastern Petroleum Pte. Ltd. inSingapore;

 

•                    372,000 metric tons of styrene andstyrene-based polymers through a joint venture between BASF (60%) and YangziPetrochemical Corporation (40%) in Nanjing, China; and

 

•                    150,000 metric tons of expandablepolystyrene through a 50-50 joint venture with Alfa Group in Altamira, Mexico.

 

(8)          Of which 500,000 are only for polyurethaneapplication.

 

(9)          Partially conducted through a 50-50 jointventure with Shell Nederland Chemie B.V. in Moerdijk, Netherlands, and througha 50-50 joint venture with Shell Eastern Petroleum Pte. Ltd. inSingapore (capacity reflects total joint venture capacity).

 

(10)    Includes the total production capacityconducted through a joint venture between BASF (50%) and Sinopec (50%), of:Ethylene 600,000 metric tons, Propylene 300,000 metric tons, Aromatics 300,000metric tons, Ethylene glycols 350,000 metric tons, Alkylamines 36,000 metrictons, Formic acid 50,000 metric tons, Propionic acid 30,000 metric tons andAcrylic monomers 160,000 metric tons in Nanjing, China.

 

See “Item 4. Information onthe Company – Environmental Matters” for information on environmental issuesrelated to BASF’s properties. Additional information regarding BASF’s property,plant and equipment is contained in Note 15 to the Consolidated FinancialStatements included in Item 18.

 

For information on BASF’soil and natural gas exploration and production activities, see “Item 4.Information on the Company – Oil & Gas” and “Supplementary informationconcerning oil and gas producing activities (unaudited)” in Item 18.

 

Item4A.         Unresolved Staff Comments

 

Not applicable.

 

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Item5.            Operating and FinancialReview 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 and valuation principles in accordance with InternationalFinancial Reporting Standards (IFRS). Due to the first time adoption of IFRS in2005, with a transition date of January 1, 2004, we are presenting only twoyears - 2004 and 2005 - of statements of income, changes in shareholders’equity and cash flow in this item.

 

There are certaindifferences relating to accounting and valuation methods that are requiredunder U.S. GAAP but are not allowed under IFRS. The effects of BASF’sreconciliation of the differences between IFRS and U.S. GAAP for the yearsended December 31, 2005 and 2004 are described in Note 5 to the ConsolidatedFinancial Statements included in Item 18.

 

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

 

**Outlook for 2006**

 

In 2006, we expect thepositive economic trend to continue and see favorable medium-term perspectivesfor the global economy. Stable geopolitical conditions and sound economicpolicy are, however, necessary for this.

 

We have based our businessplanning for 2006 on the following scenario: 

 

•                  Growth of the global gross domestic productof 3.2%, with 3.1% forecast for the midterm

 

•                  An increase in global chemical production(excluding pharmaceuticals) of 3.0%, with 3.1% forecast for the midterm

 

•                  Oil prices of around $55/barrel on average in2006 with a downward trend from the second half of the year

 

•                  An average euro/dollar exchange rate of $1.25per euro

 

•                  Moderately higher interest rates in thecourse of 2006

 

In the followingdescriptions of results of operations in the segments, we make forecasts forsales and earnings in 2006. These forecasts are based on the assumptions of theabove described scenario.

 

**Critical Accounting Policies**

 

Critical accounting policiesare those that are most important to the presentation of the company’s financialcondition and results of operations. These policies require management’s difficult,subjective and complex judgment in the preparation of the financial statementsand accompanying notes. Management makes estimates and assumptions about theeffect of matters that are inherently uncertain, relating to the reporting ofassets, liabilities, revenues, expenses and the disclosure of contingent assetsand liabilities. The company’s most critical accounting policies are discussedbelow.

 

*Pension provisions andsimilar obligations*

 

Obligations arising fromcompany pension plans are based on actuarial computations made by externalactuaries according to the projected unit credit method. Accordingly,assumptions must be made with regard to discount factors, salary and pensiontrends, and, in the case of externally financed obligations, with regard to thegrowth and return on the fund assets used to finance future obligations.

 

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These assumptions are redefinedas of each balance sheet date, taking into account the current circumstances.Discount factors are based on returns for securities or bonds with high creditratings. The expected return on fund assets is based on long-term developmentsas observed in the capital markets as well as the respective portfoliostructures. If the actual developments deviate from the assumptions made, theresulting actuarial profits or losses are offset against the equity.

 

See Note 23 to theConsolidated Financial Statements included in Item 18 for further details withregard to the change in pension obligations and financing status.

 

*Provisions for litigationand 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 currently not possibleto estimate 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 also considers the outcomes ofsimilar cases and legal opinions, taking into account the currentcircumstances. The actual outcome of legal proceedings may differ considerablyfrom these estimates. See also Note 27 to the Consolidated Financial Statementsincluded in Item 18 for further information with regard to litigation andclaims.

 

*Deferred taxes on losscarryforwards*

 

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 in2005 in view of the long carryforward period and the stable economicdevelopment in the NAFTA region.

 

See also Note 10 to theConsolidated Financial Statements included in Item 18 for further informationon deferred taxes.

 

*Goodwill*

 

Goodwill is no longer to beamortized. Instead, goodwill is written off only if the carrying value ofgoodwill is impaired. The value of goodwill has to be reviewed at least onceper year at the cash generating unit level. An impairment exists if the bookvalue of the goodwill at the cash generating unit exceeds the recoverableamount, generally determined based upon the discounted value of expected futurecash flows.

 

A significant portion ofgoodwill is associated with the acquisition of the crop protection business ofAmerican Home Products Corporation in 2000. The value of this goodwill is notimpaired given the present and future profitability of the business.

 

Write-offs due to impairmentwere not necessary in 2005.

 

*Provisions for environmentalprotection 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. Atenvironmental sites in which more than one potentially responsible party hasbeen identified, the company records a liability for its allocable share of costsrelated to its involvement with the site, as well as an allocable share ofcosts related to insolvent parties or unidentified shares. At environmentalsites in which the company is the only potentially responsible party, aliability is recorded for the total estimated costs of remediation beforeconsideration of recovery from insurers or other third parties. The process ofestimating environmental liabilities is complex and dependent on physical andscientific data at the

 

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site, uncertainties as toremedies and technologies to be used and the outcome of discussions withregulatory agencies. 

 

See also Note 24 to theConsolidated Financial Statements included in Item 18 for further explanationswith regard to the accrual of provisions for environmental protection measuresand site remediation.

 

*Impairment of long-livedassets*

 

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 thisvalue exceeds the carrying amount. The recoverable amount is the higher valueof the fair value less cost to sale and the discounted value of future cash flows.The impairment is reversed if the basis for its recognition subsides.

 

The estimation of the cash flowsis based on information available at that time including factors such as:expected sales, customer trends, operating efficiency, material and energyprices, etc. The assumptions used in the cash flow projections reflect themarket conditions at the time an impairment becomes known. Assumptions are alsomade with regard to the discount factors.

 

**IFRS accounting standards not yetadopted**

** **

The effects of IFRSs andIFRICs not applied or not yet adopted by the European Union in the reportingyear 2005 were considered:

 

IFRS 7 (FinancialInstruments: Disclosures) requires more extensive disclosure regarding financialinstruments. The disclosure requirements in IAS 32 were incorporated in IFRS 7and extended. In addition to the existing disclosure requirements regarding theapproach, presentation and measurement of financial instruments, additionalinformation is required regarding the type and extent of risks stemming from financialinstruments in financial statements prepared under IFRS. It is not expectedthat this will have any material effect on Consolidated Financial Statements ofBASF Group. IFRS 7 is to be applied for reporting years beginning on or afterJanuary 1, 2007.

 

IFRIC 6 (Liabilities arisingform Participating in a Specific Market – Waste Electrical and ElectronicEquipment) was issued to give guidance on the issue of establishing provisionsas a result of the European Union’s Directive on Waste Electrical andElectronic Equipment (WE&EE). The IFRIC interpretation clearly states whena provision is to be established according to IAS 37 for the decommissioning ofequipment that has been sold to private households before August 13, 2005 (‘historicalhousehold equipment’). IFRIC 6 will have no effect on the ConsolidatedFinancial statements of BASF Group.

 

In IFRIC 7 (Applying theRestatement Approach under IAS 29 Financial Reporting in HyperinflationaryEconomies for the First Time) two specific issues related to IAS 29 weretreated. On the one hand, it explains how an entity is to restate their financialstatements in accordance with IAS 29 in the first year the existence of hyperinflationis identified in the economy of its functional currency. On the other hand,IFRIC 7 gives guidance on how an entity has to treat deferred taxes in theopening balance sheet. IFRIC 7 is to be applied for reporting yearsbeginning on or after March 1, 2006. This interpretation will have no effect onthe Consolidated Financial Statements of BASF Group.

 

IFRIC 8 (Scope of IFRS 2)clarifies that IFRS 2 (Share-based Payment) also applies to include agreementswhereby the entity makes payments for which the entity does not receive anygoods or services or inadequate consideration. If the identifiableconsideration is less than or appears to be less than the fair value of theequity instruments granted or liability incurred, IFRIC 8 interprets thiscircumstance to indicate that other consideration (i.e. goods or services) hasbeen (or will be) received. Therefore, IFRS 2 is to be applied in suchcases. IFRIC 8 is to be applied for reporting years beginning on or after May1, 2006. The application of IFRIC 8 has no effects on the Consolidated FinancialStatements of BASF Group.

 

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

 

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

 

*Employee benefits*

 

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.

 

*Cumulative translationadjustments*

 

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.

 

*Business Combinations*

 

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

 

 

BASF did not apply any otherelective exception of IFRS 1.

 

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

 

SFAS 123R (Share-BasedPayment) revised 2004 replaces SFAS 123 (Accounting for Stock-BasedCompensation). This disallows the former optional treatments contained in APB25 (Accounting for Stock Issued to Employees). According to SFAS 123R alllisted companies must recognize stock-based payment as an expense during thevesting period. Capital instruments granted as compensation are valued at theirmarket value at the time of granting. The market value at reporting date iscalculated to value share-based payment which is to be settled in cash. SFAS123R applies to all reporting years commencing after June 15, 2005. As BASFalready recognizes share-based payment as an expense, SFAS 123R will have nomaterial effects on BASF’s Consolidated Financial Statements.

 

SFAS 154, governing theaccounting and reporting of voluntary changes in accounting methods, replacesAPB Opinion Nr. 20 (Accounting changes) and FASB Statement No. 3 (ReportingAccounting Changes in Interim Financial Statements). According to SFAS 154,future impacts on income as a result of voluntary changes in accounting methodswill no longer be shown as a separate item ‘cumulative change in accountingprinciple’ on the income statement of the current period but rather on thebalance sheet of the respective companies as an adjustment for all previouslypublished periods as if the new method had always been used. This treatmentlargely approaches IAS 8 (Accounting Policies. Changes in Accounting Policies.Changes in Accounting Estimates and Errors). As IAS 8 is already applied in theGroup Consolidated Financial Statements, the application of SFAS 154 had noeffect.

 

EITF 04-13 (InventoryExchanges) determines when a purchase and sale of inventory is to be seen as abarter transaction. According to APB Opinion No. 29 (Accounting forNon-monetary Transactions), barter  transactionsmay not be shown on the income statement. The key criterion is whether thepurchase and sale are closely connected. EITF 04-13 clearly states that nosales revenues may be recognized from these  transactions if sale and purchase ofinventories are clearly connected. Furthermore, EITF 04-13 has specified thescope of FASB Statement No.153 (Exchanges of Non-monetary Assets). EITF 04-13is to be applied to all new transactions that are concluded in the reportingyears beginning after March 15, 2006. No revenue was recognized for bartertransactions as defined in these standards. The rules are essentially similarto those in IFRS.

 

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**RESULTS OF OPERATIONS**

 

**BASF Group**

 

This Management’s Discussionand Analysis of Financial Condition and Results of Operations should be read inconjunction with the Consolidated Financial Statements and the Notes to theConsolidated Financial Statements included in Item 18 of this Annual Report.

 

BASF’s business developedvery strongly in 2005. We increased sales and earnings despite substantiallyhigher raw material prices and the subdued economic environment in our homemarket, Europe.

 

We increased income fromoperations by €637 million. This earnings growth of 12.3% compared with ourvery strong performance in 2004 was due primarily to price increases for manyproducts in our portfolio and to continued restructuring measures.

 

We completed theLudwigshafen Site Project on schedule in 2005. As a result, we permanentlylowered costs by €480 million per year at our largest site compared with 2003.In North America (NAFTA), we achieved savings of more than $250 million peryear.

 

Raw material prices werehigh and rose even further in the course of the year. We were largely able tooffset these increases by raising sales prices for our products. For someproducts, however, higher raw materials prices could only be passed on after adelay. Our Oil & Gas segment, on the other hand, benefited from higher oilprices.

 

The financial resultincreased by almost €1 billion. This was partially due to the gain from thesale of our stake in Basell.

 

Net income improved by 50%thanks to the very strong income from operations and the higher financialresult.

 

Basic earnings per share rose57% to €5.73. 

 

The following table setsforth sales and income for BASF.

 
| **Sales and Earnings**                     | ** ** | **2005**                                                                                                       | ** ** | **  % Change  from**

**PreviousYear** | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|
| ** **                                           | ** ** | **(Million €, except per share data or certain other data)** | ** ** |
| Sales                                                |       | 42,745                                                                                                         |       | 13.9                                                  |       | 37,537   |       |
| Income from operations                               |       | 5,830                                                                                                          |       | 12.3                                                  |       | 5,193    |       |
| Income from operations as a percentage of  sales (%) |       | 13.6                                                                                                           |       | —                                                |       | 13.8     |       |
| Special items                                        |       | (308)                                                                                                          |       | .                                                     |       | (37)     |       |
| Financial Result                                     |       | 96                                                                                                             |       | .                                                     |       | (846)    |       |
| Income before taxes and minority interests           |       | 5,926                                                                                                          |       | 36.3                                                  |       | 4,347    |       |
| Net income                                           |       | 3,007                                                                                                          |       | 50.0                                                  |       | 2,004    |       |
| Net income as a percentage of sales (%)              |       | 7.0                                                                                                            |       | —                                                |       | 5.3      |       |
| Basic earnings per share                             |       | 5.73                                                                                                           |       | 57.0                                                  |       | 3.65     |       |
| **Amounts in accordance with U.S. GAAP**             |       |                                                                                                           |       |                                                  |       |     |       |
| Net income                                           |       | 3,061                                                                                                          |       | 64.3                                                  |       | 1,863    |       |
| •  from continuing operations                   |       | 3,061                                                                                                          |       | 64.3                                                  |       | 1,863    |       |
| Basic earnings per share                             |       | 5.83                                                                                                           |       | 72.0                                                  |       | 3.39     |       |
| •  from continuing operations                   |       | 5.83                                                                                                           |       | 72.0                                                  |       | 3.39     |       |
| •** **diluted earnings per share           |       | 5.83                                                                                                           |       | 72.0                                                  |       | 3.39     |       |

 

 

 

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Income from operations in2005 contained special charges of €308 million, compared with €37 million inthe previous year. In 2004, special items contained the gain from the sale ofthe printing systems business. €295 million was incurred for restructuringmeasures chiefly related to measures to increase efficiency at the productionsite in Ludwigshafen, Germany, as well as the partial closure of the site inFeluy, Belgium. Other special charges were related to the restructuringprograms for the Fine Chemicals and Intermediates divisions, for example, forthe closure of a vitamin C plant in Grenaa, Denmark, as well as plants for THFand PolyTHF® inYokkaichi, Japan. Special gains primarily resulted from divestitures associatedwith portfolio optimization in the Agricultural Products division. In 2005, thefinancial result included, in particular, the gain from the sale of the 50%stake in Basell.

 

Income from operations in2004 contained net special charges of €37 million. This amount includes thegain from the sale of the printing systems business. €277 million was incurredfor restructuring measures related to steps to increase efficiency as part ofthe Ludwigshafen Site Project, the further development of our organization inEurope, as well as restructuring measures in North America (NAFTA). Special itemsalso arose due to portfolio measures and litigation. The financial resultcontained a write-down on our 50% stake in Basell and on our stake in SvalöfWeibull.

 

***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 salesby €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 from operations*

 

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 earningssubstantially despite the high volatility of raw material prices. Higher oilprices also led to 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.

 

*Income before taxes*

 

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

 

In 2005, return on assets, calculatedas income before taxes plus interest expenses as a percentage of average totalassets, increased to 17.7%, compared with 13.2% in the previous year.

 

*Net income/Earnings pershare*

 

Net income was €3,007million in 2005. This represents an increase of €1,003 million, or 50%,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. The previous year contained non-tax-deductible write-downs onparticipating interests.

 

Noncompensable foreignincome taxes on oil production rose by €404 million to €1,072 million as aresult of higher oil prices.

 

Earnings per share in 2005were €5.73 compared with €3.65 in the previous year. In 2005, net income inaccordance with U.S. GAAP was €3,061 million, or €5.83 per share, compared with€1,863 million or €3.39 per share in the previous year. Detailed explanationsof our net income in accordance with U.S. GAAP are provided in Note 5 to theConsolidated Financial Statements in Item 18.

 

*Sales and earningsforecasts*

 

The sales and earnings ofthe BASF Group are to some extent heavily dependent on the volatility of theU.S. dollar and currencies that are tied to it, and on oil price volatility. Inthe Agricultural Products and Fine Chemicals divisions and in the PerformanceProducts segment especially, a weaker U.S. dollar may result in negativecurrency translation effects.

 

Taking into account theeconomic assumptions described above, we aim to continue to grow faster thanthe market in 2006. On a comparable basis, in 2006, we plan to follow on fromthe strong level of income from operations posted in 2005.

 

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**Chemicals**

 

**Segment Data(Million €)**

 
| ** **                                              | ** ** | **2005** | ** ** | **% Change  from  Previous  Year** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------|------------|-----------------------------------------|------------|----------|------------|
| Sales to third parties                                  |       | 8,103    |       | 15.4                                    |       | 7,020    |       |
| *Thereof Inorganics*                                    | * *   | *1,017*  | * *   | *20.5*                                  | * *   | *844*    | * *   |
| *Petrochemicals*                                        | * *   | *5,084*  | * *   | *21.4*                                  | * *   | *4,189*  | * *   |
| *Intermediates*                                         | * *   | *2,002*  | * *   | *0.8*                                   | * *   | *1,987*  | * *   |
| Intersegmental transfers                                |       | 3,826    |       | 12.7                                    |       | 3,395    |       |
| Sales including intersegmental transfers                |       | 11,929   |       | 14.5                                    |       | 10,415   |       |
| Income from operations                                  |       | 1,326    |       | 3.3                                     |       | 1,284    |       |
| Special items                                           |       | (162)    |       | (74.2)                                  |       | (93)     |       |
| Operating margin (%)                                    |       | 16.4     |       | —                                  |       | 18.3     |       |
| Assets                                                  |       | 6,146    |       | 17.8                                    |       | 5,219    |       |
| Return on operational assets (%)                        |       | 23.3     |       | —                                  |       | 25.2     |       |
| Research and development expenses                       |       | 114      |       | 16.3                                    |       | 98       |       |
| Capital expenditures in tangible and  intangible assets |       | 639      |       | 6.3                                     |       | 601      |       |

 

The Chemicals segmentcomprises the Inorganics, Petrochemicals and Intermediates divisions.

 

***2005 Compared with 2004***

 

*Segment Overview*

 

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. This year, we started productionof triethylenediamine, an important basic product in the manufacture ofpolyurethanes, in Antwerp, Belgium.

 

In North America (NAFTA), weare aligning production of plasticizers with our customers’ needs. At our site inPasadena, 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® DPHP from 2-propylheptanol. Theproduction capacity of the 2-ethylhexanol plant is also being increased at thesite in Freeport, Texas. We aim to start up the new and expanded plants inmid-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 

 

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cracker and the downstreamplants have been operating reliably. This site is a key factor in supplying ourChinese customers with important petrochemical raw materials. We startedproduction of THF and PolyTHF® at theworld-scale plant at our site in Caojing, China. Among other things, PolyTHF® is used to make spandex fibers.

 

In 2006, we expect businessto remain stable with our new plants in Asia contributing significantly tobusiness. Earnings will, above all, be negatively impacted by scheduled plantshutdowns for inspections and maintenance. We also expect raw material costs toremain high and energy costs to increase. In 2006, we nevertheless aim to matchthe previous year’s strong earnings.

 

*Inorganics*

 

In 2005, we increased salesto third parties by €173 million to €1,017 million (volumes 1%, prices 1%,portfolio 18%).

 

The sales growth was mainlydue to the purchase of the electronic 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 MerckKGaA’s activities 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.

 

We expect higher sales in2006 with contributions from all of the division’s business units. We do notexpect to match the high earnings level of 2005 because further increases innatural gas and energy prices will put noticeable pressure on margins.

 

*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.

 

In 2006, we expect that ourbusiness will continue to develop positively. Although we anticipate sales  at the previous year’s level, it will be difficultto match the record earnings posted in 2005. Additional  business volumes will certainly come from the firstfull operational year of our plants in Nanjing, China.  However, these are likely to be offset byscheduled shutdowns of major plants in Europe and the United  States.

 

*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 strategicbusiness units.

 

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®, inparticular in Asia. This was due to a textile trading dispute lasting severalmonths between China and the United States as well as between 

 

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China and the E.U. In thesecond half of 2005, the strategic business unit polyalcohols and specialtiesrecovered following initially weak demand in its most important application,coatings.

 

Income from operations waslower than in 2004 due to provisions for restructuring and plant closures. Inthe first half of 2005, raw material costs remained overall constant, and priceincreases led to significantly improved margins. After the hurricanes in the Gulfof Mexico in the third quarter of 2005, however, the prices of almost allimportant raw materials rose dramatically worldwide. Costs for the startup ofsix new plants in Caojing and Nanjing, China, also negatively impacted earningsin the second half of the year.

 

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.

 

We expect sales to increaseslightly in 2006. Thanks to the restructuring measures we have introduced, weexpect to improve earnings despite higher raw material costs and additionalcapacities at both existing and new competitors.

 

**Plastics**

 

**Segment Data(Million €)**

 
| ** **                                              | ** ** | **2005** | ** ** | **% Change  from  Previous  Year** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------|------------|-----------------------------------------|------------|----------|------------|
| Sales to third parties                                  |       | 11,718   |       | 11.3                                    |       | 10,532   |       |
| *Thereof Styrenics*                                     | * *   | *4,518*  | * *   | *1.5*                                   | * *   | *4,450*  | * *   |
| *Performance Polymers*                                  | * *   | *2,909*  | * *   | *12.4*                                  | * *   | *2,587*  | * *   |
| *Polyurethane*                                          | * *   | *4,291*  | * *   | *22.8*                                  | * *   | *3,495*  | * *   |
| Intersegmental transfers                                |       | 471      |       | (30.4)                                  |       | 677      |       |
| Sales including intersegmental transfers                |       | 12,189   |       | 8.7                                     |       | 11,209   |       |
| Income from operations                                  |       | 1,015    |       | 46.3                                    |       | 694      |       |
| Special items                                           |       | (16)     |       | 72.4                                    |       | (58)     |       |
| Operating margin (%)                                    |       | 8.7      |       | —                                  |       | 6.6      |       |
| Assets                                                  |       | 6,639    |       | 7.3                                     |       | 6,187    |       |
| Return on operational assets (%)                        |       | 15.9     |       | —                                  |       | 11.6     |       |
| Research and development expenses                       |       | 135      |       | (0.7)                                   |       | 136      |       |
| Capital expenditures in tangible and  intangible assets |       | 490      |       | 3.6                                     |       | 473      |       |

 

The Plastics segmentcomprises the Styrenics, Performance Polymers and Polyurethanes divisions.

 

***2005 Compared with 2004***

 

*Segment Overview*

 

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. Inthe Performance Polymers and Polyurethanes divisions, sales and earningscontinued to improve as a result of higher prices despite high and volatile rawmaterial costs. Only the Styrenics division fell short of the previous year’shigh earnings, even though sales remained stable. This was due to both the highvolatility of benzene and styrenics prices as well as a decline in marketdemand.

 

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Price increases werenecessary to pass on higher raw material costs. As a result, demand in thesecond half of 2005 was lower than originally forecast. Our margins thereforecame under 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 Polymersand Polyurethanes divisions. Inventories and especially receivables rosecompared with the previous year as a result of significantly higher salesvolumes and prices. This increased the segment’s total assets.

 

In 2006, the main focus willbe on starting up additional capacities in Asia. The MDI/TDI complex builttogether with our partners in Caojing, China, is one example of the consistentexpansion of our activities in this region. Due to the expansion of ourbusiness, we expect sales to increase slightly. In view of the startup costsfor our new plants and the ongoing volatility of raw material costs forstyrenics and fiber intermediates, we aim to at least match the 2005 earningslevel.

 

*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.” Since then,we have marketed our product range worldwide under the new PlasticsPlus® brand. A successful example of a productinnovation is the rapid global introduction of Ecovio®, a biodegradable plastic partly based onrenewable raw materials.

 

We have reached importantmilestones in the restructuring of our business in North America (NAFTA). Themeasures carried out in 2005 included divestiture of the polystyrene businesstogether with the site in Joliet, Illinois. In addition, we transferredproduction of Styropor® fromSouth Brunswick, New Jersey, to Altamira, Mexico.

 

In 2006, we aim to increasesales and significantly increase earnings. To do this, we want to better managethe significantly higher volatility of prices and raw material costs seen inrecent years and further reduce our fixed costs.

 

*Performance Polymers*

 

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

 

Income from operationsincreased despite persistently high raw material prices. We succeeded inimplementing substantial price increases, especially for polyamides andintermediates, which made a significant contribution to earnings.

 

We expanded our engineeringplastics business worldwide. In Asia, we increased compounding capacities inPasir Gudang, Malaysia, and in Pudong, China. Additionally, we are building anew PBT plant in Kuantan, Malaysia, together with our Japanese partner TorayIndustries Inc. This plant is scheduled to start operations in mid-2006.

 

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

 

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By acquiring the NorthAmerican business of LATI USA, Inc., we consolidated our market position inthis region. The restructuring measures underway in this region will continue. 

 

We have rigorously continuedto optimize our globally managed commodity business model for polyamides andintermediates. This provides us with the flexibility to exploit regional marketadvantages.

 

In engineering plastics, weare expanding our cooperation with key customers. Here, we are focusing on newapplications and new uses for plastics.

 

On the basis of the measureswe are planning, we expect a slight increase in earnings in 2006.

 

*Polyurethanes*

 

Sales to third parties roseby €796 million to €4,291 million in 2005 (volumes 2%, prices 17%, currencies2%, portfolio 2%). The strongest growth was recorded in the Asia Pacificregion.

 

We improved income fromoperations compared with 2004. This was mainly due to sales prices, which roseduring the course of the year. Significantly higher raw material and energycosts did, however, impact our business.

 

In 2005, our capitalexpenditures again focused on Asia: The production facility for the basicmaterials MDI and TDI, which we are building with partners in Caojing, China,is scheduled to start operations in summer 2006. The additional capacities willbe used to meet the constantly rising demand in Asia, and in China inparticular. In addition, this facility will provide the necessary startingmaterials for the production of specialties in Pudong, China, which is plannedfor 2007.

 

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

 

In 2006, we expectpersistently volatile and generally very high prices for raw materials andenergy. The startup costs for the plants in Caojing, China, will additionallyreduce earnings. It will therefore be a considerable challenge to match thestrong level of earnings posted in 2005.

 

**Performance Products**

 

**SegmentData(Million €)**

 
| ** **                                              | ** ** | **2005** | ** ** | **% Change  from  Previous  Year** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------|------------|-----------------------------------------|------------|----------|------------|
| Sales to third parties                                  |       | 8,267    |       | 3.3                                     |       | 8,005    |       |
| *Thereof Performance Chemicals*                         | * *   | *2,889*  | * *   | *(10.5)*                                | * *   | *3,228*  | * *   |
| *Coatings*                                              | * *   | *2,180*  | * *   | *7.8*                                   | * *   | *2,022*  | * *   |
| *Functional Polymers*                                   | * *   | *3,198*  | * *   | *16.1*                                  | * *   | *2,755*  | * *   |
| Intersegmental transfers                                |       | 352      |       | 21.0                                    |       | 291      |       |
| Sales including intersegmental transfers                |       | 8,619    |       | 3.9                                     |       | 8,296    |       |
| Income from operations                                  |       | 863      |       | (23.5)                                  |       | 1,128    |       |
| Special items                                           |       | (27)     |       | .                                       |       | 278      |       |
| Operating margin (%)                                    |       | 10.4     |       | —                                  |       | 14.1     |       |
| Assets                                                  |       | 4,863    |       | 7.2                                     |       | 4,538    |       |
| Return on operational assets (%)                        |       | 18.4     |       | —                                  |       | 24.2     |       |
| Research and development expenses                       |       | 214      |       | (1.4)                                   |       | 217      |       |
| Capital expenditures in tangible and  intangible assets |       | 347      |       | 14.1                                    |       | 304      |       |

 

The Performance Productssegment consists of the Performance Chemicals, Coatings and Functional Polymersdivisions.

 

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***2005 Compared with 2004***

 

*Segment Overview*

 

Sales to third parties in2005 climbed €262 million to €8,267 million compared with 2004 (prices 7%,currencies 1%, portfolio –5%). This more than offset the decline in sales dueto 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 developmentof business in Asia gave additional impetus to growth.

 

The strong improvement inthe margins in the Performance Polymers and price increases in PerformanceChemicals and Coatings had a positive effect on income from operations. Theincome from operations fell short of the previous year which included the gainfrom the divestiture of the printing systems business.

 

As a result, 2005 wasanother successful year for the Peformance Products segment despite furtherincreases in raw material costs and a challenging market environment in somebusiness areas. Our Verbund structure and our strong position in Asia again hada positive impact.

 

We increased capitalexpenditures by €43 million to €347 million. The most important projects werethe integrated production complex for acrylic acid in Nanjing, China, and theconstruction of a superabsorbents plant in Freeport, Texas. In addition, we startedwork on the construction of a plant for raw materials for HDI-based coatings inCaojing, China.

 

We expect slightly highersales in 2006. In a challenging market environment, we aim to post higherearnings compared with the strong level in 2005.

 

*Performance Chemicals*

 

As a result of the sale ofthe printing systems business in 2004, sales to third parties declined by €339million to €2,889 million (prices 5%, portfolio –16%). Sales from ongoingbusiness increased in all regions  due tohigher prices for our products. Significantly higher sales compared with 2004were posted, in particular for performance chemicals for detergents andformulators 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, coatings and specialties as well as for leather. On theother hand, our restructuring measures enabled us to improve earnings inperformance chemicals for textiles despite the persistently difficult environment.

 

In 2006, we expect thepositive sales trend to continue and earnings to increase. We expect to achievethis through higher sales volumes and selective price increases. At the sametime, we are continuing to restructure our European business for the textilesand leather industries in order to adapt our activities to the ongoing difficultmarket environment in Europe.

 

*Coatings*

 

Sales to third partiesincreased by €158 million to €2,180 million (volumes –2%, prices 3%, currencies3%, portfolio 4%). 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 currency effects offset the impact of stagnation in theautomotive industry only to a limited extent. We increased both volumes andsales of automotive (OEM) and automotive refinish coatings. We continued withour measures to optimize our portfolio and restructure the industrial coatingsbusiness unit. In East Asia, we strengthened our business by acquiring theremaining 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 of sluggish growth in the automotive industry inEurope and North America (NAFTA).

 

We continued to expand our systemsupplier concept for reducing the total cost of coating processes forcustomers. In addition to supplying our products, we provide inventorymanagement and other customer services.

 

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

 

In the architecturalcoatings business in South America, we strengthened our market leadership withour Suvinil® brand and improved earnings.

 

We aim to increase sales andearnings in 2006. In particular, we expect a positive impact from our newlyestablished regional business unit in Asia. In addition, we are rigorouslypursuing the restructuring of our industrial coatings business. We areexpanding our presence in growth markets in Eastern Europe and Asia. We plan tocontinue the measures we have already introduced to increase efficiency in allregions and business units.

 

*Functional Polymers*

 

At €3,198 million, sales tothird parties increased by €443 million compared with 2004 (volumes 1%, prices14%, currencies 1%). This significant increase was primarily the result ofpassing on higher raw material costs to our customers.

 

We increased salesconsiderably, in particular for starting materials for adhesives raw materialsand acrylic monomers. Higher sales volumes of acrylic monomers resulted fromthe start of operations at our plants in Nanjing, China. Our world-scale plantsfor the production of acrylic acid and acrylates at this new BASF Verbund sitewere completed on schedule. Operations started successfully in the firstquarter, and full production capacity was available by the end of April. InEurope, we suffered losses in dispersions for paper finishing as a result ofthe long industrial dispute in the Finnish paper industry. We discontinued ourbusiness with dispersions for the carpet industry in Europe because of theunsatisfactory earnings situation and reduced our production capacities byclosing an old plant. Income from operations was significantly higher than in2004. All product lines, and especially acrylic monomers, contributed to thisthanks to high capacity utilization of cost-efficient plants.

 

In 2006, we expect sales tobe slightly higher than in 2005 due to continuing strong demand. In achallenging market environment, we aim to match the very strong earnings postedin 2005.

 

67

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**Agricultural Products &Nutrition**

 

The Agricultural Products& Nutrition segment comprises the Agricultural Products division and theFine Chemicals division. For reporting purposes each division is considered areportable segment. The following data relate to the divisions.

 

**Agricultural Products**

 

**SegmentData(Million €)**

 
| ** **                                              | ** ** | **2005** | ** ** | **% Change  from  Previous  Year** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------|------------|-----------------------------------------|------------|----------|------------|
| Sales to third parties                                  |       | 3,298    |       | (1.7)                                   |       | 3,354    |       |
| Intersegmental transfers                                |       | 29       |       | 11.5                                    |       | 26       |       |
| Sales including intersegmental transfers                |       | 3,327    |       | (1.6)                                   |       | 3,380    |       |
| Income from operations                                  |       | 681      |       | 13.1                                    |       | 602      |       |
| Special items                                           |       | 10       |       | .                                       |       | (64)     |       |
| Operating margin (%)                                    |       | 20.6     |       | —                                  |       | 17.9     |       |
| Assets                                                  |       | 5,156    |       | 3.4                                     |       | 4,985    |       |
| Return on operational assets (%)                        |       | 13.4     |       | —                                  |       | 11.4     |       |
| Research and development expenses                       |       | 303      |       | 11.4                                    |       | 272      |       |
| Capital expenditures in tangible and  intangible assets |       | 74       |       | (26.0)                                  |       | 100      |       |

 

***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 (basedon the location of the company) declined by 4% to €1,507 million. Persistentlydry weather in parts of southern Europe led to lower sales volumes. However,our business in the Central and Eastern European growth markets developedpositively. The launch of boscalid, our newly developed fungicide, also had apositive impact on our business.

 

We successfully expanded ourbusiness in North America (NAFTA), where sales rose by 9% to €946 million.Here, our product Headline®, which contains the active ingredient F 500®, made a majorcontribution thanks to 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 selling expenses and increase our profitabilityand 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 weather reduced harvests and the appreciation of thereal put our export-oriented customers under considerable pressure. In thisregion, we continued with our cautious business policy, which aims to achievelong-term success. Our fungicide Opera® withthe active ingredient F 500® continued to affirm its market leadership. Inaddition, we successfully expanded our insecticide business in Brazil with theseed treatment product Standak®, which contains the active ingredient fipronil.

 

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

 

We increased research anddevelopment expenditure by €31 million to €303 million. As a percentage ofsales, research and development expenses amounted to 9.2%, compared with 8.1%in 2004.

 

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Assuming normal seasonalconditions in 2006, we expect to increase sales and maintain earnings at lastyear’s strong level. We aim to develop our business with our high-value,innovative products. At the same time, we plan to provide additional funds toconduct research into new solutions to improve plant health and developproducts based on our latest active ingredients.

 

We will continue to managereceivables and inventories strictly in a market that continues to be highlycompetitive.

 

**Fine Chemicals**

 

**Segment Data(Million €)**

 
| ** **                                              | ** ** | **2005** | ** ** | **% Change  from  Previous  Year** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------|------------|-----------------------------------------|------------|----------|------------|
| Sales to third parties                                  |       | 1,732    |       | (3.4)                                   |       | 1,793    |       |
| Intersegmental transfers                                |       | 28       |       | (6.7)                                   |       | 30       |       |
| Sales including intersegmental transfers                |       | 1,760    |       | (3.5)                                   |       | 1,823    |       |
| Income from operations                                  |       | (58)     |       | .                                       |       | 56       |       |
| Special items                                           |       | (80)     |       | (95.1)                                  |       | (41)     |       |
| Operating margin (%)                                    |       | (3.3)    |       | .                                       |       | 3.1      |       |
| Assets                                                  |       | 1,481    |       | 13.2                                    |       | 1,308    |       |
| Return on operational assets (%)                        |       | (4.2)    |       | .                                       |       | 4.2      |       |
| Research and development expenses                       |       | 70       |       | (22.2)                                  |       | 90       |       |
| Capital expenditures in tangible and  intangible assets |       | 222      |       | 45.1                                    |       | 153      |       |

 

***2005 Compared with 2004***

 

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

 

We achieved further profitablegrowth in the product lines fat-soluble vitamins and organic acids, which areused in animal nutrition, and aroma chemicals. Business with lysine and vitaminC was significantly negatively impacted by falling prices. Regulatory changesfor the active ingredient pseudoephedrine in the U.S. pharmaceuticals marketled to lower sales in the Pharma Solutions unit. Sales were also reduced by thedisposal of the Cramlington production site, which still contributed tobusiness in 2004. Effective October 1, 2005, we acquired the Orgamol Group withsites in Switzerland and France. This acquisition will enable us to expand thehigh-growth contract manufacturing business, which involves the exclusivemanufacture of active ingredients and intermediates for the pharmaceuticalindustry.

 

Following the start of ourown production of feed enzymes from 2006 onward, we will be able to realize theadded value created by these products and achieve cost advantages.

 

In addition to the declinein sales prices, earnings were negatively affected by increasingly high costsfor raw materials and energy in the course of the year. Cost reductions, forexample in the citral product line, only partially offset operating costs.

 

We introduced arestructuring program in view of the unsatisfactory earnings trend. One-timecharges related to this program are largely accounted for the closure of thevitamin 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 reduced operating assets.

 

On the basis of the measureswe are taking, we expect higher sales and earnings in 2006.

 

69

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**Oil & Gas**

 

**Segment data (Million €)**

 
| ** **                                                | ** ** | **2005** | ** ** | **% Change  from  Previous  Year** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|-----------------------------------------|------------|----------|------------|
| Sales to third parties                                    |       | 7,656    |       | 45.5                                    |       | 5,263    |       |
| *Thereof natural gas trading*                             | * *   | *4,157*  | * *   | *49.5*                                  | * *   | *2,781*  | * *   |
| Intersegmental transfers                                  |       | 723      |       | 32.4                                    |       | 546      |       |
| Sales including intersegmental transfers                  |       | 8,379    |       | 44.2                                    |       | 5,809    |       |
| Royalties                                                 |       | 281      |       | 15.6                                    |       | 243      |       |
| Sales including intersegmental transfers,  less royalties |       | 8,098    |       | 45.5                                    |       | 5,566    |       |
| Income from operations*                                   |       | 2,410    |       | 46.7                                    |       | 1,643    |       |
| *Thereof natural gas trading*                             | * *   | *316*    | * *   | *(7.1)*                                 | * *   | *340*    | * *   |
| Special items                                             |       | —   |       | .                                       |       | (10)     |       |
| Operating margin (%)                                      |       | 31.5     |       | —                                  |       | 31.2     |       |
| Assets                                                    |       | 4,895    |       | 20.5                                    |       | 4,063    |       |
| Return on operational assets (%)                          |       | 53.8     |       | —                                  |       | 41.3     |       |
| Capital expenditures in tangible and  intangible assets   |       | 624      |       | 60.8                                    |       | 388      |       |
| Exploration expenses**                                    |       | 173      |       | (11.3)                                  |       | 195      |       |

 

----

*          Income taxes on oil production in NorthAfrica and the Middle East that are noncompensable with German corporate incometax in the amount of €1,072 million (2004: €668 million) are not deducted fromincome from operations, but are reported as income taxes. Please see Note 10 tothe Consolidated Financial Statements included in Item 18.

 

**    Starting in 2005, expenses in the Oil& Gas segment related to the exploration for oil and gas deposits and todry holes are recorded as other operating expenses rather than as research anddevelopment expenses.

 

***2005 Compared with 2004***

 

Salesto third parties in 2005 rose by €2,393 million to €7,656 million (volumes 7%,prices/currencies 38%). This was due to the significant rise in oil prices,increases in crude oil and natural gas production, as well as the expansion ofthe natural gas business.

 

Inthe exploration and production business sector, net sales to third parties in2005 increased by €1,017 million to €3,499 million. The average reference priceof crude oil (Brent) rose compared with the previous year by $16 per barrel to$55 per barrel. On a euro basis, this represents a rise of €13 per barrel to€44 per barrel. Crude oil and natural gas production rose by 3.1% to 112million barrels of oil equivalent. This was mainly due to an increase in crudeoil and associated gas production volumes in Libya. In 2004, our production inLibya was temporarily restricted by OPEC resolutions. Natural gas productionwas expanded in Argentina and the Netherlands.

 

Salesin our natural gas trading business sector rose by €1,376 million to €4,157million as a result of increased volumes and prices. Gas volumes overallincreased by 8.6% to 330.2 billion kilowatt hours. On a consolidated basis, gassales volumes rose 11.1% from 210.2 billion kilowatt hours in 2004 to 233.5billion kilowatt hours in 2005. In Germany, WINGAS again grew faster than themarket and acquired new customers, in particular in the power station sector.We expanded our marketing activities in Belgium, the United Kingdom, the CzechRepublic and Austria.

 

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Incomefrom operations rose by €767 million to €2,410 million. Income from operationsin the exploration and production business sector, which is included in thisamount, increased by €791 million to €2,094 million, mainly as a result ofhigher prices. Income from operations includes income taxes on oil productionin North Africa and the Middle East of €1,072 million that are noncompensablewith German corporate income tax. These taxes are reported as income tax (seealso Note 10 to the Consolidated Financial Statements included in Item 18).

 

Incomefrom operations from natural gas trading declined by €24 million to €316million. Our buying and selling prices largely depend on the price of crudeoil. However, the time lag between changes is longer for selling prices thanfor buying prices. The continuous increase in oil prices over a long timetherefore impaired our trading margin during the reporting period.

 

Assetsin the Oil & Gas segment rose by €832 million to €4,895 million comparedwith the previous year. Additions to tangible assets mainly involvedexploration and production activities in Germany, the Netherlands, Libya andArgentina.

 

In2005, 16 wildcat and appraisal wells were drilled in the search for new oil andnatural gas deposits, 11 of which were successful. We replenished 52% of thevolumes drilled in 2005. In the natural gas trading sector, we investedprimarily in expanding our infrastructure.

 

Provedcrude oil reserves declined by 6% to 63 million tons compared with year-end2004. The reserve-to-production ratio was seven years, compared with eightyears at year-end 2004. Proved natural gas reserves of 63 billion cubic metersdeclined by 5% compared with the previous year. The reserve-to-production ratiois nine years.

 

Tofurther extend our long-standing cooperation with our Russian partner Gazprom,we signed a memorandum of understanding covering the entire value-adding chain –from production and transportation through to natural gas trading. Under theterms of the memorandum of understanding, Gazprom is to increase its stake inWINGAS. The Yuzhno-Russkoye field in Western Siberia is to be developedjointly. It is also planned to jointly construct the North European GasPipeline (NEGP) through the Baltic Sea. Following startup, which is scheduledfor 2010, WINGAS is to obtain up to 9 billion cubic meters of gas per year forthe next 25 years from the new pipeline.

 

Inour Achimgaz joint venture with Gazprom, roads and construction site work forthe drilling and production facilities have been largely completed. This jointventure will produce natural gas and condensate from the Achimov deposit of theUrengoy gas field in western Siberia. The first drilling site of the sixplanned production wells to be drilled in the first phase of the project isexpected to start operations at the beginning of 2006.

 

In2006, we expect average prices for crude oil to remain high. We aim to increasesales and earnings in 2006 as a result of the planned expansion of natural gasproduction and natural gas trading activities.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

Thefollowing table sets forth the summarized cash flows of BASF in each of thelast two fiscal years:

 
| **Statement of cash flow**                                                   | ** ** | **2005**                  | ** ** | **2004**    | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------|------------|
| ** **                                                                                  | ** ** | **(Million €)** | ** ** |
| Net income                                                                                  |       | 3,007                     |       | 2,004       |       |
| Depreciation and amortization of  intangible, tangible and financial assets                 |       | 2,427                     |       | 3,119       |       |
| Changes in net working capital                                                              |       | 250                       |       | (193)       |       |
| Miscellaneous items                                                                         |       | (434)                     |       | (296)       |       |
| **Cash provided by operating activities  before external financing of pension obligations** | ** ** | **5,250**                 | ** ** | **4,634**   | ** ** |
| External financing of pension obligations  (CTA)                                            |       | (3,660)                   |       | —      |       |
| **Cash provided by operating activities**                                                   | ** ** | **1,590**                 | ** ** | **4,634**   | ** ** |
| Payments related to tangible and intangible  assets                                         |       | (1,948)                   |       | (2,057)     |       |
| Acquisitions / divestitures                                                                 |       | 995                       |       | 570         |       |
| Financial investments and other items                                                       |       | 247                       |       | 254         |       |
| **Cash used in investing activities**                                                       | ** ** | **(706)**                 | ** ** | **(1,233)** | ** ** |
| Capital increases / repayments                                                              |       | (1,425)                   |       | (781)       |       |
| Changes in financial liabilities                                                            |       | 299                       |       | (203)       |       |
| Dividends                                                                                   |       | (982)                     |       | (852)       |       |
| **Cash used in financing activities**                                                       | ** ** | **(2,108)**               | ** ** | **(1,836)** | ** ** |
| Net changes in cash and cash equivalents                                                    |       | (1,224)                   |       | 1,565       |       |
| Cash and cash equivaltens as of beginning  of year and other changes                        |       | 2,132                     |       | 521         |       |
| **Cash and cash equivalents as of end of year**                                             | ** ** | **908**                   | ** ** | **2,086**   | ** ** |
| Marketable securities                                                                       |       | 183                       |       | 205         |       |
| **Liquid funds**                                                                            | ** ** | **1,091**                 | ** ** | **2,291**   | ** ** |

 

***2005 Compared with 2004***

 

*Cashprovided by operating activities*

 

At€5,250 million, cash provided by operating activities before external financingof pension obligations was high in 2005, primarily as a result of the significantincrease in earnings. This represents a rise of 13.3% compared with the verystrong level in 2004.

 

Wefurther reduced net working capital despite a higher volume of business.Balance sheet items nevertheless increased, in particular due to the rise inthe value of the U.S. dollar.

 

“Miscellaneousitems” primarily reflects the reclassification of the gain from the sale of thestake in Basell, which is included as part of cash inflows in cash used ininvesting activities.

 

*Externalfinancing of pension obligations*

 

Asof the end of the year, we transferred approximately €3.7 billion into aContractual Trust Arrangement (CTA). This money will be used solely to financepension obligations to the company’s employees and pensioners. This measurewill lessen the impact of pension payments on BASF’s future cash flow and willfurther improve the transparency of our financial reporting. There will be noeffect on the benefit levels for employees and pensioners of BASF; the pensionswill also continue to be paid by BASF.

 

*Cashused in investing activities*

 

Netcapital expenditures declined by €527 million, or 42.7%, compared with 2004.This significant decline was due primarily to cash inflows from portfoliomeasures.

 

72

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Wespent €1,948 million, or 5.3% less than in 2004, on additions to tangible andintangible assets. As a result, capital expenditures were again substantiallybelow the level of depreciation and amortization.

 

Expendituresfor acquisitions totaled €536 million and were primarily related to theacquisition of the electronic chemicals business of Merck KGaA, Darmstadt,Germany, as well as the Swiss fine chemicals company Orgamol. We generatedproceeds of €1,531 million from divestitures, the most important of which wasthe sale of the stake in Basell. Additional cash inflows were related tofurther portfolio optimization measures in the Agricultural Products divisionand the sale of our polystyrene business in the United  States.

 

Changesin financial assets, marketable securities and financial receivables resultedin an outflow of €211 million. The sale and disposal of long-term assets andsecurities generated proceeds of €458 million.

 

In2005, we invested a total of €2,523 million in tangible and intangible assets,including acquisitions, compared with €2,163 million in 2004. On a regionalbasis these capital expenditures were as follows:

 
| ** **                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| ** **                         | ** ** | **%**    | ** ** | **%**    | ** ** |
| Europe                             |       | 57       |       | 56       |       |
| North America (NAFTA)              |       | 11       |       | 12       |       |
| Asia Pacific                       |       | 28       |       | 28       |       |
| South America, Africa, Middle East |       | 4        |       | 4        |       |
| **Total**                          | ** ** | **100**  | ** ** | **100**  | ** ** |

 

Inthe **Chemicals segment**, investments andacquisitions in 2005 rose by 6.3% compared with the previous year to €639million. Major projects included:

 

•                  Completion and startup of the steam cracker,a syngas plant and production plants for formic acid, C4 oxo alcohols, ethyleneoxide and ethylene glycol, propionic acid, methylamines and dimethylformamideat 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 **Plasticssegment**, we spent €490 million on capital expenditures andacquisitions in 2005. This was an increase of 3.6% compared with the previousyear. 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 engineeringplastics compounding in Pasir Gudang, Malaysia;

 

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

 

•                  Acquisition of Leuna-Miramid GmbH, Leuna,Germany.

 

73

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In the **PerformanceProducts segment**, investments in 2005 increased by 14.1% to €347million. 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 **AgriculturalProducts & Nutrition segment**, we spent €296 million on capitalexpenditures and acquisitions in 2005 compared with €253 million in theprevious year. The Agricultural Products division invested €74 million, mainlyin optimization measures at various sites. The Fine Chemicals division spent€222 million on capital expenditures and acquisitions in 2005. Major projectsincluded:

 

•                  Construction of a plant for citralderivatives in Ludwigshafen and the completion of a plant for UV absorbers inLudwigshafen, 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 €624 million compared with €388 million in2004. Key projects included:

 

•                  Pipeline connection to the Mittelplateoffshore oil field in Germany; 

 

•                  Debottlenecking of the STEGAL natural gaspipeline;

 

•                  Start of development of the Achimov horizonin a section of the Urengoy field in Russia; 

 

•                  Start of conversion of the Haidach naturalgas field in Austria into a natural gas storage facility; 

 

•                  Acquisition of the Saltfleetby natural gas fieldin the United Kingdom; and

 

•                  Development of new natural gas deposits inthe Dutch North Sea and in Argentina.

 

*Cash used in financing activities*

 

In 2005, cash used in financingactivities 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 pershare.

 

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

 

*Liquid funds*

 

Liquid funds declined due tothe transfer of funds into the Contractual Trust Arrangement and amounted to€1,091 million at the end of 2005. As a result, liquid funds as a proportion oftotal assets declined to 3.1%.

 

Financial indebtednessincreased by 19.5% compared with 2004 and amounted to €3,941 million. Becauseof the decline in liquid funds, net debt, defined as liquid funds less financialindebtness, increased by €1,843 million to €2,850 million. Financialliabilities are discussed in detail in Note 25 to the Consolidated FinancialStatements in Item 18.

 

Detailed information onother financial obligations is provided in Note 26 to the ConsolidatedFinancial Statements in Item 18.

 

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***Current situation***

 

*Working capital*

 

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

 

*Transfer restrictions*

 

Some of our subsidiaries areoperating in countries that restrict or exacerbate the free transfer of fundssuch as loan advances, dividends or capital repatriation. In order to ensurethat there 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.

 

*Restrictive covenants associatedwith borrowings*

 

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

 

Some of our joint venturesin P.R. China have entered into project financings for the construction ofplants and sites. The loans within the project financing amount to $1.1 billion(BASF share). These project financings contain usual financial covenants,mainly debt service cover ratios. The debt service cover ratio is defined asthe ratio of the cash flow available for 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 theterm loans to the aggregate of the paid-in capital and all shareholder loansprovided by the joint venture partners.

 

***Commitments for investments***

 

Planned capital expendituresin 2006 will amount to almost €2.0 billion and are thus expected to be belowthe level of depreciation and amortization. We aim to finance these plannedinvestments from cash provided by operating activities. The main focus of ourinvestment commitments is on Europe due to the projects in the Oil & Gassegment. Of the amount planned for 2006, 61% is scheduled to be invested inEurope; 17% in North America (NAFTA); 15% Asia, Pacific Area; and 7% in SouthAmerica, Africa and Middle East. By segments, 19% is scheduled to be investedby Chemicals; 21% by Plastics; 16% by Performance Products; 7% by AgriculturalProducts & Nutrition; 21% by Oil & Gas; and 16% is scheduled to beinvested for infrastructure and others.

 

Major projects by segmentinclude: 

 

*Chemicals segment*

 

•                  Expansionof the Electronic Materials Center Europe 

 

•                  Expansionof nitric acid capacity in Antwerp, Belgium 

 

•                  Expansionof capacity of the steam cracker in Antwerp, Belgium

 

75

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*Plastics segment*

 

•                  Completionand startup of production plants for TDI and MDI in Caojing, China 

 

•                  Constructionof an HPPO plant in Antwerp, Belgium

 

•                  Establishmentof a PUR systems house and construction of a production plant for TPU inPudong, China

 

•                  Completionand startup of a PBT plant in Kuantan, Malaysia 

 

•                  Constructionof a compounding plant for engineering plastics in Pudong, China 

 

•                  Expansionof production capacities for polyamide 6 in Freeport, Texas

 

•                  Constructionof a production plant for Ecoflex® in Schwarzheide, Germany 

 

*Performance Products segment*

 

•                  Constructionof a plant for HDI-based coatings in Caojing, China 

 

•                  Constructionof a superabsorbents plant in Freeport, Texas 

 

*Agricultural Products &Nutrition segment*

 

•                  Completionand startup of a plant for citral derivatives in Ludwigshafen, Germany 

 

•                  Completionand startup of a production plant for feed enzymes in Ludwigshafen, Germany 

 

*Oil & Gas segment*

 

•                  Developmentof new natural gas reserves in the Dutch North Sea and in Argentina 

 

•                  Developmentof new oil fields in Libya and the expansion of existing ones 

 

•                  Developmentof the Achimov horizon in a section of the Urengoy gas field in Russia 

 

•                  Debottleneckingof the STEGAL natural gas pipeline

 

•                  Constructionof a compressor station for the WEDAL natural gas pipeline in Lippe, Germany 

 

•                  Conversionof the Haidach natural gas field in Austria into a natural gas storage facility

 

•                  Conversionof the Saltfleetby natural gas field in the United Kingdom into a natural gasstorage facility.

 

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**EXCHANGERATE EXPOSURE AND RISK MANAGEMENT**

 

BASF conducts its businessin many currencies other than the euro. About 56% of BASF’s 2005 sales and 57%of 2004 sales were to customers in Europe, about 44% of 2005 sales and 43% of2004 sales were to customers outside Europe. Moreover, about 41% of BASF’s 2005sales and 40% of BASF’s 2004 sales were attributable to BASF operationsconducted outside Europe.

 

As a result of BASF’sforeign currency exposure, exchange rate fluctuations have a significant impactin the form of both translation risk and transaction risk on BASF’sConsolidated Financial Statements. Translation risk is the risk that BASF’sConsolidated Financial Statements expressed in euros for a particular period oras of a certain date may be affected by changes in the prevailing rates of thevarious currencies of the reporting subsidiaries against the euro. Transactionrisk arises when the currency structure of BASF’s costs and liabilitiesdeviates to some extent from the currency structure of BASF’s sales proceedsand assets.

 

The effect of exchange rate fluctuationson BASF’s income from operations for 2005 and 2004 is shown in BASF’sConsolidated Financial Statements under the line items “Other operating income”and “Other operating expense.” See Notes 7 and 8 to the Consolidated FinancialStatements included in Item 18 for further information. The net effect ofexchange rate fluctuations on BASF’s income from operations amounted to a netloss of €111.9 million in 2005 and a net gain of €83.3 million in 2004.

 

In 2005, foreign currencytranslation adjustments had a positive effect of €715 million on stockholders’equity primarily due to the stronger U.S. dollar and currencies depending onthe U.S. dollar in Asia, South America and, in particular, in the NAFTA region.In 2004, foreign currency translation adjustments had a negative effect of €231million 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 Americaand, in particular, in the NAFTA region.

 

Exchange rate riskmanagement is centralized at BASF Aktiengesellschaft. BASF bases its foreignexchange risk management generally on exposures derived from receivables andpayables on the balance sheet. Future sales revenues or expenses are onlyconsidered if such transactions have a high probability of occurrence.Receivables and payables in a particular currency are netted. Normally at BASF,receivables generated from export sales exceed payables from raw materialpurchases resulting in substantial net exposures in U.S. dollar.

 

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

 

In 2005, BASF’s hedgingtransactions have been aimed primarily at minimizing exchange rate risksagainst the U.S. dollar, the British pound, the Korean won and the Brazilianreal. See “Item 11. Quantitative and Qualitative Disclosure About Market Risk”and Note 29 to the Consolidated Financial Statements included in Item 18 forfurther information.

 

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**RESEARCH AND DEVELOPMENT**

 

BASF’s research anddevelopment activities aim to develop new and improved products, find newapplications for existing products and develop more cost-efficient andenvironmentally sound manufacturing processes.

 

BASF spent €1,064 million onresearch and development activities in 2005 compared with €986 million in 2004.Of the total R&D expenditures the Chemical segment spent 10.7%, Plastics12.7%, Performance Products 20.1%, Agricultural Products 28.5%, Fine Chemicals6.6% and Others 21.4%. BASF spent 85.4% of its annual research budget inGermany, 6.8% in other European countries, 5.2% in North America and 2.6% inAsia and South America.

 

Starting in 2005, expensesin the Oil & Gas segment related to exploration for oil and gas depositsand to dry holes are recorded as other operating expenses rather than asresearch and development expenses. This disclosure reflects the economic substanceof these expenses more appropriate and improves the comparability of BASF’s financialstatements.

 

BASF employs about 7,000people worldwide in various research and development activities. About 5,000employees are involved in research and development work in Ludwigshafen, makingthe facility one of the world’s largest research centers in the chemicalindustry.

 

The four central technologyplatforms in Ludwigshafen, and a number of decentralized research anddevelopment sites worldwide, form an efficient network that makes an importantcontribution to BASF’s Verbund approach to integration. In addition, BASFconducts research activities through almost 1,300 cooperative agreements withuniversities, research institutes and industrial partners in many countriesworldwide and through various research joint ventures. Product andmarket-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 Center near Ludwigshafen, Germany, and the researchcenter in Research Triangle Park (RTP) in Raleigh, North Carolina, developagricultural products using our network of experimental and research stationsaround the world. BASF conducts its own plant biotechnology research and isalso involved in various biotechnology research joint ventures. The activitiesare concentrated in the central technology platform BASF Plant Science GmbH,which currently employs about 400 people worldwide.

 

BASF Future Business GmbH, a100% subsidiary of BASF Aktiengesellschaft, was founded with the goal ofdeveloping new business areas together with partners both inside and outsidethe BASF Group. BASF Venture Capital GmbH, a wholly owned subsidiary of BASFFuture Business GmbH focuses on venture capital investments. Both companiesdirect their activities on high-growth markets and future challenges,especially in the field of material sciences and energy management.

 

BASF puts great emphasis onobtaining patents, trademarks, copyrights and designs to protect its investmentin research and development and the developed intellectual property. Thecompany seeks the optimum protection for significant product and process developments.

 

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**COMMITMENTS**

 

**Off-Balance Sheet Arrangements**

 

Our unconsolidated entitiesare not considered variable interest entities and do not constitute otheroff-balance sheet arrangements.

 

**Contractual Obligations and Commercial Commitments**

 

The table below summarizesBASF’s contractual and commercial obligations as of December 31, 2005.

 
| **Contractual Obligations**                                   | ** ** | **Total**    | ** ** | **Under one  year**  | ** ** | **One year to  less than  five years** | ** ** | **After five  years** | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|---------------------------|------------|------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                         | ** ** | ** **   | ** ** | **(Million €)** | ** ** | ** **                                                 | ** ** |
|                                                               |       |         |       |                      |       |                                                       |       |                       |       |
| Financial debt                                                     |       | 3,941.0      |       | 259.3                     |       | 1,197.0                                                    |       | 2,484.7                    |       |
| Miscellaneous liabilities                                          |       | 2,741.8      |       | 1,699.0                   |       | 430.7                                                      |       | 612.1                      |       |
| Commitments from long-term rental and  operating leasing contracts |       | 827.4        |       | 171.9                     |       | 391.5                                                      |       | 264.0                      |       |
| Purchase commitments for raw materials and  natural gas            |       | 60,916.6     |       | 9,934.1                   |       | 18,737.2                                                   |       | 32,245.3                   |       |
| **Total**                                                          | ** ** | **68,426.8** | ** ** | **12,064.3**              | ** ** | **20,756.4**                                               | ** ** | **35,606.1**               | ** ** |

 

“Contractual obligations”are obligations to make payments or transfer assets under existing contracts. “Financialdebt” comprises future principal and deferred interest payments that we need tomake to settle our financial liabilities. This includes primarily bonds andliabilities to credit institutions. See also Note 25 to our ConsolidatedFinancial Statements included in Item 18. “Miscellaneous liabilities” compriseadvances received on accounts of orders, non-trade liabilities of our jointventures to partners, tax, social security and payroll liabilities and deferredincome as well as various other items as set forth in Note 25 to theconsolidated financial statements. “Commitments from long-term rental andleasing contracts” encompass the total minimum undiscounted future payments forleasing and other long-term rental contracts. “Purchase commitments for rawmaterials and natural gas” contain obligations from the respective long-termpurchase contracts.

 

Additionally, remainingcosts of construction in progress include obligations arising from futureinvestments in property, plant and equipment. They amount to €1,927.8 millionas of December 31, 2005. Purchase commitments thereof amount to €692.2 million.Furthermore, there are obligations resulting from capital contribution in theamount of €92.4 million as of December 31, 2005.

 

Please see Note 23 includedin Item 18, the Consolidated Financial Statements, for further informationregarding pension commitments.

 

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Item6.                                     Directors, Senior Management and Employees

 

In accordance with theGerman Stock Corporation Act (*Aktiengesetz*),BASF Aktiengesellschaft has a Board of Executive Directors (*Vorstand*) and a Supervisory Board (*Aufsichtsrat*).The two Boards are separate, and no individual is simultaneously a member ofboth Boards.

 

The Board of ExecutiveDirectors is responsible for managing the business of BASF Aktiengesellschaftin accordance with the German Stock Corporation Act and BASF Aktiengesellschaft’sArticles of Association. The Board of Executive Directors also represents thecompany in its dealings with third parties and in court.

 

The principal function ofthe Supervisory Board is to appoint and supervise the Board of ExecutiveDirectors. The Supervisory Board may not make management decisions, but BASF’sArticles of Association or the Supervisory Board itself may require the priorconsent 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 and care toBASF Aktiengesellschaft. In exercising these duties, the applicable standard ofcare is that of a diligent and prudent business person. Members of both Boardsmust take into account a broad range of considerations when making decisions,foremost the interests of BASF Aktiengesellschaft, including its shareholders,employees and creditors and, to a certain extent, the interests of society. Themembers of the Board of Executive Directors and the Supervisory Board arepersonally liable to BASF Aktiengesellschaft for breaches of their duties ofloyalty and care.

 

**BOARD OF EXECUTIVE DIRECTORS**

 

The number of members of theBoard of Executive Directors is determined by the Supervisory Board, subject toa minimum of two members. As of December 31, 2005, BASF Aktiengesellschaft’sBoard of Executive Directors had eight members. On December 16, 2005 thesupervisory board appointed Dr. Martin Brudermüller as an additional member ofthe Board of Executive Directors, effective January 1, 2006.

 

Pursuant to the Memorandumand Articles of Association of BASF Aktiengesellschaft, any two members of theBoard of Executive Directors or one member and the holder of a special power ofattorney (*Prokura*) may bind the company.

 

The Board of ExecutiveDirectors must report regularly to the Supervisory Board on the currentbusiness of BASF Aktiengesellschaft, on the company’s business policies andother fundamental matters regarding the future conduct of the company’sbusiness, on the company’s profitability, particularly on its return on equity,on the risk exposure of the company and the risk management, as well as on anyexceptional matters that may arise from time to time. The Supervisory Board isalso entitled to request special reports at any time.

 

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

 

Under certain circumstances,such as a serious breach of duty or a bona fide vote of no confidence by amajority of votes at a shareholders’ meeting, a member of the Board ofExecutive Directors may be removed by the Supervisory Board prior to theexpiration of her or his term. A member of the Board of Executive Directors maynot deal with or vote on matters relating to proposals, arrangements orcontracts 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 majority unless the law requires a largermajority. In case of a tie, the vote of the chairman of the Board is decisive.

 

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The following table liststhe current members of the Board of Executive Directors, their ages as ofDecember 31, 2005, the years in which they were first appointed to the Boardand in which their running term ends and their outside directorships:

 

**Dr. Jürgen Hambrecht**

 
| Age: 59 |   | First year appointed: 1997 |   | Year term expires: 2007 |
|---------|--------|----------------------------|--------|-------------------------|

 
| **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, Planning & Controlling,Corporate Communications, Investor Relations, Executive Management andDevelopment.

 

*Memberships on Supervisory Boards*

 

Bilfinger Berger AG,Mannheim, Germany

 

**Eggert Voscherau**

 
| Age: 62 |   | 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                                                                                            |

 

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*Position & Main Areas of Responsibility*

 

Vice Chairman of the Boardof Executive Directors and Industrial Relations Director – Human Resources,Environment, Safety & Energy, Occupational Medicine & Health Protection,Ludwigshafen Verbund Site, Antwerp Verbund Site, Europe.

 

*Memberships on Supervisory Boards*

 

Haftpflichtverband derDeutschen Industrie VVaG, Hannover, Germany (German Industry LiabilityAssociation)

 

Talanx AG, Hannover, Germany

 

**Dr. Kurt Bock**

 
| Age: 47 |   | 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, InformationServices, Corporate Controlling, Internal Audit, South America.

 

**Dr. Martin Brudermüller**

 
| Age: 44 |   | 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(as of April 1, 2006).

 

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**Dr. John Feldmann**

 
| Age: 56 |   | 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, PolymerResearch.

 

**Dr. Andreas Kreimeyer**

 
| Age: 50 |   | 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 – PerformanceChemicals, Functional Polymers, Asia (until March 31, 2006), Coatings (as ofApril 1, 2006).

 

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**Klaus Peter Löbbe**

 
| Age: 59 |   | First year appointed: 2002 |   | Year term expires: 2006 |
|---------|--------|----------------------------|--------|-------------------------|

 
| **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 –Coatings (until March 31, 2006), North America (NAFTA).

 

**Dr. Stefan Marcinowski**

 
| Age: 52 |   | First year appointed: 1997 |   | Year term expires: 2007 |
|---------|--------|----------------------------|--------|-------------------------|

 
| **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-Presidente Executivo, 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 andResearch Executive Director – Inorganics, Petrochemicals, Intermediates,Chemical Research & Engineering, Corporate Engineering, UniversityRelations & Research Planning, BASF Future Business GmbH.

 

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**Peter Oakley**

 
| Age: 52 |   | 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, Fine Chemicals, Specialty Chemicals Research, BASF PlantScience GmbH.

 

**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 Annual Shareholders Meeting on May 6, 2003. Hans Dieter Pötschwas appointed by the district court of Ludwigshafen with effect as of March 2,2004, as successor of Helmut Werner who passed away on February 6, 2004. Themembers of the Supervisory Board representing the Company’s employees wereelected on February 25, 2003, except for Ralf Sikorski who was appointed by thedistrict court of Ludwigshafen on August 7, 2003, as a replacement for GerhardZibell. Michael Vassiliadis became member of the Supervisory Board on August 1,2004, after Jürgen Walter had resigned from his membership on the SupervisoryBoard with effect as of July 31, 2004. Michael Vassiliadis had already beenelected by the Company’s employees on February 25, 2003, as substitute forJürgen Walter.

 

The Supervisory Boardappoints a chairman and a deputy chairman from among its members. The chairmanof the Supervisory Board must be elected by a majority of two-thirds of theBoard members. If a majority is not reached in the first vote, the members ofthe Supervisory Board, who were elected by the shareholders, elect thechairman.

 

At least half of the totalrequired number of members of the Supervisory Board must be present orparticipate in decision-making to constitute a quorum. Unless otherwiseprovided for by law or BASF Aktiengesellschaft’s Articles of Association,resolutions are passed by a simple majority of the votes cast. In the event ofa tie, a second vote is held, and the chairman may cast a deciding vote.

 

Supervisory Board membersare elected for terms of approximately five years. The terms expire at the endof the Annual Meeting after the fourth fiscal year following the year in whichthe members were elected. The current terms of all Supervisory Board membersexpire at the end of the Annual Meeting in 2008. Compensation for SupervisoryBoard members is determined by BASF Aktiengesellschaft’s Articles ofAssociation.

 

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The following table liststhe current members of BASF Aktiengesellschaft’s Supervisory Board, theirrespective ages as of December 31, 2005, their principal occupation and the yearin which they were first elected or appointed to the Supervisory Board:

 
| ** **                            | ** ** | ** ** | ** ** | ** **                                                                                                                                                 | ** ** | **Year First**               |
|---------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|
| **Name**                              | ** ** | **Age**    | ** ** | **Principal Occupation**                                                                                                                              | ** ** | **Elected / Appointed** |
| DR. JÜRGEN F. STRUBE  Chairman   |       | 66         |       | Chairman of the Supervisory Board of BASF Aktiengesellschaft  Retired Chairman of the Board of Executive Directors of BASF Aktien  gesellschaft            |       | 2003                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| ROBERT OSWALD(1) Deputy Chairman |       | 50         |       | Chairman of the works council of the Ludwigshafen site of BASF Aktien  gesellschaft  Chairman of the works council of BASF Group                           |       | 2000                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| RALF-GERD BASTIAN(1)                  |       | 48         |       | Member of the works council of the Ludwigshafen site of BASF  Aktiengesellschaft                                                                           |       | 2003                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| WOLFGANG DANIEL(1)                    |       | 48         |       | Deputy Chairman of the works council of the Ludwigshafen site of BASF  Aktiengesellschaft                                                                  |       | 1996                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| DR. FRANCOIS DIEDERICH                |       | 53         |       | Professor at Zürich Technical University                                                                                                              |       | 1998                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| MICHAEL DIEKMANN                      |       | 51         |       | Chairman of the Board of Executive Directors of Allianz AG                                                                                                 |       | 2003                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| DR. TESSEN VON HEYDEBRECK             |       | 60         |       | Member of the Board of Executive Directors of Deutsche Bank AG                                                                                             |       | 1998                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| ARTHUR L. KELLY                       |       | 68         |       | Chief Executive Officer of KEL Enterprises L.P., Chicago, Illinois                                                                                         |       | 2000                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| ROLF KLEFFMANN(1)                     |       | 56         |       | Chairman of the works council of Wintershall AG’s Barnstorf oil plant                                                                                 |       | 1998                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| MAX DIETRICH KLEY                     |       | 65         |       | Attorney at law  Retired Deputy Chairman of the Board of Executive Directors of BASF Aktiengesellschaft                                                    |       | 2003                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| DR. RENATE KÖCHER                |       | 53         |       | Managing Director of the Institut für Demoskopie Allensbach,  Gesellschaft zum Studium der öffentlichen Meinung mbH                              |       | 2003                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| EVA KRAUT(1)                          |       | 49         |       | Chairwoman of the works council of BASF IT Services GmbH                                                                                                   |       | 2002                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| ULRICH KÜPPERS(1)                |       | 50         |       | Regional Manager of the Mining, Chemical and Energy Industries Union (Industriegewerkschaft,  Bergbau, Chemie, Energie) Rhineland Palatinate / Saar region |       | 1994                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| KONRAD MANTEUFFEL(1)                  |       | 53         |       | Member of the works council of the Ludwigshafen site of BASF  Aktiengesellschaft                                                                           |       | 1999                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| DR. KARLHEINZ MESSMER(1)              |       | 61         |       | Plant Manager at the Ludwigshafen site of BASF Aktiengesellschaft                                                                                          |       | 1993                              |
|                                  |       |       |       |                                                                                                                                                       |       |                              |
| HANS DIETER PÖTSCH               |       | 54         |       | Member of the Board of Executive Directors of Volkswagen AG                                                                                                |       | 2004                              |

 

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| ** **             | ** ** | ** ** | ** ** | ** **                                                                                                                                               | ** ** | **Year First**               |
|------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|
| **Name**               | ** ** | **Age**    | ** ** | **Principal Occupation**                                                                                                                            | ** ** | **Elected / Appointed** |
| DR. HERMANN SCHOLL     |       | 70         |       | Chairman of Supervisory Board of Robert Bosch GmbH Managing Partner  of Robert Bosch Industrietreuhand AG                                                |       | 1998                              |
|                   |       |       |       |                                                                                                                                                     |       |                              |
| RALF SIKORSKI(1)       |       | 44         |       | Manager of the Ludwigshafen branch of the Mining, Chemical and Energy  Industries Union (Industriegewerkschaft Bergbau, Chemie, Energie)                 |       | 2003                              |
|                   |       |       |       |                                                                                                                                                     |       |                              |
| ROBERT STUDER          |       | 67         |       | Retired Chairman of Union Bank of Switzerland                                                                                                            |       | 1993                              |
|                   |       |       |       |                                                                                                                                                     |       |                              |
| MICHAEL VASSILIADIS(1) |       | 41         |       | Member of the Central Board of Executive Directors of the Mining, Chemical  and Energy Industries Union (Industriegewerkschaft Bergbau, Chemie, Energie) |       | 2004                              |

 

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(1) Employeerepresentative

 

The Supervisory Board hasestablished three committees: the committee for the personal affairs of themembers of the Board of Executive Directors (*Personalausschuss*),the Audit Committee (*Prüfungsausschuss*)and the Mediation Committee.

 

The “Personalausschuss”performs the tasks of a nominating and compensation committee. The committeedetermines the terms and conditions of employment of the members of the Boardof Executive Directors including the level and structure of their remuneration.In addition, the committee makes proposals regarding the appointment of membersof the Board of Executive Directors. As of December 31, 2005, the members ofthis committee are Dr. Jürgen F. Strube, Robert Oswald, Dr. Tessen vonHeydebreck and Michael Vassiliadis.

 

The Audit Committee overseesthe Company’s accounting processes. Based on the independent auditor’s report,it reviews the Company’s annual financial statements and reports to theSupervisory Board who then makes an informed decision whether or not to approvethe annual financial statements. The Audit Committee is responsible for dealingwith the independent auditors of the Company. In particular, it awards theaudit contract to the independent auditor elected at the Annual Shareholders’Meeting, determines the focal points of the audit, as well as the auditor’scompensation, and approves non-audit services rendered by the independentauditor. As of December 31, 2005, the members of the Audit Committee are MaxDietrich Kley, Dr. Karlheinz Messmer, Hans Dieter Pötsch and MichaelVassiliadis. The Supervisory Board has determined that the Audit Committeecurrently includes two Audit Committee financial experts: Max Dietrich Kley andHans Dieter Pötsch.

 

The Mediation Committeecomprises two members of the Supervisory Board elected at the Shareholders’Meeting and two members of the Supervisory Board elected by the employees. Asof December 31, 2005, the members of this committee are Dr. Jürgen F. Strube,Robert Oswald, Dr. Tessen von Heydebreck and Wolfgang Daniel. In the event theSupervisory Board cannot reach the two-thirds majority required to appoint amember of the Board of Executive Directors, the Mediation Committee submits aproposal for the appointment to the Supervisory Board.

 

**Compensation of Directors and Officers**

 

The aggregate amount ofcompensation paid by BASF Aktiengesellschaft and its subsidiaries during theyear ended December 31, 2005, to all members of the Board of ExecutiveDirectors and the Supervisory Board, as a group, was €18.7 million. Of thisamount, members of the Board of Executive Directors received €15.3 million andmembers of the Supervisory Board received €3.4 million. The amount ofcompensation of the Board of Executive Directors includes accruedperformance-related bonuses for 2005 of €10.3 million. Additionally, the prorata value of stock options granted to the members of the Board of ExecutiveDirectors in 2005 amounted to €1.4 million.

 

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The total compensation paidby BASF Aktiengesellschaft and its subsidiaries during the year ended December31, 2005, to former members of the Board of Executive Directors and their beneficiarieswas €5.8 million. As of December 31, 2005, provision for pensions and similarbenefits to former members of the Board of Executive Directors and their beneficiariestotaled €77.7 million. No loans were extended to the members of the SupervisoryBoard or the Board of Executive Directors.

 

Pursuant to its Articles ofAssociation, BASF Aktiengesellschaft grants each Supervisory Board member a fixedannual payment of €25,000 and additional compensation based on dividends paidto BASF Aktiengesellschaft shareholders. This latter amount is €3,500 for each€0.05 by which the dividend paid to the shareholders by BASF Aktiengesellschaftexceeds €0.30. For the year ended December 31, 2005, the additionalcompensation based on the dividends amount was €119,000. The Chairman of the SupervisoryBoard receives a payment of twice and a Deputy Chairman receives a payment of1.5 times these amounts. BASF Aktiengesellschaft 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 reimburses eachSupervisory Board member for applicable out-of-pocket expenses and value addedtax. Each member of the Audit Committee further receives a fixed annual paymentof €25,000 for such membership. The chairman of the Audit Committee receivestwice and a deputy chairman receives 1.5 times this further amount.

 

Pursuant to BASF’s stockoption program, each member of the Board of Executive Directors is entitled toreceive options on BASF Shares corresponding to 10% to 30% of the Board member’sindividual performance-related bonus. See “Item 6. Directors, Senior Managementand Employees-BASF Stock Option Program (BOP)” for further details on thenumber of options granted and on the terms and conditions of the options’rights.

 

Directors’ service contractswith BASF or with any of its subsidiaries do not include benefits which areprovided upon termination of employment.

 

**Share Ownership by Members of the Board of Executive Directors and theSupervisory Board**

 

No member of the Board ofExecutive Directors or the Supervisory Board beneficially owns 1% or more ofthe outstanding BASF Shares.

 

**EMPLOYEES**

 

As of December 31, 2005,BASF employed a workforce of 80,945 worldwide, which represents a reduction ofapproximately 1.2% from the end of 2004. About 56.4% of the workforce is basedin Germany. Expenditures for salaries and wages totaled €4,553 million in 2005,down from €4,579 million in 2004. For further information, see Note 12 to theConsolidated Financial Statements included in Item 18.

 

The following table detailsBASF’s workforce on a regional basis as of December 31, 2005, 2004 and 2003.

 
| ** **                         | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Europe                             |       | 56,614     |       | 57,540     |       | 60,817     |       |
| *Thereof Germany*                  | * *   | *45,620*   | * *   | *46,666*   | * *   | *48,997*   | * *   |
| North America (NAFTA)              |       | 9,826      |       | 10,578     |       | 12,494     |       |
| Asia Pacific                       |       | 9,669      |       | 8,916      |       | 8,724      |       |
| South America, Africa, Middle East |       | 4,836      |       | 4,921      |       | 5,124      |       |
| **Total**                          | ** ** | **80,945** | ** ** | **81,955** | ** ** | **87,159** | ** ** |

 

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As of December 31, 2005,BASF Aktiengesellschaft employed 34,143 people mainly at its headquarters inLudwigshafen, Germany, compared with 35,303 people as of December 31, 2004. 

 

A number of BASF’snon-management employees are members of labor unions. The majority of theseunion members belong to the Mining, Chemical and Energy Industries Union *(Industriegewerkschaft Bergbau, Chemie, Energie)*. None ofBASF’s sites in Germany is operated on a “closed shop” basis, meaning thatemployees are not required to join a union. In Germany, collective bargainingagreements for employees below management level are generally negotiatedbetween the association of employers within a particular industry and therespective unions.

 

In addition, under Germanlaw, employees elect a works council *(Betriebsrat)*that participates in determining company site policy, especially with regard tocertain voluntary compensation matters and benefits.

 

The most recent collectivebargaining agreement for employees in Germany represented by labor unions,which covers most of BASF’s employees in Germany, was signed in June 2005 witha term of 19 months.

 

BASF considers its laborrelations to be positive and anticipates reaching future agreements with itslabor unions on terms satisfactory to all parties. There can be no assurances,however, that new agreements will be reached without a work stoppage or strikeor on terms satisfactory to BASF. A prolonged work stoppage or strike at any ofBASF’s major manufacturing sites could have a material adverse effect on thecompany’s results of operations. BASF has not experienced any material strikefor more than 10 years.

 

BASF transferredapproximately €3.7 billion into a newly established CTA (Contractual TrustArrangement) by the end of 2005 solely to finance the pension obligations ofBASF Aktiengesellschaft towards its employees and pensioners. In the future,existing company pension obligations will be externally funded such as those ofthe BASF Pensionskasse VVaG. Employee and pensioner benefit levels remainunchanged and ongoing benefits will continue to be paid by BASFAktiengesellschaft. The CTA enables a long-term portfolio strategy to cover theunderlying pension obligation despite the rising number of retirees and furtherincrease in life expectancy.

 

**Agreements at the Ludwigshafen site and restructuring at BASFCorporation**

 

Together with employeerepresentatives we have signed the “Stability through Change” agreement.Although this agreement remains in force until 2010, the target headcount of32,000 employees can be adjusted dependent on natural fluctuation. Enforcedredundancies will be avoided. The precondition for this agreement is that thesite is not impaired by economic factors or negative circumstances thatendanger BASF Aktiengesellschaft’s competitiveness to such an extent that specificstructural measures are necessary. The viability of the agreement will bereviewed and discussed with employee representatives each year. In 2005,provisions of €35 million were made to cover severance payments (2004: €102million).

 

In North America, atwo-phase restructuring program has been implemented. Phase I of the programfocused on improving the efficiency and effectiveness of our service andfunctional units. Phase II of the program focuses on the optimization of thesites and business units. The goal of reducing annual fixed costs by $250million was achieved in mid-2005, 18 months ahead of schedule. Ongoing measuresfrom the restructuring are expected to yield an additional $150 million in fixedcost reductions by mid-2007, bringing the total annual fixed cost reductions to$400 million. BASF in North America has reduced employment since 2002 by 4,700positions, or 32% of the total workforce.

 

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**BASF Stock Option Program (BOP)**

 

The BASF Stock OptionProgram (BOP) is offered to the Board of Executive Directors and currentlyapproximately 1,000 of BASF’s Senior Executives. The program became effectiveon April 30, 1999, after BASF’s shareholders approved a conditional capitalincrease for the program at the Annual Meeting on April 29, 1999. At the AnnualMeeting on April 26, 2001, the shareholders approved a new conditional capitalincrease to incorporate certain changes to the BOP effective as of 2001. In2005, more than 82% of the eligible Senior Executives opted to participate inthe program.

 

The participation in BOPrequires a personal investment. The Executive has to introduce a specificnumber of BASF Shares into the program and to hold these shares (“the BOPShares”) for at least two years following the Option Grant Date. The range(minimum/maximum) for the number of BOP Shares is calculated on the basis of10% to 30% of the Executive’s annual variable compensation (gross, in Euro) andthe relevant “market price” of the BASF Shares, which is the volume weightedaverage of the prices quoted in the Xetra electronic trading system of DeutscheBörse AG on the first trading day of the German Stock Exchange in Frankfurtfollowing the Annual Shareholders’ Meeting (the “BOP Basic Price”). AnExecutive participating in the BOP receives four option rights for each BOPShare. In 2005, the BOP Basic Price was €50.03 (2004: €42.73, 2003: €38.94).The annual variable compensation for a member of the Board of ExecutiveDirectors is determined by the Supervisory Board pursuant to the terms of theBoard Member’s contractual agreement with BASF. Annual variable compensationfor any other Senior Executive is determined by such Senior Executive’ssupervisors pursuant to Group-wide rules established by the Board of ExecutiveDirectors, and is based on BASF’s performance and the Senior Executive’sindividual performance.

 

Option rights granted in1999 and 2000 had a three-year vesting period. They expire 15 days after thesixth Annual Meeting of BASF Aktiengesellschaft following the grant date. Thus,the 1999 program ended in May 2005. Option rights granted since 2001 may not beexercised prior to July 1 two years after the granting. Option rights grantedin 2001 expire 15 days after the eighth Annual Meeting of BASFAktiengesellschaft following the grant date. Option rights granted in 2002-2005expire on June 30, eight years after the granting.

 

The option rights are, as amatter of principle, paid in cash. BASF reserves the right to deliver sharesinstead of the cash settlement, if this is advisable for legal, economic orother reasons.

 

Each of these option rightsentitles the holder to two subscription rights. The first subscription rightpermits participants to a cash settlement, based on the difference between theBASF Share Price on the exercise date and the BOP Basic Price, provided thatthe market price of BASF Shares on the exercise date is more than 30% higherthan the BOP Basic Price. The second subscription right permits participants toa cash settlement, provided that the BASF Share outperforms the benchmarkindex. For options granted in 1999 and 2000, the benchmark index is the DowJones EURO STOXXSM TotalReturn Index and for options granted from 2001 to 2004 it is the Dow JonesGlobal Chemicals Total Return Index. The index relevant for BOP 2005 is theMSCI World Chemicals IndexSM. The cash settlement amount is equal to therelevant BOP Basic Price multiplied by twice the percentage by which BASFShares have outperformed the benchmark index since the date of issue of therelevant right.

 

An option right may beexercised if the exercise criteria for one or both of the underlyingsubscription rights have been satisfied. If an option right is exercised basedon the exercisability of only one subscription right, then the otherunexercisable subscription right is forfeited. The monetary benefit resultingfrom the exercise of option rights being granted for one BOP Share may notexceed 10 times the personal investment.

 

As from 2005, forparticipants who are subject to U.S. taxation a specific “U.S. BOP 2005” hasbeen set forth. The only modification compared to the global program is thedeferral of the payment of any exercise gain to the last day of the program.

 

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For details about the number of stock options granted see the tablebelow:

 
| ** **                                                | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Stock options outstanding as of January 1                 |       | 4,643,465     |       | 3,833,959     |       | 3,252,444     |       |
| Stock options granted                                     |       | 1,807,800     |       | 1,115,964     |       | 1,413,816     |       |
| *Thereof to members of the Board of  Executive Directors* | * *   | *209,792*     | * *   | *120,356*     | * *   | *116,612*     | * *   |
| Option rights lapsed(1)                                   |       | 66,950        |       | 64,464        |       | 78,480        |       |
| Option rights exercised                                   |       | 983,706       |       | 241,994       |       | 753,821       |       |
| **Stock options outstanding as of December 31**           | ** ** | **5,400,609** | ** ** | **4,643,465** | ** ** | **3,833,959** | ** ** |

 

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(1)   Optionrights lapse if the option holders no longer work for BASF (for reasons otherthan retirement) or have sold part of their BOP Shares prior to the end of thetwo-year holding period.

 

**Employee Stock Purchase Program**

 

In 1999, BASFAktiengesellschaft and several other German subsidiaries of BASF launched astock purchase program for those employees who are not entitled to participatein BOP. At present, various European and Mexican subsidiaries participate inthe program. The program allows an employee to purchase BASF Shares at marketprices by using all or part of the annual variable salary that the employeereceives from the employing company. For every block of 10 BASF Shares sopurchased, the employee will be granted one additional BASF Share after one,three, five, seven and 10 years without further payment, provided that the BASFShares purchased under the program are still held by the employee.

 

In 2002, most companiesimproved the employee share purchase program. The first block of 10 sharespurchased in any year now attracts one free incentive share in each of thefollowing 10 years. In addition, all employees with permanent contracts wereoffered five free shares (which must be held for ten years). In 2005 employeesworldwide purchased 565,000 shares through the employee share purchase program.Of those, 458,720 were acquired by employees of BASF Aktiengesellschaft and106,280 by employees of other BASF Group companies. As a result, 76.9% of theeligible employees currently hold shares in the company.

 
| ** **                                                           | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|----------------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Number of BASF Shares held under the  program as of January 1        |       | 2,405,230     |       | 2,091,400     |       | 1,624,460     |       |
| Number of BASF Shares purchased under the  program                   |       | 565,000       |       | 468,320       |       | 584,490       |       |
| Maximum amount of free shares granted                                |       | 375,535       |       | 323,235       |       | 391,065       |       |
| Shares expired                                                       |       | 175,100       |       | 154,490       |       | 117,550       |       |
| **Number of BASF Shares held under the  program as of  December 31** | ** ** | **2,795,130** | ** ** | **2,405,230** | ** ** | **2,091,400** | ** ** |

 

In mid-2000, BASFCorporation implemented an Employee Stock Purchase Program (ESPP) for employeesthat are not eligible to participate in the BASF Stock Option Program. Theprogram allows an employee to purchase units in a common fund, which isinvested primarily in BASF American Depository Receipts that are traded on theNew York Stock Exchange. Units in the ESPP fund are purchased each paydaythrough voluntary payroll deductions. For every block of 10 BASF Shareequivalents so purchased, the employee is granted a proportionate number ofCompany Discount units, which vest on December 1 of the second calendar yearfollowing the purchase year. In addition, BASF grants Company Bonus units onDecember 1 of the second, fifth and eighth years following the purchase year,provided that the ESPP units purchased under the program are still held by theemployee.

 

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Item7.    Major Shareholders and Related PartyTransactions

 

**MAJOR SHAREHOLDERS**

 

The capital stock of BASFAktiengesellschaft consists of ordinary shares with no par value (*Stückaktien*) that are issued only in bearer form (“BASFShares”). As of December 31, 2005, BASF Aktiengesellschaft had an aggregate of515,059,000 ordinary shares outstanding. Thereof 680,000 are repurchased sharesintended to be cancelled. The outstanding number of shares as disclosed in the financialstatements is 514,379,000. Because the holders of BASF Shares are notregistered with BASF Aktiengesellschaft or any other organization, BASFAktiengesellschaft generally cannot determine who its shareholders are or howmany shares a particular shareholder owns. Notwithstanding the foregoing, basedon its most recent survey, BASF Aktiengesellschaft believes that, as of thebeginning of 2006, approximately 14% of the BASF Shares were held by shareholdersin the United States.

 

To the knowledge of BASFAktiengesellschaft, no shareholder beneficially owns 5% or more of the BASFShares.

 

To its knowledge, BASFAktiengesellschaft is not owned or controlled directly or indirectly by anycorporation, foreign government or any person, jointly or severally.

 

**RELATED PARTY TRANSACTIONS**

 

Certain members of theSupervisory Board and the Board of Executive Directors are members ofsupervisory or executive boards of non-affiliated companies with which BASFengages in certain transactions in the ordinary course of business. Thesetransactions are executed at prevailing market rates and terms at the time ofthe transaction. There are no loans outstanding to members of the SupervisoryBoard or the Board of Executive Directors.

 

Material supplyrelationships exist between the proportionally consolidated Group companiesWintershall Erdgas Handelshaus GmbH, Germany; Wintershall Erdgas Handelshaus,Switzerland; and companies of the BASF Group, for the supply of oil and gas. Theunconsolidated portion of these supplies amounted to €632.1 million in 2005 and€457.4 million in 2004.

 

In addition, a materialsupply relationship exists between the BASF Group, and the Basell Group, whichwas accounted for by the equity method until March 2005. Deliveries to theBasell Group amounted to €284.8 million in 2005 and €254.0 million in 2004.

 

All transactions wereexecuted on an arms-length basis.

 

Please see Note 16 to theConsolidated Financial Statements included in Item 18 for details regardingpayables and receivables with companies accounted for proportionally, atacquisition cost, or according to the equity method.

 

There were no transactionsbetween Group companies and related individuals that were significant, or of anunusual nature.

 

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Item 8.             Financial Information

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

See “Item 18. FinancialStatements.”

 

**EXPORT SALES**

 

BASF manufactures productsmainly in Europe (primarily Germany), North America and Asia. BASF’s productsare then sold in markets worldwide. Therefore, a large share of BASF’s productsare manufactured in Germany and exported for sale in Asia and to a lesserextent in South America. The following table sets forth BASF’s primary exports:

 
| ** **                          | ** ** | ** **   | ** ** | ** **                | ** ** | **Regional**  | ** ** |
|-------------------------------------|------------|--------------|------------|---------------------------|------------|---------------|------------|
| ** **                          | ** ** | **Regional** | ** ** | **Produced in**      | ** ** | **Exports**   | ** ** |
| **Region**                          | ** ** | **Sales**    | ** ** | **Region**                | ** ** | **(Imports)** | ** ** |
| ** **                          | ** ** | ** **   | ** ** | **(Million €)** | ** ** | ** **    | ** ** |
| Europe                              |       | 23,755       |       | 25,093                    |       | 1,338         |       |
| *Thereof Germany*                   | * *   | *8,865*      | * *   | *17,100*                  | * *   | *8,235*       | * *   |
| North America (NAFTA)               |       | 9,479        |       | 9,542                     |       | 63            |       |
| Asia Pacific*                       |       | 6,500        |       | 6,042                     |       | (458)         |       |
| South America, Africa, Middle East* |       | 3,011        |       | 2,068                     |       | (943)         |       |
| **Total**                           | ** ** | **42,745**   | ** ** | **42,745**                | ** ** | **—**    | ** ** |

 

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*                  Effective January 1, 2005, companies inAsia are reported in the region “Asia Pacific.” South America, which waspreviously reported separately, is now reported together with the geographicregions Africa and Middle East in the region “South America, Africa, MiddleEast.”

 

**LEGAL PROCEEDINGS**

 

**Antitrust Claims Relating to Vitamins**

 

On November 21, 2001, theEuropean Commission imposed a fine of €296.2 million against BASFAktiengesellschaft in connection with certain violations of antitrust lawsrelating to the sale of vitamin products in Europe between 1989 and early 1999.BASF has appealed against this decision. 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 the mid-nineties. BASFhas appealed against both decisions. Further proceedings are still pending inBrazil and Australia.

 

A few State court lawsuitson behalf of indirect purchasers are still pending in the United States inconnection with said antitrust law violations. Further claims for damages havebeen filed in the United Kingdom. A class action filed in Australia has beensettled, with court approval still outstanding.

 

For these proceedings, thecompany has established provisions for the costs that it anticipates to be sufficient.

 

BASF Aktiengesellschaft hasbeen named as a defendant in Empagran S.A. v. F. Hoffmann-LaRoche, Ltd, et al.,a federal class action filed in the U.S. District Court for the District ofColumbia purportedly on behalf of all persons who purchased vitamins from thedefendants outside the United States between January 1, 1988 and February 1999.The Empagran complaint alleges that the plaintiffs were overcharged on theirvitamins purchases as the result of a worldwide conspiracy among the defendantsto fix vitamin prices. By decision dated June 7, 2001, the District Court forthe District of Columbia dismissed the Empagran complaint for lack of subjectmatter jurisdiction. On January 17, 2003, a divided panel of the United StatesCourt of Appeals for the District of Columbia Circuit reversed the DistrictCourt’s ruling. The Court of Appeals held that the United States antitrust lawspermit the assertion of federal subject matter jurisdiction over claims byforeign purchasers based on purchases made and purported damages felt outsidethe United States. BASF Aktiengesellschaft and the other defendants petitionedfor a Writ of Certiorari to the United States Supreme Court. 

 

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The Supreme Court granted the petition, and on June 14, 2004, vacatedthe Court of Appeals’ ruling and remanded the case to the Court of Appeals byan 8-0 decision. On June 28, 2005, the Court of Appeals, on remand, ruled thatplaintiffs’ alleged link between foreign injury and domestic effects waslegally insufficient to trigger jurisdiction under the Sherman Act andtherefore affirmed the district court’s dismissal of the action. On October 26,2005, plaintiffs filed a new petition for a writ of certiorari to the U.S.Supreme Court. The Supreme Court has denied plaintiffs’ petition, which BASFand the other defendants have opposed, on January 6, 2006. The proceedings are,therefore, terminated and the case is finally dismissed.

 

**Meridia Class Actions against BASF Corporation and BASFAktiengesellschaft**

 

In various class actions inthe United States, Knoll Pharmaceutical Corporation (KPC) and BASF Corporation(and in two cases BASF Aktiengesellschaft) as well as Abbott Laboratories, Inc.and Glaxo Wellcome were sued for an unknown amount of damages as well as forthe reimbursement of costs for preventive medical check-ups. The claims arebased on the alleged hazardousness, alleged insufficient trials, and failuresduring the regulatory approval process of Meridia® (tradename of the obesity drug sibutramine). Both actions against BASFAktiengesellschaft have been dropped or dismissed. The claims against BASFCorporation have similarily been voluntarily dismissed. All cases have now beensettled, with payment made by Abbott Laboratories which acquired KPC from BASF.

 

**Additional Proceedings**

 

The Supreme Court of Minnesotain its decision dated February 19, 2004, upheld a jury verdict against BASFCorporation in an amount of $52 million (with interest now totaling $60million). The court held that the sale of the plant protection products Poast® and Poast Plus® at differentsales prices violated consumer protection laws. BASF believes that differentsales prices are justified because the products are based on different patentedformulas and also must be sold as different products under relevant EPAregulations. BASF filed a petition for a Writ of Certiorari seeking review bythe United States Supreme Court. BASF’s petition was granted, and the case wasremanded to the Minnesota Supreme Court for reconsideration of its prioropinion in light of an intervening U.S. Supreme Court ruling in another case.The Court’s new ruling is expected during the first quarter of 2006.

 

In 2005, class actionlawsuits against BASF Aktiengesellschaft and BASF Corporation had been filed atU.S. courts. It was alleged that sales of “urethanes and urethanes products”had violated antitrust laws. BASF will vigorously defend those lawsuits.

 

In August 2005, the EuropeanCommission issued Statements of Objections against several European producersof methacrylates and polymethacrylates for alleged anticompetitive behaviorbetween 1995 and 2000, inter alia against BASF Aktiengesellschaft. Although theevidence induced by the Commission against the company is considered weak, a finealso against the company cannot be excluded. Therefore, the company hasestablished provisions for the costs of this proceeding that it anticipates tobe sufficient.

 

**DIVIDEND POLICY**

 

The Board of ExecutiveDirectors and the Supervisory Board of BASF Aktiengesellschaft proposedividends based on BASF Aktiengesellschaft’s year-end unconsolidated financialstatements. The proposal is then voted on at BASF’s Annual Meeting. The AnnualMeeting is usually convened during the second quarter of each year.

 

Since all BASF Shares are inbearer form, dividends are either remitted to the custodian bank on behalf ofthe stockholder, generally within two days following the Annual Meeting, or inthe case of stockholders personally possessing certificates, availableimmediately following the Annual Meeting upon submission of the dividend coupontherefore at the offices of BASF Aktiengesellschaft in Ludwigshafen, Germany,or the offices of BASF Aktiengesellschaft’s appointed paying agents. Recordholders of BASF’s American Depositary Receipts (ADRs) on the dividend recorddate will be entitled to receive payment of the dividend less withholding taxof 15% in respect of the year for which it is declared. See “Item 10.Additional Information” for further information. 

 

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Cash dividends payable to ADR holders will be paid to the Bank of NewYork, as depositary, in euros and, subject to certain exceptions, will beconverted by the depositary into U.S. dollars. The amount of dividends receivedby holders of ADRs may be affected by fluctuations in exchange rates. See “Item3. Exchange Rate Information” for further information.

 

BASF Aktiengesellschaftexpects to continue to pay dividends, although there can be no assurance as tothe particular amounts that would be paid from year to year. The payment offuture dividends will depend on BASF’s financial condition. See “Item 5.Operating and Financial Review and Prospects.”

 

**SIGNIFICANT CHANGES**

 

On February 28, 2006, BASFAktiengesellschaft reached an agreement with Degussa AG, Düsseldorf, Germany,to acquire Degussa’s construction chemicals business. The purchase price forequity is approximately €2.2 billion plus assumption of liabilities. As aresult, the transaction value for BASF is currently estimated at approximately€2.7 billion. The transaction, which still requires approval from the relevantauthorities, is expected to close by the middle of 2006.

 

The construction chemicalsbusiness is a reportable segment within Degussa’s financial reporting. Thefollowing figures were reported by Degussa for the years 2005 and 2004. Degussaprepared its financial statements in accordance with International FinancialReporting Standards (IFRS).

 
| ** **             | ** ** | **2005****(1)**           | ** ** | **2004****(1)** | ** ** |
|------------------------|------------|---------------------------|------------|-----------------|------------|
| ** **             | ** ** | **(Million €)** | ** ** |
| Sales                  |       | 1,968                     |       | 1,788           |       |
| Income from operations |       | 223                       |       | 201             |       |
| Segment assets         |       | 1,472                     |       | 1,373           |       |

 

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(1)  As reported in the preprint of the financialreport 2005 of Degussa AG, published for their annual press conference

 

 

 

There have been no othermaterial changes in the financial position of BASF Aktiengesellschaft sinceDecember 31, 2005.

 

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Item 9.             The Offer and Listing

 

**LISTING DETAILS**

 

**Principal Market for BASF Shares**

 

The principal trading marketfor BASF Shares is the Frankfurt Stock Exchange. BASF Shares are also traded onthe other German stock exchanges, namely Berlin-Bremen, Düsseldorf, Hamburg,Hannover, Munich and Stuttgart. In addition, BASF Shares are traded on theLondon and Swiss stock exchanges.

 

Since June 7, 2000, AmericanDepositary Receipts (ADRs), each representing one BASF Share, have been tradedon the New York Stock Exchange (NYSE) under the trade symbol “BF.”

 

In connection with ourlisting on the NYSE, BASF, as a foreign private issuer, is required to applythe rules of Section 404 of the Sarbanes-Oxley Act for the business yearsending after July 15, 2006. The BASF Group implemented Section 404 of theSarbanes-Oxley Act in 2005, and the internal control process for financialreporting was uniformly documented in a new, separate IT system. Our systemcomplies with the requirements of the COSO Report and the Public CompanyAccounting Oversight Board (PCAOB) (See also “Item 15. Controls and Procedures”).

 

Options on BASF Shares aretraded on Eurex, the German-Swiss derivatives market jointly owned and operatedby Deutsche Börse AG and the Swiss Stock Exchange.

 

**Share Price History**

 

The table below shows forthe periods indicated the high and low official daily quotation for BASF Shareson the Frankfurt Stock Exchange as reported by Deutsche Börse AG and also thehigh and low of the DAX. See “Item 3. Exchange Rate Information” forinformation on exchange rates between the U.S. dollar and the euro during theperiods in this table.

 

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| ** **                   | ** ** | **Price per BASF Share** | ** ** | **DAX**     | ** ** |
|------------------------------|------------|-----------------------------------------|------------|-------------|------------|
| ** **                   | ** ** | **High**                                | ** ** | **Low**     | ** ** | **High** | ** ** | **Low** | ** ** |
| **Quarterly Highs and Lows** |       |                                    |       |        |       |   |   |   |   |
| **2001**                     |       |                                    |       |        |       |   |   |   |   |
| First Quarter                |       | €50.45                             |       | €42.80 |       | 6,795.14 |   | 5,388.02 |   |
| Second Quarter               |       | €49.83                             |       | €43.60 |       | 6,278.90 |   | 5,553.46 |   |
| Third Quarter                |       | €47.70                             |       | €31.00 |       | 6,109.50 |   | 3,787.23 |   |
| Fourth Quarter               |       | €44.10                             |       | €37.21 |       | 5,271.29 |   | 4,239.97 |   |
|                         |       |                                    |       |        |       |   |   |   |   |
| **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 |   |

 
| ** **                                                | ** ** | **High**    | ** ** | **Low**     | ** ** |
|-----------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Monthly Highs and Lows of the Last Six  Months****(1)** |       |        |       |        |       |
| **2005**                                                  |       |        |       |        |       |
| September                                                 |       | €62.50 |       | €57.60 |       |
| October                                                   |       | €64.60 |       | €58.37 |       |
| November                                                  |       | €62.80 |       | €59.02 |       |
| December                                                  |       | €65.33 |       | €62.73 |       |
|                                                      |       |        |       |        |       |
| **2006**                                                  |       |        |       |        |       |
| January                                                   |       | €64.86 |       | €61.93 |       |
| February                                                  |       | €65.55 |       | €62.90 |       |

 

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(1)          Effective January 2, 2001, the FrankfurtStock Exchange no longer determines official daily quotes for odd-lot trades *(Kassakurse)*. As of this date, the stock price informationprovided above is based on Xetra, the integrated computerized   trading system through which the FrankfurtStock Exchange conducts trading in equity securities.

 

97

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**Trading on the New York Stock Exchange**

 

The following table setsforth, for the period indicated, the high and low sales price per BASF ADR, asreported on the New York Stock Exchange Composite Tape.

 
| ** ** | ** ** | **High**   | ** ** | **Low**    | ** ** |
|------------|------------|------------|------------|------------|------------|
| **2005**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| September  |       | USD        |       | 75.40      |       | USD |   | 71.45 |   |
| October    |       | USD        |       | 76.28      |       | USD |   | 70.38 |   |
| November   |       | USD        |       | 73.80      |       | USD |   | 69.73 |   |
| December   |       | USD        |       | 77.26      |       | USD |   | 73.70 |   |
|       |       |       |       |       |       |   |   |   |   |
| **2006**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| January    |       | USD        |       | 78.77      |       | USD |   | 75.65 |   |
| February   |       | USD        |       | 79.30      |       | USD |   | 69.73 |   |

 

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Item 10.          AdditionalInformation

 

**ARTICLES OF ASSOCIATION**

 

BASF incorporates herein allinformation regarding its Articles of Association by reference to itsRegistration Statement on Form 20-F (File No. 1-15909), as filed withthe Securities and Exchange Commission on May 25, 2000.

 

**Acquisition of BASF Shares by BASF Aktiengesellschaft**

 

Under the German StockCorporation Act, a stock corporation may acquire its own shares in a limitednumber of exceptional cases, including if so authorized by a shareholderresolution adopted at a General Shareholders’ Meeting. At the Annual Meetingsof BASF Aktiengesellschaft held on April 29, 2004 and April 28, 2005,the shareholders 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, use the shares toservice option rights granted to participants of the BASF Stock Option Program,or with the approval of the Supervisory Board, use the shares for theacquisition of companies, parts of companies or holdings in companies in returnfor the transfer of BASF shares. In 2005, BASF Aktiengesellschaft had bought26,062,229 BASF Shares, or approximately 4.82% of the then outstanding BASFShares. The Board of Executive Directors has cancelled 26,182,229 repurchasedBASF Shares (thereof 800,000 shares repurchased in 2004), thus reducing thecompany’s outstanding share capital.

 

**EXCHANGE CONTROLS AND OTHERLIMITATIONS AFFECTING SECURITY HOLDERS**

 

There are, except in limitedembargo circumstances pursuant to resolutions adopted by the United Nations orthe European Union, no legal restrictions in Germany on international capitalmovements and foreign exchange transactions.

 

For statistical purposesonly, every individual or corporation residing in Germany (a “Resident”) mustreport to the German Central Bank (*Deutsche Bundesbank*),subject only to certain immaterial exceptions, any payment received from ormade to or on account of an individual or corporation residing outside Germany(a “Nonresident”) if such payment exceeds €12,500 or the equivalent in aforeign currency. In addition, Residents must report any claims against or anyliabilities payable to Nonresidents if such claims or liabilities in theaggregate exceed €5,000,000 or the equivalent in a foreign currency during anyone month.

 

Neither German Law nor theArticles of Association (*Satzung*) ofBASF Aktiengesellschaft impose any limitations on the rights of Nonresident orforeign owners to hold or vote BASF Shares, including those represented byAmerican Depositary Receipts (ADRs).

 

**TAXATION**

 

The following is a summaryof material U.S. federal income and German tax considerations relating to theownership of American Depositary Shares (ADSs) or BASF Shares by an EligibleU.S. Holder (as defined below).

 

The discussion is based ontax laws of the United States and Germany as in effect on the date of thisAnnual Report, including the Convention between the United States of Americaand the Federal Republic of Germany for the Avoidance of Double Taxation andthe Prevention of Fiscal Evasion with respect to Taxes on Income and Capitaland to Certain Other Taxes (the “Income Tax Treaty”), and the Conventionbetween the United States of America and the Federal Republic of Germany forthe 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.

 

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The discussion does notpurport to be a comprehensive description of all the tax considerations thatmay be relevant to the ownership of ADSs or BASF Shares. In particular, it doesnot address any aspect of U.S. federal tax law other than income taxation, orany aspect of German tax law other than income, gift, inheritance and wealthtaxation, and it does not cover the tax laws of any state or municipality, orany jurisdiction outside the United States and Germany. Moreover, thediscussion does not consider any specific facts or circumstances that may applyto a particular Eligible U.S. Holder, and does not take into account anyspecial tax rules to which certain holders (including, without limitation,tax-exempt organizations, persons subject to the alternative minimum tax,securities broker-dealers, financial institutions, persons holding ADSs or BASFShares in a hedging transaction or as part of a straddle or conversiontransaction, persons having a functional currency other than the U.S. dollar,persons that own, or that are treated as owning, 10% or more of the voting powerof our stock and persons that received ADSs or BASF Shares pursuant to theexercise of employee stock options or otherwise as compensation) may besubject.

 

Owners of ADSs or BASFShares are urged to consult their tax advisers regarding the U.S. federal,state, local, German and other tax consequences of owning and disposing of ADSsor BASF Shares. In particular, owners of ADSs or BASF Shares are urged toconsult their tax advisers to confirm their status as Eligible U.S. Holders andthe consequence to them if they do not so qualify.

 

For purposes of thediscussion that follows, an “Eligible U.S. Holder” is any beneficial owner ofADSs or BASF Shares who or which (i) is a resident of the United Statesfor the purposes of the Income Tax Treaty, such as a U.S. citizen or 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 orBASF Shares as capital assets, (iv) does not hold ADSs or BASF Shares aspart of the business property of a permanent establishment located in Germanyor as part of a fixed base of an individual located in Germany and used for theperformance of independent personal services, (v) is entitled to benefitsunder the Income Tax Treaty with respect to income and gain derived inconnection with the ADSs or BASF Shares, and (vi) if not an individual, isnot subject to the limitation on benefits restrictions in the Income TaxTreaty.

 

In general, for U.S. federalincome tax purposes, holders of ADRs evidencing ADSs will be treated as theowners of the BASF Shares represented by those ADSs.

 

**Taxation of Dividends**

 

Under U.S. federal incometax law, Eligible U.S. Holders are generally required to include in their grossincome, as dividend income from a qualified foreign corporation, the grossamount of any distribution paid from the current or accumulated earnings andprofits of BASF (as determined under U.S. federal income tax principles). Theamount of dividend income for U.S. federal income tax purposes is not reducedby German taxes withheld from a dividend distribution in respect of the ADSs orBASF Shares. Beginning in 2003, Eligible U.S. Holders are entitled to treat theincome from such distributions as “qualified dividend income” that wouldincrease their net capital gain. Eligible U.S. Holders that are corporationswill not be entitled to the dividends-received deduction with respect to suchdistributions.

 

As a German corporation,BASF is required to withhold taxes on dividends paid to German resident andnonresident stockholders. The required withholding rate applicable to BASFdividends is 20% plus a solidarity surcharge of 5.5% thereon, equal to 1.1% ofthe gross dividend (i.e., 5.5% of the 20% tax). Accordingly, a total Germanwithholding tax of 21.1% of the gross dividend is required.

 

An Eligible U.S. Holder isentitled to a refund of a portion of the withholding tax, reducing the netGerman tax rate to that permitted under the Income Tax Treaty, i.e., 15% of thegross dividend.

 

The portion of the Germanincome tax withheld that cannot be refunded under the Income Tax Treaty may beclaimed either as a foreign tax credit against the U.S. federal income taxliability of an Eligible U.S. Holder or as a deduction in computing taxableincome. For U.S. foreign tax credit purposes, dividends received in respect ofthe ADSs or BASF Shares generally will be treated as passive income (or, insome circumstances, financial services income) derived from sources outside theUnited States. The rules and 

 

100

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limitations relating to foreign tax credits are complex, and EligibleU.S. Holders should consult their own tax advisers regarding the availabilityof foreign tax credits and the application of the foreign tax creditlimitations to their particular situations. Beginning in 2003, adjustments tothese calculations may be required in the case of dividend income treated as “qualifieddividend income.”

 

To illustrate the foregoing,for each $100 gross amount of dividend paid by BASF in 2005 to an Eligible U.S.Holder, $21.10 of German tax would be withheld, of which $6.10 would berefundable. For U.S. federal income tax purposes, the U.S. Holder would reportdividend income of $100 (to the extent paid out of current and accumulatedearnings and profits) and foreign taxes paid of $15, for purposes ofcalculating the Foreign Tax Credit or the deduction for taxes paid.

 

For U.S. federal income taxpurposes, dividends paid by BASF in euros are included in the gross income ofan Eligible U.S. Holder in a U.S. dollar amount calculated by reference to theexchange rate in effect on the date the dividends (including the deemed refundof German corporate tax) are received by such Eligible U.S. Holder or, in thecase of ADSs, by the depositary. If a dividend paid in euros is converted intoU.S. dollars on the date received, Eligible U.S. Holders generally should notbe required to recognize foreign currency gain or loss in respect of thedividend.

 

**General Refund Procedures Regarding German Withholding Tax**

 

Pursuant to administrativeprocedures, claims for refunds under the Income Tax Treaty generally must besubmitted to the German Federal Tax Authority (*Bundeszentralamtfür Steuern*) either individually by an Eligible U.S. Holder, orcollectively (introduced on a trial basis) by the depositary (or a custodian asits designated agent) on behalf of all Eligible U.S. Holders owning ADSs.Claims must be filed within four years of the end of the calendar year in whichthe 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.

 

Individual claims for refundhave to be made on a special German claim form that must be filed with theGerman Federal Tax Authority at Bundeszentralamt für Steuern, Friedhofstrasse1, 53225 Bonn, Germany. The German claim-for-refund form may be obtained fromthe German Federal Tax Authority at the same address where applications are filed,or from the Embassy of the Federal Republic of Germany at 4645 Reservoir Road,N.W., Washington, D.C. 20007-1998. Forms can also be obtained from the Officeof the Assistant Commissioner (International), Internal Revenue Service, 950 L’EnfantPlaza South, SW, Washington, D.C. 20024, Attention: Taxpayer Service Division.

 

As part of the individualrefund claim, an Eligible U.S. Holder must submit to the German Federal TaxAuthority the original bank voucher (or certified copy thereof) issued by thepaying entity documenting the tax withheld, and an official certification onIRS Form 6166 of such Eligible U.S. Holder’s last filed U.S. federalincome tax return. IRS Form 6166 may be obtained by sending a request tothe Internal Revenue Service Center, Foreign Certification Request, P.O. Box16347, Philadelphia, P.A. 19114-0447. Requests for certification are to be madein writing and must include the Eligible U.S. Holder’s name, mailing addressand social security or employer identification number, the form number for therelevant U.S. federal income tax return and the tax period for which the certificationis requested.

 

The Internal Revenue Servicewill send the certification directly to the German Federal Tax Authority ifrequested by the Eligible U.S. Holder. If no such request is made, the InternalRevenue Service will send a certificate on IRS Form 6166 to the EligibleU.S. Holder, which then must submit the certification with the Eligible U.S.Holder’s claim for refund. The Internal Revenue Service certification is validfor three years and need only be resubmitted in a fourth year in the event of asubsequent application for refund.

 

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**Simplified Refund Procedure regarding German Withholding Tax in respectof ADSs or BASF Shares Deposited with The Depository Trust Company in New York**

 

As of May 7, 1999,Eligible U.S. Holders may make applications for refunds payable under theIncome Tax Treaty by using a simplified refund procedure instead of the generalrefund procedures described above. Eligible U.S. Holders may use the simplifiedrefund procedure only with respect to taxes withheld on dividends 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.

 

In the EDS system, theparticipants maintaining accounts at The Depository Trust Company report thepositions held by them at the relevant cutoff date that qualify for sharedividends subject to withholding tax at the appropriate rates under the IncomeTax Treaty. The reports of the individual participants will be compiled by TheDepository Trust Company into a collective application and submitted to theGerman Federal Tax Authority for conditional refund. After initially checkingonly arithmetical correctness, the German Federal Tax Authority will make arefund as required to The Depository Trust Company. The refund will be made atthe earliest on the due date of the withholding tax pursuant to German tax law.

 

The Depository Trust Companywill distribute the refund amounts in accordance with EDS data to theparticipants to be passed on to the beneficial owners.

 

**Taxation of Capital Gains**

 

Upon a sale or other taxabledisposition of ADSs or BASF Shares, an Eligible U.S. Holder will recognize again or loss for U.S. federal income tax purposes in an amount equal to thedifference between the amount realized from the sale or other disposition, andthe Eligible U.S. Holder’s tax basis in the ADSs or BASF Shares. Such gain orloss generally will be treated as a capital gain or loss derived from U.S.sources, and will be a long-term capital gain or loss if the Eligible U.S.Holder’s holding period for the ADSs or BASF Shares exceeds one year. In thecase of certain Eligible U.S. Holders (including individuals), long-termcapital gains are taxable at preferential U.S. federal income tax rates. Thededuction of capital losses is subject to certain limitations under U.S.federal income tax law.

 

Deposits and withdrawals ofBASF Shares in exchange for ADSs generally will not be considered a taxableevent for U.S. federal income tax purposes.

 

Under the Income Tax Treaty,an Eligible U.S. Holder will not be liable for German tax on capital gainsrealized or accrued on the sale or other disposition of ADSs or BASF Shares.

 

**Gift and Inheritance Taxes-German Taxation**

 

An Eligible U.S. Holder whois an individual and whose domicile is determined to be in the United Statesfor purposes of the Estate Tax Treaty will not be subject to German inheritanceand gift tax (the equivalent of the U.S. federal estate and gift tax) upon theindividual’s death or upon the making of a gift unless the ADSs or BASF Shares (i) arepart of the business property of a permanent establishment located in Germanyor (ii) are part of the assets of a fixed base of an individual located inGermany and used for the performance of independent personal services. Anindividual’s domicile in the United States, however, does not preventimposition of German inheritance and gift tax with respect to an heir, donee,or other beneficiary who is domiciled in Germany at the time the individualdied 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 gift tax paid to Germany, subject to certainlimitations, in a case where the ADSs or BASF Shares are subject to Germaninheritance or gift tax and U.S. federal estate or gift tax.

 

**Other German Taxes**

 

There are no Germantransfer, stamp or other similar taxes that would apply to Eligible U.S.Holders that purchase or sell ADSs or BASF Shares.

 

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**INFORMATION REPORTING AND BACKUPWITHHOLDING**

 

Dividends on ADSs or BASFShares, and payments of the proceeds of a sale of ADSs or BASF Shares, paidwithin the United States or through certain U.S.-related intermediaries aresubject to Internal Revenue Service information reporting, and may be subjectto backup withholding at a 28% rate unless the holder (i) is a corporationor other exempt recipient or (ii) provides a correct taxpayer identificationnumber, certifies that no loss of exemption from backup withholding hasoccurred and otherwise complies with the backup withholding requirements.

 

**DOCUMENTS ON DISPLAY**

 

BASF is subject to theinformational requirements of the Securities Exchange Act of 1934, as amended.In accordance with these requirements, BASF files reports and other informationwith the Securities and Exchange Commission. These materials, including thisAnnual Report and the exhibits thereto, may be inspected and copied at theCommission’s Public Reference Room at 450 Fifth Street, N.W., Washington,D.C. 20549 and at the Commission’s regional offices at 175 W. JacksonBoulevard, 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 ofthe Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribedrates. The public may obtain information on the operation of the Commission’sPublic Reference Room by calling the Commission in the United States at 1-800-SEC-0330.The Commission also maintains a web site at www.sec.gov that contains reports,proxy statements and other information regarding registrants that fileelectronically with the Commission. BASF’s Annual Report and some of the otherinformation submitted by BASF to the Commission may be accessed through thiswebsite. In addition, material filed by BASF can be inspected at the offices ofthe New York Stock Exchange at 20 Broad Street, New York, N.Y. 10005.

 

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Item 11.          Quantitative andQualitative 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 hedge against these risks, derivatives are used,including foreign currency forward contracts, currency options, interestrate/currency swaps, combined instruments and commodity derivatives. Inaddition, financial derivative instruments are used as a substitute fororiginal financial instruments, such as shares or fixed-income securities.

 

Exclusive use is made ofcommonly used instruments with sufficient market liquidity. Derivativeinstruments are only used if they have corresponding underlying positionsarising from the operating business, cash investments and financing. Theleverage effect that can be achieved with derivatives is deliberately not used.The derivative instruments held by BASF are solely held for purposes other thantrading.

 

Where derivatives have apositive market value, BASF is exposed to credit risks in the event of non-performanceby their counterparties. The credit risk is minimized by exclusively tradingcontracts with major creditworthy counterparties.

 

To ensure efficient riskmanagement, market risks are centralized at BASFAktiengesellschaft and BASFGroup companies designated for this purpose, except when certain subsidiarieshave been authorized to close derivative contracts under the principlesmentioned above. BASF has developed and implemented internal guidelines basedon the principles of separation of the placement function from the settlementfunction for derivative instruments.

 

The risks arising fromchanges in exchange rates, interest rates and prices as a result of theunderlying transactions and the derivative transactions concluded to hedge themare monitored constantly. For this purpose, market quotations or computer ormathematical models are used to determine the current market values not only ofthe underlying transactions but also of the derivative transactions and theseare compared with each other. Where derivative instruments were entered into asa substitute for original financial instruments, market trends are alsomonitored constantly.

 

**INTEREST RATE RISK MANAGEMENT**

 

BASF employs interest-ratesensitive financial instruments to manage the liquidity and cash needs of itsoperations. Financial liabilities consist of bank loans (31% of financialliabilities), which BASF Group companies worldwide took from numerous localbanks in their various local currencies. Additionally, BASF has two fixed-rateeuro bonds outstanding (61% of financial liabilities), as well as a number ofvariable and fixed-rate U.S. dollar-bonds denominated infrastructure andenvironmental bonds with a preferred tax status in the United States (8% of financialliabilities). BASF has entered into a number of interest rate derivatives inorder 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 combined interest/currency derivatives. In most cases,BASF is obliged to pay a fixed rate in a foreign currency and receives avariable rate in euros. Such swaps were concluded to optimize the internal financingof Group companies worldwide and to offer the internal parties the desiredcredit terms and cash flows.

 

The following information ondebt is presented in euro equivalents, which is BASF’s reporting currency.

 

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***Principal (Notional) Amount Interest Rate – December 31, 2004******(1)***

 
| ** **                                             | ** ** | **Expected  Maturity Date** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|------------|------------|
| ** **                                             | ** ** | **(Million  €)**       | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair  Value** | ** ** |
| ** **                                             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **December** | ** ** |
| ** **                                             | ** ** | **2005**                    | ** ** | **2006**   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **31, 2004** | ** ** |
| **Debt,  including current portion U.S. dollar (USD)** |       |                        |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate                                             |       | 24.4                        |       | 2.9        |       |   |   | 11.0 |   | 13.5 |   | 25.3 |   | 77.1 |   | 78.5 |   |
| Weighted average  interest rate (fixed)                |       | 2.78%                       |       | 3.86%      |       |   |   | 3.52% |   | 3.95% |   | 4.49% |   |   |   |   |   |
| Variable rate                                          |       | 20.5                        |       |       |       |   |   |   |   |   |   | 442.8 |   | 463.3 |   | 463.3 |   |
| Interest rate  (variable)                              |       | 3.08%                       |       |       |       |   |   |   |   |   |   | 2.18% |   |   |   |   |   |
| **Subtotal**                                           |       | 44.9                        |       | 2.9        |       |   |   | 11.0 |   | 13.5 |   | 468.1 |   | 540.4 |   | 541.8 |   |
| ** **                                             |       |                        |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Euro  (EUR)**                                        |       |                        |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate                                             |       | 1,257.3                     |       | 0.3        |       | 0.4 |   | 0.3 |   | 0.4 |   | 1,004.0 |   | 2,262.7 |   | 2,292.2 |   |
| Weighted average  interest rate (fixed)                |       | 5.74%                       |       | 3.02%      |       | 3.02% |   | 3.02% |   | 3.02% |   | 3.49% |   |   |   |   |   |
| Variable rate                                          |       | 12.5                        |       | 15.3       |       | 14.2 |   | 14.2 |   | 14.2 |   | 35.4 |   | 105.8 |   | 105.8 |   |
| Interest rate  (variable)                              |       | 2.91%                       |       | 2.92%      |       | 2.99% |   | 2.99% |   | 2.99% |   | 2.99% |   |   |   |   |   |
| **Subtotal**                                           |       | 1,269.8                     |       | 15.6       |       | 14.6 |   | 14.5 |   | 14.6 |   | 1,039.4 |   | 2,368.5 |   | 2,398.0 |   |
| ** **                                             |       |                        |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Chinese  renminbi (CNY)**                            |       |                        |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate                                             |       | 26.8                        |       |       |       |   |   |   |   |   |   | 89.4 |   | 116.2 |   | 116.2 |   |
| Weighted average  interest rate (fixed)                |       | 5.06%                       |       |       |       |   |   |   |   |   |   | 5.18% |   |   |   |   |   |
| Variable rate                                          |       |                        |       |       |       |   |   |   |   |   |   | 160.1 |   | 160.1 |   | 160.1 |   |
| Interest rate  (variable)                              |       |                        |       |       |       |   |   |   |   |   |   | 5.18% |   |   |   |   |   |
| **Subtotal**                                           |       | 26.8                        |       |       |       |   |   |   |   |   |   | 249.5 |   | 276.3 |   | 276.3 |   |
| ** **                                             |       |                        |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other  currencies**                                  |       |                        |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate                                             |       | 63.2                        |       | 1.6        |       | . |   | 5.8 |   |   |   |   |   | 70.6 |   | 70.6 |   |
| Weighted average  interest rate (fixed)                |       | 4.57%                       |       | 12.76%     |       | 7.50% |   | 4.35% |   |   |   |   |   |   |   |   |   |
| Variable rate                                          |       | 47.5                        |       |       |       |   |   |   |   |   |   |   |   | 47.5 |   | 47.5 |   |
| Interest rate  (variable)                              |       | 6.02%                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Subtotal**                                           |       | 110.7                       |       | 1.6        |       | . |   | 5.8 |   |   |   |   |   | 118.1 |   | 118.1 |   |
| ** **                                             |       |                        |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total**                                              | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **3,303.3** | ** ** | **3,334.2** | ** ** |

 

----

(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 €5.9 million lower than the respectivetotal principal amount as shown above.

 

105

----

 

***Principal (Notional) Amount Interest Rate – December 31, 2005************(1)***

 
| ** **                                             | ** ** | **Expected  Maturity Date** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|------------|------------|
| ** **                                             | ** ** | **(Million  €)**       | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair  Value** | ** ** |
| ** **                                             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **December** | ** ** |
| ** **                                             | ** ** | **2006**                    | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **31, 2005** | ** ** |
| **Debt,  including current portion 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 valued at present  value. Subsequent valuation follows the effective interest method. Therefore,  the total book value of the financial liabilities is €9.2 million lower than  the respective total principal amount as shown above. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

106

----

 

The following information onderivatives is presented in euro equivalents, which is BASF’s reportingcurrency. The instruments’ actual cash flows are denominated in the currenciesnoted parenthetically.

 

***Interest Rate Swaps – December 31,2004***

 
| ** **                                | ** ** | **Expected  Maturity Date**                | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **(notional  amounts, Million****€)** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                                | ** ** | **2005**                                   | ** ** | **2006**   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Value** | ** ** |
| **Euro  (EUR)**                           |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Payer swap                                |       |                                       |       |       |       |   |   |   |   |   |   | 824 |   | 824 |   | (42.82) |   |
| Weighted average  pay rate (fixed)        |       |                                       |       |       |       |   |   |   |   |   |   | 4.6% |   |   |   |   |   |
| Weighted average  receive rate (variable) |       |                                       |       |       |       |   |   |   |   |   |   | 3.4% |   |   |   |   |   |
|                                      |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **U.S.  dollar (USD)**                    |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Payer swap                                |       | 3                                          |       |       |       |   |   |   |   | 82 |   |   |   | 85 |   | (1.00) |   |
| Weighted average  pay rate (fixed)        |       | 2.2%                                       |       |       |       |   |   |   |   | 4.3% |   |   |   |   |   |   |   |
| Weighted average  receive rate (variable) |       | 2.4%                                       |       |       |       |   |   |   |   | 4.0% |   |   |   |   |   |   |   |

 

***Interest Rate Swaps – December 31,2005***

 
| ** **                                | ** ** | **Expected  Maturity Date**                | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **(notional  amounts, Million****€)** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                                | ** ** | **2006**                                   | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **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% |   |   |   |   |   |   |   |

 

The total volume ofinterest-rate swaps decreased from €909 million in 2004 to €199 million in 2005due to the expiration of contracts. The total fair value of the interest-rateswaps increased from €(43.82) million to €(2.41) million due to the expirationof contracts with negative market values.

 

107

----

 

***Combined Interest Rate and Cross Currency Swaps***

 

For combined Interest Rateand Cross Currency Swaps please see the section on foreign currencyexchange rate risk below.

 

***Other Derivatives – December 31, 2004***

 
| ** **                                | ** ** | **Expected  Maturity Date**                | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **(notional  amounts, Million****€)** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                                | ** ** | **2005**                                   | ** ** | **2006**   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Value** | ** ** |
| Equity forward  sales                     | ** ** | 26                                         |       |       |       |   |   |   |   |   |   |   |   | 26 |   | (2.78) |   |
| Weighted average  share price (EUR/share) | ** ** | 50.13                                      |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

Due to the expiration of allcontracts, as of December 31, 2005, BASF did not hold any otherderivatives.

 

**FOREIGN EXCHANGE RISK MANAGEMENT**

 

The principal derivative financialinstruments used by BASF to hedge foreign currency exposures resulting fromproduct sales, purchases of raw materials and commercial paper denominated inforeign currency are foreign currency forward contracts and currency options.In 2005, transactions in these hedging instruments were primarily aimed athedging the exchange rate risk arising from the U.S. dollar, the British pound,the Korean won and the Brazilian real.

 

Intercompany loans withinthe BASF Group must frequently be denominated in a currency which is foreign tothe intercompany borrower or the intercompany lender or both. The foreigncurrency risks inherent in such loans are hedged by foreign currency forwardcontracts or foreign currency borrowings from third parties in such cases wherethe loan has a short-term or a variable maturity. Longer-term intercompanyloans with fixed maturity schedules are hedged primarily with forward foreignexchange contracts and cross-currency swaps.

 

The following tables provideinformation about significant derivative financial instruments which aresensitive to changes in foreign currency exchange rates.

 

108

----

 

***Foreign Currency Forward Contracts – December 31, 2004******(1)***

 
| ** **                    | ** ** | ** **           | ** ** | **Weighted**      | ** ** | ** **           | ** ** |
|-------------------------------|------------|----------------------|------------|-------------------|------------|----------------------|------------|
| ** **                    | ** ** | ** **           | ** ** | **Average**       | ** ** | ** **           | ** ** |
| ** **                    | ** ** | **Contract**         | ** ** | **Forward**       | ** ** | **Fair**             | ** ** |
| ** **                    | ** ** | **Amount**           | ** ** | **Exchange Rate** | ** ** | **Value**            | ** ** |
| ** **                    | ** ** | **(Million €)** | ** ** | ** **        | ** ** | **(Million €)** | ** ** |
| **Euro  (EUR)**               |       |                 |       |              |       |                 |       |
| Purchase  U.S. dollar (USD)   |       | 329.6                |       | 1.22              |       | (32.41)              |       |
| Purchase  British pound (GBP) |       | 118.6                |       | 0.70              |       | (1.46)               |       |
| Sale British  pound (GBP)     |       | 229.9                |       | 0.69              |       | 7.52                 |       |
| Sale  Japanese yen (JPY)      |       | 122.9                |       | 136.64            |       | 2.19                 |       |
| Sale U.S.  dollar (USD)       |       | 3,909.8              |       | 1.16              |       | 571.32               |       |
|                          |       |                 |       |              |       |                 |       |
| **U.S.  dollar (USD)**        |       |                 |       |              |       |                 |       |
| Purchase  Korean won (KRW)    |       | 38.9                 |       | 1,073.89          |       | 1.11                 |       |
| Sale  Brazilian real (BRL)    |       | 202.1                |       | 2.90              |       | (4.33)               |       |
| Sale Mexican  peso (MXN)      |       | 40.9                 |       | 11.68             |       | (1.10)               |       |
| Other currencies              |       | 272.6                |       |              |       | (1.74)               |       |

 

----

(1) All maturingin 2005 except for €893.7 million in 2006 and €165.3 million in 2007.

 

***Foreign Currency Forward Contracts – December 31, 2005******(1)***

 
| ** **                    | ** ** | ** **           | ** ** | **Weighted**      | ** ** | ** **           | ** ** |
|-------------------------------|------------|----------------------|------------|-------------------|------------|----------------------|------------|
| ** **                    | ** ** | ** **           | ** ** | **Average**       | ** ** | ** **           | ** ** |
| ** **                    | ** ** | **Contract**         | ** ** | **Forward**       | ** ** | **Fair**             | ** ** |
| ** **                    | ** ** | **Amount**           | ** ** | **Exchange Rate** | ** ** | **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                 |       |
| Sale  Brazilian real (BRL)    |       | 109.7                |       | 2.73              |       | 4.30                 |       |
| Sale British  pound (GBP)     |       | 388.0                |       | 0.70              |       | (3.09)               |       |
| Sale U.S.  Dollar (USD)       |       | 3,097.5              |       | 1.18              |       | 33,76                |       |
| Sale  Japanese yen (JPY)      |       | 173.5                |       | 138.94            |       | (0.96)               |       |
|                          |       |                 |       |              |       |                 |       |
| **U.S.  dollar (USD)**        |       |                 |       |              |       |                 |       |
| Purchase  Korean won (KRW)    |       | 188.8                |       | 1,021.72          |       | 1.99                 |       |
| Sale Korean  won (KRW)        |       | 106,9                |       | 1,034.44          |       | (2.23)               |       |
| Other  currencies             |       | 605.9                |       |              |       | (3.13)               |       |

 

----

(1) Allmaturing in 2006 except for €288.8 million in 2007, €369.2 million in 2008,€173.8 million in 2009, and €3.5 million in 2010.

 

The total volume of forwardcurrency contracts increased from €5,265 million in 2004 to €5,676 million asof December 31, 2005, mainly due to new hedges of items denominated inforeign currencies. The total fair value of the outstanding forward currencycontracts decreased from €541 million as of December 31, 2004, to €35million as of December 31, 2005, mainly due to the rise in the U.S. dollarexchange rate.

 

109

----

 

***Foreign Currency Options – December 31,2004***

 
| ** **                                                 | ** ** | **Expected  Maturity Date**                | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **(notional  amounts, Million****€)** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                                                 | ** ** | **2005**                                   | ** ** | **2006**   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Value** | ** ** |
| **Purchase  euro (EUR) / sell U.S. dollar (USD) (long)**   |       | 1,141                                      |       |       |       | 1 |   |   |   |   |   |   |   | 1,142 |   | 78.51 |   |
| Weighted Average  Strike Price (USD/EUR)                   |       | 1.28                                       |       |       |       | 1.40 |   |   |   |   |   |   |   |   |   |   |   |
| **Purchase  U.S. dollar (USD) / sell euro (EUR) (long)**   |       | 110                                        |       |       |       |   |   |   |   |   |   |   |   | 110 |   | 0.35 |   |
| Weighted Average  Strike Price (USD/EUR)                   |       | 1.21                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Purchase  U.S. dollar (USD) / sell euro (EUR) (short)**  |       | 861                                        |       |       |       | 1 |   |   |   |   |   |   |   | 862 |   | (11.97) |   |
| Weighted Average  Strike Price (USD/EUR)                   |       | 1.20                                       |       |       |       | 1.32 |   |   |   |   |   |   |   |   |   |   |   |
| **Purchase  euro (EUR) / sell Japanese yen (JPY) (long)**  |       | 4                                          |       |       |       |   |   |   |   |   |   |   |   | 4 |   | 0.02 |   |
| Weighted Average  Strike Price (JPY/EUR)                   |       | 139.70                                     |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Purchase  euro (EUR) / sell Japanese yen (JPY) (short)** |       | 4                                          |       |       |       |   |   |   |   |   |   |   |   | 4 |   | 0.00 | (1) |
| Weighted Average  Strike Price (JPY/EUR)                   |       | 131.90                                     |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

----

(1) The fair value of this contract is less than€0.01 million.

 

110

----

 

***Foreign Currency Options –December 31, 2005***

 
| ** **                                                 | ** ** | **Expected  Maturity Date**                | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **(notional  amounts, Million****€)** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                                                 | ** ** | **2006**                                   | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **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 (PLN) (long)**               |       | 14                                         |       |       |       |   |   |   |   |   |   |   |   | 14 |   | 0.21 |   |
| Weighted Average  Strike Price (PLN/EUR)                   |       | 3.90                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Purchase  euro (EUR) / sell (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 (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 greaterthan €(0.01) million.

 

The total volume of foreigncurrency options increased from €2,122 on December 31, 2004, to €3,407million on December 31, 2005, due to new hedges of items denominated inforeign currencies and of product sales in U.S. dollar. The total fair value offoreign currency options was €(34) million.

 

111

----

 

***Cross Currency Swaps – December 31,2004***

 
| ** **                                              | ** ** | **Expected  Maturity Date**                | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **(notional  amounts, Million****€)** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                                              | ** ** | **2005**                                   | ** ** | **2006**   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Value** | ** ** |
| **Receive  euro (EUR) / Pay U.S. dollar (USD)**         |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                         |       | 150                                        |       | 55         |       | 99 |   | 24 |   |   |   |   |   | 328 |   | 91.53 |   |
| Average contract  rate U.S. dollar (USD) per euro (EUR) |       | 1.00                                       |       | 1.09       |       | 0.90 |   | 1.07 |   |   |   |   |   |   |   |   |   |
| Weighted average  pay rate (variable, USD)              |       | 3.0%                                       |       | 2.7%       |       | 4.5% |   | 4.7% |   |   |   |   |   |   |   |   |   |
| Weighted average  receive rate (variable, EUR)          |       | 2.9%                                       |       | 2.9%       |       | 3.6% |   | 3.8% |   |   |   |   |   |   |   |   |   |
| Notional amount                                         |       | 302                                        |       | 345        |       | 419 |   |   |   |   |   | 210 |   | 1,276 |   | 279.40 |   |
| Average contract  rate U.S. dollar (USD) per euro (EUR) |       | 1.05                                       |       | 1.04       |       | 0.95 |   |   |   |   |   | 0.95 |   |   |   |   |   |
| Weighted average  pay rate (fixed, USD)                 |       | 7.2%                                       |       | 7.0%       |       | 7.6% |   |   |   |   |   | 7.8% |   |   |   |   |   |
| Weighted average  receive rate (variable, EUR)          |       | 2.2%                                       |       | 2.7%       |       | 2.3% |   |   |   |   |   | 2.5% |   |   |   |   |   |
|                                                    |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Receive  euro (EUR) / Pay Japanese yen (JPY)**        |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                         |       |                                       |       |       |       | 19 |   | 15 |   |   |   |   |   | 34 |   | 2.84 |   |
| Average contract  rate Japanese yen per euro (EUR)      |       |                                       |       |       |       | 172.00 |   | 188.54 |   |   |   |   |   |   |   |   |   |
| Weighted average  pay rate (fixed, JPY)                 |       |                                       |       |       |       | 1.0% |   | 0.5% |   |   |   |   |   |   |   |   |   |
| Weighted average  receive rate (fixed, EUR)             |       |                                       |       |       |       | 3.4% |   | 3.5% |   |   |   |   |   |   |   |   |   |
|                                                    |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Receive  euro (EUR) / Pay Singapore dollar (SGD)**    |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                         |       |                                       |       |       |       |   |   |   |   | 15 |   |   |   | 15 |   | 0.90 |   |
| Average contract  rate Singapore dollar per euro (EUR)  |       |                                       |       |       |       |   |   |   |   | 2.14 |   |   |   |   |   |   |   |
| Weighted average  pay rate (fixed, SGD)                 |       |                                       |       |       |       |   |   |   |   | 2.9% |   |   |   |   |   |   |   |
| Weighted average  receive rate (fixed, EUR)             |       |                                       |       |       |       |   |   |   |   | 3.8% |   |   |   |   |   |   |   |
|                                                    |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Receive  U.S. dollar (USD) /  Pay Korean won (KRW)**  |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                         |       | 234                                        |       | 81         |       | 140 |   |   |   |   |   |   |   | 455 |   | (65.80) |   |
| Average contract  rate Korean won per U.S. dollar (USD) |       | 1,192.19                                   |       | 1,186.56   |       | 1,229.50 |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average  pay rate (fixed, KRW)                 |       | 5.3%                                       |       | 4.7%       |       | 5.1% |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average  receive rate (variable, USD)          |       | 3.0%                                       |       | 2.9%       |       | 3.4% |   |   |   |   |   |   |   |   |   |   |   |

 

112

----

 

***Cross Currency Swaps – December 31,2005***

 
| ** **                                                    | ** ** | **Expected  Maturity Date**                | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                                    | ** ** | **(notional  amounts, Million****€)** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                                                    | ** ** | **2006**                                   | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **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% |   |   |   |   |   |   |   |   |   |   |   |
|                                                          |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **ReceiveEuro  (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   |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

113

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| ** **                                                           | ** ** | **Expected  Maturity Date**                | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                                           | ** ** | **(notional  amounts, Million****€)** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                                                           | ** ** | **2006**                                   | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Value** | ** ** |
| 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% |   |   |   |   |   |

 

The total volume of thecombined interest-rate and cross-currency swaps decreased from €2,108 millionin 2004 to €1,439 million as of December 31, 2005 due to expiringtransactions. The total fair value of the swaps changed from €309 million in2004 to €128 million as of December 31, 2005, mainly due to the rise inthe exchange rate of the USD and the expiration of transactions with positivemarket values.

 

**MARKETABLE SECURITIES**

 

As of December 31,2005, BASF owned debt and equity securities which are exposed to price changes.These financial instruments are used as profitable investments of BASF’s cashsurplus and are not held for trading purposes. All securities are quoted onstock exchanges, and the funds have readily determinable market prices. Thesecurities are reflected in the financial statements at their fair value of €183.0million. See Note 19 to the Consolidated Financial Statements in Item 18 forfurther information. BASF carefully monitors developments in the financialmarkets.

 

A 10% change in overallequity prices would not materially impact BASF’s operations, financial positionor cash flows.

 

**COMMODITY PRICE RISKS**

 

Certain BASF divisions areexposed to fluctuations in prices for raw materials and commodities. BASFoperates in markets where the prices of raw materials and products are commonlyaffected by cyclical movements of the economy.

 

In order to secure thesupply of raw materials, BASF generally relies on long-term supply contractsand is buying additional quantities on the spot market. Some of the mostimportant 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 rawmaterial. The quantities contracted are divided amongst the suppliers based ontheir ability to ensure supply security. BASF enters into long-term contractsonly after a strict evaluation of the supplier’s financial base and technicalcapabilities as well as its environmental safety record, so that supplyproblems and quality problems are reduced to a minimum.

 

•                  Price risks are managed through severalmeasures. Purchasing raw materials in a mix via long-term contracts as well asfrom spot markets allows BASF to obtain favorable conditions. In our long-termcontracts, price conditions are usually based on published raw material pricequotations and lead to the permanent adjustment of prices (price glidingclauses) or are adjusted at least on a quarterly basis.

 

114

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•                  Additionally, commodity hedging derivativesare used to manage risks from price volatility. The company uses futurescontracts, options and swaps to buy, sell or exchange commodities. Thesehedging instruments are used for the purchases of oil, oil products and naturalgas to counteract the high volatility in oil prices.

 

The following table providesinformation related to all material contracts as of December 31, 2004:

 
| ** **                | ** ** | ** **             | ** ** | ** **   | ** ** | **Nominal**          | ** ** | ** **     | ** ** |
|---------------------------|------------|------------------------|------------|--------------|------------|----------------------|------------|----------------|------------|
| **Type of Contract**      | ** ** | **Contract Volumes**   | ** ** | **Maturity** | ** ** | **Value**            | ** ** | **Fair Value** | ** ** |
| ** **                | ** ** | **(Notional amounts)** | ** ** | ** **   | ** ** | **(Million €)** | ** ** |
| **Oil and  Oil products** |       |                   |       |         |       |                 |       |           |       |   |
| Call Options  (Purchased) |       | 150,000                | mt         |         | 2005       |                 | 50.7       |           | 1.19       |   |
| Put Options  (Written)    |       | 300,000                | mt         |         | 2005       |                 | 88.9       |           | (11.49)    |   |
| Call Options  (Purchased) |       | 555,000                | bbls       |         | 2005       |                 | 20.6       |           | 1.77       |   |
| Put Options  (Written)    |       | 1,110,000              | bbls       |         | 2005       |                 | 36.0       |           | (4.63)     |   |
| Swaps  (Purchase)         |       | 6,679,500              | bbls       |         | 2005       |                 | 76.6       |           | (2.80)     |   |
| Swaps  (Purchase)         |       | 54,272                 | mt         |         | 2006       |                 | 11.8       |           | 0.77       |   |
| Swaps  (Purchase)         |       | 8,236                  | mt         |         | 2005       |                 | 1.6        |           | 0.33       |   |
|                      |       |                   |       |         |       |                 |       |           |       |   |
| **Natural  Gas**          |       |                   |       |         |       |                 |       |           |       |   |
| Swaps  (Purchase)         |       | 8,260,000              | MMBtu      |         | 2005       |                 | 43.2       |           | (4.20)     |   |

 

----

mt: metric ton

bbls: barrels

MMBtu: Million Britishthermal unit

 

The following table providesinformation related to all material contracts as of December 31, 2005:

 
| ** **                | ** ** | ** **             | ** ** | ** **   | ** ** | **Nominal**          | ** ** | ** **     | ** ** |
|---------------------------|------------|------------------------|------------|--------------|------------|----------------------|------------|----------------|------------|
| **Type of Contract**      | ** ** | **Contract Volumes**   | ** ** | **Maturity** | ** ** | **Value**            | ** ** | **Fair Value** | ** ** |
| ** **                | ** ** | **(Notional amounts)** | ** ** | ** **   | ** ** | **(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

 

115

----

 

Item 12.          Description ofSecurities Other than Equity Securities

 

Notapplicable.

 

116

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**PART II**

 

Item 13.          Defaults,Dividend Arrearages and Delinquencies

 

None.

 

Item 14.          Material Modificationsto the Rights of Security Holders and Use of Proceeds

 

Notapplicable.

 

117

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Item 15.          Controls andProcedures

 

**(a) Disclosure Controls and Procedures**

 

As of the date of thisreport, BASF performed an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures. Disclosure controls andprocedures are designed to ensure that the material financial and non-financialinformation required to be disclosed in Form 20-F and filed with theSecurities and Exchange Commission is recorded, processed, summarized andreported on a timely basis. The evaluation was performed under the supervisionof BASF’s Chairman of the Board of Executive Directors, Dr. JürgenHambrecht, and BASF’s Chief Financial Officer, Dr. Kurt Bock. In designingand evaluating the disclosure controls and procedures, management recognizedthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable, rather than absolute assurance of achieving thedesired control objectives. Based on the foregoing, the Chairman of the Boardof Executive Directors and the Chief Financial Officer concluded that BASF’sdisclosure controls and procedures as of December 31, 2005 were effective.

 

**(b) Management’s Annual Report on Internal Control Over FinancialReporting**

 

BASF’s management isresponsible for establishing and maintaining adequate internal control over financialreporting. BASF’s internal control system was designed to provide reasonableassurance to BASF’s management regarding the reliability of financial reportingand the preparation and fair presentation of its published consolidated financialstatements.

 

All internal controlsystems, no matter how well designed, have inherent limitations. Therefore,even those systems determined to be effective may not prevent or detect misstatementsand can provide only reasonable assurance with respect to financial statementpreparation and presentation. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may decline.

 

BASF’s management assessedthe effectiveness of the Company’s internal control over financial reporting asof December 31, 2005. In making this assessment, it used the criteriaestablished in “Internal Control – Integrated Framework” issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Basedon the evaluation under these criteria, management has concluded that, as of December 31,2005, BASF’s internal control over financial reporting was effective.

 

Management’s assessment aswell as the effectiveness of internal control over financial reporting as of December 31,2005 have been audited by Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft,an independent registered public accounting firm, as stated in their reportwhich is included herein.

 

**(c) Attestation Report of the Registered Public Accounting Firm**

 

See report of Deloitte &Touche, an independent registered public accounting firm, which appears below.

 

**(d) Changes in Internal Control Over Financial Reporting**

 

There were no changes toBASF’s internal control over financial reporting that occurred during theperiod covered by this Form 20-F that have materially affected, or arereasonably likely to materially affect, the Company’s internal control over financialreporting.

 

118

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

We have audited management’sassessment, included in the accompanying Annual Report on Internal Control OverFinancial Reporting, that BASF Aktiengesellschaft, Ludwigshafen, andsubsidiaries maintained effective internal control over financial reporting asof December 31, 2005, based on criteria established in Internal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). BASF’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting based onour audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. Our audit included obtainingan understanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operating effectivenessof internal control, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinions.

 

A company’s internal controlover financial reporting is a process designed by, or under the supervision of,the company’s principal executive and principal financial officers, or personsperforming similar functions, and effected by the company’s board of directors,management, and other personnel to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitationsof internal control over financial reporting, including the possibility ofcollusion or improper management override of controls, material misstatementsdue to error or fraud may not be prevented or detected on a timely basis. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

In our opinion, management’sassessment that BASF Aktiengesellschaft and subsidiaries maintained effectiveinternal control over financial reporting as of December 31, 2005, isfairly stated, in all material respects, based on criteria established inInternal Control — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Also in our opinion, BASFAktiengesellschaft and subsidiaries maintained, in all material respects,effective internal control over financial reporting as of December 31,2005, based on criteria established in Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).

 

119

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We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements as of and for the yearended December 31, 2005 of BASF Aktiengesellschaft and subsidiaries andour report dated February 21, 2006 expressed an unqualified opinion onthose financial statements and included an explanatory paragraph regarding theeffects of applying accounting principles generally accepted in the UnitedStates of America.

 

 
| Frankfurt am Main,                   |
|--------------------------------------|
|                                 |
| February 21, 2006               |
|                                 |
| Deloitte & Touche GmbH      |
| Wirtschaftsprüfungsgesellschaft |
|                                 |
|                                 |
| Dr. Künnemann              | Dr. Beine |
| Wirtschaftsprüfer               | Wirtschaftsprüfer |

 

120

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Item 16A.       Audit CommitteeFinancial Expert

 

Our Supervisory Board hasdetermined that the Company’s Audit Committee currently includes two AuditCommittee financial experts: Max Dietrich Kley and Hans Dieter Pötsch.

 

Max Dietrich Kley and HansDieter Pötsch are independent, as the term is defined in Rule 10A-3 underthe 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 Chief Executive Officer, the Chief Financial Officer,and the senior management of financial reporting and controlling, as well as toall of the Company’s employees performing similar functions in and outsideGermany and to all other senior financial personnel. The code of ethics for financialmatters is available on the Company’s website at corporate.basf.com/values.

 

Item 16C.        PrincipalAccountant Fees and Services

 

Fees billed to the Companyfor professional services by its principal accountant, Deloitte &Touche, during the fiscal years 2004 and 2005 were as follows:

 
| ** **          | ** ** | **For fiscal year**  | ** ** | **For fiscal year** | ** ** |
|---------------------|------------|----------------------|------------|---------------------|------------|
| ** **          | ** ** | **ended December**   | ** ** | **ended December**  | ** ** |
| **Type of Fees**    | ** ** | **31, 2005**         | ** ** | **31, 2004**        | ** ** |
| ** **          | ** ** | **(Million €)** | ** ** |
| Audit Fees          |       | 12.8                 |       | 11.7                |       |
| Audit-related  Fees |       | 5.1                  |       | 1.8                 |       |
| Tax Fees            |       | 0.9                  |       | 1.6                 |       |
| All Other  Fees     |       | 0.5                  |       | 0.5                 |       |
| **Total**           | ** ** | **19.3**             | ** ** | **15.6**            | ** ** |

 

In the above table, “auditfees” are the aggregate fees billed by Deloitte & Touche forprofessional services in connection with the audit of the Company’sconsolidated annual financial statements as well as audits of statutory financialstatements of BASF Aktiengesellschaft and its affiliates. Also included in “auditfees” are amounts billed for attestation services in relation to regulatory filingsand other compliance requirements. “Audit-related fees” are fees billed byDeloitte & Touche for due diligence engagements related toacquisitions or divestitures, confirmation of the conformance to certaincontractual obligations as well as audits relating to documentation of theinternal control system required by the Sarbanes-Oxley Act. “Tax fees” includeprimarily fees for tax advice on actual or contemplated transactions,expatriate employee tax services and transfer pricing studies. “Other fees”concern amounts billed in connection with insurance damage claims as well asnumerous other services.

 

In accordance with Germanlaw, BASF’s independent auditors are appointed by the Annual Shareholders’Meeting based on a recommendation of our Supervisory Board. The Audit Committeeof the Supervisory Board prepares the board’s recommendation on the selectionof the independent auditors. Subsequent to the auditors’ appointment, the AuditCommittee awards the contract and in its sole authority approves the terms andscope of the audit and all audit engagement fees as well as monitors theauditors’ independence. On April 28, 2005, the Annual Shareholders’Meeting appointed Deloitte & Touche GmbH,Wirtschaftsprüfungsgesellschaft, to serve as the Company’s independent auditorsfor the 2005 fiscal year.

 

In order to assure the integrityof independent audits, BASF’s Audit Committee adopted pre-approval policies andprocedures pursuant to which the Audit Committee annually pre-approves certaintypes of services to be performed by BASF’s independent auditors. Under thepolicies, the Company’s independent auditors are not allowed to perform anynon-audit services which may impair the auditors’ independence under the rules ofthe U.S. Securities and Exchange Commission. Furthermore, the Supervisory Boardhas

 

121

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limited the aggregate amount of non-audit fees payable to Deloitte &Touche during 2005 to a maximum of €1.5 million for services rendered for BASFAktiengesellschaft and €5.0 million for services for all other companies of theBASF Group. Additionally, services relating to the audit of the internalcontrol system over financial reporting required by the Sarbanes-Oxley Act wereapproved separately by the Audit Committee.

 

Services not included in oneof the types of pre-approved services covered by the pre-approval policies andprocedures require specific authorization of the Audit Committee. An approvalmay not be granted if the service falls into a category of services notpermitted by applicable law or if it is inconsistent with maintaining auditorindependence.

 

Item 16D.       Exemptions fromthe Listing Standards for Audit Committees

 

With regard to one member ofthe Audit Committee, BASF relies on the exemption afforded by Rule 10A-3(b)(1)(iv)(C) underthe Securities Exchange Act. We believe that such reliance does not materiallyadversely affect the ability of the Audit Committee to act independently or tosatisfy the other requirements of Rule 10A-3.

 

Item 16E.        Purchases ofEquity Securities by the Issuer and Affiliated Purchasers

 

BASF Aktiengesellschaft hasa stock repurchase program currently in existence. Purchases made in 2005 inaccordance with this program are listed in the table below.

 

**Issuer Purchases of Equity Securities**

 
| ** **                                        | ** ** | ** **     | ** ** | ** **     | ** ** | **(c)**             | ** ** | **(d)  Maximum**      | ** ** |
|---------------------------------------------------|------------|----------------|------------|----------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | ** **     | ** ** | ** **     | ** ** | **Total**           | ** ** | **Number of**         | ** ** |
| ** **                                        | ** ** | ** **     | ** ** | ** **     | ** ** | **Number of**       | ** ** | **Shares (or**        | ** ** |
| ** **                                        | ** ** | ** **     | ** ** | ** **     | ** ** | **Shares**          | ** ** | **Approximate**       | ** ** |
| ** **                                        | ** ** | ** **     | ** ** | ** **     | ** ** | **Purchased**       | ** ** | **Euro Value)**       | ** ** |
| ** **                                        | ** ** | **(a)**        | ** ** | ** **     | ** ** | **as Part of** | ** ** | **that May Yet** | ** ** |
| ** **                                        | ** ** | **Total**      | ** ** | **(b)**        | ** ** | **Publicly**        | ** ** | **Be Purchased**      | ** ** |
| ** **                                        | ** ** | **Number of**  | ** ** | **Average**    | ** ** | **Announced**       | ** ** | **Under the**         | ** ** |
| ** **                                        | ** ** | **Shares**     | ** ** | **Price Paid** | ** ** | **Plans or**        | ** ** | **Plans or**          | ** ** |
| **Period**                                        | ** ** | **Purchased**  | ** ** | **per Share**  | ** ** | **Programs**        | ** ** | **Programs**          | ** ** |
| From  January 1 to January 31, 2005     |       | 2,150,410      |       | 51.94          |       | 2,150,410           |       | 162,299,829           |       |
| From  February 1 to February 28, 2005   |       | 1,150,000      |       | 54.39          |       | 1,150,000           |       | 99,734,779            |       |
| From  March 1 to March 31, 2005         |       | 1,791,000      |       | 55.67          |       | 1,791,000           |       | 2,684                 |       |
| From  April 1 to April 30, 2005         |       | 3,650,819      |       | 52.15          |       | 3,650,819           |       | 1,309,562,644         | (1)        |
| From  May 1 to May 31, 2005             |       | 6,140,000      |       | 51.87          |       | 6,140,000           |       | 991,005,304           |       |
| From  June 1 to June 30, 2005           |       | 1,520,000      |       | 55.58          |       | 1,520,000           |       | 906,501,741           |       |
| From  July 1 to July 31, 2005           |       | 1,705,000      |       | 55.53          |       | 1,705,000           |       | 811,798,186           |       |
| From August 1  to August 31, 2005       |       | 1,960,000      |       | 57.59          |       | 1,960,000           |       | 698,893,704           |       |
| From  September 1 to September 30, 2005 |       | 835,000        |       | 58.78          |       | 835,000             |       | 649,800,501           |       |
| From  October 1 to October 31, 2005     |       | 1,800,000      |       | 59.64          |       | 1,800,000           |       | 542,419,012           |       |
| From  November 1 to November 30, 2005   |       | 2,680,000      |       | 59.90          |       | 2,680,000           |       | 381,842,884           |       |
| From  December 1 to December 31, 2005   |       | 680,000        |       | 63.14          |       | 680,000             |       | 338,897,799           |       |
| **Total**                                         | ** ** | **26,062,229** | ** ** | **55.05**      | ** ** | **26,062,229**      | ** ** | **—**            | ** ** |

 

----

(1)          On April 19, 2005, the decision wasannounced by the Board of Executive Directors to increase the value of theprogram by another €1,500 million.

 

122

----

 

**PART III**

 

Item 17.  Financial Statements

 

Not applicable.

 

Item 18.  Financial Statements

 

The following ConsolidatedFinancial Statements, together with the report of Deloitte & Touche GmbHthereon, are filed as part of this Annual Report.

 
| Report of Independent Registered Public  Accounting Firm | F-2                                                                                                      |
|----------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                     |                                                                                                     |
| Consolidated Financial Statements                        | F-3                                                                                                      |
|                                                     |                                                                                                     |
|                                                     | Consolidated Statements of  Income for the years ended December 31, 2005 and 2004                        | F-3 |
|                                                     |                                                                                                     |   |
|                                                     | Consolidated Balance Sheets at  December 31, 2005 and 2004                                               | F-4 |
|                                                     |                                                                                                     |   |
|                                                     | Consolidated Statements of  Recognized Income and Expense for the years ended December 31, 2005 and 2004 | F-5 |
|                                                     |                                                                                                     |   |
|                                                     | Consolidated Statements of  Stockholders’ Equity for the years ended December 31, 2005 and 2004     | F-6 |
|                                                     |                                                                                                     |   |
|                                                     | Consolidated Statements of  Cash Flows for the years ended December 31, 2005 and 2004                    | F-7 |
|                                                     |                                                                                                     |   |
|                                                     | Notes to the Consolidated  Financial Statements                                                          | F-8 |

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

We have audited theaccompanying consolidated balance sheets of BASF Aktiengesellschaft andsubsidiaries as of December 31, 2005 and 2004, and the related consolidatedstatements of income, recognized income and expense, stockholders’ equity, andcash flows for the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in Germany and thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of BASF Aktiengesellschaft and its subsidiaries as ofDecember 31, 2005 and 2004, and the results of their operations and their cash flowsfor the years then ended in conformity with International Financial ReportingStandards.

 

Application of accountingprinciples generally accepted in the United States of America would haveaffected stockholders’ equity as of December 31, 2005 and 2004 and net incomefor the years then ended to the extent summarized by the Company in Note 5 tothe Consolidated Financial Statements.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control over financialreporting as of December 31, 2005, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission, and our report dated February 21,2006 expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

 

Frankfurt am Main,

 

February 21, 2006

(February 28, 2006 as to Note 33)

 

Deloitte & Touche GmbH

Wirtschaftsprüfungsgesellschaft

 

 
| Dr. Künnemann     |   | Dr. Beine              |
|------------------------|--------|------------------------|
| Wirtschaftsprüfer |   | Wirtschaftsprüfer |

 

F-2

----

 

**BASF GROUP**

** **

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Million € and Million $, ExceptPer Share Amounts)**

 
| ** **                                                   | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                   | ** ** | **Note**                    | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales                                                        |       | (6                          | )          | $50,618.5 |   | €42,744.9 |   | €37,536.6 |   |
| Cost of sales                                                |       |                        |       | (35,013.0) |   | (29,566.8) |   | (25,721.2) |   |
| **Gross profit on sales**                                    | ** ** | ** **                  | ** ** | **15,605.5** | ** ** | **13,178.1** | ** ** | **11,815.4** | ** ** |
| Selling expenses                                             |       |                        |       | (5,127.5) |   | (4,329.9) |   | (4,309.2) |   |
| General and administrative expenses                          |       |                        |       | (923.8) |   | (780.1) |   | (707.4) |   |
| Research and development expenses                            |       |                        |       | (1,259.6) |   | (1,063.7) |   | (986.5) |   |
| Other operating income                                       |       | (7                          | )          | 710.8 |   | 600.2 |   | 1,046.1 |   |
| Other operating expenses                                     |       | (8                          | )          | (2,102.1) |   | (1,775.1) |   | (1,665.9) |   |
| **Income from operations**                                   | ** ** | ** **                  | ** ** | **6,903.3** | ** ** | **5,829.5** | ** ** | **5,192.5** | ** ** |
| Income from companies accounted for using  the equity method |       |                        |       | 6.6 |   | 5.6 |   | (7.2) |   |
| Other income from participations                             |       |                        |       | 405.5 |   | 342.4 |   | (588.5) |   |
| Interest result                                              |       |                        |       | (201.3) |   | (170.0) |   | (206.1) |   |
| Other financial result                                       |       |                        |       | (97.0) |   | (81.9) |   | (43.9) |   |
| **Financial result**                                         | ** ** | (9                          | )          | **113.8** | ** ** | **96.1** | ** ** | **(845.7)** | ** ** |
| **Income before taxes and minority interests**               | ** ** |                        |       | **7,017.1** | ** ** | **5,925.6** | ** ** | **4,346.8** | ** ** |
| Income taxes                                                 |       | (10                         | )          | (3,266.1) |   | (2,758.1) |   | (2,213.5) |   |
| **Income before minority interests**                         | ** ** |                        |       | **3,751.0** | ** ** | **3,167.5** | ** ** | **2,133.3** | ** ** |
| Minority interests                                           |       | (11                         | )          | 190.5 |   | 160.8 |   | 129.0 |   |
| **Net income**                                               | ** ** |                        |       | **3,560.5** | ** ** | **3,006.7** | ** ** | **2,004.3** | ** ** |
| **Earnings per share (€)**                              | ** ** | (4                          | )          | **6.79** | ** ** | **5.73** | ** ** | **3.65** | ** ** |
| Dilution effect                                              |       |                        |       | — |   | — |   | — |   |
| **Diluted earnings per share (€)**                      | ** ** | (4                          | )          | **6.79** | ** ** | **5.73** | ** ** | **3.65** | ** ** |

 

Solely for the convenience of the reader, the 2005 financial informationhas been translated into U.S. dollars using the December 31, 2005 noon buyingrate of the Federal Reserve Bank of New York of $1.1842 = €1.00.

 

The accompanying Notes arean integral part of these Consolidated Financial Statements.

 

F-3

----

 

**BASF GROUP**

** **

**CONSOLIDATED BALANCE SHEETS**

**(Million€ and Million $)**

 
| ** **                                                                                           | ** ** | ** ** | ** ** | **At December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------|------------|
| **Assets**                                                                                           | ** ** | **Note**   | ** ** | **2005**            | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Long-term  assets**                                                                                |       |       |       |                |       |   |   |   |   |
| Intangible  assets                                                                                   |       | (14)       |       | $4,404.7            |       | €3,719.6 |   | €3,606.6 |   |
| Property,  plant and equipment                                                                       |       | (15)       |       | 16,563.3            |       | 13,986.9 |   | 13,062.7 |   |
| Investments  accounted for using the equity method                                                   |       | (16)       |       | 289.3               |       | 244.3 |   | 1,100.5 |   |
| Other financial  assets                                                                              |       | (16)       |       | 962.8               |       | 813.0 |   | 938.1 |   |
| Deferred  taxes                                                                                      |       | (10)       |       | 1,485.8             |       | 1,254.7 |   | 1,336.6 |   |
| Other  long-term assets                                                                              |       | (18)       |       | 620.5               |       | 524.0 |   | 473.5 |   |
|                                                                                                 |       |       |       | **24,326.4**        | ** ** | **20,542.5** | ** ** | **20,518.0** | ** ** |
| **Short-term  assets**                                                                               |       |       |       |                |       |   |   |   |   |
| Inventories                                                                                          |       | (17)       |       | 6,430.5             |       | 5,430.2 |   | 4,645.4 |   |
| Accounts  receivable, trade                                                                          |       |       |       | 8,313.3             |       | 7,020.2 |   | 5,860.8 |   |
| Other  receivables and other short-term assets                                                       |       | (18)       |       | 1,878.6             |       | 1,586.4 |   | 2,132.8 |   |
| Liquid funds *(thereof  cash and cash equivalents €907.8 million, 2004: €2,085.9 million)* |       | (19)       |       | 1,291.7             |       | 1,090.8 |   | 2,290.5 |   |
|                                                                                                 |       |       |       | **17,914.1**        | ** ** | **15,127.6** | ** ** | **14,929.5** |   |
| **Total  assets**                                                                                    |       |       |       | **42,240.5**        | ** ** | **35,670.1** | ** ** | **35,447.5** |   |

 
| ** **                                           | ** ** | ** ** | ** ** | **At December 31,** | ** ** |
|------------------------------------------------------|------------|------------|------------|---------------------|------------|
| **Stockholders’ equity and liabilities**        | ** ** | **Note**   | ** ** | **2005**            | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Stockholders’  equity**                       |       |       |       |                |       |   |   |   |   |
| Subscribed  capital                                  |       | (20)       |       | $1,559.4            |       | €1,316.8 |   | €1,383.5 |   |
| Capital  surplus                                     |       | (20)       |       | 3,671.3             |       | 3,100.2 |   | 3,027.6 |   |
| Retained  earnings                                   |       | (21)       |       | 14,125.1            |       | 11,928.0 |   | 11,923.1 |   |
| Other  comprehensive income                          |       | (21)       |       | 825.0               |       | 696.7 |   | (60.5) |   |
| Minority  interests                                  |       | (22)       |       | 570.5               |       | 481.8 |   | 328.5 |   |
|                                                 |       |       |       | **20,751.3**        | ** ** | **17,523.5** | ** ** | **16,602.2** |   |
| **Long-term  liabilities**                           |       |       |       |                |       |   |   |   |   |
| Provisions  for pensions and similar obligations.    |       | (23)       |       | 1,831.5             |       | 1,546.6 |   | 4,124.1 |   |
| Other  provisions                                    |       | (24)       |       | 3,305.3             |       | 2,791.2 |   | 2,375.7 |   |
| Deferred  taxes                                      |       | (10)       |       | 828.1               |       | 699.3 |   | 948.0 |   |
| Financial  indebtedness                              |       | (25)       |       | 4,359.9             |       | 3,681.7 |   | 1,844.6 |   |
| Other  liabilities                                   |       | (25)       |       | 1,234.9             |       | 1,042.8 |   | 1,078.8 |   |
|                                                 |       |       |       | **11,559.7**        | ** ** | **9,761.6** | ** ** | **10,371.2** |   |
| **Short-term  liabilities**                          |       |       |       |                |       |   |   |   |   |
| Accounts  payable, trade                             |       |       |       | 3,288.5             |       | 2,777.0 |   | 2,371.5 |   |
| Provisions                                           |       | (24)       |       | 3,271.3             |       | 2,762.5 |   | 2,364.1 |   |
| Tax  liabilities                                     |       | (10)       |       | 1,050.6             |       | 887.2 |   | 644.3 |   |
| Financial  indebtedness                              |       | (25)       |       | 307.1               |       | 259.3 |   | 1,452.8 |   |
| Other  liabilities                                   |       | (25)       |       | 2,012.0             |       | 1,699.0 |   | 1,641.4 |   |
|                                                 |       |       |       | **9,929.5**         | ** ** | **8,385.0** | ** ** | **8,474.1** | ** ** |
| **Total  stockholders’ equity and liabilities** |       |       |       | **42,240.5**        | ** ** | **35,670.1** | ** ** | **35,447.5** | ** ** |

 

Solely for the convenience of the reader, the 2005 financial informationhas been translated into U.S. dollars using the December 31, 2005 noon buyingrate of the Federal Reserve Bank of New York of $1.1842 = €1.00.

 

The accompanying Notes arean integral part of these Consolidated Financial Statements.

 

F-4

----

 

**BASF GROUP**

** **

**CONSOLIDATED STATEMENTS OFRECOGNIZED INCOME AND EXPENSE**

**(Million€ and Million $)**

 
| ** **                                                    | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| **Income and expense items**                                  | ** ** | **2005**                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Income  before minority interests**                         | ** ** | **$3,751.0**                | ** ** | **€3,167.5** | ** ** | **€2,133.3** | ** ** |
|                                                          |       |                        |       |   |   |   |   |
| Fair value  changes in available-for-sale securities          |       | 79.0                        |       | 66.7 |   | 96.9 |   |
| Cash-flow  hedges                                             |       | (25.1)                      |       | (21.2) |   | (42.4) |   |
| Change in  foreign currency translation adjustments           |       | 846.1                       |       | 714.5 |   | (230.6) |   |
| Actuarial  gains/losses from pensions and similar obligations |       | (1,274.1)                   |       | (1,075.9) |   | (364.5) |   |
| Deferred  taxes                                               |       | 489.3                       |       | 413.2 |   | 147.1 |   |
| Minority  interests                                           |       | 34.8                        |       | 29.4 |   | (19.4) |   |
| **Total  income and expense recognized in equity**            | ** ** | **150.0**                   | ** ** | **126.7** | ** ** | **(412.9)** | ** ** |
| **Total  income and expense for the period**                  | ** ** | **3,901.0**                 | ** ** | **3,294.2** | ** ** | **1,720.4** | ** ** |
| *Thereof BASF*                                                | * *   | *3,675.8*                   | * *   | *3,104.0* | * * | *1,610.8* | * * |
| *Thereof minority interests*                                  | * *   | *225.2*                     | * *   | *190.2* | * * | *109.6* | * * |

 

Solely for the convenience of the reader, the 2005 financial informationhas been translated into U.S. dollars using the December 31, 2005 noon buyingrate of the Federal Reserve Bank of New York of $1.1842 = €1.00.

 
| ** **                            | ** ** | ** **        | ** ** | ** **                      | ** ** | **Total  income**       | ** ** |
|---------------------------------------|------------|-------------------|------------|---------------------------------|------------|-------------------------|------------|
| **Development of income**             | ** ** | ** **        | ** ** | ** **                      | ** ** | **and  expense**        | ** ** |
| **and expense recognized**            | ** ** | **Retained**      | ** ** | ** **                      | ** ** | **recognized**          | ** ** |
| **directly in equity**                | ** ** | **earnings**      | ** ** | **Other  comprehensive income** | ** ** | **directly  in equity** | ** ** |
| ** **                            | ** ** | ** **        | ** ** | ** **                      | ** ** | **Fair  value**         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **        | ** ** | **Foreign**                     | ** ** | **changes  in**         | ** ** | ** ** | ** ** | **Total of** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **        | ** ** | **currency**                    | ** ** | **available-**          | ** ** | ** ** | ** ** | **other** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Actuarial**     | ** ** | **translation**                 | ** ** | **for-sale**            | ** ** | **Cash-flow** | ** ** | **comprehensive** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **gains/losses**  | ** ** | **adjustment**                  | ** ** | **securities**          | ** ** | **hedges** | ** ** | **income** | ** ** | ** ** | ** ** |
| **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 under IFRS** | ** ** | **—**        | ** ** | **—**                      | ** ** | **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 arean integral part of these Consolidated Financial Statements.

 

F-5

----

 

**BASF GROUP**

** **

**CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY**

**(Million€)**

 
| ** **                                                                                             | ** ** | **Number of**   | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | ** **   | ** ** | ** **             | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|-------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------------------|------------|
| ** **                                                                                             | ** ** | **subscribed**  | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | **Other**         | ** ** | ** **   | ** ** | **Total**              | ** ** |
| ** **                                                                                             | ** ** | **shares**      | ** ** | **Subscribed** | ** ** | **Capital** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Minority** | ** ** | **stockholders’** | ** ** |
| ** **                                                                                             | ** ** | **outstanding** | ** ** | **capital**    | ** ** | **surplus** | ** ** | **earnings** | ** ** | **income****(1)** | ** ** | **interest** | ** ** | **equity**             | ** ** |
| **As of January 1, 2005**                                                                              | ** ** | **540,440,410** | ** ** | **1,383.5**    | ** ** | **3,027.6** | ** ** | **11,923.1** | ** ** | **(60.5)**        | ** ** | **328.5**    | ** ** | **16,602.2**           | ** ** |
| 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 former Wintershall 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**           | ** ** |
| **December  31, 2003 under German GAAP**                                                               | ** ** | **556,643,410** | ** ** | **1,425.0**    | ** ** | **2,982.4** | ** ** | **12,054.8** | ** ** | **(971.9)**       | ** ** | **388.1**    | ** ** | **15,878.4**           | ** ** |
| Changes in  accounting policies in the financial statements prepared according to German GAAP  in 2004 |       |            |       |           |       |        |       | (202.5)      |       | (99.4)            |       | (66.4)       |       | (368.3)                |       |
| Adjustments due  to first-time adoption of IFRS(4)                                                     |       |            |       |           |       | 2.6         |       | (219.8)      |       | 1,170.4           |       | (3.0)        |       | 950.2                  |       |
| **January 1, 2004 under IFRS**                                                                         | ** ** | **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                   |       |
| **As of 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 Recognized Income and Expense” above. |
|-----|----------------------------------------------------------------------------------------------------------|
| (2) | Profit and loss transfers                                                                                |
| (3) | Granting of BASF shares under the employee  share program “plus”                               |
| (4) | The effects of conversion to IFRS are shown  in detail in Note 3.                                        |

 

 

The accompanying Notes arean integral part of these Consolidated Financial Statements.

 

F-6

----

 

**BASF GROUP**

** **

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Million€ and Million $)**

 
| ** **                                                                                              | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                              | ** ** | **2005**                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                                                                              |       | $3,560.5                    |       | €3,006.7 |   | €2,004.3 |   |
| Depreciation and amortization of intangible  assets, property, plant and equipment and financial assets |       | 2,873.6                     |       | 2,426.6 |   | 3,118.5 |   |
| Changes in pension provisions, defined benefit  assets and other non-cash items                         |       | (14.0)                      |       | (11.8) |   | 87.9 |   |
| Net gains from disposal of long-term assets  and securities                                             |       | (499.9)                     |       | (422.1) |   | (383.8) |   |
| Changes in inventories                                                                                  |       | (488.2)                     |       | (412.3) |   | (503.5) |   |
| Changes in receivables                                                                                  |       | 423.0                       |       | 357.2 |   | (1,150.4) |   |
| Changes in operating liabilities and other  provisions. .                                               |       | 362.4                       |       | 306.0 |   | 1,461.0 |   |
| **Cash provided by operating activities  before external financing of pension obligations**             | ** ** | **6,217.4**                 | ** ** | **5,250.3** | ** ** | **4,634.0** | ** ** |
| External financing of pension obligations  (CTA)                                                        |       | (4,334.2)                   |       | (3,660.0) |   | — |   |
| **Cash provided by operating activities**                                                               | ** ** | **1,883.2**                 | ** ** | **1,590.3** | ** ** | **4,634.0** | ** ** |
| Payments related to intangible assets and  property, plant and equipment                                |       | (2,306.5)                   |       | (1,947.7) |   | (2,057.0) |   |
| Payments related to financial assets and  securities                                                    |       | (250.3)                     |       | (211.4) |   | (203.8) |   |
| Payments related to acquisitions                                                                        |       | (634.4)                     |       | (535.7) |   | (103.6) |   |
| Proceeds from divestitures                                                                              |       | 1,812.8                     |       | 1,530.8 |   | 674.0 |   |
| Proceeds from the disposal of long-term  assets and marketable securities                               |       | 542.7                       |       | 458.3 |   | 457.4 |   |
| **Cash used in investing activities**                                                                   | ** ** | **(835.7)**                 | ** ** | **(705.7)** | ** ** | **(1,233.0)** | ** ** |
| Capital increases/repayments                                                                            |       | 11.2                        |       | 9.5 |   | (55.5) |   |
| Share repurchases                                                                                       |       | (1,699.1)                   |       | (1,434.8) |   | (725.7) |   |
| Proceeds from the addition of financial  liabilities                                                    |       | 2,654.4                     |       | 2,241.5 |   | 706.7 |   |
| Repayment of financial liabilities                                                                      |       | (2,300.1)                   |       | (1,942.4) |   | (909.7) |   |
| Dividends paid                                                                                          |       |                        |       |   |   |   |   |
| to shareholders of BASF Aktiengesellschaft                                                              |       | (1,070.4)                   |       | (903.9) |   | (774.1) |   |
| to minority shareholders                                                                                |       | (92.5)                      |       | (78.2) |   | (77.7) |   |
| **Cash used in financing activities**                                                                   | ** ** | **(2,496.5)**               | ** ** | **(2,108.3)** | ** ** | **(1,836.0)** | ** ** |
| **Net changes in cash and cash equivalents**                                                            | ** ** | **(1,449.1)**               | ** ** | **(1,223.7)** | ** ** | **1,565.0** | ** ** |
| Effects on cash and cash equivalents                                                                    |       |                        |       |   |   |   |   |
| from foreign exchange rates                                                                             |       | 41.8                        |       | 35.3 |   | (17.3) |   |
| from changes in scope of consolidation                                                                  |       | 12.2                        |       | 10.3 |   | 57.6 |   |
| Cash and cash equivalents as of January 1                                                               |       | 2,470.1                     |       | 2,085.9 |   | 480.6 |   |
| **Cash and cash equivalents as of December 31**                                                         | ** ** | **1,075.0**                 | ** ** | **907.8** | ** ** | **2,085.9** | ** ** |
| Marketable securities                                                                                   |       | 216.8                       |       | 183.0 |   | 204.6 |   |
| **Liquid funds as shown on the balance sheet**                                                          | ** ** | **1,291.8**                 | ** ** | **1,090.8** | ** ** | **2,290.5** | ** ** |

 

For further information regarding the Statements of Cash Flows, seeexplanations in Note 12.

Solely for the convenience of the reader, the 2005 financial informationhas been translated into U.S. dollars using the December 31, 2005 noon buyingrate of the Federal Reserve Bank of New York of $1.1842 = €1.00.

 

The accompanying Notes arean integral part of these Consolidated Financial Statements.

 

F-7

----

 

**BASF GROUP**

** **

**NOTESTO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.      Summary of accounting policies**

 

**(a) Basis of presentation**

 

The Consolidated FinancialStatements of BASF Aktiengesellschaft (“BASF” or “BASF Aktiengesellschaft”)were prepared for the first time according to the International FinancialReporting Standards (IFRS) valid as of December 31, 2005. All those IFRS validin the reporting year 2005 as well as the pronouncements of the InternationalFinancial Reporting Committee (IFRIC) were adopted to the extent that they wereendorsed by the European Union. IFRS, which had not been endorsed by theEuropean Union until that time had no effect on BASF’s Consolidated FinancialStatements. The Consolidated Financial Statements of the BASF Group have beenconverted to IFRS retrospectively as of January 1, 2004. The effects of the first-timeadoption of IFRS are shown in Note 3.

 

The Consolidated FinancialStatements comply with U.S. Generally Accepted Accounting Principles (U.S.GAAP) as far as permissible under IFRS. The remaining differences are shown ina reconciliation of net income and stockholders’ equity to U.S. GAAP in Note 5.

 

The translation of eurosinto U.S. dollars ($) has been made solely for the convenience of the reader atthe noon buying rate of the Federal Reserve Bank of New York on December 31,2005, which was $1.1842 = €1.00. No representation is made that such euroamounts could have been or could be converted into dollars at that or any otherexchange rate on such date or any other dates.

 

**(b) Scope of consolidation**

 

The Consolidated FinancialStatements include BASF Aktiengesellschaft, the parent company, with itsheadquarters in Germany as well as all the material subsidiaries in which BASFAktiengesellschaft directly or indirectly exercises a majority of the votingrights (collectively, the “Company”). Material, jointly-operated companies areincluded on a proportional consolidation basis, with the exception of the jointventure Basell Group, which was operated largely independently and not includedin the planning processes of BASF and was therefore accounted for using theequity method until March 2005. The shares in the Basell Group were divested onMay 5, 2005.

 

Consolidated companies andchanges to the scope of consolidation were as follows:

 
| ** **                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Consolidated  companies as of January 1       |       | 160      |       | 154      |       |
| *Thereof proportionally consolidated*         |       | *12*     | * *   | *12*     | * *   |
| First-time  consolidations                    |       | 28       |       | 20       |       |
| *Thereof proportionally consolidated*         |       | *4*      | * *   | *—* | * *   |
| *Thereof changes in the consolidation method* | * *   | *(1)*    | * *   | *—* | * *   |
| Deconsolidations                              |       | 8        |       | 14       |       |
| *Thereof proportionally consolidated*         |       | —   |       | —   |       |
| Consolidated  as of December 31               |       | **180**  | ** ** | **160**  | ** ** |
| *Thereof proportionally consolidated*         | * *   | *15*     | * *   | *12*     | * *   |

 

Subsidiaries and jointventures whose impact on the net worth, financial position and results of theCompany are individually and in aggregate immaterial are not consolidated. Theeffects of not consolidating immaterial companies on the net worth, financialposition and results of the Company account in each case for less than 2.0%.

 

Certain affiliated companiesnot consolidated due to immateriality, non-proportionally consolidatedjointly-owned companies, as well as the remaining associated companies areaccounted for using the equity method. Associated companies are those entitiesin 

 

F-8

----

 

which the Company has a participation of at least 20% and exercises asignificant influence over the operating and financial policies. Overall, thisapplies to:

 
| ** **                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Affiliated  companies       |       | 11       |       | 13       |       |
| Joint ventures              |       | 2        |       | 3        |       |
| Other  associated companies |       | 3        |       | 3        |       |
| **Total**                   | ** ** | **16**   | ** ** | **19**   | ** ** |

 

First-time consolidations in2005 comprised:

 

•                  Threecompanies in Asia and four in Europe in connection with the acquisition of theelectronic chemicals business of Merck KGaA, Darmstadt, Germany;

•                  TheLeuna Miramid GmbH, Leuna, Germany, which produces and sells polyamid andpolyamid compounds;

•                  Threecompanies in connection with the acquisition of a consulting company, planbusiness market enabling services AG, Germany which is focused on the design ofbusiness processes and their mapping in IT systems;

•                  Twocompanies headquartered in Switzerland and one in France as a result of theacquisition of the Swiss fine chemicals company, Orgamol;

•                  OOOAchimgaz, the Russian Federation, a joint venture with Gazprom for theexploration of gas, which has been proportionally consolidated;

•                  Sixfurther newly-founded companies in Canada, Germany, the U.K. and the U.S.; and

•                  Sevenfurther previously unconsolidated companies with headquarters in Germany,China, Taiwan, Malaysia and Turkey due to their increased importance.

 

Deconsolidations in 2005included eight companies due to their decreased importance or due to mergerswith other BASF companies.

 

First time consolidations in2004 comprised:

 

•                  BASFPerformance Polymers GmbH, Rudolstadt, Germany, which produces nylon granulesand compounding products;

•                  FoamEnterprises Inc., United States, which produces rigid polyurethane foams; 

•                  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;

•                  Eightpreviously unconsolidated European and two U.S. companies due to corporaterestructuring; and

•                  Fourpreviously unconsolidated companies with headquarters in China, Japan, andGermany due to their increased importance.

 

Deconsolidations in 2004included two companies due to their decreased significance and five due torestructuring or liquidation. A further seven companies were eliminated fromthe scope of consolidation as a result of the sale of the printing systemsbusiness to CVC Capital Partners.

 

F-9

----

 

Changes in the scope ofconsolidation had the following effects on the sales and the balance sheet ofthe BASF Group:

 
| ** **                                              | ** ** | **2005**           | ** ** | **2005**  | ** ** | **2004**           | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|-----------|------------|--------------------|------------|----------|------------|
| ** **                                              | ** ** | **Million €** | ** ** | **%**     | ** ** | **Million €** | ** ** | **%**    | ** ** |
| Sales                                                   |       | 81.2               |       | 0.2       |       | 43.5               |       | 0.1      |       |
|                                                    |       |               |       |      |       |               |       |     |       |
| Long-term  assets                                       |       | 3.2                |       | —    |       | 3.5                |       | —   |       |
| Short-term  assets                                      |       | (38.0)             |       | (0.3)     |       | 17.3               |       | 0.1      |       |
| **Total assets**                                        | ** ** | **(34.8)**         | ** ** | **(0.1)** | ** ** | **20.8**           | ** ** | **0.1**  | ** ** |
| Stockholders’  equity                              |       | 3.1                |       | —    |       | 37.8               |       | 0.2      |       |
| Long-term  liabilities                                  |       | 16.8               |       | 0.2       |       | 0.2                |       | —   |       |
| Short-term  liabilities                                 |       | (54.7)             |       | (0.6)     |       | (17.2)             |       | (0.2)    |       |
| **Total stockholders’  equity and liabilities**    | ** ** | **(34.8)**         | ** ** | **(0.1)** | ** ** | **20.8**           | ** ** | **0.1**  | ** ** |
| Contingent  liabilities and other financial obligations |       | 46.3               |       | 1.6       |       | 89.8               |       | 2.8      |       |

 

**Proportional consolidation**

 

Condensed financialinformation relating to the Company’s pro rata interest in jointly operatedcompanies accounted for using the proportional consolidation method is asfollows:

 
| **Million €**                                   | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Income  statement information**                    |       |        |       |        |       |
| Sales                                                |       | 3,150.5     |       | 2,258.6     |       |
| Gross profit  on sales                               |       | 183.2       |       | 178.1       |       |
| Income from  operations                              |       | 123.8       |       | 116.6       |       |
| Income  before taxes and minority interests          |       | 127.6       |       | 124.9       |       |
| Net income                                           |       | 113.7       |       | 99.3        |       |
| **Balance  sheet information**                       |       |        |       |        |       |
| Long-term  assets                                    |       | 1,396.4     |       | 1,241.9     |       |
| Short-term  assets                                   |       | 775.9       |       | 527.8       |       |
| **Total assets**                                     | ** ** | **2,172.3** | ** ** | **1,769.7** | ** ** |
| Stockholders’  equity                           |       | 630.7       |       | 678.4       |       |
| Long-term  liabilities                               |       | 948.7       |       | 668.5       |       |
| Short-term  liabilities                              |       | 592.9       |       | 422.8       |       |
| **Total stockholders’  equity and liabilities** | ** ** | **2,172.3** | ** ** | **1,769.7** | ** ** |
| Warranties  and other financial obligations          |       | 128.5       |       | 77.1        |       |
| **Cash flow  information**                           |       |        |       |        |       |
| Cash  provided by operating activities               |       | 207.6       |       | 79.6        |       |
| Cash used in  investing activities                   |       | (205.5)     |       | (267.9)     |       |
| Cash  provided by financing activities               |       | 14.4        |       | 181.6       |       |
| Net change  in cash and cash equivalents             |       | 16.5        |       | (6.7)       |       |

 

F-10

----

 

**Associated companies accounted for using the equity method**

 

Condensed financialinformation of the most significant associated companies accounted for usingthe equity method, including the Solvin Group (BASF’s share: 25%) and theSvalöf Weibull Group (BASF’s share: 40%) is shown below. The 2004 figurescontain the Basell Group, which was sold in 2005 (BASF’s share: 50%).

 
| **Million €**                                   | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Income  statement information**                    |       |        |       |        |       |
| Sales                                                |       | 1,372.0     |       | 8,052.7     |       |
| Gross profit  on sales                               |       | 351.3       |       | 1,131.7     |       |
| Income from  operations                              |       | 103.8       |       | 296.4       |       |
| Income  before taxes and minority interests          |       | 102.0       |       | 318.3       |       |
| Net income                                           |       | 67.0        |       | 222.6       |       |
| BASF’s share  of net income                     |       | 16.8        |       | 93.9        |       |
| **Balance  sheet information**                       |       |        |       |        |       |
| Long-term  assets                                    |       | 477.3       |       | 5,258.4     |       |
| *Thereof property, plant, and equipment*             |       | *459.5*     | * *   | *3,430.0*   | * *   |
| Short-term  assets                                   |       | 672.1       |       | 2,486.4     |       |
| *Thereof liquid funds*                               | * *   | *48.6*      | * *   | *8.0*       | * *   |
| **Total  assets**                                    | ** ** | **1,149.4** | ** ** | **7,744.8** | ** ** |
| Stockholders’  equity                           |       | 343.4       |       | 3,540.3     |       |
| Long-term  liabilities                               |       | 190.6       |       | 2,158.0     |       |
| *Thereof financial indebtedness*                     | * *   | *123.3*     | * *   | *1,338.7*   | * *   |
| Short-term  liabilities                              |       | 615.4       |       | 2,046.5     |       |
| *Thereof financial indebtedness*                     | * *   | *20.4*      | * *   | *329.9*     | * *   |
| **Total  stockholders’ equity and liabilities** | ** ** | **1,149.4** | ** ** | **7,744.8** | ** ** |
| BASF’s  investment                              |       | 95.4        |       | 1,695.8     |       |

 

**(c) Summary of significant accounting policies**

 

***Balance sheet date:*** The individual financial statements of thecompanies forming part of the Group (hereinafter referred to as “consolidatedcompanies”) are generally prepared as of the balance sheet date of theConsolidated Financial Statements. In certain cases, interim financialstatements or adjusted statements as of the balance sheet date of theConsolidated Financial Statements are prepared and used.

 

***Uniform valuation:*** Assets and liabilities of consolidatedcompanies are accounted for and valued uniformly in accordance with theprinciples described herein. For companies accounted for using the equitymethod, significant deviations in the valuations are adjusted.

 

***Eliminations:*** Transactions between consolidated companiesas well as inter-company profits resulting from sales and services renderedbetween consolidated companies are eliminated in full and those for jointlyoperated companies on a pro rata basis. Inter-company profits resulting fromsales at market prices to companies accounted for using the equity method arenot eliminated due to immateriality.

 

***Capital consolidation:*** Capital consolidation is based on thepurchase method, which conforms with U.S. GAAP.  Initially, all assets, debts and intangibleassets that are to be capitalized are valued at fair value. Finally, theacquisition cost is offset against the proportionate share of the acquiredequity. Differences not allocated to individual assets are capitalized asgoodwill. Goodwill is not amortized but written down in the case of impairment(see Note 14 for further information on intangible assets).

 

F-11

----

 

***Revenue recognition:*** Revenues from product sales and therendering of services are recognized upon shipment to customers or performanceof the service and the transfer of ownership and risks to the buyer. Provisionsfor discounts, sales returns, rebates to customers, estimated future warrantyobligations and other claims are provided for in the same period the relatedsales are recorded.

 

In certain cases, deliveriesrequire customer acceptance. In these cases, revenues are deferred untilcustomer acceptance occurs.

 

Long-term contractsprimarily concern the construction of chemical plants for third parties.Realization of revenues and costs takes place according to the stage ofcompletion when the outcome of the construction contract can be estimatedreliably. To the extent that the outcome of the construction cannot beestimated reliably, revenue is recognized only to the extent of contract costsincurred. Expected losses on the construction contract are recognized bywrite-downs to the lower fair value.

 

Revenue frominterest-bearing assets is recognized according to the outstanding receivablesat reporting date using the effective interest method. Dividends are recognizedwhen the shareholder’s right to receive payment is established.

 

Payments relating to thesale or licensing of technologies or technological expertise are recognized inincome according to the contractually agreed transfer of the rights andobligations relating to those technologies.

 

***Borrowing costs:*****If the construction phase of property, plantor equipment extends beyond a period of one year, the interest incurred onborrowed capital that is directly attributable to that asset is capitalized aspart of the cost of that asset up to the date the asset is ready for itsintended use or is available for sale. All other borrowing costs are recognizedas an expense in the period in which they are incurred.

 

***Investment subsidies:*** Government grants related to the acquisitionor construction of property, plant and equipment reduce the acquisition orconstruction cost of the respective assets. Other government grants orgovernment assistance are set up as deferred income and recognized as incomeover the underlying period or the expected useful life of the respective asset.

 

***Conversion of foreigncurrency items:*****The cost of assets acquiredin foreign currencies and revenues from sales in foreign currencies arerecorded at current rates on transaction dates. Short-term foreign currencyreceivables and liabilities are valued at the rate on the balance sheet date.

 

***Translation of foreigncurrency financial statements:*****The translation offoreign currency financial statements conforms with the functional currenciesof the consolidated companies. The U.S. dollar is the functional currency ofBASF subsidiaries and jointly operated companies in North America (NAFTA), andof certain subsidiaries in Malaysia and Singapore, while the local currency isthe functional currency in Japan, Korea, China, Brazil, and the RussianFederation. Translation therefore takes place using the current rate method.

 

Balance sheet items aretranslated to euros at year-end rates, with the exception of equity accounts,which are valued at historical rates. Expenses and income are translated atmonthly average rates in euro and accumulated for the year. The effects of ratechanges are shown under “foreign currency translation adjustment” as acomponent of other comprehensive income in equity and are treated as income orexpense in the consolidated statements of income only upon the disposal of acompany.

 

The euro is the functionalcurrency for the remaining companies. The temporal method is therefore used tomake the conversion: long-term assets except loans and paid-in capital aretranslated using historical rates. Other assets, liabilities and provisions aretranslated using closing rates. Equity is then calculated as the balancing figure.Expenses and income are converted at monthly average rates and cumulated toyear-end figures, except for those items derived from balance sheet itemsconverted at historical rates, which are also translated at historical rates.Foreign exchange gains or losses resulting from the conversion process arerecognized in profit or loss and shown in other operating expenses or income.

 

***Research and Development:*****Research is expensed in the period in whichit is incurred. Development costs meeting certain criteria are capitalized asper IAS 38.75. Research and development projects of acquired businesses arecapitalized as intangible assets and amortized over their useful lives.

 

F-12

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***Advertising:*****Advertising is expensed as incurred.

 

***Acquired intangible assets– excluding goodwill:*****Acquired intangible assets –excluding goodwill – are valued at cost less regularly scheduled straight-lineamortization. The useful life is determined based on the period of theunderlying contract and the period of time over which the intangible asset isexpected to be used. Write-downs are made when the recoverable amount of theasset is lower than the carrying value. The recoverable value is the higher offair value less selling costs and value in use. Write-backs (reversals ofimpairment losses) are made if the reasons for the previous years’ write-downsno longer exist.

 

***Internally generatedintangible assets:*****Internally generatedintangible assets primarily comprise internally developed software. Suchsoftware, as well as other internally generated assets for internal use, arevalued at cost and amortized over their useful lives. Write-downs are made ifthe carrying amount of an asset exceeds the recoverable value.

 

Development costs alsoincludes, in addition to those costs directly attributable to the developmentof the asset, appropriate allocations of material and manufacturing overheadsas well as an appropriate share of the administrative costs involved in thedevelopment of the intangible assets. Borrowing costs are capitalized if theyare material and are incurred during the period of the development of theasset.

 

The average amortizationperiod for intangible assets with finite useful lives is nine years for 2005and eight years for 2004 based on the following expected useful lives:

 
| **Depreciation periods**                       | ** ** | **Years** | ** ** |
|------------------------------------------------|------------|-----------|------------|
| Marketing  and similar rights                  |       | 2–20 |       |
| Product  rights, licenses and trademarks       |       | 2–15 |       |
| Know-how,  patents and production technologies |       | 3–15 |       |
| Internally  generated intangible assets        |       | 3–5  |       |
| Other rights  and values                       |       | 2–20 |       |

 

***Impairments andwrite-backs:*** Forthe purposes of impairment testing, goodwill is allocated to each of theGroup’s affected cash generating units. These are tested annually forimpairment, or more frequently if there is an indication of possibleimpairment. If the recoverable amount of the cash-generating unit is less thanthe carrying amount of the unit, the impairment loss is allocated first toreduce the goodwill allocated to the unit, and then to the other assets,pro-rata on the basis of the asset’s carrying amount. Write-backs (reversals ofimpairment losses) are made if the reason for the previous write-down no longerexists.

 

***Goodwill:*****Since 2004, goodwill is only written down ifthere is an impairment. Impairment testing takes place annually andadditionally if there is an indication of an impairment. The goodwillimpairment test is based on cash generating units using the discounted cash-flowmethod. The cash generating units at BASF are principally the business units.Recoverable value is the higher of net sales price and the value in use. Valuein use is generally determined using the discounted cashflow method. Theestimated cash flows are generally based on the current plans of the Companyfor the next three years and rely on the expertise of the respective businessunit management. For cash flow projections beyond the detailed planning period,growth rates ranging from 0% to 2% were assumed depending on the individualbusiness units. Interest rates used depend on the underlying business and thecountry in which the business unit operates and ranged from 8.7% to 13.8%.

 

If the necessary write-downexceeds the carrying value of goodwill, the write-down is made with theremaining write-down charged evenly to the remaining assets in thecash-generating unit. Goodwill write-downs are reported under other operatingexpenses.

 

***Emission rights:*** Emission right certificates granted by theGerman Emissions Trading Authority (DEHSt) or a similar authority in otherEuropean countries are recorded at fair value at the time of issue. Purchasedemission rights are recorded at acquisition cost.

 

F-13

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***Property, plant andequipment:*****Property, plant andequipment is stated at acquisition or production cost less scheduleddepreciation over its estimated useful life. Low-value assets are fullydepreciated in the year of acquisition and are shown as disposals. Therevaluation method is not used for the valuation of property, plant andequipment.

 

The cost of self-constructedplants includes direct costs, appropriate allocations of material andmanufacturing overheads, and an appropriate share of the administrative costsrelated to the construction of the plant. Borrowing costs which are incurredduring the period of construction are capitalized. For companies in Germany,borrowing costs were set at 4.5% whereas country-specific rates were used forGroup companies outside Germany.

 

Costs for the regularlyscheduled shutdown of important plants for maintenance are capitalized as partof the asset and depreciated using the straight-line method over the period tothe next planned shutdown. In oil and gas exploration, the estimated discountedcosts for rehabilitating sites, especially the filling of wells and the removalof production facilities, are capitalized as part of the individual asset anddepreciated over the expected useful life of the asset using the straight-linemethod.

 

Long-term assets, includinglong-distance natural gas pipelines, are depreciated using the straight-linemethod. The weighted-average periods of depreciation used were as follows:

 
| **Depreciation periods**                           | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|----------------------------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                         | ** ** | **(Years)** | ** ** | **(Years)** | ** ** |
| Buildings  and structural installations            |       | 28          |       | 25          |       |
| Industrial  plant and machinery                    |       | 13          |       | 12          |       |
| Long-distance  natural gas pipelines               |       | 25          |       | 25          |       |
| Working and  office equipment and other facilities |       | 8           |       | 8           |       |

 

Write-downs are made onproperty, plant and equipment whenever events or changes in circumstancesindicate that the carrying value of an asset may not be recoverable.Measurement of an impairment loss for long-lived assets that the Companyexpects to hold and use is based on the discounted expected future cash flowsfrom the use of the asset. A write-down is made in the amount of the differencebetween the net carrying value and the discounted future cash flows.

 

In oil and gas exploration,exploration and production costs are accounted for using the successful effortsmethod. Under this method, costs of successful and incomplete oil and gasdrilling operations are capitalized as property, plant and equipment. Successfuldrillings are depreciated based on the production and estimated availablereserves. Successful drillings of German operations that were completed beforethe end of 2000 are depreciated under the declining balance method over eightyears (for drilling in old fields) and 15 years. Geophysical expenditures,including exploratory and dry-hole costs, are charged against income.

 

Investment properties heldto realize capital gains or rental income are immaterial. They are valued atacquisition cost less scheduled depreciation or fair value.

 

***Leasing:*****According to IAS 17, leasing contracts areclassified as either financing or operating leases. Assets used which aresubject to operating leases are not capitalized. Leasing payments are chargedto income in the year they are incurred.

 

A lease is classified as a financelease if it transfers substantially all of the risks and rewards incidental toits ownership. Assets used subject to a finance lease are recorded at the fairvalue of the leased property or, if lower, the present value of the minimumlease payments. Leasing payments are apportioned between the interest componentand the principal component. The principal component reduces the outstandingliability, while the interest component is charged as interest expense.Depreciation takes place over the useful life of the asset or the period of thelease if it is shorter.

 

Details regarding leasingarrangements are presented in Note 30.

 

***Investments in companiesaccounted for using the equity method:*****The capital consolidation of participationsaccounted for using the equity method is carried out under the same principlesas for those companies which are fully consolidated.

 

F-14

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The carrying values of these companies are adjusted annually based onthe pro rata share of income, dividends and other changes in shareholders’equity. Since 2004, goodwill associated with such investments is no longeramortized but is written down only in the case of an impairment.

 

***Financial instruments:*** Financial assets and financial liabilitiesare recorded on the balance sheet when the BASF Group becomes a party to a financialinstrument. Financial assets are derecognized when the contractual rights tothe cash flows from the financial asset expire or when the financial asset,including all risks and rewards of ownership, is transferred. Financialliabilities are derecognized when the contractual obligation is discharged,cancelled or expires. Customary purchases or sales of assets are accounted forusing settlement date accounting. According to IAS 32, financial instrumentsinclude primary instruments such as accounts receivable and accounts payable aswell as investments and equity instruments. Financial instruments also includederivatives, which are matched to underlying primary financial instruments andused to hedge risks, such as those arising from changes in currency exchangeand interest rates.

 

Financial assets andliabilities are classified into the following valuation categories: 

 

***Financial assets andliabilities that are measured at fair value through profit or loss*****include exclusively derivatives and othertrading instruments. Cash balances, time deposits and checks, which are shownunder “liquid funds”, as well as derivatives shown under other assets and otherliabilities belong to this valuation category.

 

***Loans and receivables*****comprise financial assets with fixed ordeterminable payments, which are not quoted on an active market and are notderivatives or classified as available-for-sale. Other receivables and loansclassified under “accounts receivable, trade,” “other receivables and othershort-term assets,” and “other long-term assets” are included herein. Initialvaluation is done at present value, which generally matches the nominal valueof the receivable or loan. Interest-free and low-interest long-term loans andreceivables are recorded at present value. Subsequent valuations are generallydone at historical cost, under consideration of the effective interest method.

 

***Held-to-maturity financialinstruments*****consist of those financialassets with fixed or determinable payments, which the company has the abilityand intent to hold until maturity, which are not derivatives and do not fallunder other valuation categories. Initial valuation is done at present value,which generally matches the nominal value. Subsequent valuations are generallydone at historical cost, under consideration of the effective interest method.There exist no material financial assets that fall into this category.

 

***Available-for-salefinancial instruments*****comprise financial assetswhich are not derivatives and do not fall into any of the previously statedvaluation categories. Participations booked under the item “other financialassets” not accounted for using the equity method, and securities, which areavailable for sale as well as long-term securities reported under the item“liquid funds” are included here. Initial valuation is done at present value.Changes in the present value are booked into equity under the item “othercomprehensive income”, and only flow through the income statement when they aredisposed of or have an impairment in value. Participations whose present valuecannot be reliably determined are carried at historical cost and are writtenoff in the case of an impairment in value.

 

***Financial liabilities:*** Financial liabilities are initially valuedat present value, which generally corresponds to the amount received or nominalvalue. Subsequent valuations are generally done at historical cost, usingconsideration of the effective interest method.

 

In 2005 and 2004, there wereno reclassifications between these valuation categories.

 

Derivative financialinstruments can be embedded within other contracts. Under IFRS, embedded derivativesare recorded separately from their base contracts and shown at fair value. 

 

Derivatives within the BASFGroup are generally used for hedging purposes. The bulk of these contracts,however, are not accounted for using hedge accounting as defined under IFRS.Nonetheless, these derivatives are effective hedges in the context of the Groupstrategy. Changes in the fair value of the derivatives almost completely offsetthe change in the value of the underlying contracts.

 

F-15

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The BASF Group uses hedgeaccounting for certain hedges of future transactions (“cash flow hedge”). Theeffective portion of the change in fair value is thereby recorded directly inequity under other comprehensive income, taking deferred taxes into account,and does not flow through the income statement. The ineffective portion isrecorded immediately in the income statement. In the case of futuretransactions that will lead to a non-financial asset or a non-financial debtbeing booked, the accumulated fair value changes in equity are immediatelycharged against the acquisition cost. For future transactions that will lead tofinancial debts or assets, the accumulated fair value changes in equity flowthrough the income statement during the same reporting period in which theunderlying contract affects the income statement. The hedging time frame offuture transactions generally extends up to one year; the maturity of thehedging instrument is based upon the effective date of the future transaction.All hedged future transactions became effective in the 2005 business year. Theuse of derivative financial instruments to hedge exchange rate, interest andprice risks is detailed in Note 29.

 

If there are indications ofimpairment in financial instruments, impairment write-downs are carried out.The indications include above all, a reduction in the fair value, a significantreduction in credit quality, the existence of transfer risks, payment delays,higher probability of insolvency, the necessity of debtor recapitalization orthe disappearance of an active market.

 

If the reason for awrite-down for loans and receivables as well as held-to-maturity financialinstruments no longer exists, the write-down is reversed up to the acquisitioncost carried forward and recognized in income. In the case ofavailable-for-sale securities, write-ups principally do not flow through theincome statement, but are credited directly to equity (other comprehensiveincome). Write-ups up to the amount of the original write-down are recognizedin income in the case of debt instruments; write-ups beyond are recognized inequity. Write-ups are not made for participations for which a fair value cannotbe reliably determined and are therefore carried at acquisition cost.

 

***Deferred tax assets:*****Deferred tax assets are recorded for taxabletemporary differences between the valuation of assets and liabilities in the financialstatements of the consolidated companies and the carrying amounts for taxpurposes. In addition, deferred taxes are recorded for tax loss carryforwardsto the extent that it is probable that future taxable profit for the relevanttax authority will be available against which the tax loss carryforwards can beutilized. For companies located in Germany, a 38% tax rate is applied; forother companies, the tax rates applicable in the individual 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 berealized.

 

***Inventories:*****Inventories are carried at acquisition costsor production costs. Write-downs are made if the fair value or value in usebased on the net realizable value is lower than the carrying value. The netrealizable value is based on the expected sales proceeds less costs, which canbe directly allocated to the respective asset incurred prior to sale.

 

Production costs include, inaddition to direct costs, an appropriate allocation of overhead cost ofproduction using normal utilization rates of the production plants. Inaddition, pensions, social services and voluntary social benefits are includedas well as allocations for administrative costs, provided they relate to theproduction process. Financing costs are not included in production costs.

 

***Receivables and otherassets:*****Receivables are generallycarried at nominal value or at amortized cost.

 

***Cash and cash equivalents:*****Cash and cash equivalents comprise marketablesecurities with original maturities of three months or less, cash at banks,cash on hand and checks in transit.

 

***Pension provisions andother personnel obligations:*****Provisions forpensions are based on actuarial computations made according to the projectedunit credit method. Similar obligations, especially those arising fromcommitments made by North American Group companies to pay the healthcare costsand life insurance premiums of retired staff and their dependents, are includedin pension provisions.

 

F-16

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Actuarial profits and lossesare offset against other comprehensive income. The calculation of the pensionprovisions was based largely on reports prepared by Bode Hewitt AG & Co. KGin Munich, Germany. 

 

***Other Provisions:*** Other provisions are set up when there is apresent obligation as a result of a past event and when there is a probable outflowof resources whose amount can be reliably estimated. The amount of theprovision is the probable amount required to settle the obligation. 

 

Provisions are recognizedfor German trade income tax and German corporate income tax and similar incometaxes in the amount necessary to meet the expected payment obligations, lessany prepayments that have been made. Other taxes assessed are appropriatelyconsidered.

 

Provisions are establishedfor certain environmental protection measures and risks if the measures arelikely necessary as a result of legal or regulatory obligations or other eventsand are not capitalized. Provisions for required recultivation associated withoil and gas operations, primarily concern the filling of wells and the removalof production facilities upon the termination of production. The present valueof the obligation increases the acquisition cost of the respective asset whenit is initially recognized.

 

Provisions are made forexpected severance payments or similar personnel expenses as well as fordemolition expenses and other charges related to the closing down of operationsthat have been decided upon and publicly announced by management.

 

The probable amount requiredto settle long-term obligations is discounted if the effect of discounting ismaterial. In this case, valuation of the provision is done at present value.Financing costs are shown in other financial results.

 

Provisions for long-serviceand anniversary bonuses are largely calculated based on actuarial principles,and discounted using an interest rate of 3.25%. For signed contracts under thepre-retirement part-time programs, provisions for the present value ofsupplemental (top-up) payments are provided in their full amount and the wageand salary payments due during the passive phase of agreements are accruedthrough installments and discounted at an interest rate of 3.0%. Provisions arerecorded for the expected costs of pre-retirement part-time programs that areanticipated to be contracted during the term of the collective bargainingagreements, taking into consideration the ceilings provided in the collectiveagreements.

 

The formation of provisionsfor the BASF stock option program (BOP) and BASF’s incentive share program“plus” is described in detail in Note 28.

 

***Deferred tax liabilities:*** Deferred tax liabilities are recorded fortemporary differences between the valuation of assets and liabilities in the financialstatements of the consolidated company and the carrying amounts for taxpurposes to the extent that there is a surplus of deferred tax liabilitiesrelating to a taxation authority.

 

***Earnings per share:*** The calculation of earnings per share isbased on the average number of common shares outstanding during the applicableperiod and the net income of the period after minority interests.

 

***Use of estimates andassumptions in financial statement preparation:*** The preparation of financial statementsrequires the use of estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting periods. In the preparation of theseConsolidated Financial Statements, estimates and assumptions have been made bymanagement concerning the selection of useful lives of property, plant andequipment and intangible assets, the measurement of provisions, the carryingvalue of investments, and other similar evaluations of assets and obligations.Given the uncertainty regarding the determination of these factors, actualresults could differ from these estimates.

 

The use of estimates atclosing date is especially significant for the following items:

 

F-17

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**Goodwill** is measured for reporting units and istested for impairment once a year. Write downs are made when an impairment hasbeen determined, i.e., when the book value of the cash-generating unit exceedsthe net present value of future cash flows. Impairment testing relies onlong-term earnings predictions based on economic trends.

 

**Deferred taxes** are also recognized for tax loss carryforwards. Their realization depends on the future taxable profits of therespective Group companies. Write-downs are made when it is uncertain if futureearnings will be sufficient to take advantage of the tax loss carryforwards.

 

**Pension provisions** are influenced by assumptions covering thefuture development of wages and salaries, future pension payments, interestrates and the value of plan assets. Errors in assumptions could lead to anover- or under funding of pension liabilities, which are offset againstretained earnings. See Note 23 for additional information.

 

**Other provisions** also cover risks resulting from legaldisputes and proceedings. In order to determine the amount of the provisions,the facts relating to each case, the size of the claim, claims awarded insimilar cases and independent legal advice are considered along withassumptions regarding the probability of a successful claim and the range ofpossible claims. The actual costs can deviate from these estimates (See alsoNote 27).

 

Other provisions alsoinclude expected charges for the rehabilitation of contaminated sites, therecultivation of landfills, the removal of environmental contamination atexisting production or storage facilities, and other similar measures. If therespective Group company is the only possible claimant that can be identified,the provision covers the entire expected claim. At sites operated together byone or more partners, the provision covers only BASF’s share of the expectedclaim. The determination of the amount of the claim is complex and is based onthe available site data, the technology and processes used as well as currentregulations (See Note 24).

 

Assumptions have to be madein determining the interest rate to be used in calculating long-termprovisions.

 

**Write-downs:** Write-downs of assets are made in the caseof an impairment. An impairment test is conducted if certain events indicate animpairment loss. Impairment tests are based on a comparison of the carryingvalue and the recoverable amount. The recoverable amount is the higher of netrealizable value and value in use. The determination of value in use requiresthe estimation and discounting of cash flows. The estimation of the cash flowsconsiders all the information available at closing date which may deviate fromactual developments. This includes, among other things, expected revenue fromsales of products, the return on assets, materials and energy costs. If therecoverable value is lower than the carrying value, a write-down in the amountof the difference is made.

 

***IFRSs and IFRICs notadopted in the preparation of these statements:*** The effects of IFRSs and IFRICs not appliedor not yet endorsed by the European Union in the reporting year 2005 werereviewed:

 

IFRS 7 “FinancialInstruments: Disclosures” requires more extensive disclosure regarding financialinstruments. The disclosure requirements in IAS 32 were incorporated in IFRS 7and extended. In addition to the existing disclosure requirements regarding theapproach, presentation and measurement of financial instruments, additionalinformation is required regarding the type and extent of risks stemming from financialinstruments. It is not expected that this will have any material effect on theConsolidated Financial Statements of BASF Group. IFRS 7 is to be applied forreporting years beginning on or after January 1, 2007.

 

IFRIC 6 “Liabilities arisingform Participating in a Specific Market – Waste Electrical and ElectronicEquipment” was issued to give guidance on the issue of establishing provisionsas a result of the European Union’s Directive on Waste Electrical andElectronic Equipment. The IFRIC interpretation clearly states when a provisionis to be established according to IAS 37 for the decommissioning of equipmentthat has been sold to private households before August 13, 2005 (“historicalhousehold equipment”). IFRIC 6 will have no effect on the ConsolidatedFinancial Statements of the BASF Group.

 

F-18

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In IFRIC 7 “Applying theRestatement Approach under IAS 29 Financial Reporting in HyperinflationaryEconomies for the First Time” two specific issues related to IAS 29 weretreated. On the one hand, it explains how an entity has to restate its financialstatements in accordance with IAS 29 in the first year the existence of hyperinflationis identified in the economy of its functional currency. On the other hand,IFRIC 7 gives guidance on how an entity has to treat deferred taxes in theopening balance sheet. IFRIC 7 is to be applied for reporting years beginningon or after March 1, 2006. This interpretation will have no effect on theConsolidated Financial Statements of BASF Group.

 

IFRIC 8 “Scope of IFRS 2”clarifies that IFRS 2 “Share-based Payment” also applies to agreements wherebythe entity makes payments for which the entity does not receive any goods orservices or inadequate consideration. If the identifiable consideration is lessthan, or appears to be less than, the fair value of the equity instrumentsgranted or liability incurred, IFRIC 8 interprets this circumstance to indicatethat other consideration (i.e., goods or services) has been (or will be)received. Therefore, IFRS 2 is to be applied in such cases. IFRIC 8 is to beapplied for reporting years beginning on or after May 1, 2006. The applicationof IFRIC 8 has no effects on the Consolidated Financial Statements of BASFGroup, as there are no agreements to which IFRIC 8 would apply.

 

**2.    Acquisitions/divestitures**

 

On January 28, 2005, BASFacquired the electronic chemicals business of Merck KGaA, Darmstadt, Germany,for €270 million. The transaction included production and distribution centersfor high purity chemicals in Asia and Europe. Merck’s sales in this businessamounted to approximately €200 million in 2004. This business was included inthe Inorganics division.

 

The difference between theacquisition price and the fair value of the equity purchased, which could notbe allocated to any particular asset was recorded as goodwill. Goodwillincludes inseparable assets such as future synergies and the resulting future earningspotential. In total, €122 million was recognized as goodwill.

 

On October 1, 2005, BASFacquired 100% of the shares in the Swiss fine chemicals company Orgamol S.A.The acquisition included, among other things, two production sites for theproduction of pharma ingredients. In 2004, company sales stood at approximately€100 million. The business was included in the Fine Chemicals division.

 

At acquisition, goodwill of€2 million was recognized for the Orgamol Group.

 

Further acquisitions in 2005included Leuna Miramid GmbH and a consulting company, plan business marketenabling services AG, as well as the 50% share of BASF Coatings Japan Ltd. fromNOF Corp.

 

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.

 

F-19

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Acquisitions had thefollowing effects on the sales and the balance sheet of the BASF Group:

 
| **Acquisitions**                                        | ** ** | **2005**           | ** ** | **2005** | ** ** | **2004**           | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|----------|------------|--------------------|------------|----------|------------|
| ** **                                              | ** ** | **Million €** | ** ** | **%**    | ** ** | **Million €** | ** ** | **%**    | ** ** |
| Sales                                                   |       | 324.5              |       | 0.9      |       | 504.5              |       | 1.5      |       |
|                                                    |       |               |       |     |       |               |       |     |       |
| Long-term  assets                                       |       | 601.1              |       | 2.9      |       | 91.4               |       | 0.4      |       |
| *Thereof property, plant and equipment*                 | * *   | *329.5*            | * *   | *2.5*    | * *   | *58.3*             | * *   | *0.4*    | * *   |
| Short-term  assets                                      |       | (348.3)            |       | (2.3)    |       | (73.1)             |       | (0.6)    |       |
| *Thereof liquid funds**                                 | * *   | *(535.7)*          | * *   | *(23.4)* | * *   | *(103.6)*          | * *   | *(16.1)* | * *   |
| **Assets**                                              |       | **252.8**          | ** ** | **0.7**  | ** ** | **18.3**           | ** ** | **0.1**  | ** ** |
| Long-term  liabilities                                  |       | 117.6              |       | 1.1      |       | 2.6                |       | —   |       |
| *Thereof financial indebtedness*                        | * *   | *2.0*              | * *   | *0.1*    | * *   | *—*           | * *   | *—* | * *   |
| Short-term  liabilities                                 |       | 135.2              |       | 1.6      |       | 15.7               |       | 0.2      |       |
| *Thereof financial indebtedness*                        | * *   | *45.9*             | * *   | *3.2*    | * *   | *—*           | * *   | *—* | * *   |
| **Stockholders’  equity and liabilities**          |       | **252.8**          | ** ** | **0.7**  | ** ** | **18.3**           | ** ** | **0.1**  | ** ** |
| Contingent  liabilities and other financial obligations |       | 71.7               |       | 2.5      |       | —             |       | —   |       |

 

----

* Primarily due topurchase price payments

 

On May 5, 2005, BASF andShell Chemicals sold their 50-50 joint venture Basell to Nell AcquisitionS.a.r.l., Luxembourg, a subsidiary of Access Industries, New York. The salesprice totaled €4.4 billion including liabilities.

 

Furthermore, the polystyrenebusiness in the United States and Canada including our production plant inJoliet, Illinois, was sold to INEOS on April 25, 2005. The business andproduction plant sold belonged to the Styrenics division.

 

Divestitures in 2004concerned primarily the sale of the printing systems business to CVC CapitalPartners.

 
| **Divestitures**                                        | ** ** | **2005**           | ** ** | **2005** | ** ** | **2004**           | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|----------|------------|--------------------|------------|----------|------------|
| ** **                                              | ** ** | **Million €** | ** ** | **%**    | ** ** | **Million €** | ** ** | **%**    | ** ** |
| Sales                                                   |       | (636.1)            |       | (1.7)    |       | (246.7)            |       | (0.7)    |       |
|                                                    |       |               |       |     |       |               |       |     |       |
| Long-term  assets                                       |       | (1,028.3)          |       | (5.0)    |       | (119.0)            |       | (0.5)    |       |
| *Thereof property, plant and equipment*                 | * *   | *(52.2)*           | * *   | *(0.4)*  | * *   | *(85.4)*           | * *   | *(0.6)*  | * *   |
| Short-term  assets                                      |       | 1,435.9            |       | 9.6      |       | 314.6              |       | 2.5      |       |
| *Thereof liquid funds**                                 | * *   | *1,530.8*          | * *   | *66.8*   | * *   | *674.0*            | * *   | *104.9*  | * *   |
| **Assets**                                              |       | **407.6**          | ** ** | **1.1**  | ** ** | **195.6**          | ** ** | **0.6**  | ** ** |
| Stockholders’  equity                              |       | 362.7              |       | 2.2      |       | 360.4              |       | 2.2      |       |
| Long-term  liabilities                                  |       | 50.3               |       | 0.5      |       | (59.6)             |       | (0.5)    |       |
| *Thereof financial indebtedness*                        | * *   | *—*           | * *   | *—* | * *   | *—*           | * *   | *—* | * *   |
| Short-term  liabilities                                 |       | (5.4)              |       | (0.1)    |       | (105.2)            |       | (1.5)    |       |
| *Thereof financial indebtedness*                        | * *   | *—*           | * *   | *—* | * *   | *(0.3)*            | * *   | *(0.1)*  | * *   |
| **Stockholders’  equity and liabilities**          |       | **407.6**          | ** ** | **1.1**  | ** ** | **195.6**          | ** ** | **0.6**  | ** ** |
| Contingent  liabilities and other financial obligations |       | —             |       | —   |       | (4.5)              |       | (0.1)    |       |

 

----

* In particular,due to proceeds from divestitures

 

F-20

----

 

**Discontinued operations**

 

There were no discontinuedoperations in 2005 or 2004.

 

**Planned acquisitions/divestitures**

 

On January 9, 2006, the IronAcquisition Corporation, Florham Park, New Jersey, a 100% subsidiary of BASFAktiengesellschaft, announced a cash offer for all the shares of EngelhardCorporation, Iselin, New Jersey, in the amount of $37 per share. The total costof the transaction based on the price per share would be approximately $4.9billion.

 

See Note 33 for informationregarding the agreement between BASF Aktiengesellschaft and Degussa AG,Düsseldorf, Germany, to acquire Degussa’s construction chemicals business.

 

**3.    Effects of the conversion to IFRS**

 

The consolidated financialstatements of BASF Group were based on the accounting and valuation principlesof the German Commercial Code (*Handelsgesetzbuch*)and the German Stock Corporation Act (*Aktiengesetz*)as well as the accounting standards of the German Accounting StandardsCommittee (*Deutscher Standardisierungsrat*),collectively German GAAP up to and including the 2004 reporting year.International Financial Reporting Standards (IFRS) were followed to thegreatest extent allowable under German GAAP.

 

Due to the mandate by theEuropean Union on July 19, 2002, BASF, as a listed company, has completelyconverted to the International Financial Reporting Standards (IFRS) inaccordance with IFRS 1 “First-time Adoption of International Financial ReportingStandards” effective January 1, 2005. The figures for the previous year wererestated appropriately. Effects of the conversion were netted against equity asof January 1, 2004.

 

In accordance with IFRS 1“First-time Adoption of International Financial Reporting Standards,” theretrospective application of standards concerning the derecognition of financialassets and financial liabilities, hedge accounting and estimates is prohibited.

 

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

 

*Employee benefits*

 

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.

 

*Cumulative translationadjustments*

 

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.

 

*Business Combinations*

 

BASF used the exception notto apply IFRS 3 retrospectively; business combinations prior to the date oftransition have not been restated.

 

 

BASF did not apply any otherelective exception of IFRS 1.

 

F-21

----

 

The conversion affected the following items:

 
| ** **                                                                         | ** ** | ** ** | ** ** | **January 1,**       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|----------------------|------------|------------------|------------|
| **Reconciliation of stockholders’ equity to IFRS**                            | ** ** | **Note**   | ** ** | **2004**             | ** ** | **2004**         | ** ** |
| ** **                                                                         | ** ** | ** ** | ** ** | **(Million €)** | ** ** |
| **Stockholders’ equity in accordance with  German GAAP**                      |       |       |       | **15,878.4**         | ** ** | **15,765.0**     |       |
| Capitalization of interest cost                                                    |       | (a         | )          | 322.4                |       | 314.3            |       |
| Capitalization of internally generated  intangible assets                          |       | (b         | )          | 114.4                |       | 80.6             |       |
| Accounting for pensions                                                            |       | (c         | )          | (160.8)              |       | (62.7)           |       |
| Accounting for provisions                                                          |       | (d         | )          | 186.4                |       | 178.8            |       |
| Accounting for financial instruments                                               |       | (e         | )          | (22.6)               |       | 196.3            |       |
| Valuation of inventories                                                           |       | (f         | )          | 102.2                |       | 11.8             |       |
| Reversal of goodwill amortization and  write-offs due to impairment                |       | (g         | )          | —               |       | 108.7            |       |
| Other adjustments                                                                  |       | (h         | )          | (71.2)               |       | 52.6             |       |
| Tax effects of planned dividend payments  and other tax effects                    |       | (i         | )          | 57.9                 |       | (43.2)           |       |
| Valuation adjustments relating to companies  accounted for using the equity method |       | (j         | )          | 53.2                 |       | —           |       |
| **Adjustments in accordance with IFRS**                                            |       |       |       | **581.9**            | ** ** | **837.2**        | ** ** |
|                                                                               |       |       |       | ** **           | ** ** | ** **       | ** ** |
| **Stockholders’ equity in accordance with  IFRS**                             |       |       |       | **16,460.3**         | ** ** | **16,602.2**     | ** ** |

 

The results for the 2004reporting year are presented according to IFRS. The retroactive adjustment of theresults for 2004 led to the following reconciliation items:

 
| **Reconciliation of income from operations to IFRS**                   | ** ** | **Note**   | ** ** | **2004**             | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                                                             | ** ** | ** ** | ** ** | **(Million €)** | ** ** |
| **Income  from operations in accordance with German GAAP**             |       |       |       | **4,855.6**          |       |
| Capitalization  of interest cost                                       |       | (a         | )          | (63.6)               |       |
| Capitalization  of internally generated intangible assets              |       | (b         | )          | (53.5)               |       |
| Accounting  for pensions                                               |       | (c         | )          | 65.6                 |       |
| Accounting  for provisions                                             |       | (d         | )          | 13.9                 |       |
| Accounting  for financial instruments                                  |       | (e         | )          | 95.2                 |       |
| Valuation of  inventories                                              |       | (f         | )          | (3.4)                |       |
| Reversal of  goodwill amortization and write-offs due to impairments   |       | (g         | )          | 150.4                |       |
| Other  adjustments                                                     |       | (h         | )          | (22.8)               |       |
| Change in  presentation of net financing cost of personnel obligations |       |       |       | 155.1                |       |
| **Adjustments  in accordance with IFRS**                               |       |       |       | **336.9**            | ** ** |
|                                                                   |       |       |       | ** **           | ** ** |
| **Income  from operations in accordance with IFRS**                    |       |       |       | **5,192.5**          | ** ** |

 
| **Reconciliation of income after taxes and  minority interests to IFRS**           | ** ** | **Note**   | ** ** | **2004**             | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | ** ** | ** ** | **(Million €)** | ** ** |
| **Net  income after minority interests in accordance with German GAAP**            |       |       |       | **1,883.0**          |       |
| Capitalization  of interest cost                                                   |       | (a         | )          | 4.3                  |       |
| Capitalization  of internally generated intangible assets                          |       | (b         | )          | (32.5)               |       |
| Accounting  for pensions                                                           |       | (c         | )          | 41.1                 |       |
| Accounting  for provisions                                                         |       | (d         | )          | (8.5)                |       |
| Accounting  for financial instruments                                              |       | (e         | )          | 150.1                |       |
| Valuation of  inventories                                                          |       | (f         | )          | (2.1)                |       |
| Reversal of  goodwill amortization and write-offs due to impairments               |       | (g         | )          | 112.9                |       |
| Other  adjustments                                                                 |       | (h         | )          | 16.4                 |       |
| Tax effects of  planned dividend payments and other tax effects                    |       | (i         | )          | (107.2)              |       |
| Valuation  adjustments relating to companies accounted for using the equity method |       | (j         | )          | (53.2)               |       |
| **Adjustments  in accordance with IFRS**                                           |       | ** ** | ** ** | **121.3**            | ** ** |
|                                                                               |       | ** ** | ** ** | ** **           | ** ** |
| **Net  income after minority interests in accordance with IFRS**                   |       | ** ** | ** ** | **2,004.3**          | ** ** |

 

F-22

----

 

The significant adjustmentsto IFRS are explained below:

 

***(a)   Capitalization of interest cost***

 

According to IFRS, borrowingcosts for property, plant and equipment that are directly attributable to theconstruction period may be capitalized in the period in which they are incurredif the construction period is long-term. Previously, in accordance with GermanGAAP borrowing costs for construction were not capitalized. Under U.S. GAAP,the capitalization of construction interest costs is required. In order tominimize the differences between IFRS and U.S. GAAP, the allowed alternativetreatment of capitalizing interest incurred in long-term construction projectshas been followed.

 

***(b)   Capitalization of internally generatedintangible assets***

 

Costs incurred for computersoftware developed or obtained for the Company’s internal use are to becapitalized as intangible assets and amortized over the expected useful life ofthe software under IFRS. According to German GAAP, the capitalization of costsfor internally generated intangible assets is not permissible. IAS 38“Intangible Assets” requires the capitalization of development costs.

 

***(c)   Accounting for pensions***

 

Pension obligations arisingfrom direct promises of the Company to employees were already recorded in the2004 annual financial statements according to IAS 19 “Employee Benefits.” Thisled to a new valuation whereby the formerly deferred actuarial gains and losseswere offset against retained earnings as of January 1, 2004.

 

Pension benefits are alsoprovided by legally independent funds, particularly the “BASF PensionskasseVVaG” (“BASF Pensionskasse”). As BASF guarantees the commitments of the thesefunds, they are classified as defined benefit plans according to IFRS and areto be included in the Group Consolidated Financial Statements. This was notpermissible under German GAAP.   The inclusion of these pension plans was doneretroactively to January 1, 2004 according to IFRS. Actuarial gains and losseswere not recognized according to IFRS 1 “First-time Adoption of InternationalFinancial Reporting Standards.”

 

BASF exercises the optionintroduced by an amendment to IAS 19 “Employee Benefits,” which allows actuarialgains and losses to be recognized against retained earnings in the year theyare incurred.

 

Additionally, financingcosts for pensions and other personnel obligations are offset against theexpected return on plan assets (2004: €155.1 million) and not shown, aspreviously, before income from operations, but rather separately under “other financialresult.”

 

***(d)   Accounting for provisions***

 

The reconciliation itemcontains the following deviations:

 

•                  Provisions are made for deferred maintenanceand mandated modifications in connection with the operation of plants accordingto German GAAP. IFRS requires that the cost of such measures be expensed in theperiod they occur.

 

•                  Under IFRS, provisions for certainenvironmental measures and recultivation obligations are set-up in the amountof the expected obligations and at the same time increase the acquisition costof the respective assets. According to German GAAP, such costs were accrued,whereas according to IFRS they are capitalized and depreciated using thestraight-line method.

 

•                  According to German GAAP, provisions areestablished for cyclical major overhauls whereas IFRS requires that suchexpenses are capitalized upon performance and are depreciated until the nextregularly scheduled overhaul.

 

•                  Long-term provisions are discounted underIFRS. German GAAP stipulates the use of nominal values.

 

F-23

----

 

***(e)   Accounting for financial instruments***

 

IFRS requires thatderivatives are valued on the balance sheet at market value and shown as “otherreceivables” or “other liabilities.” Changes in market value, as long as theydo not fulfill the strict requirements of hedge accounting, affect income.Under German GAAP, unrealized gains on swaps and other forward contracts aredeferred until settlement or termination while unrealized expected losses frompending transactions are charged to income each period.

 

Under German GAAP, long-termreceivables and liabilities denominated in a foreign currency are convertedinto euros at the exchange rates at the dates when the transactions took placeor the lower exchange rates at year end for receivables and the higher exchangerates for liabilities. IFRS requires conversion at the exchange rate at the endof the year.

 

Under IFRS,available-for-sale securities are recorded at market values on the balancesheet date. Changes in valuation are recognized outside of income in equity.Write-downs affect income. Under German GAAP such securities and otherinvestments are valued at the lower of acquisition cost or market value at thebalance sheet date and affect income.

 

***(f)    Valuation of inventories***

 

As the LIFO method is notallowed under IFRS, the valuation of inventories was already changed to theweighted-average method as of January 1, 2004.

 

According to German GAAP,raw materials and supplies are to be discounted based on lower replacementcosts. Under IFRS write-downs are only allowed based on lower net realizablevalue.

 

***(g)    Reversal of goodwill amortization and write-offs due toimpairment***

 

Goodwill was amortized overits useful life in accordance with German GAAP. IFRS 3 “Business Combinations,”however, requires that goodwill is tested for impairment at least once a yearaccording to IAS 36 “Impairment of Assets.” Based on IFRS 1 “First-timeAdoption” and IFRS 3 “Business Combinations,” regularly scheduled depreciationon goodwill was not to be made after January 1, 2004. According to impairmenttests carried out at the transition date, and at year-end 2004 and 2005, noimpairment write-offs were necessary.

 

***(h)   Other adjustments***

 

These refer primarily to thetreatment of government grants, which are not recognized as income initiallybut rather reduce the acquisition cost of the respective property, plant andequipment. They also refer to reclassifications in the consolidated incomestatement, which is discussed in more detail below under “Presentation.”

 

***(i)    Tax effects of planned dividend payments andother tax effects***

 

According to IFRS, deferredtaxes in 2004 were recognized for the tax effect of planned dividenddistributions from BASF Group companies based on the current financial plansand a change in the German Corporate Income Tax Act (Section 8b KStG).

 

***(j)    Valuation adjustments relating to companiesaccounted for using the equity method***

 

Significant changesresulting from the conversion to IFRS primarily concern the capitalization andthe straight-line amortization of internally generated software as well as theaccounting for capitalized interest cost for Group companies accounted forusing the equity method. As a result of these adjustments, the book value ofthese financial assets under IFRS was higher than that recorded under GermanGAAP as of January 1, 2004. The negative reconciliation item to income underIFRS was related to write-downs of these participations.

 

F-24

----

 

**Presentation**

 

The presentation of theincome statement as well as the balance sheet is in accordance with IAS 1“Presentation of Financial Statements.” Individual items were summarized toimprove clarity and are presented in detail in the Notes to the ConsolidatedFinancial Statements.

 

**Consolidated Balance Sheets**

 

IFRS requires thedifferentiation between long-term and short-term assets. German GAAP, bycontrast, distinguished between fixed assets and current assets. In 2004,“investments accounted for using the equity method” was largely composed of ourstake in the Basell joint venture, which was sold on May 5, 2005. In equity,the new item “other comprehensive income” is presented to account for changesthat do not affect income. The option under IFRS 1 to net the translationadjustment against retained earnings as of January 1, 2004 was exercised.Liabilities are segmented according to maturity, whereas they were previouslysegmented into provisions and liabilities under German GAAP.

 

**Consolidated Statements of Income**

 

Financing costs for pensionsand other personnel obligations netted against expected returns of pension planassets are not included in income from operations, but after income fromoperations in a new item “other financial result.” This also includes thecapitalization of interest cost, the accrued interest of other provisions andchanges in the fair value of interest rate derivatives.

 

**4.    Earnings per share**

 
| **Earnings per share**                      | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|---------------------------------------------|------------|-------------|------------|-------------|------------|
| **Net  income under IFRS (Million €)** |       | **3,006.7** | ** ** | **2,004.3** | ** ** |
| ** **                                  |       |        |       |        |       |
| **Number  of shares (1,000)**               |       |        |       |        |       |
| Weighted-average  number of shares          |       | 525,125     |       | 548,714     |       |
|                                        |       |        |       |        |       |
| **Earnings  per share under IFRS (€)** |       | **5.73**    | ** ** | **3.65**    | ** ** |

 

The calculation of earningsper common share is based on the weighted-average number of common sharesoutstanding during the applicable period. The calculation of diluted earningsper common share reflects the dilutive effect of all potential common sharesthat were outstanding during the respective period. Shares awarded under theBASF employee participation program “plus” have been included in thecomputation of diluted earnings per share. Due to a resolution by the Board ofExecutive Directors and the Supervisory Board in 2002, settlements of stockoptions from the BASF stock option program (BOP) for senior management are madein cash, therefore do not have a dilutive effect.

 

The earnings per share werenot impacted by any dilutive effect in 2005 and in 2004, as the impact ofpotential common shares was anti-dilutive in each year.

 

F-25

----

 

**5.    Reconciliation of net income and stockholders’ equity to U.S. GAAP**

 

The Consolidated FinancialStatements comply with U.S. GAAP as far as permissible under IFRS. Theremaining differences concern the following adjustments:

 
| **Reconciliation  of net income to U.S. GAAP**                                                        | ** ** | **Note**   | ** ** | **2005**                                                      | ** ** | **2005**          | ** ** | **2004**          | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                            | ** ** | ** ** | ** ** | **(Million  € and Million $, Except Per Share Amounts)** | ** ** |
| **Income after taxes and minority interests according  to IFRS**                                      |       | ** ** | ** ** | **$3,560.5**                                                  | ** ** | **€3,006.7** | ** ** | **€2,004.3** | ** ** |
| **Adjustments required to conform with U.S. GAAP**                                                    |       |       |       |                                                          |       |              |       |              |       |
| Accounting for pensions                                                                               |       | (a         | )          | (86.0)                                                        |       | (72.6)            |       | (24.6)            |       |
| Accounting for provisions                                                                             |       | (b         | )          | 7.7                                                           |       | 6.5               |       | 6.1               |       |
| Valuation adjustments relating to companies  accounted for using the equity method                    |       | (e         | )          | —                                                        |       | —            |       | (108.4)           |       |
| Acquisitions                                                                                          |       | (f         | )          | (25.8)                                                        |       | (21.8)            |       |              |       |
| Other adjustments                                                                                     |       | (g         | )          | 197.6                                                         |       | 166.9             |       | (11.0)            |       |
| Deferred taxes                                                                                        |       | (h         | )          | (31.0)                                                        |       | (26.2)            |       | (2.4)             |       |
| Minority interests                                                                                    |       | (i         | )          | 1.3                                                           |       | 1.1               |       | (1.2)             |       |
| **Adjustments to U.S. GAAP**                                                                          | ** ** | ** ** | ** ** | **63.8**                                                      | ** ** | **53.9**          | ** ** | **(141.5)**       | ** ** |
| **Net income in accordance with U.S. GAAP**                                                           | ** ** | ** ** | ** ** | **3,624.4**                                                   | ** ** | **3,060.6**       | ** ** | **1,862.8**       | ** ** |
| Cumulative effect of change in accounting  for major overhauls                                        |       | (g         | )          | (90.0)                                                        |       | (76.0)            |       | —            | ** ** |
| **Net income in accordance with U.S. GAAP  before cumulative effect of change in accounting**         | ** ** | ** ** | ** ** | **3,534.4**                                                   | ** ** | **2,984.6**       | ** ** | **1,862.8**       | ** ** |
|                                                                                                  |       |       |       |                                                          |       |              |       |              |       |
| **Earnings per share in accordance with U.S.  GAAP**                                                  | ** ** | ** ** | ** ** | **6.90**                                                      | ** ** | **5.83**          | ** ** | **3.39**          | ** ** |
| Cumulative effect of change in accounting  for major overhauls                                        |       |       |       | (0.17)                                                        |       | (0.14)            |       | —            | ** ** |
| **Earnings per share in accordance with U.S.  GAAP before cumulative effect of change in accounting** | ** ** | ** ** | ** ** | **6.73**                                                      | ** ** | **5.69**          | ** ** | **3.39**          | ** ** |
| Dilutive effect                                                                                       |       |       |       | —                                                        |       | —            |       | —            |       |
| **Diluted earnings per share in accordance with  U.S. GAAP**                                          |       |       |       | **6.90**                                                      | ** ** | **5.83**          | ** ** | **3.39**          | ** ** |

 

F-26

----

 
| **Reconciliation of stockholders’ equity to U.S. GAAP** | ** ** | **Note**   | ** ** | ** **                                             | **2005**   | ** **         | ** ** | **2005**           | ** ** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|--------------------|------------|--------------------|------------|------------|----------|------------|
| ** **                                                                                 | ** ** | ** ** | ** ** | **(Million € and Million $)** | ** ** |
| **Stockholders’ equity in accordance with  IFRS  as of December 31**                  | ** ** | ** ** | ** ** | **$20,751.3**                                          | ** ** | **€17,523.5** | ** ** | **€16,602.2** | ** ** |
| Minority interests                                                                         |       |       |       | (570.5)                                                |       | (481.8)            |       | (328.5)            |       |
| **Stockholders’ equity excluding minority  interests**                                | ** ** | ** ** | ** ** | **20,180.8**                                           | ** ** | **17,041.7**       | ** ** | **16,273.7**       | ** ** |
| ** **                                                                                 | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** **         | ** ** | ** **         | ** ** |
| **Adjustments required to conform with U.S. GAAP**                                         | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** **         | ** ** | ** **         | ** ** |
| Accounting for pensions                                                                    |       | (a         | )          | 1,089.6                                                |       | 920.1              |       | 1,020.1            |       |
| Accounting for provisions                                                                  |       | (b         | )          | 133.8                                                  |       | 113.0              |       | 105.0              |       |
| Accounting for financial instruments                                                       |       | (c         | )          | (14.3)                                                 |       | (12.1)             |       | —             |       |
| Reversal of goodwill amortization and  write-offs due to impairment                        |       | (d         | )          | 408.0                                                  |       | 344.5              |       | 325.7              |       |
| Valuation adjustments relating to companies  accounted for using the equity method         |       | (e         | )          | 46.2                                                   |       | 39.0               |       | 39.0               |       |
| Acquisitions                                                                               |       | (f         | )          | (25.8)                                                 |       | (21.8)             |       | —             |       |
| Other adjustments                                                                          |       | (g         | )          | (0.1)                                                  |       | (0.1)              |       | (145.7)            |       |
| Deferred taxes                                                                             |       | (h         | )          | (548.8)                                                |       | (463.4)            |       | (441.7)            |       |
| Minority interests                                                                         |       | (i         | )          | (19.1)                                                 |       | (16.1)             |       | (17.0)             |       |
| **Adjustments to U.S. GAAP**                                                               | ** ** | ** ** | ** ** | **1,069.5**                                            | ** ** | **903.1**          | ** ** | **885.4**          | ** ** |
| ** **                                                                                 | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** **         | ** ** | ** **         | ** ** |
| **Stockholders’ equity in accordance with  U.S. GAAP as of December 31**              | ** ** | ** ** | ** ** | **21,250.3**                                           | ** ** | **17,944.8**       | ** ** | **17,159.1**       | ** ** |

 
| **Earnings per share**                                                                      | ** ** | **2005**                                                                                             | ** ** | **2005**          | ** ** | **2004**          | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                            | ** ** | **(Million € and Million $, Except Per Share Amounts)** | ** ** |
| **Net income in accordance with U.S. GAAP**                                                           | ** ** | **$3,624.4**                                                                                         | ** ** | **€3,060.6** | ** ** | **€1,862.8** | ** ** |
| ** **                                                                                            | ** ** | ** **                                                                                           | ** ** | ** **        | ** ** | ** **        | ** ** |
| **Number of shares (1,000)**                                                                          | ** ** | ** **                                                                                           | ** ** | ** **        | ** ** | ** **        | ** ** |
| Weighted-average undiluted number of shares                                                           |       | 525,125                                                                                              |       | 525,125           |       | 548,714           |       |
| Dilutive effect                                                                                       |       | —                                                                                               |       |              |       |              |       |
| Weighted-average diluted number of shares                                                             |       | 525,125                                                                                              |       | 525,125           |       | 548,714           |       |
| ** **                                                                                            | ** ** | ** **                                                                                           | ** ** | ** **        | ** ** | ** **        | ** ** |
| **Basic earnings per share in accordance with  U.S. GAAP**                                            | ** ** | **6.90**                                                                                             | ** ** | **5.83**          | ** ** | **3.39**          | ** ** |
| Dilutive effect                                                                                       |       | —                                                                                               |       | —            |       | —            |       |
| **Diluted earnings per share in accordance  with U.S. GAAP**                                          | ** ** | **6.90**                                                                                             | ** ** | **5.83**          | ** ** | **3.39**          | ** ** |
| Cumulative effect of change in accounting  for major overhauls                                        |       | (0.17)                                                                                               |       | (0.14)            |       | —            |       |
| **Earnings per share in accordance with U.S. GAAP  before cumulative effect of change in accounting** | ** ** | **6.73**                                                                                             | ** ** | **5.69**          | ** ** | **3.39**          | ** ** |

 

The calculation of earningsper share is described in detail in Note 4.

 

**(a) Accounting for pensions**

 

Pension provisions andexpenses which fall under the scope of SFAS 87 are based on the same actuarialassumptions as under IFRS (see Note 23).

 

BASF exercises the optionallowing actuarial gains and losses to be offset directly against retainedearnings outside of profit and loss in the year in which they are incurred.According to SFAS 87, these items are charged to income as soon as they exceed10% of the greater of the Projected Benefit Obligation (PBO) and pension planassets. In addition, a difference results because an Additional MinimumLiability reduces stockholders’ equity according to U.S. GAAP.

 

F-27

----

 

The Accumulated BenefitObligation (ABO) amounted to €11,398.0 million in 2005 compared with €9,419.9million in 2004. The pension plans whose plan assets do not completely coverthe ABO are shown below.

 
| **Current funding situation  (Million €)** | ** ** | **2005**     | ** **           | **2004**     | ** ** |
|----------------------------------------------------------------|------------|--------------|----------------------|--------------|------------|
| ** **                                                     | **ABO**    | ** **   | **Plan Assets** | ** **   | **ABO**    | ** ** | **Plan Assets** | ** ** |
| Unfunded pension plans                                         |       | 582.2        |                 | —       |       | 3,563.1 |   | — |   |
| Partially funded pension plans                                 |       | 6,954.6      |                 | 6,756.6      |       | 1,727.5 |   | 1,686.3 |   |
| **Total of pension plans that are not fully  funded**          | ** ** | **7,536.8**  | ** **           | **6,756.6**  | ** ** | **5,290.6** | ** ** | **1,686.3** | ** ** |
| Fully funded pension plans                                     |       | 3,861.2      |                 | 4,258.6      |       | 4,129.3 |   | 4,518.0 |   |
| **Total**                                                      | ** ** | **11,398.0** | ** **           | **11,015.2** | ** ** | **9,419.9** | ** ** | **6,204.3** | ** ** |

 

The balance of the expectedreturn on plan assets and the interest costs pertaining to the pensionobligation is recognized in the financial results (see Note 9) as an allowableIFRS option. According to U.S. GAAP, these items are considered in personnelcosts. As a result, income from operations, according to U.S. GAAP would belower in 2005 by €120.8 million (2004: €134.8 million), and the financialresult accordingly higher.

 

Actuarial losses amounted to€2,587.1 million as of December 31, 2005 and €1,505.8 million as of December31, 2004. Based on these amounts, €62.2 million was amortized in 2005 and €15.4million in 2004 in the income statement. As of December 31, 2005, unrecognizedprior service costs existed in the amount of €54.2 million and as of December31, 2004, €64.3 million. Based on these amounts, €10.4 million was amortized in2005 and €9.2 million in 2004 in the income statement. Information requiredaccording to SFAS 132 “Employers’ Disclosures about Pensions and OtherPostretirement Benefits” (revised 2003) are contained in Note 23.

 

**(b) Accounting for provisions**

 

The reconciliation itemcontains the following deviations:

 

***Provisions for part-timeprograms for employees nearing retirement age*****:** In these financial statements agreed upontop-up payments within the pre-retirement part-time programs are immediatelyaccrued in their full amount, and discounted at a rate of 3.0%. A provision isalso recorded for the expected costs for agreements that are anticipated to beconcluded during the term of the collective bargaining agreements, taking intoconsideration the ceilings on the number of employee participants provided insuch collective bargaining agreements. In accordance with U.S. GAAP, provisionsmay 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 a decrease in income under U.S. GAAP of €29.4 million in 2005and €22.3 million in 2004. Stockholders’ equity increased by €125.3 million in2005 and by €154.7 million in 2004.

 

***Provisions forrestructuring measures*****:** SFAS 146,“Accounting for Costs Associated with Exit and Disposal Activities” requiresexpected costs associated with the exit or disposal of business activities tobe accrued only when a liability against a third party exists. In case of aretention period, severance payments to employees are accrued over the term ofthis period.

 

***Discounting of provisionsand liabilities*****:** According to IFRS, long-term provisions andliabilities are to be discounted to their present value if the effect fromdiscounting is material. Under U.S. GAAP, however, discounting is onlypermissible for specific types of provisions and liabilities when the amountand timing of the cash flows can be reliably predicted. This resulted in anincome effect of €10.8 million in 2005 and €47.0 million in 2004, and adecrease in equity of €30.5 million in 2005 and of €41.3 million in 2004.

 

F-28

----

 

**(c) Accounting for financialinstruments**

 

The guidelines foraccounting for financial instruments according to IAS 39 “FinancialInstruments: Recognition and Measurement” and SFAS 133 “Accounting forDerivatives and Hedging Activities” are very similar in concept. Thereconciliation items relate to the differing treatment of fair value changes ofderivatives within equity, which are a component of a cash-flow hedge for a futuretransaction. According to IAS 39, for hedging future transactions, there is anoption regarding the accounting treatment of these fair value changes. BASF haschosen the option to net these changes in valuation against the acquisitioncosts of the non-financial assets or debts. The other option allows thevaluation changes to be charged to the income statement in the same period inwhich the hedged transaction flows through the income statement. According toSFAS 133, only the second method is allowed, while netting against acquisitioncosts is prohibited. This timing difference leads to a difference in equity andhas no impact on income.

 

**(d) Reversal of goodwillamortization and write-offs due to impairment**

 

Goodwill is only writtendown if an impairment exists according to SFAS 142 as of January 1, 2002.According to IFRS 1 “First-time Adoption” in conjunction with IFRS 3 “BusinessCombinations,” regularly scheduled amortization of goodwill has been replacedby impairment testing effective as of January 1, 2004. The amortization ongoodwill in 2002 and 2003 has been reversed and increases stockholders’ equity.

 

**(e) Valuation adjustmentsrelating 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 the scheduled amortization for goodwill wasdiscontinued under U.S. GAAP (2002) and IFRS (2004).

 

**(f) Acquisitions**

 

A difference between U.S.GAAP and IFRS with respect to the first-time consolidation involves thetreatment of in-process research and development projects of acquiredbusinesses. Whereas these costs are expensed in the first year of consolidationunder U.S. GAAP, IFRS requires that these costs are capitalized as intangible assetsand amortized over their useful lives. This resulted in a decrease of income of€25.5 million. Stockholders’ equity decreased similarly by €25.5 million in2005. There were no in-process research and development costs in connectionwith acquisitions in 2004.

 

According to U.S. GAAP,contingent purchase price adjustments of acquisitions are only accounted for atthe time of payment of the contingent price adjustment. IFRS 3, however,requires the recognition of these purchase price adjustments at estimatedvalues in the first consolidation of an acquired business. If the purchaseprice is less than the fair value of assets and liabilities acquired as aresult of these differing practices, the difference is to be booked immediatelyto the income statement according to IFRS, whereas according to U.S. GAAP itreduces the values assigned to the acquired assets. This resulted in an incomeeffect of €3.7 million in 2005. Stockholders’ equity increased corresepondinglyby €3.7 million in 2005. There were no such differences in 2004 as a result ofcontingent price adjustments.

 

**(g) Other adjustments**

 

This item primarily includesthe elimination of provisions for the fair value of stock options granted,differences arising from the accounting of sale and leaseback transactions aswell as provisions for major overhauls of large scale plants.

 

Following a resolution bythe Board of Executive Directors, stock options are to be settled in cash.Under U.S. GAAP, such obligations are to be accounted for as stock appreciationrights based on the intrinsic value of the options on the balance sheet date.However, options granted in prior years, for which cash settlement was notforeseen, are to be accounted for in accordance with SFAS 123 as equity instrumentsbased upon the fair value on the grant date. In the present FinancialStatements, all obligations resulting 

 

F-29

----

 

from stock options areaccounted for based upon the fair value on the balance sheet date. A provisionis accrued over the vesting period of the options. The different accountingmethods led to an increase in net income in accordance with U.S. GAAP of €6.1million in 2005, and €16.1 million in 2004.

 

In the present FinancialStatements, obligations resulting from stock options are shown as provisions.In accordance with U.S. GAAP, options for which cash settlement was notoriginally foreseen are recorded as additions to stockholders’ equity. Overall,the accounting for stock options resulted in a decrease in stockholders’ equityof €17.4 million in 2005, and €9.4 million in 2004.

 

Under IFRS, anticipatedcosts necessary for the major overhaul of large scale plants prescribed atcertain intervals are capitalized as a part of the respective asset anddepreciated on a straight-line basis over the period until the next regularlyscheduled major overhaul. According to U.S. GAAP, provisions for such costswere established. In 2005, this accounting method was changed to comply withIFRS. The pretax cumulative effect of €117.0 million was recognized in income.The net effect after taxes amounted to €76.0 million.

 

Gains from the sale ofassets, which continue to be used under operating leases are to be recognizedin income under IFRS, if the sale is an arm’s length transaction. U.S. GAAPrequires the deferral of the gain and its recognition in income over the usefullife of the asset.

 

**(h) Deferred taxes**

 

The adjustments required toconform with U.S. GAAP would result in taxable temporary differences betweenthe valuation of assets and liabilities in the Consolidated FinancialStatements and the carrying amount for tax purposes. Resulting adjustments fordeferred taxes primarily relate to the following:

 
| ** **                                                          | ** ** | **Stockholders’ equity** | ** ** | **Net Income** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                                                          | ** ** | **Note**                           | ** ** | **2005**       | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                          | ** ** | ** **                         | ** ** | ** **     | ** ** | **(Million €)** | ** ** | ** ** | ** ** |
| Accounting for pensions                                             |       | (a                                 | )          | (348.5)        |       | (384.2) |   | 27.4 |   | 10.2 |   |
| Accounting for provisions                                           |       | (b                                 | )          | (51.6)         |       | (46.0) |   | (5.2) |   | 10.7 |   |
| Accounting for financial instruments                                |       | (c                                 | )          | 4.3            |       |   |   | (5.3) |   | — |   |
| Reversal of goodwill amortization and  write-offs due to impairment |       | (d                                 | )          | (96.2)         |       | (86.9) |   | — |   | — |   |
| Acquisitions                                                        |       | (f                                 | )          | 9.3            |       | — |   | 9.3 |   | — |   |
| Other adjustments                                                   |       | (g                                 | )          | 19.3           |       | 75.4 |   | (52.4) |   | (23.3) |   |
| **Total**                                                           | ** ** | ** **                         | ** ** | **(463.4)**    | ** ** | **(441.7)** | ** ** | **(26.2)** | ** ** | **(2.4)** | ** ** |

 

**(i) Minority interests**

 

The portion of U.S. GAAPvaluation adjustments applying to minority interests is shown separately.

 

***Consolidation ofmajority-owned subsidiaries:***

 

First-time consolidations ofsubsidiaries require the restatement of the figures of the previous year. Theeffect of first-time consolidated companies on the net worth, financialposition and results was immaterial; an adjustment was therefore not performed.

 

***New U.S. GAAP accountingstandards not yet adopted:***

 

SFAS 123R “Share-BasedPayment” revised 2004 replaces SFAS 123 “Accounting for Stock-Based Compensation.”This disallows the former optional treatments contained in APB 25 “Accountingfor Stock Issued to Employees.” According to SFAS 123R all listed companiesmust recognize stock-based payment as an expense during the vesting period.Equity instruments granted as payment are valued at their market value at thetime of granting. The market value at reporting date is calculated to valueshare-based payment, which is to be settled in cash. SFAS 123R applies to allreporting years commencing after June 15, 2005. As BASF already recognizesshare-based payment as an expense, SFAS 123R will have no material effects onBASF’s Consolidated Financial Statements.

 

F-30

----

 

SFAS 154, governing theaccounting and reporting of voluntary changes in accounting methods, replacesAPB Opinion Nr. 20 “Accounting Changes” and FASB Statement No. 3 “ReportingAccounting Changes in Interim Financial Statements.” According to SFAS 154,impacts on income as a result of voluntary changes in accounting methods willno longer be shown as a separate item “cumulative change in accountingprinciple” on the income statement of the current period but rather as anadjustment of the financial statements for all previously published periods asif the new method had always been used.

 

EITF 04-13 “InventoryExchanges” determines when a purchase and sale of inventory is to be seen as abarter transaction. According to APB Opinion No. 29 “Accounting forNon-monetary Transactions,” barter transactions are not to be included inincome. The key criterion is whether the purchase and sale are closelyconnected. EITF 04-13 clearly states that no sales revenues may be recognizedfrom these transactions if sale and purchase of inventories are clearly connected.Furthermore, EITF 04-13 has specified the scope of FASB Statement No. 153“Exchanges of Non-monetary Assets.” EITF 04-13 is to be applied to all newtransactions that were concluded in the reporting years beginning after March15, 2006. No revenue was recognized for barter transactions as defined in thesestandards.

 

**Other changes in stockholders’equity**

 

The option allowed by IFRS 1to offset currency translation adjustments against retained earnings as ofJanuary 1, 2004 was exercised. Under U.S. GAAP, the translation adjustment isto be carried forward unchanged.

 

According to U.S. GAAP,specifically SFAS 130, certain expenses and income are recognized outside ofprofit or loss (Other Comprehensive Income):

 
| **Million €**                                                          | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|----------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Net income in accordance with U.S. GAAP (before  other comprehensive income)** | ** ** | **3,060.6** | ** ** | **1,862.8** | ** ** |
| Change of foreign currency translation  adjustments                              |       |        |       |        |       |
| Gross                                                                            |       | 765.6       |       | (291.3)     |       |
| Deferred taxes                                                                   |       | (33.1)      |       | 17.2        |       |
| Changes in unrealized holding gains on  securities                               |       |        |       |        |       |
| Gross                                                                            |       | 66.7        |       | 95.6        |       |
| Deferred taxes                                                                   |       | 4.5         |       | 0.3         |       |
| Changes in unrealized losses from cash flow  hedges                              |       |        |       |        |       |
| Gross                                                                            |       | (21.2)      |       | (54.0)      |       |
| Deferred taxes                                                                   |       | 11.6        |       | 18.7        |       |
| Additional minimum liability for pensions                                        |       |        |       |        |       |
| Gross                                                                            |       | (1,179.7)   |       | (514.7)     |       |
| Deferred taxes                                                                   |       | 457.1       |       | 197.0       |       |
| **Other comprehensive income (loss), net of  tax**                               | ** ** | **71.5**    | ** ** | **(531.2)** | ** ** |
| ** **                                                                       | ** ** | ** **  | ** ** | ** **  | ** ** |
| **Comprehensive income, net of tax**                                             | ** ** | **3,132.1** | ** ** | **1,331.6** | ** ** |

 

F-31

----

 
| **Million €**                                                                                                   | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|
| **Stockholders’ equity in accordance with  U.S. GAAP (before  accumulated other comprehensive income) on January 1** | ** ** | **19,408.9**  | ** ** | **18,694.7**  | ** ** |
| **Accumulated other comprehensive income**                                                                                |       |          |       |          |       |
| Foreign currency translation adjustments                                                                                  |       |          |       |          |       |
| Gross                                                                                                                     |       | (603.4)       |       | (1,369.0)     |       |
| Deferred taxes                                                                                                            |       | 36.1          |       | 69.2          |       |
| Unrealized holding gains on securities                                                                                    |       |          |       |          |       |
| Gross                                                                                                                     |       | 262.9         |       | 196.2         |       |
| Deferred taxes                                                                                                            |       | (40.9)        |       | (45.4)        |       |
| Unrealized losses from cash flow hedges                                                                                   |       |          |       |          |       |
| Gross                                                                                                                     |       | (79.3)        |       | (58.1)        |       |
| Deferred taxes                                                                                                            |       | 31.7          |       | 20.1          |       |
| Additional minimum liability for pensions                                                                                 |       |          |       |          |       |
| Gross                                                                                                                     |       | (1,730.7)     |       | (551.0)       |       |
| Deferred taxes                                                                                                            |       | 659.5         |       | 202.4         |       |
| **Accumulated other comprehensive income**                                                                                | ** ** | **(1,464.1)** | ** ** | **(1,535.6)** | ** ** |
| ** **                                                                                                                | ** ** | ** **    | ** ** | ** **    | ** ** |
| **Total stockholders’ equity in accordance with  U.S. GAAP  including comprehensive income on December 31**          |       | **17,944.8**  |       | **17,159.1**  |       |

 

**6.****             ****Reporting by segment and region**

 

The Company is a worldwidemanufacturer and supplier of about 8,000 products. The Company offers a widerange of products, including chemicals, plastics, dyes and pigments,dispersions, automotive and industrial coatings, agricultural products, finechemicals, crude oil and natural gas.

 

The Company conducts itsworldwide operations through 12 operating divisions, which have been aggregatedinto five reporting segments based on the nature of the products and productionprocesses, the type of customers, the channels of distribution and the natureof the regulatory environment.

 

The Chemicals segment ismade up of the divisions Inorganics, Petrochemicals and Intermediates. Plasticsis composed of the divisions Styrenics, Performance Polymers and Polyurethanes.Performance Products comprises the divisions Performance Chemicals, Coatingsand Functional Polymers. The segment Agricultural Products and Nutritioncomprises the divisions Agricultural Products and Fine Chemicals. The Oil andGas Segment consists of the operating division Oil & Gas, which conductsoil and gas exploration and production and natural gas trading.

 

Business activities notallocated to any operating division are shown as “other” and comprise the saleof feedstock, remaining fertilizers activities, engineering and other servicesas well as rental income. The income from operations recorded as “other”includes mainly research costs shared by the Group of €225.0 million in 2005,and €168.0 million in 2004. “Other” also includes foreign currency results fromfinancial indebtedness, hedging of forecasted sales, as well as from foreigncurrency positions that were macrohedged of €(97.0) million in 2005, and €54.0million in 2004.

 

Transfers between thereportable segments are shown separately and generally valued at marketbasedprices.

 

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.

 

Exploration expenses in theOil & Gas segment are reported under other operating expenses as of 2005.Prior years’ figures were restated accordingly.

 

F-32

----

 

**Segments**

 
| **2005**                                                                               | ** ** | ** **    | ** ** | ** **   | ** ** | **Performance** | ** ** | **Agricultural Products** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | **BASF**                 | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------|------------|--------------|------------|-----------------|------------|--------------------------------|------------|-----------------------------|------------|------------|------------|------------|------------|--------------------------|------------|
| **Million €**                                                                |       | **Chemicals** |       | **Plastics** | ** ** | **Products**    |       | **& Nutrition**       |       | **Oil & Gas** |       | **Other**  |       | **Group**  |       |
| ** **                                                                             | ** ** | ** **    | ** ** | ** **   | ** ** | ** **      |       | **Agricultural  Products**     | ** ** | **Fine  Chemicals**         | ** ** | **Total**  | ** ** | ** ** | ** ** | **Thereof  Exploration** | ** ** | ** ** | ** ** | ** ** |   |
| 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* | * * |
| Return on operating  assets (%)*                                                       |       | 23.3          |       | 15.9         |       | 18.4            |       | 13.4                           |       | —                      |       | 9.6        |       | 53.8       |       | 103.3                    |       | — |   | 19.9 |   |
| Debt                                                                                   |       | 1,766         |       | 1,676        |       | 1,766           |       | 951                            |       | 538                         |       | 1,489      |       | 1,836      |       | 903                      |       | 9,614 |   | 18,147 |   |
| Research and  development expense                                                      |       | 114           |       | 135          |       | 214             |       | 303                            |       | 70                          |       | 373        |       | 1          |       | —                   |       | 227 |   | 1,064 |   |
| Investment in  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  Million €**                                                            |     | **Chemicals** |     | **Plastics** |     | **Performance  Products** |     | **Agricultural Products  & Nutrition** |     | **Oil & Gas** |     | **Other** |     | **BASF  Group** |     |
|------------------------------------------------------------------------------------------|----------|---------------|----------|--------------|----------|---------------------------|----------|------------------------------------------------------|----------|-----------------------------|----------|-----------|----------|-----------------|----------|
| ** **                                                                               |     | ** **    |     | ** **   |     |                      |     | **Agricultural  Products**                           |     | **Fine  Chemicals**         |     | **Total** |     |            |     | **Thereof  Exploration** |   | ** ** |   | ** ** |   |
| 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* | * * |
| Return on  operating assets (%)*                                                         |     | 25.2          |     | 11.6         |     | 24.2                      |     | 11.4                                                 |     | 4.2                         |     | 9.9       |     | 41.3            |     | 69.6 |   | — |   | 18.5 |   |
| Debt                                                                                     |     | 1,836         |     | 1,836        |     | 2,287                     |     | 1,100                                                |     | 704                         |     | 1,804     |     | 1,902           |     | 1,081 |   | 9,181 |   | 18,846 |   |
| Research and  development  expense                                                       |     | 98            |     | 136          |     | 217                       |     | 272                                                  |     | 90                          |     | 362       |     | —          |     | — |   | 173 |   | 986 |   |
| Investment in  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* | * * |

 

----

* Return on operations is defined as income fromoperations of a segment divided by average operating assets.

 

F-33

----

 

**Regions**

 
| ** **                                                                            | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | **South**            | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|----------------------|------------|------------|------------|
| ** **                                                                            | ** ** | ** ** | ** ** | ** **  | ** ** | **North**   | ** ** | ** **  | ** ** | **America,**         | ** ** | ** ** | ** ** |
| **2005**                                                                              | ** ** | ** ** | ** ** | **Thereof** | ** ** | **America** | ** ** | **Asia**    | ** ** | **Africa,**          | ** ** | **BASF**   | ** ** |
| **Million €**                                                               | ** ** | **Europe** | ** ** | **Germany** | ** ** | **(NAFTA)** | ** ** | **Pacific** | ** ** | **Middle East** | ** ** | **Group**  | ** ** |
| **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 (As of December 31)                                                         |       | 56,614     |       | 45,620      |       | 9,826       |       | 9,669       |       | 4,836                |       | 80,945     |       |

 
| ** **                                                                            | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | **South**            | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|----------------------|------------|------------|------------|
| ** **                                                                            | ** ** | ** ** | ** ** | ** **  | ** ** | **North**   | ** ** | ** **  | ** ** | **America,**         | ** ** | ** ** | ** ** |
| **2004**                                                                              | ** ** | ** ** | ** ** | **Thereof** | ** ** | **America** | ** ** | **Asia**    | ** ** | **Africa,**          | ** ** | **BASF**   | ** ** |
| **Million €**                                                               | ** ** | **Europe** | ** ** | **Germany** | ** ** | **(NAFTA)** | ** ** | **Pacific** | ** ** | **Middle East** | ** ** | **Group**  | ** ** |
| **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 (As of December 31)                                                         |       | 57,540     |       | 46,666      |       | 10,578      |       | 8,916       |       | 4,921                |       | 81,955     |       |

 

The region “Asia Pacific”has been shown separately since January 1, 2005, due to its increasingimportance. Africa, which was included in the “Asia Pacific and Africa” regionuntil 2004, and the Middle East have been combined with the formerlyindependent region “South America.” The values for the previous year have beenappropriately restated.

 

F-34

----

 

**7.****             ****Other operating income**

 
| **Million €**                                  | ** ** | **2005**  | ** ** | **2004**    | ** ** |
|----------------------------------------------------------|------------|-----------|------------|-------------|------------|
| Release and adjustment of provisions                     |       | 118.4     |       | 154.4       |       |
| Income from miscellaneous revenue  generating activities |       | 85.3      |       | 71.7        |       |
| Gains from foreign currency transactions                 |       | 43.3      |       | 145.6       |       |
| Gains from foreign currency conversion                   |       | 57.3      |       | 12.1        |       |
| Gains from disposal of assets and divestitures           |       | 107.4     |       | 448.7       |       |
| Other                                                    |       | 188.5     |       | 213.6       |       |
| **Total**                                                | ** ** | **600.2** | ** ** | **1,046.1** | ** ** |

 

***Release and adjustment ofprovisions*** relateprincipally to sales and purchase provisions, provisions for lawsuits anddamage claims and various other items in the normal course of business.Provisions are reversed or adjusted if the circumstances at closing dateindicate that they are no longer probable or that the probable amount has beenreduced.

 

***Income from miscellaneousrevenue-generating activities*** primarily represents revenues from energy sales, sales of rawmaterials as well as income from rentals and logistics services.

 

***Gains from foreigncurrency transactions*** represent realized gains on receivables and liabilities denominated inforeign currencies, gains resulting from conversion of receivables, liabilitiesand other items denominated in foreign currencies at the balance sheet date andgains from changed fair values of currency derivatives.

 

***Gains from conversion offinancial statements of Group companies in foreign currencies includes gainsfrom currency exposures of financial statements in foreign currency,*** which are converted into euros using thetemporal method. They are related to a higher net asset exposure or lower netliability exposure after conversion into euros than at the previous balancesheet date.

 

***Gains from the disposal ofassets*** primarilyincludes divestitures in the Agricultural Products segment to optimize theportfolio in 2005 and the sale of the printing systems business in 2004.

 

***Other*** includes reversal of valuation allowances onreceivables, miscellaneous sales and various other sundry items.

 

**8.****             ****Other operating expenses**

 
| **Million €**                                                                                                                         | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Integration and restructuring measures                                                                                                          |       | 446.5       |       | 542.8       |       |
| Environmental protection and safety  measures, costs of demolition and noncapitalizable planning costs related to  capital expenditure projects |       | 158.3       |       | 168.3       |       |
| Amortization of intangible assets and  depreciation of property, plant and equipment                                                            |       | 204.6       |       | 209.3       |       |
| *Thereof internally generated intangible  assets*                                                                                               | * *   | *61.7*      | * *   | *78.6*      | * *   |
| Costs from miscellaneous revenue-generating  activities                                                                                         |       | 84.7        |       | 69.7        |       |
| Losses from foreign currency transactions                                                                                                       |       | 189.5       |       | 30.3        |       |
| Losses from foreign currency conversion                                                                                                         |       | 23.0        |       | 44.1        |       |
| Losses from disposal of assets                                                                                                                  |       | 15.5        |       | 12.2        |       |
| Oil and gas exploration expenses                                                                                                                |       | 172.9       |       | 194.9       |       |
| Other                                                                                                                                           |       | 480.1       |       | 394.3       |       |
| **Total**                                                                                                                                       | ** ** | **1,775.1** | ** ** | **1,665.9** | ** ** |

 

F-35

----

 

***Integration andrestructuring measures*** in 2005 primarily concerned the restructuring of the Fine Chemicalsdivision as well as measures to further improve the efficiency at the sites inLudwigshafen, Germany, and Feluy, Belgium. In 2004, this item includedadditional charges from the Ludwigshafen Site Project and restructuringmeasures in North America.

 

Further expenses wererelated to the cost of demolition and removal of fixed assets as well as thepreparation of capital expenditure projects not subject to mandatorycapitalization. 

***Costs from miscellaneousrevenue-generating activities*** refer to costs relating to the items shown as “income frommiscellaneous revenue-generating activities” (see Note 7).

 

***Losses from foreign currencytransactions***include losses from foreign currency items and forward contracts as well as thevaluation of receivables and liabilities in foreign currencies at the exchangerate on the balance sheet date.

 

***Other expenses*** were incurred as a result of write-offs ofno longer usable inventory in the amount of €103.0 million in 2005, and €83.0million in 2004 as well as for other reasons affecting various items.

 

**9.****             ****Financial result**

 
| ** **                                                                | ** ** | **2005**                  | ** ** | **2004**    | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------|------------|-------------|------------|
| ** **                                                                | ** ** | **(Million €)** | ** ** |
| **Income (losses) from companies accounted for  using the equity method** | ** ** | **5.6**                   | ** ** | **(7.2)**   | ** ** |
| Income from participations in affiliated  and associated companies        |       | 53.5                      |       | 10.5        |       |
| Income from the disposal or write-ups of  participations                  |       | 310.7                     |       | 38.1        |       |
| Income from profit transfer agreements                                    |       | 9.0                       |       | 2.3         |       |
| Losses from loss transfer agreements                                      |       | (13.6)                    |       | (15.2)      |       |
| Write-down of, and losses from, retirement  of participations             |       | (17.9)                    |       | (625.4)     |       |
| Income from tax allocation to  participations                             |       | 0.7                       |       | 1.2         |       |
| **Other income from participations**                                      | ** ** | **342.4**                 | ** ** | **(588.5)** | ** ** |
|                                                                      |       |                      |       |        |       |
| Interest expenses                                                         |       | (351.9)                   |       | (288.9)     |       |
| Interest income                                                           |       | 153.3                     |       | 66.3        |       |
| Interest and dividend income from securities  and receivables             |       | 28.6                      |       | 16.5        |       |
| **Interest result**                                                       | ** ** | **(170.0)**               | ** ** | **(206.1)** | ** ** |
| ** **                                                                | ** ** | ** **                | ** ** | ** **  | ** ** |
| Write-ups/profits from the sale of securities  and receivables            |       | 16.1                      |       | 13.7        |       |
| Write-downs/losses from the disposal of securities  and receivables       |       | (6.7)                     |       | (40.3)      |       |
| Net financing cost for long-term personnel  provisions                    |       | (121.7)                   |       | (137.7)     |       |
| Interest accrued on other interest-bearing  liabilities                   |       | (50.8)                    |       | (48.8)      |       |
| Capitalization of interest cost                                           |       | 43.0                      |       | 72.5        |       |
| Other financial expenses and income                                       |       | 38.2                      |       | 96.7        |       |
| **Other financial result**                                                | ** ** | **(81.9)**                | ** ** | **(43.9)**  | ** ** |
| ** **                                                                | ** ** | ** **                | ** ** | ** **  | ** ** |
| **Financial result**                                                      | ** ** | **96.1**                  | ** ** | **(845.7)** | ** ** |

** **

Income from the disposal orwrite-ups of participations contains the gain of the sale of our 50% share ofBasell in 2005. In the previous year, in contrast, valuation adjustments onparticipations were necessary, which were shown under write-down of, and lossesfrom, retirement of participations.

 

F-36

----

 

**10.****      ****Income taxes**

 
|                                                                          |       | 2005                      |       | 2004        |       |
|-------------------------------------------------------------------------------|------------|---------------------------|------------|-------------|------------|
| ** **                                                                    | ** ** | **(Million €)** | ** ** |
| German corporate income tax, solidarity  surcharge, German trade income taxes |       | 433.4                     |       | 532.4       |       |
| Foreign income tax                                                            |       | 1,970.1                   |       | 1,396.5     |       |
| Taxes for prior years                                                         |       | 81.5                      |       | (16.1)      |       |
| **Current taxes**                                                             | ** ** | **2,485.0**               | ** ** | **1,912.8** | ** ** |
| Deferred taxes                                                                |       | 273.1                     |       | 300.7       |       |
| **Income taxes**                                                              | ** ** | **2,758.1**               | ** ** | **2,213.5** | ** ** |
| *Thereof income taxes on oil-producing  operations*                           | * *   | *1,450.0*                 | * *   | *911.0*     | * *   |
| Other taxes                                                                   |       | 151.4                     |       | 150.4       |       |
| **Tax expense**                                                               | ** ** | **2,909.5**               | ** ** | **2,363.9** | ** ** |

 

Income before taxes andminority interests is broken down into domestic and foreign income as follows:

 
|                                                 |       | 2005                      |       | 2004        |       |
|------------------------------------------------------|------------|---------------------------|------------|-------------|------------|
| ** **                                           | ** ** | **(Million €)** | ** ** |
| Germany                                              |       | 1,524.5                   |       | 1,270.5     |       |
| Foreign oil production branches of German  companies |       | 1,514.6                   |       | 975.0       |       |
| Foreign                                              |       | 2,886.5                   |       | 2,101.3     |       |
| **Total**                                            | ** ** | **5,925.6**               | ** ** | **4,346.8** | ** ** |

 

In Germany a uniformcorporate tax of 25% and thereon a solidarity surcharge of 5.5% is uniformlylevied on all distributed and undistributed earnings. In addition to corporateincome tax, income generated in Germany is subject to a trade income tax thatvaries depending on the municipality in which the company is located. Afteraccounting for trade income tax, which is a tax deductible item, BASF has aweighted average trade income tax rate of 15.3%. Because German trade incometax is deductible, it also reduces the assessment basis for corporate incometax. For German companies, deferred taxes are calculated using a tax rate of38%.

 

Income from foreign Groupcompanies is taxed at the income tax rates applicable in the respectivecountries of domicile.

 

For foreign Group companies,deferred taxes are calculated using the tax rates applicable in the individualforeign countries. Such rates averaged 29% in 2005 and 2004.

 

Income taxes on foreignoil-producing operations in certain regions are compensated up to the level ofthe German corporate income tax on this foreign taxable income. The non-compensableamount is shown separately in the following table.

 

“Other taxes” includes realestate taxes and other comparable taxes in the amount of €90.0 million in 2005and €93.0 million in 2004; they are allocated to the appropriate functionalcosts.

 

F-37

----

 
| **Reconciliation from the statutory tax rate in Germany to the** | ** ** | ** **                | ** ** | ** ** | ** ** | ** **                | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------|------------|---------------------------|------------|------------|------------|
| **effective tax rate**                                                                              | ** ** | **2005**                  | ** ** | **2004**   | ** ** |
| ** **                                                                                                    | ** ** | **(Million €)** | ** ** | **%**      | ** ** | **(Million €)** | ** ** | **%**      | ** ** |
| German corporate income tax                                                                                   |       | 1,481.4                   |       | 25.0       |       | 1,086.7                   |       | 25.0       |       |
| Solidarity surcharge                                                                                          |       | 13.4                      |       | 0.2        |       | 12.7                      |       | 0.3        |       |
| German trade income tax net of corporate  income tax                                                          |       | 141.2                     |       | 2.4        |       | 177.5                     |       | 4.1        |       |
| Foreign tax-rate differential                                                                                 |       | 113.5                     |       | 1.9        |       | 44.5                      |       | 1.0        |       |
| Tax exempt income                                                                                             |       | (208.4)                   |       | (3.5)      |       | (209.2)                   |       | (4.8)      |       |
| Non-deductible expenses                                                                                       |       | 155.6                     |       | 2.6        |       | 325.3                     |       | 7.5        |       |
| Income after taxes of companies accounted  for using the equity method                                        |       | (1.4)                     |       | —     |       | 1.8                       |       | —     |       |
| Taxes for previous years                                                                                      |       | 81.5                      |       | 1.4        |       | (16.1)                    |       | (0.4)      |       |
| Income taxes on oil-producing operations non-compensable  with German corporate income tax                    |       | 1,072.5                   |       | 18.1       |       | 667.7                     |       | 15.4       |       |
| Deferred taxes for planned dividend  distributions                                                            |       | 9.5                       |       | 0.2        |       | 107.5                     |       | 2.5        |       |
| Other                                                                                                         |       | (100.7)                   |       | (1.7)      |       | 15.1                      |       | 0.3        |       |
| **Income taxes/effective tax rates**                                                                          | ** ** | **2,758.1**               | ** ** | **46.6**   | ** ** | **2,213.5**               | ** ** | **50.9**   | ** ** |

 

Tax exempt earnings arosefrom the sale of participations or securities. This particularly concerned thesale of the joint venture Basell in 2005, and the sale of the printing systemsbusiness in 2004. The non-deductible expenses in 2004 include primarilywrite-downs of participations.

 

Deferred tax assets on taxloss carryforwards, including those for prior years, are recorded. If expectedfuture taxable ports of a company make it more likely than not that the futuretax benefits will not be realized, adequate valuation allowances areestablished.

 

Deferred taxes result fromthe following temporary differences between the valuation of assets andliabilities under IFRS and for tax purposes.

 
| ** **                           | ** ** | **Tax assets**       | ** ** | **Tax liabilities** | ** ** |
|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| **Deferred tax assets**    | ** ** | **2005**                  | ** ** | **2004**                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(Million €)** | ** ** |
| Intangible assets                    |       | (111.0)                   |       | (30.0)                   |       | 282.2 |   | 125.2 |   |
| Property, plant and equipment        |       | (456.8)                   |       | (333.6)                  |       | 343.0 |   | 775.7 |   |
| Financial assets                     |       | 12.7                      |       | 21.6                     |       | 0.2 |   | 55.3 |   |
| Inventories and accounts receivable  |       | 3.6                       |       | (57.7)                   |       | 110.8 |   | 36.5 |   |
| Provisions for pensions              |       | 641.0                     |       | 331.7                    |       | 2.9 |   | (73.0) |   |
| Other provisions and liabilities     |       | 415.2                     |       | 491.2                    |       | (44.2) |   | (127.4) |   |
| Tax loss carryforwards               |       | 840.0                     |       | 816.7                    |       | — |   | — |   |
| Other                                |       | 44.7                      |       | 210.3                    |       | 4.4 |   | 155.7 |   |
| Valuation allowances                 |       | (134.7)                   |       | (113.6)                  |       | — |   | — |   |
| *Thereof for tax loss carryforwards* | * *   | *(37.3)*                  | * *   | *(41.6)*                 | * *   | *—* | * * | *—* | * * |
| **Total**                            | ** ** | **1,254.7**               | ** ** | **1,336.6**              | ** ** | **699.3** | ** ** | **948.0** | ** ** |
| *Thereof short-term*                 | * *   | *369.4*                   | * *   | *207.3*                  | * *   | *137.5* | * * | *145.7* | * * |

 

The assessment of theprobability of a reversal of the temporary difference between the book and taxvalues or the use of a tax loss carry forward are decisive for the value of adeferred tax asset. The carrying amount of a deferred tax asset is recognizedto the extent to which it is probable that sufficient taxable profit relatingto the same taxation authority will be available to allow the benefit of partor all of that deferred tax asset to be utilized. Based on experience and theexpected development of taxable income, it is assumed that the advantages ofdeferred tax assets recognized will be realized.

 

Deferred tax assets wereoffset against deferred tax liabilities of the same maturity to the degree thatthese relate to the same taxation authority.

 

F-38

----

 

Deferred tax assets forundistributed earnings of subsidiaries in the amount of €7,918.7 million in2005, and €7,245.3 million in 2004 were not recognized, as they are not subjectto such taxation or they will be reinvested for indeterminate periods of time.For these timing differences, the calculation of deferred taxes would have onlyhad to consider the respective withholding tax or the German taxation of 5% ondividends paid.

 

The regional distribution of tax loss carryforwards is as follows:

 
| ** ** | ** ** | **2005**                  | ** ** | **2004**    | ** ** |
|------------|------------|---------------------------|------------|-------------|------------|
| ** ** | ** ** | **(Million €)** | ** ** |
| Germany    |       | 30.1                      |       | 26.3        |       |
| Foreign    |       | 2,114.5                   |       | 2,142.4     |       |
| **Total**  | ** ** | **2,144.6**               | ** ** | **2,168.7** | ** ** |

 

German tax losses may becarried forward indefinitely. Foreign loss carryforwards exist primarily inNorth America (NAFTA). These expire starting in 2020. North America (NAFTA)recorded a loss before taxes in 2004. Loss carryforwards in the NAFTA regionwere utilized in 2005 due to higher earnings but amounts in euro increased dueto changes in exchange rates. Considering the restructuring measures that arebeing implemented and expected future profits as a result, the recordeddeferred tax assets are considered realizable.

 

Write-downs on deferred taxassets related to tax loss carryforwards of €72.2 million at December 31, 2005and €87.0 million at December 31, 2004 were made.

 

Tax liabilities comprise taxliabilities and tax provisions. Tax liabilities primarily concern the assessedincome tax and other taxes. Tax provisions mainly concern the currentobligations arising from income taxes for the current year and the previousyear.

 
| **Tax liabilities** | ** ** | **2005**                  | ** ** | **2004**  | ** ** |
|--------------------------|------------|---------------------------|------------|-----------|------------|
| ** **               | ** ** | **(Million €)** | ** ** |
| Tax provisions           |       | 330.7                     |       | 309.0     |       |
| Tax liabilities          |       | 556.5                     |       | 335.3     |       |
| **Total**                | ** ** | **887.2**                 | ** ** | **644.3** | ** ** |

 

**11.****       Minority interests**

** **
| ** **                    | ** ** | **2005**                  | ** ** | **2004**  | ** ** |
|-------------------------------|------------|---------------------------|------------|-----------|------------|
| ** **                    | ** ** | **(Million €)** | ** ** |
| Minority interests in profits |       | 179.0                     |       | 145.5     |       |
| Minority interests in losses  |       | 18.2                      |       | 16.5      |       |
| **Total**                     | ** ** | **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 22 for a detailedanalysis of consolidated subsidiaries with minority shareholdings.

 

F-39

----

 

**12.****      ****Other information**

 

Cash provided by operatingactivities includes the following cash flows:

 
| **Additional information on consolidated statements of cash flows** | ** ** | **2005**                  | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|----------|------------|
| ** **                                                                                             | ** ** | **(Million €)** | ** ** |
| Income tax payments                                                                                    |       | 2,252.4                   |       | 1,543.0  |       |
| Interest payments                                                                                      |       | 220.3                     |       | 226.6    |       |
| Dividends received                                                                                     |       | 68.1                      |       | 47.6     |       |

 
| **Personnel costs**                                                | ** ** | **2005**                  | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------|------------|-------------|------------|
| ** **                                                              | ** ** | **(Million €)** | ** ** |
| Wages and salaries                                                      |       | 4,553.0                   |       | 4,579.1     |       |
| Social security contributions and expenses  for pensions and assistance |       | 1,021.4                   |       | 1,035.8     |       |
| *Thereof for pension benefits*                                          | * *   | *242.4*                   | * *   | *227.4*     | * *   |
| **Total**                                                               | ** ** | **5,574.4**               | ** ** | **5,614.9** | ** ** |

 

German Group companies incurredcosts for employee representatives to comply with statutory regulations of€11.4 million in 2005 and €11.2 million in 2004.

 
| ** **                                     | ** ** | **Fully-consolidated** | ** ** | **Proportionally**              | ** ** | ** **          | ** ** |
|------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|---------------------|------------|
| ** **                                     | ** ** | **companies**          | ** ** | **consolidated companies** | ** ** | **BASF Group** | ** ** |
| **Average number of employees** | ** ** | **2005**               | ** ** | **2004**                        | ** ** | **2005**            | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                                         |       | 56,284                 |       | 59,783                          |       | 270                 |       | 252 |   | 56,554 |   | 60,035 |   |
| *Thereof Germany*                              | * *   | *45,618*               | * *   | *47,830*                        | * *   | *16*                | * *   | *14* | * * | *45,634* | * * | *47,844* | * * |
| North America (NAFTA)                          |       | 9,934                  |       | 11,002                          |       | 466                 |       | 488 |   | 10,400 |   | 11,490 |   |
| Asia Pacific                                   |       | 8,732                  |       | 7,911                           |       | 1,694               |       | 1,912 |   | 10,426 |   | 9,823 |   |
| South America, Africa, Middle East             |       | 4,827                  |       | 5,000                           |       | —              |       | — |   | 4,827 |   | 5,000 |   |
| **BASF Group**                                 | ** ** | **79,777**             | ** ** | **83,696**                      | ** ** | **2,430**           | ** ** | **2,652** | ** ** | **82,207** | ** ** | **86,348** | ** ** |
| *Thereof with trainee contracts*               | * *   | *2,329*                | * *   | *2,549*                         | * *   | *2*                 | * *   | *2* | * * | *2,331* | * * | *2,551* | * * |
| *Thereof with limited-term contracts*          | * *   | *1,709*                | * *   | *1,738*                         | * *   | *12*                | * *   | *233* | * * | *1,721* | * * | *1,971* | * * |

 

The number of employees inproportionally consolidated companies is included in the figures above in full.Considered pro rata, the average number of employees in the BASF Group was80,992 in 2005, and 85,022 in 2004.

 

The number of employees in2005 fell primarily due to ongoing measures to improve the efficiency of oursites in Europe and North America. As a result of the acquisition of theelectronic chemicals business from Merck KGaA, the number of employeesincreased by 578 in 2005.

 

As a result of the sale ofthe fibers business, 1,214 employees transferred to Honeywell in 2004. The saleof the printing systems resulted in a reduction in the number of employees by326 in 2005, and 2,029 in 2004.

 

**Subsidiaries**

 

German subsidiaries, whichare either joint-stock companies or partnerships make use of the exemptionsaccording to Section 264 (3) and Section 264b of the German Commerical Code.The individual companies are listed in the “List of Shares Held” (see directlybelow).

 

**List of Shares Held**

 

A list of companies includedin the Consolidated Financial Statements as well as a list of all companies inwhich BASF has a participation has been deposited in the Commercial RegisterHRB 3000 in Ludwigshafen (Rhine), Germany, as required by the German CommercialCode, Section 313 (2). The List of Shares Held can be obtained as a separatereport from BASF Aktiengesellschaft and is available on the Internet atcorporate.basf.com/cg_reports.

 

F-40

----

 

**Statement of compliance according to Section 161 of the German StockCorporation Act**

 

The statement of compliancewith the German Corporate Governance Code according to Section 161 of theGerman Stock Corporation Act was signed by the Board of Executives and theSupervisory Board. The statement of compliance may be seen on the Internet atcorporate.basf.com/governance_e.

 

**13.****      ****Compensation for the Board ofExecutive Directors and Supervisory Board of BASF Aktiengesellschaft**

 
| **Compensation for the Board of Executive Directors and Supervisory Board** | ** ** | **2005**                  | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|----------|------------|
| ** **                                                                                                               | ** ** | **(Million €)** | ** ** |
| Board of Executive Directors’ compensation                                                                          |       | 15.3                      |       | 14.0     |       |
| *Thereof fixed payments*                                                                                                 | * *   | *5.0*                     | * *   | *4.8*    | * *   |
| *Thereof performance-related payments*                                                                                   | * *   | *10.3*                    | * *   | *9.2*    | * *   |
| Exercise of option rights by the Board of  Executive Directors                                                           |       | 1.4                       |       | 0.6      |       |
| Supervisory Board’s compensation                                                                                    |       | 3.4                       |       | 2.7      |       |
| *Thereof fixed payments*                                                                                                 | * *   | *0.5*                     | * *   | *0.5*    | * *   |
| *Thereof performance-related payments*                                                                                   | * *   | *2.9*                     | * *   | *2.2*    | * *   |
| Total compensation of former members of the  Board of Executive Directors and their surviving dependents                 |       | 5.8                       |       | 6.0      |       |
| Exercise of option rights by former members  of the Board of Executive Directors and their surviving dependents          |       | 2.9                       |       | 1.3      |       |
| Pension provisions for former members of  the Board of Executive Directors and their surviving dependents.               |       | 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-basedcompensation for Board members is determined based on the return on assets,which corresponds to earnings before tax plus borrowing costs as a percentageof average assets.

 

In 2005, the members of theBoard of Executive Directors were also granted 209,792 options under the BASFstock option program. Together with the options granted in previous years, andreduced by the options already exercised, current and former members of theBoard of Executive Directors hold 618,456 options. In 2005, the issue ofoptions resulted in additional personnel costs totaling €6.3 million. Of thisamount, €1.4 million was related to options issued in 2005, and €4.9 million tooptions issued between 1999 and 2004.

 

In 2005, the exercising ofoptions granted in 1999 resulted in cash payments totaling €1.4 million tomembers of the Board of Executive Directors, and €2.9 million to previousmembers or their surviving dependents. Cash payments do not influence personnelcosts associated with the issuing of options, as the payments were chargedagainst provisions established for this purpose in previous years. See Note 28for further details.

 

The change in pensionprovisions for former members of the Board of Directors compared to 2004 waslargely due to the use of a lower interest rate in the valuation.

 

F-41

----

 

**14.****      ****Intangible assets**

 
| ** **                                 | ** ** | **Marketing,**            | ** ** | **Product**           | ** ** | **Know-how,**        | ** ** | ** **   | ** ** | **Internally** | ** ** | ** **          | ** ** | ** **  | ** ** |
|--------------------------------------------|------------|---------------------------|------------|-----------------------|------------|----------------------|------------|--------------|------------|----------------|------------|---------------------|------------|-------------|------------|
| ** **                                 | ** ** | **supply and**       | ** ** | **rights,**           | ** ** | **patents and** | ** ** | ** **   | ** ** | **generated**  | ** ** | **Other**           | ** ** | ** **  | ** ** |
| ** **                                 | ** ** | **similar**               | ** ** | **licenses and** | ** ** | **production**       | ** ** | ** **   | ** ** | **intangible** | ** ** | **rights and** | ** ** | ** **  | ** ** |
| **Developments 2005**                 | ** ** | **rights**                | ** ** | **trademarks**        | ** ** | **technology**       | ** ** | **Goodwill** | ** ** | **assets**     | ** ** | **values***         | ** ** | **Total**   | ** ** |
| ** **                                 | ** ** | **(Million €)** | ** ** |
| **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** | ** ** |

 

----

* 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 lists. There were no material write-ups.

 

Concessions for oil and gasproduction of €59.8 million purchased by companies in the Oil & Gas segmentwere included under “other rights and values.” The oil and gas concessionsallow the production of oil and gas in certain locations and involveobligations to deliver a small portion of the amounts produced to localcompanies. The rights to produce oil and gas expire at the end of the licenseperiod.

 

The emission rights grantedwithout charge were capitalized in the line “transfers” as “other rights andvalues.” Their book value on the balance sheet date equates to the acquisitioncosts of €52.2 million.

 

F-42

----

 
| ** **                                 | ** ** | **Marketing,**            | ** ** | **Product**           | ** ** | **Know-how,**        | ** ** | ** **   | ** ** | **Internally** | ** ** | ** **          | ** ** | ** **  | ** ** |
|--------------------------------------------|------------|---------------------------|------------|-----------------------|------------|----------------------|------------|--------------|------------|----------------|------------|---------------------|------------|-------------|------------|
| ** **                                 | ** ** | **supply and**       | ** ** | **rights,**           | ** ** | **patents and** | ** ** | ** **   | ** ** | **generated**  | ** ** | **Other**           | ** ** | ** **  | ** ** |
| ** **                                 | ** ** | **similar**               | ** ** | **licenses and** | ** ** | **production**       | ** ** | ** **   | ** ** | **intangible** | ** ** | **rights and** | ** ** | ** **  | ** ** |
| **Developments 2004**                 | ** ** | **rights**                | ** ** | **trademarks**        | ** ** | **technology**       | ** ** | **Goodwill** | ** ** | **assets**     | ** ** | **values***         | ** ** | **Total**   | ** ** |
| ** **                                 | ** ** | **(Million €)** | ** ** |
| **Acquisition costs**                      |       |                      |       |                  |       |                 |       |         |       |           |       |                |       |        |       |
| Balance as of January 1, 2004              |       | 672.5                     |       | 728.3                 |       | 916.3                |       | 2,038.3      |       | 282.0          |       | 714.5               |       | 5,351.9     |       |
| Changes in scope of consolidation          |       | 35.0                      |       | 3.5                   |       | 3.1                  |       | 1.2          |       | —         |       | 1.6                 |       | 44.4        |       |
| Additions                                  |       | 22.1                      |       | 13.3                  |       | 11.9                 |       | 16.6         |       | 30.5           |       | 46.2                |       | 140.6       |       |
| Disposals                                  |       | 16.5                      |       | 8.2                   |       | 50.8                 |       | 9.2          |       | 38.2           |       | 51.9                |       | 174.8       |       |
| Transfers                                  |       | (5.6)                     |       | 1.7                   |       | 53.1                 |       | (1.9)        |       | —         |       | 16.8                |       | 64.1        |       |
| Exchange differences                       |       | 0.5                       |       | (11.3)                |       | (5.6)                |       | (72.6)       |       | (2.2)          |       | (33.8)              |       | (125.0)     |       |
|                                       |       |                      |       |                  |       |                 |       |         |       |           |       |                |       |        |       |
| Balance as of December 31, 2004            |       | 708.0                     |       | 727.3                 |       | 928.0                |       | 1,972.4      |       | 272.1          |       | 693.4               |       | 5,301.2     |       |
|                                       |       |                      |       |                  |       |                 |       |         |       |           |       |                |       |        |       |
| **Amortization**                           |       |                      |       |                  |       |                 |       |         |       |           |       |                |       |        |       |
| Balance as of January 1, 2004              |       | 300.1                     |       | 175.5                 |       | 532.9                |       | —       |       | 99.9           |       | 268.2               |       | 1,376.6     |       |
| Changes in scope of consolidation          |       | —                    |       | —                |       | 1.7                  |       | —       |       | —         |       | 1.0                 |       | 2.7         |       |
| Additions                                  |       | 92.7                      |       | 71.6                  |       | 88.2                 |       | —       |       | 78.6           |       | 108.3               |       | 439.4       |       |
| Disposals                                  |       | 8.5                       |       | 9.5                   |       | 55.2                 |       | —       |       | 32.8           |       | 49.0                |       | 155.0       |       |
| Transfers                                  |       | 23.7                      |       | 28.9                  |       | 14.2                 |       | —       |       | —         |       | (10.4)              |       | 56.4        |       |
| Exchange differences                       |       | (0.1)                     |       | (5.4)                 |       | (2.0)                |       | —       |       | (1.9)          |       | (16.1)              |       | (25.5)      |       |
|                                       |       |                      |       |                  |       |                 |       |         |       |           |       |                |       |        |       |
| Balance as of December 31, 2004            |       | 407.9                     |       | 261.1                 |       | 579.8                |       | —       |       | 143.8          |       | 302.0               |       | 1,694.6     |       |
|                                       |       |                      |       |                  |       |                 |       |         |       |           |       |                |       |        |       |
| **Net book value as of December 31, 2004** | ** ** | **300.1**                 | ** ** | **466.2**             | ** ** | **348.2**            | ** ** | **1,972.4**  | ** ** | **128.3**      | ** ** | **391.4**           | ** ** | **3,606.6** | ** ** |

 

----

* Includinglicenses on such rights and values

 

Additions in 2004 primarilyrelate to the acquisition of the polyurethane foams business from FoamEnterprises, Inc., United States.

 

There were no significantwrite-downs in 2004. There were no material write-ups.

 

F-43

----

 

**15.****      ****Property, plant and equipment**

 
| ** **                                 | ** ** | ** **                | ** ** | ** **             | ** ** | ** **            | ** ** | **Advance**           | ** ** | ** **   | ** ** |
|--------------------------------------------|------------|---------------------------|------------|------------------------|------------|-----------------------|------------|-----------------------|------------|--------------|------------|
| ** **                                 | ** ** | **Land, land**       | ** ** | **Machinery**          | ** ** | **Miscellaneous**     | ** ** | **payments and** | ** ** | ** **   | ** ** |
| ** **                                 | ** ** | **rights and**       | ** ** | **and technical** | ** ** | **equipment**         | ** ** | **construction**      | ** ** | ** **   | ** ** |
| **Developments 2005**                 | ** ** | **buildings**             | ** ** | **equipment**          | ** ** | **and fixtures** | ** ** | **in progress**  | ** ** | **Total**    | ** ** |
| ** **                                 | ** ** | **(Million €)** | ** ** |
| **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 primarilyinclude the steam cracker and downstream facilities in Nanjing, China, as wellas plants for the Chemicals and Plastics segments in Caojing, China.

 

Write-downs of €76.5 millionin 2005 primarily relate to restructuring measures in the Intermediatesdivision in Asia.

 

There were no materialwrite-ups in either 2005 or 2004.

 

F-44

----

 
| ** **                                 | ** ** | ** **                | ** ** | ** **             | ** ** | ** **            | ** ** | **Advance**           | ** ** | ** **   | ** ** |
|--------------------------------------------|------------|---------------------------|------------|------------------------|------------|-----------------------|------------|-----------------------|------------|--------------|------------|
| ** **                                 | ** ** | **Land, land**       | ** ** | **Machinery**          | ** ** | **Miscellaneous**     | ** ** | **payments and** | ** ** | ** **   | ** ** |
| ** **                                 | ** ** | **rights and**       | ** ** | **and technical** | ** ** | **equipment**         | ** ** | **construction**      | ** ** | ** **   | ** ** |
| **Developments 2004**                 | ** ** | **buildings**             | ** ** | **equipment**          | ** ** | **and fixtures** | ** ** | **in progress**  | ** ** | **Total**    | ** ** |
| ** **                                 | ** ** | **(Million €)** | ** ** |
| **Acquisition costs**                      | ** ** | ** **                | ** ** | ** **             | ** ** | ** **            | ** ** | ** **            | ** ** | ** **   | ** ** |
| Balance as of January 1, 2004              |       | 6,567.2                   |       | 29,775.6               |       | 2,762.1               |       | 2,173.7               |       | 41,278.6     |       |
| Change in scope of consolidation           |       | 26.3                      |       | 92.7                   |       | 11.2                  |       | 22.8                  |       | 153.0        |       |
| Additions                                  |       | 55.0                      |       | 490.1                  |       | 85.3                  |       | 1,391.7               |       | 2,022.1      |       |
| Disposals                                  |       | 227.7                     |       | 692.5                  |       | 197.4                 |       | 32.8                  |       | 1,150.4      |       |
| Transfers                                  |       | 142.0                     |       | 1,093.4                |       | 3.4                   |       | (1,417.5)             |       | (178.7)      |       |
| Exchange differences                       |       | (87.6)                    |       | (520.4)                |       | (68.5)                |       | (5.9)                 |       | (682.4)      |       |
|                                       |       |                      |       |                   |       |                  |       |                  |       |         |       |
| Balance as of December 31, 2004            |       | 6,475.2                   |       | 30,238.9               |       | 2,596.1               |       | 2,132.0               |       | 41,442.2     |       |
|                                       |       |                      |       |                   |       |                  |       |                  |       |         |       |
| **Depreciation**                           | ** ** | ** **                | ** ** | ** **             | ** ** | ** **            | ** ** | ** **            | ** ** | ** **   | ** ** |
| Balance as of January 1, 2004              |       | 3,927.8                   |       | 21,398.8               |       | 2,224.9               |       | 4.4                   |       | 27,555.9     |       |
| Change in scope of consolidation           |       | 8.6                       |       | 77.9                   |       | 9.2                   |       | —                |       | 95.7         |       |
| Additions                                  |       | 251.6                     |       | 1,600.9                |       | 184.9                 |       | 15.4                  |       | 2,052.8      |       |
| Disposals                                  |       | 172.3                     |       | 580.0                  |       | 177.5                 |       | 0.2                   |       | 930.0        |       |
| Transfers                                  |       | (0.9)                     |       | 8.0                    |       | (21.0)                |       | 0.1                   |       | (13.8)       |       |
| Exchange differences                       |       | (42.3)                    |       | (289.1)                |       | (49.7)                |       | —                |       | (381.1)      |       |
|                                       |       |                      |       |                   |       |                  |       |                  |       |         |       |
| Balance as of December 31, 2004            |       | 3,972.5                   |       | 22,216.5               |       | 2,170.8               |       | 19.7                  |       | 28,379.5     |       |
|                                       |       |                      |       |                   |       |                  |       |                  |       |         |       |
| **Net book value as of December 31, 2004** | ** ** | **2,502.7**               | ** ** | **8,022.4**            | ** ** | **425.3**             | ** ** | **2,112.3**           | ** ** | **13,062.7** | ** ** |

 

Additions in 2004 primarilyconcern the construction of our Verbund site in Nanjing, China.

 

Write-downs of €111.9million in 2004 primarily relate to European sites of the Chemicals segment aswell as restructuring measures in North America (NAFTA).

 

F-45

----

 

**16.****      ****Investments accounted for usingthe equity method and other financial assets**

 
| ** **                                 | ** ** | **Investments**           | ** ** | ** **             | ** ** | ** **             | ** ** | ** **         | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|---------------------------|------------|------------------------|------------|------------------------|------------|--------------------|------------|----------------|------------|
| ** **                                 | ** ** | **accounted for**    | ** ** | **Investments**        | ** ** | **Investments**        | ** ** | **Shares**         | ** ** | ** **     | ** ** |
| ** **                                 | ** ** | **using the**        | ** ** | **in affiliated** | ** ** | **in associated** | ** ** | **in other**  | ** ** | **Long-term**  | ** ** |
| **Developments 2005**                 | ** ** | **equity method**    | ** ** | **companies**          | ** ** | **companies**          | ** ** | **participations** | ** ** | **securities** | ** ** |
| ** **                                 | ** ** | **(Million €)** | ** ** |
| **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                                  |       | (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**        | ** ** |

 
| ** **                                 | ** ** | ** **                | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **               | ** ** | **Investments**        | ** ** |
|--------------------------------------------|------------|---------------------------|------------|----------------------------|------------|--------------------|------------|--------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | ** **                | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **               | ** ** | **accounted for** | ** ** |
| ** **                                 | ** ** | ** **                | ** ** | **Loans to**          | ** ** | ** **         | ** ** | ** **               | ** ** | **using the**     | ** ** |
| ** **                                 | ** ** | ** **                | ** ** | **associated**             | ** ** | ** **         | ** ** | ** **               | ** ** | **equity method** | ** ** |
| ** **                                 | ** ** | **Loans to**         | ** ** | **companies**              | ** ** | **Other**          | ** ** | ** **               | ** ** | **and other**     | ** ** |
| ** **                                 | ** ** | **affiliated**            | ** ** | **and participating** | ** ** | **loans and** | ** ** | **Other financial** | ** ** | **financial**          | ** ** |
| **Developments 2005**                 | ** ** | **companies**             | ** ** | **interests**              | ** ** | **investments**    | ** ** | **assets**               | ** ** | **assets**             | ** ** |
| ** **                                 | ** ** | **(Million €)** | ** ** |
| **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                                  |       | (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**            | ** ** |

 

F-46

----

 
| **Developments 2004**                 | ** ** | **Investments  accounted for  using the  equity method** | ** ** | **Investments  in  affiliated  companies** | ** ** | **Investments in  associated  companies** | ** ** | **Shares in  other  participations** | ** ** | **Long-term  securities** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------|------------|---------------------------|------------|
| ** **                                 | ** ** | **(Million €)**                                               | ** ** |
| **Acquisition cost carried forward**       |       |                                                                    |       |                                       |       |                                           |       |                                      |       |                      |       |
| Balance as of January 1, 2004              |       | 1,698.7                                                                 |       | 357.5                                      |       | 75.2                                           |       | 335.3                                     |       | 14.4                      |       |
| Change in scope of consolidation           |       | (21.3)                                                                  |       | (30.2)                                     |       | —                                         |       | 7.8                                       |       | —                    |       |
| Additions                                  |       | 9.5                                                                     |       | 7.7                                        |       | 19.2                                           |       | 2.7                                       |       | 1.2                       |       |
| Disposals                                  |       | 72.0                                                                    |       | 61.8                                       |       | —                                         |       | 0.2                                       |       | 3.4                       |       |
| Transfers                                  |       | 39.7                                                                    |       | (0.7)                                      |       | (6.6)                                          |       | 80.7                                      |       | (0.1)                     |       |
| Exchange differences                       |       | (0.1)                                                                   |       | (0.5)                                      |       | (1.3)                                          |       | (0.6)                                     |       | —                    |       |
|                                       |       |                                                                    |       |                                       |       |                                           |       |                                      |       |                      |       |
| Balance as of December 31, 2004            |       | 1,654.5                                                                 |       | 272.0                                      |       | 86.5                                           |       | 425.7                                     |       | 12.1                      |       |
| ** **                                 |       |                                                                    |       |                                       |       |                                           |       |                                      |       |                      |       |
| **Accumulated valuation adjustments**      |       |                                                                    |       |                                       |       |                                           |       |                                      |       |                      |       |
| Balance as of January 1, 2004              |       | —                                                                  |       | 89.7                                       |       | 19.0                                           |       | 0.1                                       |       | 1.9                       |       |
| Change in scope of consolidation           |       | —                                                                  |       | 0.2                                        |       | —                                         |       | —                                    |       | —                    |       |
| Additions                                  |       | 554.0                                                                   |       | 28.6                                       |       | 11.8                                           |       | 20.2                                      |       | —                    |       |
| Disposals                                  |       | —                                                                  |       | 10.7                                       |       | —                                         |       | —                                    |       | —                    |       |
| Transfers                                  |       | —                                                                  |       | (7.6)                                      |       | —                                         |       | —                                    |       | (0.5)                     |       |
| Exchange differences                       |       | —                                                                  |       | (0.2)                                      |       | —                                         |       | —                                    |       | —                    |       |
|                                       |       |                                                                    |       |                                       |       |                                           |       |                                      |       |                      |       |
| Balance as of December 31, 2004            |       | 554.0                                                                   |       | 100.0                                      |       | 30.8                                           |       | 20.3                                      |       | 1.4                       |       |
|                                       |       |                                                                    |       |                                       |       |                                           |       |                                      |       |                      |       |
| **Net book value as of December 31, 2004** | ** ** | **1,100.5**                                                             | ** ** | **172.0**                                  | ** ** | **55.7**                                       | ** ** | **405.4**                                 | ** ** | **10.7**                  |       |

 
| **Developments 2004**                      | ** ** | **Loans to  affiliated  companies** | ** ** | **Loans to  associated  companies  and participating  interests** | ** ** | **Other loans  and  investments** | ** ** | **Other  financial  assets** | ** ** | **Investments  accounted for  using the  equity method  and other  financial  assets** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------|------------|------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **(Million €)**                | ** ** |
| **Acquisition cost carried forward**       |       |                                |       |                                                              |       |                              |       |                         |       |                                                                                   |       |
| Balance as of January 1, 2004              |       | 127.9                               |       | 117.0                                                             |       | 65.2                              |       | 1,092.5                      |       | 2,791.2                                                                                |       |
| Changes in scope of consolidation          |       | (8.3)                               |       | —                                                            |       | —                            |       | (30.7)                       |       | (52.0)                                                                                 |       |
| Additions                                  |       | 77.3                                |       | 13.3                                                              |       | 13.1                              |       | 134.5                        |       | 144.0                                                                                  |       |
| Disposals                                  |       | 1.0                                 |       | —                                                            |       | —                            |       | 66.4                         |       | 138.4                                                                                  |       |
| Transfers                                  |       | 0.6                                 |       | (23.2)                                                            |       | (14.5)                            |       | 36.2                         |       | 75.9                                                                                   |       |
| Exchange differences                       |       | (0.2)                               |       | (5.0)                                                             |       | 1.8                               |       | (5.8)                        |       | (5.9)                                                                                  |       |
|                                       |       |                                |       |                                                              |       |                              |       |                         |       |                                                                                   |       |
| Balance as of December 31, 2004            |       | 196.3                               |       | 102.1                                                             |       | 65.6                              |       | 1,160.3                      |       | 2,814.8                                                                                |       |
|                                       |       |                                |       |                                                              |       |                              |       |                         |       |                                                                                   |       |
| **Accumulated valuation adjustments**      |       |                                |       |                                                              |       |                              |       |                         |       |                                                                                   |       |
| Balance as of January 1, 2004              |       | 29.8                                |       | —                                                            |       | 3.9                               |       | 144.4                        |       | 144.4                                                                                  |       |
| Changes in scope of consolidation          |       | 42.8                                |       | —                                                            |       | —                            |       | 43.0                         |       | 43.0                                                                                   |       |
| Additions                                  |       | 11.0                                |       | —                                                            |       | 0.7                               |       | 72.3                         |       | 626.3                                                                                  |       |
| Disposals                                  |       | —                              |       | —                                                            |       | —                            |       | 10.7                         |       | 10.7                                                                                   |       |
| Transfers                                  |       | (18.1)                              |       | —                                                            |       | (0.3)                             |       | (26.5)                       |       | (26.5)                                                                                 |       |
| Exchange differences                       |       | —                              |       | —                                                            |       | (0.1)                             |       | (0.3)                        |       | (0.3)                                                                                  |       |
|                                       |       |                                |       |                                                              |       |                              |       |                         |       |                                                                                   |       |
| Balance as of December 31, 2004            |       | 65.5                                |       | —                                                            |       | 4.2                               |       | 222.2                        |       | 776.2                                                                                  |       |
|                                       |       |                                |       |                                                              |       |                              |       |                         |       |                                                                                   |       |
| **Net book value as of December 31, 2004** | ** ** | **130.8**                           | ** ** | **102.1**                                                         | ** ** | **61.4**                          | ** ** | **938.1**                    | ** ** | **2,038.6**                                                                            | ** ** |

 

F-47

----

 

Disposals in2005 within investments accounted for using the equity method relate almostentirely to the sale of our 50% stake in Basell. Additions to investments in affiliatedcompanies in 2005 concern, 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 are recorded at market value.

 

The marketvalues of available-for-sale “long-term securities” and “shares in otherparticipations” as well as the changes of market values recognized in othercomprehensive income (OCI) are summarized below:

 
| ** **                                    | ** ** | **2005**                        | ** ** | **2004**                   | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **Original  acquisition  cost** | ** ** | **Book /  market  values** | ** ** | **Recognized  in OCI** | ** ** | **Original  acquisition  cost** | ** ** | **Book /  market  values** | ** ** | **Recognized  in OCI** | ** ** |
| ** **                                    | ** ** | **(Million €)**            | ** ** |
| Shares in funds                               |       | 4.0                             |       | 4.0                        |       | — |   | 9.7 |   | 9.8 |   | 0.1 |   |
| Shares in other participations and securities |       | 221.2                           |       | 397.4                      |       | 202.8 |   | 277.6 |   | 406.3 |   | 149.0 |   |
| **Total**                                     | ** ** | **225.2**                       | ** ** | **401.4**                  | ** ** | **202.8** | ** ** | **287.3** | ** ** | **416.1** | ** ** | **149.1** |   |

 

The disposalof available-for-sale securities generated proceeds of €6.4 million as well asincome of €0.5 million in 2005. The disposal of available-for-sale securitiesgenerated income of less than €0.1 million in 2004. The sale of otherparticipations generated proceeds of €65.2 million as well as income of €7.4million in 2005. Write-downs of €8.3 million in 2005 as well as €20.2 millionin 2004 due to impairments of other participations were made.

 

**17.****       Inventories**

** **
| ** **                                       | ** ** | **2005**             | ** ** | **2004**    | ** ** |
|--------------------------------------------------|------------|----------------------|------------|-------------|------------|
| ** **                                       | ** ** | **(Million €)** | ** ** |
| Raw  materials and factory supplies              |       | 1,213.8              |       | 1,026.3     |       |
| Work-in-process,  finished goods and merchandise |       | 4,148.5              |       | 3,552.3     |       |
| Advance  payments and construction in progress   |       | 67.9                 |       | 66.8        |       |
| **Total**                                        | ** ** | **5,430.2**          | ** ** | **4,645.4** | ** ** |

 

“Work-in-process”and “Finished goods and merchandise” are combined into one item due to theproduction conditions in the chemical industry.

 

Constructionin progress relates mainly to chemical plants under construction. Totalinventory valued at net realizable value was €1,074.3 million in 2005 and€900.0 million in 2004. Inventories were valued using the weighted-average costmethod.

 

F-48

----

 

**18.****      ****Other receivables and otherassets**

 
| ** **                                         | ** ** | **2005**             | ** ** | **2004**                | ** ** |
|----------------------------------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | ** **           | ** ** | **Thereof  short-term** | ** ** | ** ** | ** ** | **Thereof  short-term** | ** ** |
| ** **                                         | ** ** | **(Million €)** | ** ** |
| Receivables  from affiliated companies             |       | 383.8                |       | 383.8                   |       | 286.0 |   | 286.0 |   |
| Prepaid  expenses                                  |       | 136.1                |       | 123.0                   |       | 150.0 |   | 132.2 |   |
| Defined benefit  assets                            |       | 288.3                |       | —                  |       | 185.5 |   | — |   |
| Miscellaneous  receivables and other assets        |       | 1,302.2              |       | 1,079.6                 |       | 1,984.8 |   | 1,714.6 |   |
| *Thereof:*                                         |       |                 |       |                    |       |   |   |   |   |
| *Receivables from associated companies and  other* |       |                 |       |                    |       |   |   |   |   |
| *participating interests*                          |       | *55.7*               | * *   | *52.1*                  | * *   | *73.3* | * * | *73.2* | * * |
| *Other assets*                                     |       | *1,246.5*            | * *   | *1,027.5*               | * *   | *1,911.5* | * * | *1,641.4* | * * |
| **Total**                                          | ** ** | **2,110.4**          | ** ** | **1,586.4**             | ** ** | **2,606.3** | ** ** | **2,132.8** | ** ** |

 

Prepaid expenses includepre-payments for operating expenses of €32.9 million in 2005, and €29.3 millionin 2004 as well as pre-payments for insurance premiums of €28.0 million in2005, and €23.2 million in 2004.

 
| **Composition of other assets**          | ** ** | **2005**             | ** ** | **2004**    | ** ** |
|------------------------------------------|------------|----------------------|------------|-------------|------------|
| ** **                               | ** ** | **(Million €)** | ** ** |
| Tax refund  claims                       |       | 276.7                |       | 244.1       |       |
| Loans and  interest receivables          |       | 134.0                |       | 187.6       |       |
| Deferrals  from financial derivatives    |       | 296.6                |       | 935.0       |       |
| Employee  receivables                    |       | 31.7                 |       | 36.6        |       |
| Rents and  deposits                      |       | 55.7                 |       | 44.7        |       |
| Insurance  claims                        |       | 12.4                 |       | 2.9         |       |
| Receivables  from joint venture partners |       | 129.8                |       | 36.3        |       |
| Other                                    |       | 309.6                |       | 424.3       |       |
| **Total**                                | ** ** | **1,246.5**          | ** ** | **1,911.5** |       |

 

Deferrals from financialderivatives decreased primarily due to an increase in exchange rates of the relevantcurrencies.

 
| **Valuation allowances for  doubtful  accounts** | ** ** | **As of  January 1,  2005** | ** ** | **Additions  affecting  income** | ** ** | **Releases  affecting  income** | ** ** | **Additions  not affecting  income** | ** ** | **Releases  not affecting  income** | ** ** | **Balance as  of December  31, 2005** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **(Million €)**        | ** ** |
| Accounts receivable, trade                       |       | 336.3                       |       | 86.2                             |       | 87.5                            |       | 38.4                                 |       | 17.6                                |       | 355.8                                 |       |
| Miscellaneous receivables and other assets       |       | 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**                             | ** ** |

 
| **Valuation allowances for  doubtful  accounts** | ** ** | **As of  January 1,  2004** | ** ** | **Additions  affecting  income** | ** ** | **Releases  affecting  income** | ** ** | **Additions  not affecting  income** | ** ** | **Releases  not affecting  income** | ** ** | **Balance as  of December  31, 2004** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **(Million €)**        | ** ** |
| Accounts  receivable, trade                      |       | 333.0                       |       | 81.3                             |       | 55.8                            |       | 12.7                                 |       | 34.9                                |       | 336.3                                 |       |
| Miscellaneous receivables and other assets       |       | 40.4                        |       | 16.4                             |       | 8.7                             |       | 0.2                                  |       | 15.3                                |       | 33.0                                  |       |
| **Total**                                        | ** ** | **373.4**                   | ** ** | **97.7**                         | ** ** | **64.5**                        | ** ** | **12.9**                             | ** ** | **50.2**                            | ** ** | **369.3**                             | ** ** |

 

Additions and releases notaffecting income related primarily to changes in scope of consolidation, totranslation adjustments and write-offs of receivables previously written down.

 

Contingent assets in 2005and 2004 were immaterial.

 

F-49

----

 

**19.****      ****Marketable securities**

 

“Liquid funds” includes thefollowing marketable securities:

 
| ** **                                 | ** ** | **2005**                       | ** ** | **2004**                | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **Original  acquisition cost** | ** ** | **Book/  market value** | ** ** | **Original  acquisition cost** | ** ** | **Book/  market value** | ** ** |
| ** **                                 | ** ** | **(Million €)**           | ** ** |
| Fixed-term,  interest-bearing certificates |       | 13.5                           |       | 13.7                    |       | 12.4 |   | 12.9 |   |
| Shares                                     |       | 122.0                          |       | 169.3                   |       | 156.1 |   | 191.5 |   |
| Other  securities                          |       | —                         |       | —                  |       | 0.2 |   | 0.2 |   |
| **Total**                                  | ** ** | **135.5**                      | ** ** | **183.0**               | ** ** | **168.7** | ** ** | **204.6** | ** ** |

 

The sale of short-termsecurities in 2005 resulted in proceeds of €65.5 million and income of €32.3million. The sale of short-term securities in 2004 resulted in proceeds of€20.0 million and income of €9.2 million.

 

**Maturities of fixed-termsecurities**

 
| ** **             | ** ** | **2005**                       | ** ** | **2004**                | ** ** |
|------------------------|------------|--------------------------------|------------|-------------------------|------------|
| ** **             | ** ** | **Original  acquisition cost** | ** ** | **Book/  market value** | ** ** | **Original  acquisition cost** | ** ** | **Book/  market value** | ** ** |
| ** **             | ** ** | **(Million €)**           | ** ** |
| Less than 1  year      |       | —                         |       | —                  |       | — |   | — |   |
| Between 1  and 5 years |       | 13.5                           |       | 13.7                    |       | 12.4 |   | 12.9 |   |
| More than 5  years     |       | —                         |       | —                  |       | — |   | — |   |
| **Total**              | ** ** | **13.5**                       | ** ** | **13.7**                | ** ** | **12.4** | ** ** | **12.9** | ** ** |

 

**20.****      ****Capital and reserves**

 
| ** **                                                                                                                                       | ** ** | **Conditional capital** | ** ** | **Authorized capital** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                                                       | ** ** | **2005**                | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                       | ** ** | **(Million €)**    | ** ** |
| January 1                                                                                                                                        |       | 424.0                   |       | 425.3                  |       | 500.0 |   | 500.0 |   |
| Conditional capital for the stock option  program BOP 1999/2000 and the BOP 2001/2005, decrease due to exercise and  expiration of option rights |       | (12.3)                  |       | (1.3)                  |       |   |   |   |   |
| Cancellation of the prior authorization at  the annual meeting on April 29, 2004                                                                 |       |                    |       |                   |       |   |   | (500.0) |   |
| Increase due to authorization for the  issuance of new shares against cash or contributions in kind at the annual  meeting on April 29, 2004     |       |                    |       |                   |       |   |   | 500.0 |   |
| **As of December 31**                                                                                                                            | ** ** | **411.7**               | ** ** | **424.0**              | ** ** | **500.0** | ** ** | **500.0** | ** ** |

 
| **Subscribed capital**                                           | ** ** | **Outstanding  shares** | ** ** | **Subscribed  capital** | ** ** | **Capital  reserves** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | ** **              | ** ** | **(Million €)**    | ** ** |
| Outstanding shares as of December 31, 2005                       |       | 515,059,000             |       | 1,318.5                 |       | 3,100.2               |       |
| Repurchased shares intended to be cancelled                      |       | (680,000)               |       | (1.7)                   |       | —                |       |
| **Outstanding shares as disclosed in the financial  statements** | ** ** | **514,379,000**         | ** ** | **1,316.8**             | ** ** | **3,100.2**           | ** ** |

 

F-50

----

 

**Share repurchase**

 

The Board of ExecutiveDirectors received approval at the Annual Meeting on April 28, 2005, torepurchase BASF’s shares to a maximum amount of 10% of subscribed capital byOctober 27, 2006. 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 validity of the prior authorizationsto repurchase BASF shares.

 

In addition, the Board ofExecutive Directors has been authorized at the Annual Meeting on April 28, 2005to purchase shares through the use of put and call options. The price paid foroptions purchased may not exceed the theoretical value calculated with recognizedfinancial models using the same assumptions, such as strike price, as theoptions themselves, while the price received for options sold may not fallbeneath this value.

 

In 2005, a total of26,062,229 shares, or 4.8% of the issued shares, were acquired. The averagepurchase price was €55.05 per share. A total of 26,182,229 shares werecancelled by December 31, 2005. Thereof were included 800,000 shares that wereacquired in 2004. As of the balance sheet date, 680,000 shares of BASF stockwere held by BASF. These were acquired for the purpose of cancellation.Therefore, these shares were not capitalized, but rather the subscribed capitalis shown net of these shares at December 31, 2005. During 2004, 16,203,000shares, or 2.9% of the issued shares, were acquired. The average purchase pricewas €44.79 per share. These were cancelled in 2004 and 2005.

 

**Conditional capital**

 

Of the conditioned capital,€384.0 million serves to fulfill the exercising of warrants related to optionbonds. As of December 31, 2005, these option bonds had not been issued. TheBoard of Executive Directors was authorized at the Annual Meeting on April 26,2001, to do so until April 1, 2006. An additional €27.4 million is reserved tofulfill stock options granted under the BASF Stock Option Program (BOP)2001/2005 to the members of the Board of Executive Directors and other seniorexecutives of BASF and its subsidiaries; up to €0.3 million is reserved to fulfillstock options from the Stock Option Program 1999/2000.

 

**Authorized capital**

 

At the Annual Meeting onApril 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 or contributionin kind through May 1, 2009. The Board of Executive Directors is empowered todecide on the exclusion of shareholders’ subscription rights, for these newshares.

 

**Capital surplus**

 

Capital surplus includespremiums from the issuance of shares, the fair value of warrants attached tooption bonds and negative goodwill from the capital consolidation resultingfrom acquisitions of subsidiaries in exchange for issue of BASF shares at parvalue.

 

F-51

----

 

**21.****      ****Retained earnings and othercomprehensive income**

 
| ** **                                  | ** ** | **2005**             | ** ** | **2004**     | ** ** |
|---------------------------------------------|------------|----------------------|------------|--------------|------------|
| ** **                                  | ** ** | **(Million €)** | ** ** |
| Legal  reserves                             |       | 291.7                |       | 258.6        |       |
| Other  retained earnings and profitretained |       | 11,636.3             |       | 11,664.5     |       |
| **Retained  earnings**                      | ** ** | **11,928.0**         | ** ** | **11,923.1** | ** ** |

 

The changes in scope of consolidationdid not lead to a change in the legal reserves in 2005, but led to a reductionof less than €0.1 million in 2004. Transfers from “other retained earnings andprofit retained” increased legal reserves by €33.1 million in 2005, and €15.5million in 2004. The offsetting of actuarial gains and losses resulted in areduction of retained earnings by €659.9 million in 2005, and €233.9 million in2004.

 

**Other comprehensive income**

 

Certain expenses and incomehave been recorded according to IFRS outside of the income statement. Includedamong these are translation adjustments, valuation of securities at fair valueand changes in the fair value of derivatives held to hedge future cash flows.

 

**Translation adjustments**

 

The difference between thehistorical exchange rate at the time of acquisition and the rate used totranslate the equity of a company as of the balance sheet date is recordeddirectly in equity and only flows through the income statement when a companyis disposed of.

 

**Cash flow hedges**

 

In 2005, the acquisitioncosts of inventories were reduced by €17.4 million through cashflow hedges. Theentry affecting the income statement related to interest expenses.

 

The total ineffectiveportion of all fair value changes of derivatives in 2005 affecting the incomestatement amounted to €3.9 million.

 

**Valuation of securities at fairvalue**

 

Changes in value ofavailable-for-sale securities are accounted for in equity, without impactingthe income statement, until the securities are disposed of. Upon disposal, thechanges accumulated in equity are accounted for in the income statement.

 

F-52

----

 

**22.****      ****Minority interests**

 
| **Company**                                                 | ** ** | **Partner**                                                 | ** ** | **2005  Equity stake** | ** ** | **2005**           | ** ** | **2004  Equity stake** | ** ** | **2004**           | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                                  | ** ** | ** **                                                  | ** ** | **(%)**                | ** ** | **Million €** | ** ** | **(%)**                | ** ** | **Million €** | ** ** |
| WINGAS GmbH, Kassel, Germany                                |       | Gazprom-Group, Moscow, Russia                               |       | 35.0                   |       | 81.4               |       | 35.0                   |       | 88.1               |       |
| Yangzi-BASF Styrenics Co. Ltd., Nanjing,  China             |       | Yangzi Petrochemical Corp. Ltd., Nanjing,  China            |       | 40.0                   |       | 45.3               |       | 40.0                   |       | 49.5               |       |
| BASF India Ltd., Mumbai, India                              |       | Publicly traded shares                                      |       | 47.3                   |       | 28.4               |       | 47.3                   |       | 23.7               |       |
| BASF PETRONAS Chemicals Sdn. Bhd., Petaling  Jaya, Malaysia |       | PETRONAS (Petroliam Nasional Bhd.),  Kuala Lumpur, Malaysia |       | 40.0                   |       | 117.2              |       | 40.0                   |       | 97.3               |       |
| BASF SONATRACH PropanChem S.A., Tarragona,  Spain           |       | SONATRACH, Algiers, Algeria                                 |       | 49.0                   |       | 36.9               |       | 49.0                   |       | 20.6               |       |
| BASF FINA Petrochemicals Ltd., Port Arthur,  Texas          |       | Total Petrochemicals Inc., Houston,Texas                    |       | 40.0                   |       | 124.4              |       | 40.0                   |       | 18.1               |       |
| Other                                                       |       |                                                        |       |                   |       | 48.2               |       |                   |       | 31.2               |       |
| **Total**                                                   | ** ** | ** **                                                  | ** ** | ** **             | ** ** | **481.8**          | ** ** | ** **             | ** ** | **328.5**          |       |

 

**23.****      ****Provisions for pensions andsimilar obligations**

 

In addition to governmentpension schemes, most employees are entitled to Company pension benefits fromeither defined contribution or defined benefit plans or both. Benefitsgenerally depend on years of service, contribution or compensation and considerthe legal, fiscal and economic conditions of the countries where companies arelocated. To control the risks of changing conditions in the capital markets, aswell the increasing life expectancies, employees will be increasingly offereddefined contribution plans in the future.

 

For BASF Aktiengesellschaftand other German subsidiaries, a basic level of benefits is provided by thelegally independent funded plan, BASF Pensionskasse VVaG, which is financed bycontributions of employees and the Company and the returns on its assets.Mid-2004, the defined benefit plan of BASF Pensionskasse VVaG, was closed, anda new defined contribution plan was introduced. To fulfill legal solvencyobligations (Section 53c VAG), a contribution of €135.5 million was made to theBASF Pensionskasse in 2005, which did not flow through the income statement.

 

Additional employee pensioncommitments at German Group companies were previously unfunded. In December2005, BASF established a Contractual Trust Arrangement (CTA), BASFPensionstreuhand e.V., and contributed liquid funds of €3,660 million to financeemployee pension commitments of BASF Aktiengesellschaft. The funds areadministered by this trustee and serve exclusively to finance the pensionobligations of BASF Aktiengesellschaft. Since the contributed funds are classifiedas plan assets according to IAS 19, they are netted against existing pensionprovisions.

 

In the case of non-Germansubsidiaries, pension entitlements are covered in some cases by pensionprovisions, but mainly by external insurance companies or pension funds.

 

The measurement date formost of the pension plans is December 31 of the reporting period. The mostrecent actuarial mortality tables are used.

 

F-53

----

 

The valuation using theprojected unit credit method per IAS 19 was carried out under the followingaverage assumptions: 

 
| ** **                                                                            | ** ** | **Germany** | ** ** | **Foreign** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Assumptions used to determine  the defined benefit  obligation (weighted average)** | ** ** | **(in%)**   | ** ** | **(in%)**   | ** ** |
| ** **                                                                            | **2005**   | ** **  | **2004**   | ** **  | **2005**   | ** ** | **2004** | ** ** |
| Interest  rate                                                                        |       | 4.25        |       | 5.25        |       | 5.18 |   | 5.58 |   |
| Projected  increase of wages and salaries                                             |       | 2.50        |       | 2.50        |       | 4.55 |   | 3.80 |   |
| Projected  pension increase                                                           |       | 1.50        |       | 1.50        |       | 0.51 |   | 0.51 |   |

 
| ** **                                                                          | ** ** | **Germany** | ** ** | **Foreign** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Assumptions used to determine  expenses for  pension benefit (weighted average)** | ** ** | **(in%)**   | ** ** | **(in%)**   | ** ** |
| ** **                                                                          | **2005**   | ** **  | **2004**   | ** **  | **2005**   | ** ** | **2004** | ** ** |
| Interest  rate                                                                      |       | 5.25        |       | 5.75        |       | 5.58 |   | 5.93 |   |
| Projected  increase of wages and salaries                                           |       | 2.50        |       | 2.50        |       | 3.80 |   | 3.88 |   |
| Projected  pension increase                                                         |       | 1.50        |       | 1.50        |       | 0.51 |   | 0.60 |   |
| Expected  return on plan assets                                                     |       | 5.16        |       | 6.25        |       | 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 5.5%.

 

The assumptions regardingthe overall expected long-term rate of return are based on forecasts ofexpected individual asset class returns and the desired portfolio structure.The forecasts are based on long-term historical average returns and take thecurrent yield level and the inflation trend into consideration. Due to yetlower interest rates and the expectations of lower future inflation rates, thelong-term expected return on debt securities has been lowered, compared withthe prior year.

 

The portfolio structure ofthe pension plan assets is as follows:

 
| **Asset class**  | ** ** | **Average target  allocation** | ** ** | **Plan assets** | ** ** |
|------------------|------------|--------------------------------|------------|-----------------|------------|
| ** **       | **(in%)**  | ** **                     | **(in%)**  | ** **      |
| ** **       | **2006**   | ** **                     | **2005**   | ** **      | **2004**   | ** ** |
| Equities         |       | 36                             |       | 31              |       | 45 |   |
| Debt  securities |       | 55                             |       | 30              |       | 48 |   |
| Real estate      |       | 6                              |       | 3               |       | 5 |   |
| Other            |       | 3                              |       | 36              |       | 2 |   |
| **Total**        | ** ** | **100**                        | ** ** | **100**         | ** ** | **100** | ** ** |

 

The high percentage ofassets under “other” in 2005 is due to the inclusion of BASF Pensionstreuhande.V. for the first time. Funds contributed in December 2005 were first placedin cash, and will be invested according to the target allocation in 2006.

 

The target asset allocationhas been defined using asset liability studies and is reviewed regularly. Thisensures that plan assets are aligned with plan liabilities. The currentportfolio structure is generally oriented towards the target asset allocation.In addition, current market views are taken into consideration. In order tomitigate investment risks and to benefit from a large number of return sources,individual investments are globally diversified.

 

F-54

----

 
| **Development of the defined benefit obligation** | ** ** | **2005**             | ** ** | **2004**    | ** ** |
|---------------------------------------------------|------------|----------------------|------------|-------------|------------|
| ** **                                        | ** ** | **(Million €)** | ** ** |
| Defined benefit  obligation as of January 1       |       | 9,814.1              |       | 9,220.3     |       |
| Service cost                                      |       | 192.7                |       | 185.9       |       |
| Interest  cost                                    |       | 527.4                |       | 528.6       |       |
| Benefits  paid                                    |       | (566.0)              |       | (589.2)     |       |
| Participants’  contributions                 |       | 39.3                 |       | 40.5        |       |
| Change in  actuarial assumptions                  |       | 1,530.4              |       | 521.2       |       |
| Settlements  and other changes                    |       | 77.2                 |       | 30.5        |       |
| Exchange  rate changes                            |       | 292.4                |       | (123.7)     |       |
| **Defined  benefit obligation as of December 31** | ** ** | **11,907.5**         | ** ** | **9,814.1** | ** ** |

 
| **Development of plan assets**                                    | ** ** | **2005**             | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------|------------|----------------------|------------|-------------|------------|
| ** **                                                        | ** ** | **(Million €)** | ** ** |
| Plan assets  as of January 1                                      |       | 6,204.3              |       | 5,952.4     |       |
| Expected  return on plan assets                                   |       | 421.7                |       | 409.6       |       |
| Difference  between expected and actual returns                   |       | 438.4                |       | 192.8       |       |
| Employer  contributions                                           |       | 244.5                |       | 99.8        |       |
| One-time  contribution to fund the CTA by BASF Aktiengesellschaft |       | 3,660.0              |       | —      |       |
| Participants’  contributions                                 |       | 39.3                 |       | 40.5        |       |
| Benefits  paid                                                    |       | (336.2)              |       | (344.6)     |       |
| Exchange  rate changes                                            |       | 254.2                |       | (110.7)     |       |
| Other  changes                                                    |       | 89.0                 |       | (35.5)      |       |
| **Plan  assets as of December 31**                                | ** ** | **11,015.2**         | ** ** | **6,204.3** |       |

 

The pension funds heldsecurities issued by BASF Group companies, whose total market value amounted to€13.4 million on December 31, 2005 (2004: €8.6 million). The market value ofrental properties held by BASF pension funds rented to BASF Group companiesamounted to €43.8 million as of December 31, 2005 (2004: €43.8 million). Nomaterial transactions took place between the pension funds and BASF Groupcompanies or related companies in 2005 and in 2004.

 

The pension provisions wereas follows:

 
| **Reconciliation of the defined benefit obligation to the pension provisions** | ** ** | **2005**             | ** ** | **2004**    | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------|------------|-------------|------------|
| ** **                                                                     | ** ** | **(Million €)** | ** ** |
| Defined benefit  obligation as of December 31                                  |       | 11,907.5             |       | 9,814.1     |       |
| Less plan assets as of December 31                                             |       | 11,015.2             |       | 6,204.3     |       |
| **Funded  status**                                                             | ** ** | **892.3**            | ** ** | **3,609.8** | ** ** |
| Unrecognized  past service cost                                                |       | (2.7)                |       | (3.5)       |       |
| Asset  ceiling in accordance with IAS 19.58                                    |       | 1.9                  |       | —      |       |
| Capitalized  defined benefit asset                                             |       | 288.3                |       | 185.5       |       |
| **Provisions  for pensions**                                                   | ** ** | **1,179.8**          | ** ** | **3,791.8** | ** ** |
| Provisions  for similar obligations                                            |       | 366.8                |       | 332.3       |       |
| **Provisions  for pensions and similar obligations**                           | ** ** | **1,546.6**          | ** ** | **4,124.1** | ** ** |

 

Actuarial gains and lossesare charged directly against retained earnings in the reporting period theyoccur. Expenses from past service costs are amortized over the average serviceperiod of the entitled employees until the benefits become vested.

 

€1,075.9 million and €364.5million in actuarial losses were charged outside of income and profit toretained earnings in 2005 and 2004 respectively. Since the introduction of thisaccounting policy, a total of €1,440.4 million has been charged against retainedearnings, not taking deferred taxes into account.

 

F-55

----

 

The current fundingsituation of the defined benefit obligation is disclosed in the followingtable:

 
| **Current funding situation**                         | ** ** | **2005**             | ** **      | **2004**     | ** ** |
|-------------------------------------------------------|------------|----------------------|-----------------|--------------|------------|
| ** **                                            | **DBO**    | ** **           | **Plan assets** | ** **   | **DBO**    | ** ** | **Plan assets** | ** ** |
| ** **                                            | ** ** | **(Million €)** | ** **      |
| Unfunded  pension plans                               |       | 606.3                |            | —       |       | 3,638.5 |   | — |   |
| Partially  funded pension plans                       |       | 7,299.2              |            | 6,758.5      |       | 1,853.0 |   | 1,687.7 |   |
| **Total of  pension plans that are not fully funded** | ** ** | **7,905.5**          | ** **      | **6,758.5**  | ** ** | **5,491.5** | ** ** | **1,687.7** | ** ** |
| Fully funded  pension plans                           |       | 4,002.0              |            | 4,256.7      |       | 4,322.6 |   | 4,516.6 |   |
| **Total**                                             | ** ** | **11,907.5**         | ** **      | **11,015.2** | ** ** | **9,814.1** | ** ** | **6,204.3** | ** ** |

 

Due to rising DBOs, thepension liabilities exceeded plan assets for the first time in 2005 for severalpension plans leading to their inclusion in the partially funded plan category.

 

The following overview showsthe differences between the actuarial assumptions and the actual developmentrelating to the DBO and the plan assets.

 
| **Differences between actuarial assumptions and the actual development** | ** ** | **2005**             | ** ** | **2004**    | ** ** |
|--------------------------------------------------------------------------|------------|----------------------|------------|-------------|------------|
| ** **                                                               | ** ** | **(Million €)** | ** ** |
| Defined benefit  obligation                                              |       | 11,907.5             |       | 9,814.1     |       |
| *Thereof impact of experience adjustments*                               | * *   | *19.5*               | * *   | *22.6*      | * *   |
| Plan assets                                                              |       | 11,015.2             |       | 6,204.3     |       |
| *Thereof impact of experience adjustments*                               | * *   | *438.4*              | * *   | *192.8*     | * *   |
| **Funded  status**                                                       | ** ** | **892.3**            | ** ** | **3,609.8** | ** ** |

 
| **Expected payments resulting from pension obligations existing as of  December 31, 2005** | ** ** | **Million €** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                 | ** ** | ** **         | ** ** |
| 2006                                                                                       |       | 570.1              |       |
| 2007                                                                                       |       | 586.0              |       |
| 2008                                                                                       |       | 591.6              |       |
| 2009                                                                                       |       | 602.9              |       |
| 2010                                                                                       |       | 633.3              |       |
| 2011 through  2015                                                                         |       | 3,362.3            |       |

 
| **Composition of expenses for pension benefits**                           | ** ** | **2005**             | ** ** | **2004**  | ** ** |
|----------------------------------------------------------------------------|------------|----------------------|------------|-----------|------------|
| ** **                                                                 | ** ** | **(Million €)** | ** ** |
| Service cost                                                               |       | 192.7                |       | 185.9     |       |
| Amortization  of past service cost                                         |       | 1.9                  |       | 6.0       |       |
| Settlement  gains/losses                                                   |       | (3.6)                |       | (10.2)    |       |
| Expenses for  similar obligations                                          |       | 0.1                  |       | —    |       |
| **Expenses  for defined benefit plans charged to income from operations.** | ** ** | **191.1**            | ** ** | **181.7** | ** ** |
| Interest  cost                                                             |       | 527.4                |       | 528.6     |       |
| Expected  return on plan assets                                            |       | (421.7)              |       | (409.6)   |       |
| Expenses for  similar obligations                                          |       | 15.1                 |       | 15.8      |       |
| **Expenses  for defined benefit plans charged to financial result**        | ** ** | **120.8**            | ** ** | **134.8** | ** ** |
| Expenses for  defined contribution plans                                   |       | 51.7                 |       | 45.7      |       |
| **Expenses  for pension benefits**                                         | ** ** | **363.6**            | ** ** | **362.2** | ** ** |

 

The estimated contributionpayments for defined benefit plans for 2006 are €119.6 million.

 

In addition, contributionsto public pension plans amounted to €317.7 million in 2005 and €307.6 millionin 2004.

 

F-56

----

 

**24.****       Otherprovisions**

 
| ** **                                                | ** ** | **2005**             | ** ** | **2004**       | ** ** |
|-----------------------------------------------------------|------------|----------------------|------------|----------------|------------|
| ** **                                                | ** ** | ** **           | ** ** | **Thereof**    | ** ** | ** ** | ** ** | **Thereof** | ** ** |
| ** **                                                | ** ** | **Total**            | ** ** | **short-term** | ** ** | **Total** | ** ** | **short-term** | ** ** |
| ** **                                                | ** ** | **(Million €)** | ** ** |
| Recultivation  obligations                                |       | 589.4                |       | 0.2            |       | 534.8 |   | 0.2 |   |
| Environmental  protection and remediation costs           |       | 252.9                |       | 63.8           |       | 203.9 |   | 38.8 |   |
| Personnel  costs                                          |       | 1,599.2              |       | 929.0          |       | 1,473.1 |   | 842.9 |   |
| Sales and  purchase risks                                 |       | 919.0                |       | 917.0          |       | 758.7 |   | 757.4 |   |
| Integration,  shutdown and restructuring costs            |       | 266.3                |       | 241.8          |       | 324.3 |   | 316.9 |   |
| Legal, damage claims, guarantees and  related commitments |       | 446.9                |       | 238.3          |       | 425.6 |   | 141.0 |   |
| Other                                                     |       | 1,480.0              |       | 372.4          |       | 1,019.4 |   | 266.9 |   |
| **Total**                                                 | ** ** | **5,553.7**          | ** ** | **2,762.5**    | ** ** | **4,739.8** | ** ** | **2,364.1** | ** ** |

 

**Recultivation obligations** concern estimatedcosts for the filling of wells and the removal of production equipment afterthe end of production.

 

**Environmental protection and remediation costs**concernexpected costs for rehabilitating contaminated sites, recultivating landfills,removal of environmental contamination at existing production or storage sites,and other measures.

 

**Personnel cost provisions** include obligationsto grant long-time service bonuses and anniversary payments, variablecompensation including related social security contributions and other accrualsas well as provisions for early retirement and short-working programs foremployees nearing retirement. Most German BASF companies have various programsthat entitle employees who are at least 55 years old to reduce their workinghours to 50% for up to six years. Under such arrangements, employees generallywork full time during the first half of the transition period and leave theCompany at the start of the second period. Employees receive a minimum 85% oftheir net salary throughout the transition period.

 

**Sales and purchase risks provisions** includewarranties, product liability, customer rebates, payment discounts and otherprice reductions, sales commissions and provisions for expected losses oncommitted purchases or similar obligations.

 

**Integration, shutdown and restructuring costs provisions**includeseverance payments to employees as well as specific site shutdown or restructuringcosts, including the costs for demolition and similar measures.

 

Additions in2005 and in 2004 consisted primarily of personnel measures at the Ludwigshafensite. Additions in 2005 also concern restructuring measures in the NAFTAregion.

 

Expenses in2005 include restructuring expenses within the Agricultural Products andNutrition segment.

 

Amounts paidin 2005 and 2004 are related to the execution of restructuring measuresinitiated in the prior year.

 

**Provisions for guarantees, damage claims, legal and related commitments**are recorded for the expected cost of outstandinglitigation and claims of third parties, including regulatory authorities, otherguarantees and warranties for antitrust proceedings. The significantproceedings are described in Note 27.

 

**Other** also includes long-term tax provisions.These relate to amounts accrued for expected tax payments as well as risksassociated with tax audits.

 

F-57

----

 

Provisions developed asfollows:

 
| ** **                                               | ** ** | **January 1,  2005** | ** ** | **Additions** | ** ** | **Interest  compounding** | ** ** | **Utilization ** | ** ** | **Releases** | ** ** | **Other  changes** | ** ** | **December  31, 2005** | ** ** |
|----------------------------------------------------------|------------|----------------------|------------|---------------|------------|---------------------------|------------|-----------------------|------------|--------------|------------|--------------------|------------|------------------------|------------|
| ** **                                               |       | **(Million €)** |       |
| Recultivation obligations                                |       | 534.8                |       | 54.0          |       | 18.7                      |       | (8.4)                 |       | (11.4)       |       | 1.7                |       | **589.4**              |       |
| Environmental protection and remediation costs           |       | 203.9                |       | 68.9          |       | 2.4                       |       | (28.0)                |       | (4.6)        |       | 10.3               |       | **252.9**              |       |
| Personnel costs                                          |       | 1,473.1              |       | 905.3         |       | 16.6                      |       | (784.4)               |       | (36.2)       |       | 24.8               |       | **1,599.2**            |       |
| Sales and purchase risks                                 |       | 758.7                |       | 1,363.8       |       | —                    |       | (1,157.1)             |       | (96.6)       |       | 50.2               |       | **919.0**              |       |
| Integration, shutdown and restructuring  costs           |       | 324.3                |       | 161.1         |       | 0.3                       |       | (202.7)               |       | (20.4)       |       | 3.7                |       | **266.3**              |       |
| Legal, damage claims, guarantees and related commitments |       | 425.6                |       | 107.1         |       | 11.4                      |       | (94.8)                |       | (28.8)       |       | 26.4               |       | **446.9**              |       |
| Other                                                    |       | 1,019.4              |       | 914.0         |       | 0.6                       |       | (418.5)               |       | (56.8)       |       | 21.3               |       | **1,480.0**            |       |
| **Total**                                                | ** ** | **4,739.8**          | ** ** | **3,574.2**   | ** ** | **50.0**                  | ** ** | **(2,693.9)**         | ** ** | **(254.8)**  | ** ** | **138.4**          | ** ** | **5,553.7**            | ** ** |

 

**25.****      ****Liabilities**

 
| **Financial indebtedness**                             | ** ** | **2005**             | ** ** | **2004**    | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|-------------|------------|
| ** **                                             | ** ** | **(Million €)** | ** ** |
| 3.5% Euro Bond 2003/2010 of BASF Aktiengesellschaft    |       | 994.8                |       | 993.5       |       |
| 3.375% Euro Bond 2005/2012 of BASF Aktiengesellschaft  |       | 1,396.0              |       | —      |       |
| 5.75% Euro Bond 2000/2005 of BASF Aktiengesellschaft   |       | —               |       | 1,249.0     |       |
| Other bonds                                            |       | 308.9                |       | 267.3       |       |
| Commercial  paper                                      |       | —               |       | 7.6         |       |
| **Bonds  and other liabilities to the capital market** |       | **2,699.7**          | ** ** | **2,517.4** |       |
| Liabilities  to credit institutions                    |       | 1,241.3              |       | 780.0       |       |
| **Total**                                              |       | **3,941.0**          | ** ** | **3,297.4** |       |

 

Financial liabilities aredenominated predominantly in the following currencies:

 
| ** **         | ** ** | **2005**             | ** ** | **2004**    | ** ** |
|--------------------|------------|----------------------|------------|-------------|------------|
| ** **         | ** ** | **(Million €)** | ** ** |
| U.S. dollar        |       | 718.9                |       | 540.2       |       |
| Euro               |       | 2,631.9              |       | 2,368.8     |       |
| Malaysian  ringgit |       | 16.3                 |       | 17.7        |       |
| Korean won         |       | 9.3                  |       | 16.8        |       |
| Chinese  renminbi  |       | 529.1                |       | 276.3       |       |
| Other              |       | 35.5                 |       | 77.6        |       |
| **Total**          | ** ** | **3,941.0**          | ** ** | **3,297.4** | ** ** |

 

The weighted-averageinterest rate on short-term borrowings was 4.7% on December 31, 2005 (2004:4.2%). Financial liabilities have the following maturities as of December 31,2005:

 
|                 |       | ** ** |       | **Million** |   |
|----------------------|------------|------------|------------|-------------|--------|
| 2006                 |       |       |       | 259.3       |   |
| 2007                 |       |       |       | 12.3        |   |
| 2008                 |       |       |       | 97.8        |   |
| 2009                 |       |       |       | 45.7        |   |
| 2010                 |       |       |       | 1.041.3     |   |
| 2011 and  thereafter |       |       |       | 2.484.6     |   |
| **Total**            | ** ** | ** ** | ** ** | **3.941.0** |   |

 

F-58

----

 

The 3.375%Euro Bond 2005/2012 of BASF Aktiengesellschaft was issued in May 2005 in theamount of €1,400 million and matures in May 2012. The effective interest rateof this bond is 3.42 %. The 3.5 % Euro Benchmark Bond 2003/2010 of BASFAktiengesellschaft was issued in June 2003 in the amount of €1,000 million. Theeffective interest rate of this bond is 3.63%. The 5.75% Euro Bond 2000/2005 ofBASF Aktiengesellschaft was repaid in July of 2005. The effective interest rateof this bond was 5.92%. Interest payments of both currently outstanding bondsis due annually in arrears.

 

“Other bonds”consist primarily of industrial revenue and pollution control bonds that areused to finance investments in the United States. Both the weighted-averageinterest rate and the weighted-average effective interest rate of these bondswas 2.7% in 2005, and 1.5% in 2004. The average maturity amounted to 317 monthsas of December 31, 2005.

 

**Liabilities to creditinstitutions**

 

Liabilities tocredit institutions relate to a large number of different credit institutionsin various countries. Liabilities to credit institutions denominated inringgit, won und renminbi result from the local financing of investments inMalaysia, Korea and China.

 

BASFAktiengesellschaft had committed and unused credit lines with variable interestrates of €2,119.2 million as of December 31, 2005, and €1,835.4 million as ofDecember 31, 2004. Additional uncommitted credit lines of BASFAktiengesellschaft amounted to €227.0 million as of December 31, 2005, and€227.0 million as of December 31, 2004.

 
| **Other liabilities**                                          | ** ** | **2005**             | ** ** | **2004**       | ** ** |
|----------------------------------------------------------------|------------|----------------------|------------|----------------|------------|
| ** **                                                     | ** ** | ** **           | ** ** | **Thereof**    | ** ** | ** ** | ** ** | **Thereof** | ** ** |
| ** **                                                     | ** ** | ** **           | ** ** | **short-term** | ** ** | ** ** | ** ** | **short-term** | ** ** |
| ** **                                                     | ** ** | **(Million €)** | ** ** |
| Advances received  on account of orders                        |       | 121.3                |       | 121.3          |       | 109.8 |   | 109.4 |   |
| Liabilities  on bills                                          |       | 47.5                 |       | 45.0           |       | 70.1 |   | 70.1 |   |
| Liabilities  to companies in which participations are held     |       | 333.1                |       | 268.2          |       | 362.5 |   | 259.4 |   |
| Liabilities  relating to social security                       |       | 174.1                |       | 174.0          |       | 155.0 |   | 155.0 |   |
| Non-trade  liabilities to joint venture partners               |       | 683.0                |       | 116.9          |       | 687.6 |   | 119.8 |   |
| Liabilities arising from deferrals from  financial derivatives |       | 185.4                |       | 154.0          |       | 83.7 |   | 70.3 |   |
| Liabilities  arising from financing leases                     |       | 117.5                |       | 15.9           |       | 24.6 |   | 6.9 |   |
| Miscellaneous  liabilities                                     |       | 814.6                |       | 717.0          |       | 876.0 |   | 736.2 |   |
| **Total**                                                      |       | **2,476.5**          | ** ** | **1,612.3**    | ** ** | **2,369.3** | ** ** | **1,527.1** | ** ** |
| Deferred  income                                               |       | 265.3                |       | 86.7           |       | 350.9 |   | 114.3 |   |
| **Other  liabilities**                                         | ** ** | **2,741.8**          | ** ** | **1,699.0**    | ** ** | **2,720.2** | ** ** | **1,641.4** | ** ** |

 

Liabilities tocompanies in which participations are held include the portion of liabilitiesthat are not eliminated to jointly owned companies accounted for using theproportional consolidation method of €80.0 million as of December 31, 2005, and€31.6 million as of December 31, 2004. Further liabilities relating toassociated companies accounted for using the equity or cost method were €253.1million as of December 31, 2005, and €330.9 million as of December 31, 2004.

 

F-59

----

 
| **Maturities of liabilities**                      | ** **            | **2005**             | ** **    | **2004**    | ** **             |
|----------------------------------------------------|-----------------------|----------------------|---------------|-------------|------------------------|
| ** **                                         | **Less than  1 year** | ** **           | **1-5 years** | ** **  | **More than  5 years** | ** ** | **Less than  1 year** | ** ** | **1-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                                         | ** **            | **(Million €)** | ** **    |
| Bonds and other liabilities  to the capital market |                  | —               |          | 1,009.0     |                   | 1,690.7 |   | 1,256.5 |   | 2.5 |   | 1,258.4 |   |
| Liabilities to credit  institutions                |                  | 259.3                |          | 188.0       |                   | 794.0 |   | 196.3 |   | 82.6 |   | 501.1 |   |
| Accounts payable, trade                            |                  | 2,777.0              |          | —      |                   | — |   | 2,371.5 |   | — |   | — |   |
| Liabilities to affiliated  companies               |                  | 187.7                |          | 1.0         |                   | 63.9 |   | 227.2 |   | 67.1 |   | 36.0 |   |
| Advances received on account  of orders            |                  | 121.3                |          | —      |                   | — |   | 109.4 |   | 0.4 |   | — |   |
| Liabilities on bills                               |                  | 45.0                 |          | 2.5         |                   | — |   | 70.1 |   | — |   | — |   |
| Liabilities to associated  companies               |                  | 80.5                 |          | —      |                   | — |   | 32.2 |   | — |   | — |   |
| Miscellaneous liabilities                          |                  | 1,264.5              |          | 427.2       |                   | 548.2 |   | 1,202.5 |   | 517.4 |   | 457.9 |   |
| **Total**                                          | ** **            | **4,735.3**          | ** **    | **1,627.7** | ** **             | **3,096.8** | ** ** | **5,465.7** | ** ** | **670.0** | ** ** | **2,253.4** | ** ** |

 

Leasing liabilities are shownin detail in Note 30.

 

Collateralized liabilitiesand contingent liabilities are shown below.

 
| **Secured liabilities and contingent liabilities** | ** ** | **2005**             | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------------------|------------|----------|------------|
| ** **                                         | ** ** | **(Million €)** | ** ** |
| Liabilities  to credit institutions                |       | 4.2                  |       | 4.3      |       |
| Other  liabilities                                 |       | 7.1                  |       | 7.3      |       |
| Contingent  liabilities                            |       | —               |       | —   |       |
| **Total**                                          | ** ** | **11.3**             | ** ** | **11.6** | ** ** |

 

Certain liabilities arecollateralized with mortgages or securities. In addition, BASFAktiengesellschaft has given covenants in favor of BASF Pensionskasse VVaG withregard to adhering to certain balance sheet ratios and to forgo encumberingproperty as security for creditors.

 

**26.****      ****Contingent liabilities and other financialobligations**

 

The contingencies listedbelow are stated at nominal value.

 
| **Contingent liabilities**                                | ** ** | **2005**             | ** ** | **2004**  | ** ** |
|-----------------------------------------------------------|------------|----------------------|------------|-----------|------------|
| ** **                                                | ** ** | **(Million €)** | ** ** |
| Bills of  exchange                                        |       | 8.9                  |       | 10.3      |       |
| *Thereof to affiliated companies*                         |       | *0.3*                | * *   | *0.2*     |       |
| Guarantees                                                |       | 330.8                |       | 248.2     |       |
| *Thereof to affiliated companies*                         |       | *50.6*               | * *   | *7.8*     |       |
| Warranties                                                |       | 93.8                 |       | 69.6      |       |
| Granting  collateral on behalf of third-party liabilities |       | 12.7                 |       | 13.0      |       |
| **Total**                                                 | ** ** | **446.2**            | ** ** | **341.1** | ** ** |

 

F-60

----

 
| **Other financial obligations**                                        | ** ** | **2005**             | ** ** | **2004**    | ** ** |
|------------------------------------------------------------------------|------------|----------------------|------------|-------------|------------|
| ** **                                                             | ** ** | **(Million €)** | ** ** |
| Remaining  cost of construction in progress                            |       | 1,927.8              |       | 1,700.7     |       |
| *Thereof purchase commitment*                                          | * *   | *692.2*              | * *   | *378.6*     | * *   |
| *Thereof for the purchase of intangible  assets*                       | * *   | *2.2*                | * *   | *—*    | * *   |
| Obligation  arising from long-term leases (excluding financing leases) |       | 827.4                |       | 812.4       |       |
| Payment and  loan commitments and other financial obligations          |       | 92.4                 |       | 15.9        |       |
| **Total**                                                              | ** ** | **2,847.6**          | ** ** | **2,529.0** | ** ** |

 

Obligations from long-termrental and lease contracts (not financing leases) as of December 31, 2005 aredue as follows:

 
| ** **           | ** ** | **(Million €)** | ** ** |
|----------------------|------------|----------------------|------------|
| 2006                 |       | 171.9                |       |
| 2007                 |       | 137.6                |       |
| 2008                 |       | 103.0                |       |
| 2009                 |       | 83.5                 |       |
| 2010                 |       | 67.4                 |       |
| 2011 and  thereafter |       | 264.0                |       |
| **Total**            | ** ** | **827.4**            |       |

 

Property, plant andequipment held under long-term leases primarily concern buildings and computerinfrastructure. Leasing obligations are explained further in Note 30.

 

**Purchase commitments for rawmaterials and natural gas from long-term contracts**

 

The Company has entered intolong-term purchase contracts for natural gas, the vast majority of which arecoupled with long-term supply contracts to customers. In addition, the Companypurchases raw materials globally, both on the basis of long-term contracts andin spot markets. In general, such commitments are at prices that are regularlyadjusted to market conditions. The fixed and determinable portions of long-termpurchase contracts with a remaining term of more than one year as of December31, 2005, are as follows:

 
| ** **           | ** ** | **(Million €)** | ** ** |
|----------------------|------------|----------------------|------------|
| 2006                 |       | 9,934.1              |       |
| 2007                 |       | 6,316.0              |       |
| 2008                 |       | 4,814.0              |       |
| 2009                 |       | 4,193.4              |       |
| 2010                 |       | 3,413.8              |       |
| 2011 and  thereafter |       | 32,245.3             |       |
| **Total**            | ** ** | **60,916.6**         | ** ** |

 

See note 2 for informationregarding announced acquisitions and divestitures.

 

F-61

----

 

**27.****       Risksfrom litigation and claims**

 

**AntitrustClaims Relating to Vitamins**

 

On November 21, 2001, theEuropean Commission imposed a fine of €296.2 million against BASFAktiengesellschaft in connection with certain violations of antitrust lawsrelating to the sale of vitamin products in Europe between 1989 and early 1999.On December 9, 2004, the European Commission imposed an additional fine of €35million for violations of certain antitrust laws relating to the sale ofvitamin B4 (choline chloride) in the mid-1990s. BASF has appealed against bothdecisions. Further proceedings are still pending in Brazil and Australia.

 

A few State court lawsuitson behalf of indirect purchasers are still pending in the United States inconnection with said antitrust law violations. Further claims for damages havebeen filed in the United Kingdom. A class action filed in Australia has beensettled, with court approval still outstanding.

 

For these proceedings, thecompany has established provisions that it anticipates to be sufficient.

 

BASF Aktiengesellschaft hasbeen named as a defendant in Empagran S.A. v. F. Hoffmann-LaRoche, Ltd, et al.,a federal class action filed in the U.S. District Court for the District ofColumbia purportedly on behalf of all persons who purchased vitamins from thedefendants outside the United States between January 1, 1988 and February 1999.The Empagran complaint alleges that the plaintiffs were overcharged on theirvitamins purchases as the result of a worldwide conspiracy among the defendantsto fix vitamin prices. By decision dated June 7, 2001, the District Court forthe District of Columbia dismissed the Empagran complaint for lack of subjectmatter jurisdiction. On January 17, 2003, a divided panel of the United StatesCourt of Appeals for the District of Columbia Circuit reversed the DistrictCourt’s ruling. The Court of Appeals held that the United States antitrust lawspermit the assertion of federal subject matter jurisdiction over claims byforeign purchasers based on purchases made and purported damages felt outsidethe United States.

 

BASF Aktiengesellschaft andthe other defendants petitioned for a Writ of Certiorari to the United StatesSupreme Court. The Supreme Court granted the petition, and on June 14, 2004,vacated the Court of Appeals’ ruling and remanded the case to the Court ofAppeals by an 8-0 decision. On June 28, 2005, the Court of Appeals, on remand,ruled that plaintiffs’ alleged link between foreign injury and domestic effectswas legally insufficient to trigger jurisdiction under the Sherman Act andtherefore affirmed the district court’s dismissal of the action. On October 26,2005, plaintiffs filed a new petition for a writ of certiorari to the U.S.Supreme Court. The Supreme Court has denied plaintiffs’ petition, which BASFand the other defendants have opposed, on January 6, 2006. The proceedings are,therefore, terminated and the case is finally dismissed.

 

**MeridiaClass Actions against BASF Corporation and BASF Aktiengesellschaft**

 

In various class actions inthe United States, Knoll Pharmaceutical Corporation (KPC) and BASF Corporation(and in two cases BASF Aktiengesellschaft) as well as Abbott Laboratories,Inc., and Glaxo Wellcome were sued for an unknown amount of damages as well asfor the reimbursement of costs for preventive medical check-ups. The claims arebased on the alleged hazardousness, alleged insufficient trials, and failuresduring the regulatory approval process of Meridia®(trade name of the obesity drug sibutramine). Both actions against BASFAktiengesellschaft have been dropped or dismissed. The claims against BASFCorporation have similarily been voluntarily dismissed. All cases have now beensettled, with payment made by Abbott Laboratories which acquired KPC from BASF.

 

**AdditionalProceedings**

 

The Supreme Court ofMinnesota in its decision dated February 19, 2004, upheld a jury verdictagainst BASF Corporation in an amount of $52 million (with interest nowtotaling $60 million). The court held that the sale of the plant protectionproducts Poast® and Poast Plus® at different salesprices violated consumer protection laws. BASF believes that different salesprices are justified because the products are based on different patentedformulas and also must be sold as different products under relevant EPAregulations.

 

F-62

----

 

BASF filed a petition for aWrit of Certiorari seeking review by the United States Supreme Court. BASF’spetition was granted, and the case was remanded to the Minnesota Supreme Courtfor reconsideration of its prior opinion in light of an intervening U.S.Supreme Court ruling in another case. The Court’s new ruling is expected duringthe first quarter of 2006.

 

In 2005, classaction lawsuits against BASF Aktiengesellschaft and BASF Corporation had been filedat U.S. courts. It was alleged that sales of urethanes and “urethanes products”had violated antitrust laws. BASF will vigorously defend those lawsuits.

 

In August2005, the European Commission issued Statements of Objections against severalEuropean producers of methacrylates and polymethacrylates for allegedanticompetitive behavior between 1995 and 2000, inter alia against BASFAktiengesellschaft. Although the evidence induced by the Commission against thecompany is considered weak, a fine against the company cannot be excluded.Therefore, the company has established provisions for the costs of thisproceeding that it anticipates to be sufficient.

 

**28.****      ****Stock-based compensation**

 

**BASF stockoption program (BOP)**

 

In 2005, BASFcontinued the BASF stock option program (BOP) for senior executives of thecompany worldwide. This program has existed since 1999. Approximately 1,000senior executives, including the Board of Executive Directors, are currentlyentitled to participate in this program.

 

To participatein the stock option program, each participant must hold as a personalinvestment BASF shares in the amount of 10% to 30% of his or her individualvariable compensation. The number of shares is determined by the amount ofvariable compensation designated by the participant and the weighted-averagemarket price quotation for BASF shares on the first business day after theannual meeting, which was €50.03 on April 29, 2005 (base price).

 

For each BASFshare of the individual investment, a participant receives four options. Eachoption consists 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 base price; it islimited to 100% of the base price.

 

Right B may beexercised if the cumulative percentage performance of BASF shares exceeds(relative threshold) the percentage performance of the MSCI World ChemicalsIndexSM (MSCI Chemicals). The value of right B will bethe base price of the option multiplied by twice the percentage outperformanceof BASF shares compared to the MSCI Chemicals index on the exercise date.Shares of the individual investment must be held for at least two yearsfollowing the granting of the options.

 

The optionswere granted on July 1, 2005 and may be exercised following a two-year vestingperiod, between July 1, 2007 and June 30, 2013. During the exercise period, itis not possible to exercise options during certain periods (closed periods).Each option right may only be exercised if the performance targets are achievedand may only be exercised once, meaning that if only one performance target ismet and that option is exercised, the other option right expires. The maximumgain for a participant from the BOP program is limited to 10 times the originalindividual investment and will be principally settled in cash.

 

The stockoption programs BOP 1999 to BOP 2004 were structured in a similar way to the BOP2005 program. To participate in the BOP program, each participant must holdBASF shares in the amount of 10% to 30% of his or her individual variablecompensation (BOP 2001 – 2004) or must make an individual investment in BASFshares in the amount of 10% to 30% of his or her individual variablecompensation that is used to purchase BASF shares at the market price on the firstbusiness day after the Annual Meeting (BOP 1999 and 2000). The options may beexercised following a vesting period of two years (BOP 2001– 2004) or threeyears (BOP 1999 and 2000).

 

The benchmarkindex used to determine the value of right B for BOP 1999 and 2000 is the DowJones EURO STOXXSM Total Return Index (EURO STOXXSM). This was replaced by the Dow JonesChemicals Total Return Index (DJ Chemicals) between 2001 and 2004, and startingin 2005 by the MSCI Chemicals.

 

F-63

----

 

The MSCI Chemicals is a globalindustry index for the chemical industry that measures the performance of thecompanies contained within it in their respective local currencies, which significantlyreduces currency effects.

 

Details on thefair value and the number of options issued are described below.

 
| **Fair value and parameters used as of December 31, 2005****(1)**** ** | ** **            | **Program years** | ** ** |
|-----------------------------------------------------------------------------|-----------------------|-------------------|------------|
| ** **                                                                  | **BASF stock option** | ** **        |
| ** **                                                                  | **program**           | ** **        |
| ** **                                                                  | **2005**              | ** **        | **2004**   | ** ** |
| Fair value                                                                  |                  | € 26.44      |       | € 35.73 |   |
| Dividend  yield of BASF shares                                              |                  | 2.63%             |       | 2.63% |   |
| Risk free  interest rate                                                    |                  | 3.22%             |       | 3.17% |   |
| Volatility  of BASF shares                                                  |                  | 26.26%            |       | 24.66% |   |
| Volatility  index (2)                                                       |                  | 17.29%            |       | 15.58% |   |
| Correlation  BASF quotation: index (2)                                      |                  | 85.05%            |       | 68.74% |   |

 

----

(1)   It is assumed that the options will beexercised, based upon the potential gains.

(2)   2005: MSCI Chemicals; 2004: DJ Chemicals

 

The values forvolatility were determined on the basis of the monthly closing prices over ahistorical period corresponding to the remaining exercise term.

 
| **Options outstanding**                    | ** **              | **2005**   | ** **   | **2004**      | ** **              |
|--------------------------------------------|-------------------------|------------|--------------|---------------|-------------------------|
| ** **                                 | **Weighted-average**    | ** ** | **Options**  | ** **    | **Weighted-average**    | ** ** | **Options** | ** ** |
| ** **                                 | **base price (€)** | ** ** | **(Number)** | ** **    | **base price (€)** | ** ** | **(Number)** | ** ** |
| Options  outstanding as of January 1       |                    | 43.64      |         | 4,643,465     |                    | 43.99 |   | 3,833,959 |   |
| Options  granted                           |                    | 50.03      |         | 1,807,800     |                    | 42.73 |   | 1,115,964 |   |
| Options  expired and forfeited (1)         |                    | 43.79      |         | 66,950        |                    | 43.15 |   | 64,464 |   |
| Options  exercised                         |                    | 43.36      |         | 983,706       |                    | 45.02 |   | 241,994 |   |
| **Options  outstanding as of December 31** | ** **              | **45.83**  | ** **   | **5,400,609** | ** **              | **43.64** | ** ** | **4,643,465** | ** ** |
| *Thereof exercisable options*              |                    | *44.16*    | * *     | *2,493,669*   | * *                | *45.46* | * * | *312,181* |   |

 

----

(1)   Option rights lapse if the option holders nolonger work for BASF or have sold part of their individual investment beforethe two-year holding period. They remain valid in the case of retirement.

 

Theweighted-average maturity of the outstanding options was 5.86 years on December31, 2005 and 5.70 years on December 31, 2004. The base prices were within arange of €38.94 to €50.03 in 2005, and €38.94 to €47.87 in 2004.

 

Because of aresolution by the Board of Executive Directors and the Supervisory Board in2002, to settle stock options in cash, options outstanding as of December 31,2005 are valued with the fair value as of the balance sheet date. This amountis accrued as a provision over the respective vesting period. An amount of€48.5 million was charged to income in 2005, and €36.4 million was charged toincome in 2004. Previously accrued provisions were increased from €81.8 millionon December 31, 2004 to €101.0 million on December 31, 2005. The totalintrinsic value of exercisable options amounted to €51.2 million on December31, 2005 and €2.4 million on December 31, 2004.

 

***BASF “plus” incentive shareprogram***

 

In 1999, BASFstarted 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. Foreach 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 10 years.  The right to receive free BASF shares expiresif a participant sells the individual investment in BASF shares, if theparticipant stops working for the Company or one year after retirement. Detailson the incentive share program are described below.

 

F-64

----

 
| **Number of shares held under the program**                           | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-----------------------------------------------------------------------|------------|---------------|------------|---------------|------------|
| Number of  shares held as individual investment as of January 1       |       | 2,405,230     |       | 2,091,400     |       |
| Number of  shares added to the individual investment                  |       | 565,000       |       | 468,320       |       |
| Number of subscription  rights lapsed                                 |       | 175,100       |       | 154,490       |       |
| **Number  of shares held as individual investment as of December 31** | ** ** | **2,795,130** | ** ** | **2,405,230** | ** ** |

 

The free shares to beprovided 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 €39.57for the program in 2005 and €32.44 for the program in 2004.

 

The fair value of the freeshares to be granted is booked through the income statement against capitalsurplus over the period until the shares are issued.

 

Provisions for the costs forthe 1999 – 2002 program continue to be accrued proportionally on the basis ofthe BASF closing stock price.

 

Compensation cost of €12.2million was recorded in 2005 and €10.4 million in 2004 for the employee stockprogram.

 

**29.****      ****Derivatives and other financialinstruments**

** **

**The use of derivative instruments**

 

The Company is exposed toforeign currency, interest rate, and commodity price risks during the normalcourse of business. These risks are hedged through a centrally determinedstrategy, with the use of derivative instruments. In addition, derivativeinstruments are used to replace transactions in original financial instruments,such as shares or fixed-interest securities. Derivative instruments are onlyused if they have a corresponding underlying position or planned transactionarising from the operating business, cash investments, financing or plannedsales. The leverage effect that can be achieved with derivatives isdeliberately not used. The derivative instruments held by the Company are notheld for the purpose of trading.

 

Where derivatives have apositive market value, the Company is exposed to credit risks in the event ofnon-performance of their counterparts. This credit risk is minimized by tradingcontracts exclusively with major creditworthy financial institutions andpartners, within pre-defined credit limits.

 

To ensure efficient riskmanagement, market risks are centralized at BASF Aktiengesellschaft, exceptwhen certain subsidiaries have been authorized to conclude derivative contractsunder the principles mentioned above. Contracting and execution of theseinstruments is performed according to internal guidelines, and complies withrigorous control mechanisms.

 

The risks arising fromchanges in exchange rates, interest rates, and prices as a result of theunderlying transactions and the derivative transactions concluded to hedge themare monitored constantly. The same is true of the derivative instruments, whichare used to replace transactions in original financial instruments.

 

***Financial risks***

** **

**Foreigncurrency risk:**Changesin foreign exchange rates could lead to a decline in value in financial instruments.Foreign currency risks are especially prevalent in accounts payable andreceivable that are not denominated in the local currency of BASF Groupcompanies, or for future foreign currency transactions.

 

To hedge the exchange raterisk against the U.S. dollar, the British pound, the Brazilian real, and theKorean won, foreign exchange forward contracts, combined interest and currencyswaps; and currency options are used.

 

F-65

----

 

**Default risk:** This is the risk that thecounterparties do not fulfill their contractual obligations. The book value ofall financial assets plus the nominal value of contingent assets excludingcontingent liabilities represents the maximal default risk.

 

Due to theglobal activities and diversified customer structure of the BASF Group, thereis no significant concentration of default risk.

 

**Interest rate risk:** Interest rate risks resultfrom changes in prevailing interest rates, which can cause a change in thepresent value of fixed rate instruments, as well as a change in the interestpayments of variable rate instruments. To hedge this risk, and in particular tohedge the risk for loans to Group companies, interest rate swaps, and combinedinterest and currency swaps are used. These risks are relevant in the case ofinvestments and financial obligations but are not of material significance onthe operating side.

 
| **Book value of interest-**       | ** ** | **December  31, 2005**   | ** ** | **December  31, 2004**      | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **bearing financial instruments** | ** ** | **Fixed  interest rate** | ** ** | **Variable  interest rate** | ** ** | **Fixed  interest rate** | ** ** | **Variable  interest rate** | ** ** |
| ** **                        | ** ** | **(Million  €)**    | ** ** |
| Loans                             |       | 195.6                    |       | 5.1                         |       | 217.6 |   | 76.7 |   |
| Securities                        |       | 13.7                     |       | —                      |       | 12.8 |   | — |   |
| Financial indebtedness            |       | 2,831.3                  |       | 1,109.7                     |       | 2,520.8 |   | 776.6 |   |

 

***Fair value of financialinstruments***

 

The fair valueof a financial instrument is the price at which the instrument could beexchanged between willing parties. When pricing on an active market isavailable, for example a stock exchange, this price is used. In other cases avaluation is based on an internal valuation model, using current marketparameters. Commonly used techniques include net present value and optionpricing models. The fair value of financial debts is determined on the basis ofinterbank interest rates.

 

For tradeaccounts receivable, liquid funds and other assets, trade accounts payable andother liabilities, the book value of short-term items approximates the fairvalue.

 

Containedwithin “other financial assets” are participations that are not traded on anactive market and whose net present value could not be reliably determined.These are therefore valued at acquisition cost. The book value of theseparticipations amounts to €606.8 million on December 31, 2005, and €633.1million on December 31, 2004. The book value of financial indebtedness amountedto €3,941.0 million in 2005 and €3,297.4 million in 2004. The market value of financialindebtedness amounted to €3,963.4 million in 2005 and €3,334.2 million in 2004.The difference between book and market values resulted primarily due to changesin market interest rates.

 
| ** **                                 | ** ** | **Nominal  value as of December 31** | ** ** | **Market value  as of December 31** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **Derivative instruments at market value** | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(Million  €)**                | ** ** |
| Foreign currency forward  contracts        |       | 5,675.5                              |       | 5,265.3                             |       | 35.1 |   | 541.1 |   |
| Currency options                           |       | 3,407.3                              |       | 2,122.1                             |       | (33.5) |   | 66.9 |   |
| **Foreign currency derivatives**           | ** ** | **9,082.8**                          | ** ** | **7,387.4**                         | ** ** | **1.6** | ** ** | **608.0** | ** ** |
| Interest swaps                             |       | 199.1                                |       | 908.9                               |       | (2.4) |   | (43.8) |   |
| Combined interest and currency swaps       |       | 1,438.5                              |       | 2,108.0                             |       | 127.8 |   | 308.9 |   |
| **Interest derivatives**                   | ** ** | **1,637.6**                          | ** ** | **3,016.9**                         | ** ** | **125.4** | ** ** | **265.1** | ** ** |
| Commodity derivatives/Other derivatives    |       | 873.7                                |       | 355.5                               |       | (15.8) |   | (21.8) |   |

 

Foreigncurrency forward contracts generally mature within one year.

 

The nominalvalues are the totals of the purchases and sales of the particular derivativeson a gross basis. The fair market values correspond to the difference betweenthe cost and resale value, which is determined from market quotations or by theuse of option pricing models or, in the case of unlisted contracts, thetermination amount in the event of premature cancellation. Offsetting changesin the valuation of the underlying transactions are not taken into account.

 

F-66

----

 

Positive fair values ofderivatives are contained within the item other receivables in the amount of€296.6 million in 2005 and €935.0 million in 2004. Negative fair values in theamount of €185.4 million in 2005 and €83.7 million in 2004 are shown under otherliabilities.

 

Commodity derivatives in theamount of €4.4 million are used in line with cash flow hedge accounting tohedge prices for raw material prices, e.g., naphtha. The hedged raw-material inflowswill most likely impact the cash-flow and income statement in 2006.

 

**30.****      ****Leasing**

 

***Leased assets***

 

Property, plant and equipmentinclude those assets that are considered to be economically owned through a financinglease. They primarily concern the following items:

 
|                                                                     |       | **December 31, 2005**     |       |
|--------------------------------------------------------------------------|------------|---------------------------|------------|
| **Leased Assets**                                                   | ** ** | **Acquisition cost** | ** ** | **Net book value** | ** ** |
|                                                                     |       | **(Million  €)**     |       |
| Land, land  rights and building, incl. buildings on land owned by others |       | 78.9                      |       | 63.0 |   |
| Machinery  and technical equipment                                       |       | 114.6                     |       | 65.3 |   |
| Miscellaneous  equipment and fixtures                                    |       | 83.5                      |       | 28.0 |   |
| Advance  payments and construction in progress                           |       | —                    |       | — |   |
| **Total**                                                                | ** ** | **277.0**                 | ** ** | **156.3** | ** ** |

 
| ** **                            | ** ** | **Minimum  leasing**  | ** ** | ** **            | ** ** | ** **             | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------|------------|------------------------|------------|
| **Liabilities from financing leases** | ** ** | **payments**          | ** ** | **Interest  portion** | ** ** | **Leasing  liability** | ** ** |
| ** **                            | ** ** | **(Million  €)** | ** ** |
| 2006                                  |       | 22.9                  |       | 7.0                   |       | 15.9                   |       |
| 2007                                  |       | 20.6                  |       | 6.6                   |       | 14.0                   |       |
| 2008                                  |       | 18.7                  |       | 6.2                   |       | 12.5                   |       |
| 2009                                  |       | 17.0                  |       | 5.8                   |       | 11.2                   |       |
| 2010                                  |       | 17.7                  |       | 5.4                   |       | 12.3                   |       |
| 2011 and  thereafter                  |       | 77.5                  |       | 25.9                  |       | 51.6                   |       |
| **Total**                             | ** ** | **174.4**             | ** ** | **56.9**              | ** ** | **117.5**              | ** ** |

 

In the current year, lessthan €0.1 million in additional lease payments were booked to the minimum leaseexpense (through the income statement) due to contractual obligations.Offsetting these leasing liabilities, expected minimum lease payments fromsub-lessees amounted to €0.1 million.

 

In addition, BASF is a lesseein operating leases. The resulting lease obligations totalling €827.4 millioncome due in the following years:

 
| ** **                                        | ** ** | **December  31, 2005** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **Less  than**         | ** ** | ** ** | ** ** | **More  than** | ** ** |
| **Liabilities due to operating  lease contracts** | ** ** | **1 year**             | ** ** | **1 to 5 years** | ** ** | **5 years in total** | ** ** |
| ** **                                        | ** ** | **(Million  €)**  | ** ** |
| Nominal  value of the future minimum payments     |       | 171.9                  |       | 391.5 |   | 264.0 |   |

 

Offsetting these leasingliabilities, expected minimum lease payments from sub-lessees amounted to €13.9million.

 

Minimum lease payments in theamount of €15.6 million, conditional lease payment of €0.6 million, andpayments received from sub-lessees of €3.3 million are included in the incomefrom operations of the current year.

 

**BASF as lessor**

 

BASF acts as the lessor onlyin a minor capacity for financing leases. Receivables from financing leases areless than €0.5 million as of December 31, 2005. Nominal minimum paymentsarising from operating leases amount to €7.3 million within one year, and €27.2million within the next five years.

 

F-67

----

 

**31.****      ****Related party transactions**

 

IAS 24 requires thedisclosure of transactions with related parties; both with companies that arenot fully consolidated, as well as with individuals. Material supplyrelationships exist between the proportionally consolidated Group companiesWintershall Erdgas Handelshaus GmbH, Germany; Wintershall Erdgas Handelshaus,Switzerland; and companies of the BASF Group for the supply of oil and gas. Theunconsolidated portion of these supplies amounted to €632.1 million in 2005 and€457.4 million in 2004.

 

In addition, a materialsupply relationship existed between the BASF Group and the Basell Group, whichwas accounted for by the equity method until 2005. Deliveries to the BasellGroup amounted to €284.8 million in 2005 and €254.0 million in 2004. Alltransactions were at arm’s length.

 

Please see Notes 18 and 25for details regarding payables and receivables with companies accounted forproportionally, at acquisition cost, or according to the equity method.

 

There were no transactionsbetween Group companies and related individuals that were significant, or of anunusual nature.

 

**32.****      ****Services provided by the externalauditor**

 

BASF Group companies haveused the following services of Deloitte & Touche GmbH:

 
| ** **                 | ** ** | **2005**             | ** ** | **2004** | ** ** |
|----------------------------|------------|----------------------|------------|----------|------------|
| ** **                 | ** ** | **(Million €)** | ** ** |
| Annual audit               |       | 12.8                 |       | 11.7     |       |
| Audit-related  services    |       | 5.1                  |       | 1.8      |       |
| Tax  consultation services |       | 0.9                  |       | 1.6      |       |
| Other  services            |       | 0.5                  |       | 0.5      |       |
| **Total**                  | ** ** | **19.3**             | ** ** | **15.6** | ** ** |

 

The annual audit concernedthe audit of the annual financial statements of the BASF Group as well as thelegally required audit of the financial statements of BASF Aktiengesellschaftand the consolidated subsidiary companies and joint ventures.

 

Audit-related servicesconcerned billed services primarily for due diligence, confirmation of theconformance to certain contractual obligations as well as audits of internalcontrol over financial reporting. 

 

Tax consultation servicesprimarily concerned tax consultation services in connection with planned orexisting transactions, transfer price analysis as well as consultation withemployees on foreign delegation assignments.

 

Other services concernamounts billed in connection with the handling of insurance damage claims aswell as numerous other services.

 

Costs for the audit of BASFAktiengesellschaft amounted to €2.3 million in both 2005 and 2004. For othercontracted services not related to the annual audit for BASFAktiengesellschaft, fees paid to Deloitte amounted to €2.0 million in 2005 and€0.8 million in 2004.

 

Costs for the audit of proportionallyconsolidated companies amounted to €0.4 million in 2005, and €0.4 million in2004. For other contracted services not related to the annual audit forproportionally consolidated companies, fees amounted to €0.02 million in 2005,and €0.1 million in 2004.

 

F-68

----

 

**33.****      ****Subsequent events**

 

On February 28, 2006, BASFAktiengesellschaft signed an agreement with Degussa AG, Düsseldorf, Germany, toacquire Degussa’s construction chemicals business. The purchase price forequity is approximately €2.2 billion plus the assumption of liabilities. As aresult, the transaction value for BASF is currently estimated at approximately€2.7 billion. The transaction, which still requires approval from the relevantauthorities, is expected to close by the middle of 2006.

 

The construction chemicalsbusiness is a reportable segment within Degussa’s financial reporting. Thefollowing figures in accordance with International Financial ReportingStandards (IFRS) were reported by Degussa for the years 2005 and 2004(unaudited).

 
| ** **              | ** ** | ** ** | ** ** | **2005****(1)**      | ** ** | **2004****(1)** | ** ** |
|-------------------------|------------|------------|------------|----------------------|------------|-----------------|------------|
| ** **              | ** ** | ** ** | ** ** | **(Million €)** | ** ** |
| Sales                   |       |       |       | 1,968                |       | 1,788           |       |
| Income from  operations |       |       |       | 223                  |       | 201             |       |
| Segment  assets         |       |       |       | 1,472                |       | 1,373           |       |

 

----

(1)   As reportedin the preprint of the financial report 2005 of Degussa AG, published for theirannual press conference

 

F-69

----

 

**Supplementary information concerning oil and gas producing activities(unaudited)**

 

**Oil and gas producing activities**

 

“Additional Petroleum Data”disclosures are presented in accordance with the provisions of SFAS 69,“Disclosure of Oil and Gas Producing Activities.” Accordingly, volumes ofreserves and production exclude royalty interests of third parties, and royaltypayments are shown as reductions in revenues.

 

**Results of operations from oil and gas producing activities**

 

Results of operations fromoil and gas producing activities represent only those revenues and expensesdirectly associated with Wintershall’s oil and gas production. These amounts donot include any allocation of interest expenses or corporate overheads and aretherefore not necessarily indicative of contributions to consolidated netearnings of the Company. Estimated income taxes were computed by applying thestatutory income tax rates to the pretax income from producing activities.

 
| ** **                                                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** | **Rest of**      | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **                                                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**        | ** ** |
| **2005**                                                    | ** ** | **Germany**           | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**   | ** ** | **Total**  | ** ** | **(at  equity)** | ** ** |
| ** **                                                  | ** ** | **(Million  €)** | ** ** |
| **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**            | ** ** |

 
| ** **                                                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** | **Rest of**      | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **                                                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**        | ** ** |
| **2004**                                                    | ** ** | **Germany**           | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**   | ** ** | **Total**  | ** ** | **(at  equity)** | ** ** |
| ** **                                                  | ** ** | **(Million  €)** | ** ** |
| **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-70

----

 

**Costs incurred in oil and gas property acquisition, exploration anddevelopment activities**

 

Costs incurred representamounts capitalized or charged against income as incurred in connection withoil and gas property acquisition, exploration and development activities.Exploration and development costs include applicable depreciation of supportequipment and sites used in such activities.

 
| ** **              | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** | **Rest of**      | ** ** |
|-------------------------|------------|-----------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **              | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**        | ** ** |
| **2005**                | ** ** | **Germany**           | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**   | ** ** | **Total**  | ** ** | **(at  equity)** | ** ** |
| ** **              | ** ** | **(Million  €)** | ** ** |
| **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**            | ** ** |
|                         |            |                       |            |            |            |               |            |                 |            |             |            |            |            |                  |            |  |  |

 
| ** **              | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** | **Rest of**      | ** ** |
|-------------------------|------------|-----------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **              | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**        | ** ** |
| **2004**                | ** ** | **Germany**           | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**   | ** ** | **Total**  | ** ** | **(at  equity)** | ** ** |
| ** **              | ** ** | **(Million  €)** | ** ** |
| **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-71

----

 

**Capitalized costs relating to oil and gas producing activities**

 

Capitalized costs representtotal expenditures on proved and unproved oil and gas properties with relatedaccumulated depreciation, depletion and amortization.

 
| ** **                                                                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** | **Rest of**      | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **                                                                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**        | ** ** |
| **2005**                                                                     | ** ** | **Germany**           | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**   | ** ** | **Total**  | ** ** | **(at  equity)** | ** ** |
| ** **                                                                   | ** ** | **(Million  €)** | ** ** |
| **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**            | ** ** |

 
| ** **                                                                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** | **Rest of**      | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **                                                                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**        | ** ** |
| **2004**                                                                     | ** ** | **Germany**           | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**   | ** ** | **Total**  | ** ** | **(at  equity)** | ** ** |
| ** **                                                                   | ** ** | **(Million  €)** | ** ** |
| **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**            | ** ** |

 

**Oil and natural gas reserves**

 

Proved oil and gas reservesare the estimated volumes of crude oil, natural gas and natural gas liquids thatare shown by geological and engineering data with reasonable certainty to berecoverable in future years from known reserves under existing economic andoperating conditions, i.e., prices and costs as of the date the estimates aremade. Prices only reflect changes in existing prices resulting from contractualarrangements, not escalation based on future conditions. Proved reservesexclude royalties and interests of third parties.

 

Proved developed reserves arereserves that can be expected to be recovered through existing wells withexisting equipment and operating methods. Additional oil and gas expected to beobtained through the application of fluid injection or other improved recoverytechniques for supplementing natural forces and mechanisms of primary recoveryare included as proved developed reserves only after testing in the form of apilot project or after the operation of an installed program has confirmedthrough production response that increased recovery will be achieved.

 

F-72

----

 

Numerous uncertainties areinherent in estimating quantities of proved reserves and in projecting futurerates of production and timing development expenditures. The accuracy of anyreserve estimate is a function of the quality of available data and engineeringand geological interpretation and judgment. Results of drilling, testing andproduction after the date of the estimate may necessitate substantial upward ordownward revisions. In addition, changes in oil and natural gas prices couldhave an effect on the quantities of proved reserves because the estimates ofreserves are based on prices and costs at the date when such estimates aremade.

 

The tables below show theestimated net quantities, calculated in compliance with Regulation S-X, Rule4-10(a), as of December 31, 2004 and 2005 of the Company’s proved oil and gasreserves and proved developed oil and gas reserves, as well as changes inestimated proved reserves as a result of production and other factors. The Company’sreserves for 2004 and 2005 include reserves owned directly by the Company andits consolidated subsidiaries.

 
| ** **                                                  | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** | **Rest of**      | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **                                                  | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**        | ** ** |
| **2005**                                                    | ** ** | **Germany**                | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**   | ** ** | **Total**  | ** ** | **(at  equity)** | ** ** |
| ** **                                                  | ** ** | **(millions  of barrels)** | ** ** |
| **Estimated  proved oil reserves**                          |       |                       |       |       |       |          |       |            |       |        |       |       |       |             |       |
| 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-73

----

 
| ** **                                                  | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** | **Rest of**      | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **                                                  | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**        | ** ** |
| **2004**                                                    | ** ** | **Germany**                | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**   | ** ** | **Total**  | ** ** | **(at  equity)** | ** ** |
| ** **                                                  | ** ** | **(millions  of barrels)** | ** ** |
| **Estimated  proved oil reserves**                          |       |                       |       |       |       |          |       |            |       |        |       |       |       |             |       |
| 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      |       | —           |       |

 

F-74

----

 

**Standardized measure of discounted future net cash flows relating toproved oil and gas reserves**

 

The following information hasbeen prepared in accordance with SFAS No. 69, which requires the standardizedmeasure of discounted future net cash flows to be based on year-end salesprices, costs and statutory income tax rates and a 10% annual discount rate.Because prices used in the calculation are as of December, the standardizedmeasure could vary significantly from year to year depending on marketconditions at that specific date.

 

The projection should not beviewed as realistic estimates of future cash flows nor should the “standardizedmeasure” be interpreted as representing current value to the company. Materialrevisions of estimates of proved reserves may occur in the future, developmentand production of the reserves may not occur in the period assumed, actualprices realized are expected to vary significantly from those used and actualcosts may also vary. The company’s investment and operating decisions are notbased on the information presented below, but on a wide range of reserves, andon different price and cost assumptions from those reflected in thisinformation.

 

Beyond the aboveconsiderations, the “standardized measure” is also not directly comparable withasset balances appearing elsewhere in the Consolidated Financial Statementsbecause any such comparison would require a reconciling adjustment.

 

**Standardized measure of discounted future net cash flows relating toproved oil and gas reserves**

 
| ** **                                         | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** | **Rest of**      | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **                                         | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**        | ** ** |
| **2005**                                           | ** ** | **Germany**           | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**   | ** ** | **Total**  | ** ** | **(at  equity)** | ** ** |
| ** **                                         | ** ** | **(Million  €)** | ** ** |
| **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**           | ** ** |

 
| ** **                                         | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** | **Rest of**      | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **                                         | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**        | ** ** |
| **2004**                                           | ** ** | **Germany**           | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**   | ** ** | **Total**  | ** ** | **(at  equity)** | ** ** |
| ** **                                         | ** ** | **(Million  €)** | ** ** |
| **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-75

----

 

**Summary of changes in standardized measure of discounted future netcash flows relating to proved oil and gas reserves**

 
| ** **                                                             | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** | **Rest of**      | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **                                                             | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**        | ** ** |
| **2005**                                                               | ** ** | **Germany**           | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**   | ** ** | **Total**  | ** ** | **(at  equity)** | ** ** |
| ** **                                                             | ** ** | **(Million  €)** | ** ** |
| **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**           | ** ** |

 
| ** **                                                             | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** | **Rest of**      | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **                                                             | ** ** | ** **            | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**        | ** ** |
| **2004**                                                               | ** ** | **Germany**           | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**   | ** ** | **Total**  | ** ** | **(at  equity)** | ** ** |
| ** **                                                             | ** ** | **(Million  €)** | ** ** |
| **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-76

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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 May  25, 2000, File No. 1-15909) |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                              |
| 8.1    |   | List of subsidiaries of BASF Aktiengesellschaft (List of Shares Held  2005)                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                              |
| 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

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**SIGNATURES**

 

The registrant hereby certifiesthat it meets all of the requirements for filing on Form 20-F and that it hasduly caused and authorized the undersigned to sign this annual report on itsbehalf.

 
| Date: March 1, 2006 | 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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