KfW 18K/A Annual report (foreign governments) (amended)

FORM 18-K/A

For Foreign Governments and Political Subdivisions Thereof

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 4

ANNUAL REPORT

KfW

(Name of Registrant)

and

KfW INTERNATIONAL FINANCE INC.

(Name of Registrant)

Date of end of last fiscal year: December 31, 2004

SECURITIES REGISTERED
(As of the close of the fiscal year)*



	Amount as to which	Names of exchanges on which
Title of Issue	registration is effective	registered
N/A	N/A	N/A


*		The registrants file annual reports on Form 18-K on a voluntary basis.

Name and address of person authorized to receive notices
and communications from the Securities and Exchange Commission:

David Morrison
Sullivan & Cromwell LLP
Neue Mainzer Strasse 52
60311 Frankfurt am Main, Germany

Page 1 of 80

TABLE OF CONTENTS


THE FEDERAL REPUBLIC OF GERMANY			3
RECENT DEVELOPMENTS			3
KFW			6
GENERAL			6
BUSINESS			9
SHORT-TERM INDEBTEDNESS AND CAPITALIZATION			29
MANAGEMENT			30
EMPLOYEES			32
FINANCIAL SECTION			33
FINANCIAL STATEMENTS AND AUDITORS			33
MANAGEMENT’S COMMENTS ON THE CONSOLIDATED FINANCIAL STATEMENTS			34
FINANCIAL STATEMENTS OF KFW			43
FINANCIAL STATEMENTS OF KFW BANKENGRUPPE			46
NOTES TO FINANCIAL STATEMENTS			50
SUPPLEMENTARY INFORMATION ON FUNDED DEBT OF KFW BANKENGRUPPE			77
SIGNATURES			80
Exhibit (g)

The undersigned registrants hereby amend their Annual Report on Form 18-K for the fiscal year ended December 31, 2004, as subsequently amended, as follows. This Amendment No. 4 to the Annual Report on Form 18-K for the fiscal year ended December 31, 2004 is intended to be incorporated by reference into KfW’s prospectus dated January 3, 2006.

Exhibit (d) is hereby amended by adding the following text to “The Federal Republic of Germany” prior to the section entitled “General” as a new section entitled “The Federal Republic of Germany – Recent Developments”:

“THE FEDERAL REPUBLIC OF GERMANY

RECENT DEVELOPMENTS

General Budget Deficit

On February 22, 2006, the Federal Statistical Office reported a general government deficit in 2005 of EUR 74.5 billion, or 3.3% of gross domestic product (“GDP”), which exceeds the threshold of 3% of the Maastricht Treaty. The same day, the Federal Government, in conjunction with the approval of the draft 2006 federal budget, adopted an update of the German stability program. With a view to stabilizing the current economic situation, the updated stability program envisages a delay in the implementation of certain consolidation measures until 2007. As a result, the Federal Government expects that the general government deficit will remain at 3.3% of GDP in 2006, but will be lowered below the 3% threshold in 2007. In light of these developments, on March 14, 2006, the ECOFIN Council adopted a decision to step-up the excessive deficit procedure against Germany, giving notice to Germany to lower its government deficit below the 3% threshold as rapidly as possible, and by 2007 at the latest. The ECOFIN Council’s decision requires Germany to report to the Commission by July 14, 2006 and on four subsequent occasions on measures taken to correct its deficit. Germany is further required to ensure a cumulative improvement in its structural deficit of at least 1% of GDP in 2006 and 2007, and an annual reduction in its structural deficit of at least 0.5% after the excessive deficit has been corrected.

Sources:
http://www.destatis.de/presse/englisch/pm2006/p0730121.htm;
http://www.bundesregierung.de/en/Latest-News/Information-from-the-Governmen-
,10157.967322/artikel/German-budget-on-consolidation.htm;
http://europa.eu.int/comm/economy_finance/about/activities/sgp/country/countryfiles/de/de20052006_en.pdf;
http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/ecofin/88797.pdf;

Deutsche Bundesbank, Monatsbericht März 2006, pp. 8-10.

2006 Federal Budget

On February 22, 2006, the Federal cabinet approved the draft 2006 Federal Budget. Among other things, the draft budget provides for total expenditures of EUR 261.7 billion, net borrowings of EUR 38.3 billion and investments of EUR 23.2 billion.

Sources:
http://www.bundesregierung.de/en/Latest-News/Information-from-the-Governmen-
,10157.967322/artikel/German-budget-on-consolidation.htm;
http://www.bundesfinanzministerium.de/lang_de/EN/Service/Downloads/060320agmb002,templateId=raw,property=publicationFile.pdf.

Key Economic Figures

In the fourth quarter of 2005, the Federal Republic’s real GDP (adjusted for seasonal and calendar effects) remained unchanged compared to the third quarter of 2005. This stagnation was due, in particular, to negative growth contributions from net exports and consumption which were offset by a positive growth contribution from capital formation. In the third quarter of 2005, real GDP rose by 0.6% compared to the second quarter of 2005. In the second quarter, real GDP increased by 0.3% compared to the first quarter of 2005, and in the first quarter of 2005, real GDP increased by 0.6% compared to the last quarter of 2004. For 2005 as a whole,

real GDP rose by 0.9% compared to 2004, which corresponds to an annual increase of 1.1% after adjusting for calendar effects.

Sources:
http://www.destatis.de/presse/englisch/pm2006/p0720121.htm;
Statistisches Bundesamt, Fachserie 18, Reihe 1.2, 4. Vierteljahr 2005, Table 1.1.

The inflation rate (defined as year-on-year change in the consumer price index) was 2.2% in the fourth quarter of 2005 and 2.0% for 2005 as a whole. Apart from rises in tobacco as well as motor vehicle taxes, strong increases in energy prices were, in particular, responsible for the upward price trend.

Sources:
Deutsche Bundesbank, Monthly Report February 2006, p. 7;
http://www.destatis.de/presse/englisch/pm2006/p0240051.htm.

The seasonally adjusted unemployment rate, according to the national definition used by the Federal Employment Agency, was 11.4% in the fourth quarter of 2005, down from 11.6% in the third quarter of 2005. On an annual basis, the unemployment rate increased to 11.7% in 2005, compared with 10.5% in 2004, largely reflecting a change in methodology (recipients of social assistance who are able to work have been included in the national unemployment statistics since January 2005). The internationally comparable unemployment rate according to the ILO definition decreased slightly from 9.2% in 2004 to 9.1% in 2005.

Sources:
Deutsche Bundesbank, Monthly Report January 2006, p. 6;
Deutsche Bundesbank, Monatsbericht März 2006, p. 64*;
Statistisches Bundesamt, Fachserie 18, Reihe 1.2, 4. Vierteljahr 2005, Table 1.10.

As of December 31, 2005, the accumulated current account surplus amounted to EUR 92.2 billion, compared with EUR 81.9 billion as of December 31, 2004.

Source: Deutsche Bundesbank, Monatsbericht März 2006, p. 68*.

Public Finance and Debt

The following table presents receipts and expenditures in the public sector for the years 2001 to 2005:

Public Sector Accounts(1)


	2005			2004			2003			2002			2001
	(EUR in billions)
Federal Government, Länder governments and municipalities
Receipts		597.1			579.2			583.3			578.6			578.1
of which taxes(2)		491.1			481.2			481.7			477.4			477.7
Expenditures		668.2			659.1			661.9			651.3			633.9
Balance		(71.2	)		(79.9	)		(78.6	)		(72.7	)		(55.8	)
Social security
Receipts		468.1			467.4			467.4			458.9			445.4
Expenditures		471.4			468.7			475.4			465.8			449.2
Balance		(3.4	)		(1.3	)		(8.0	)		(6.9	)		(3.8	)
Consolidated public sector
Receipts		974.8			956.8			960.3			951.2			945.5
Expenditures		1049.3			1,038.0			1,046.8			1,030.8			1,005.1
Balance		(74.5	)		(81.2	)		(86.6	)		(79.6	)		(59.6	)


(1)		Definition according to the national accounts.

(2)		Excluding taxes of domestic sectors to EU.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4, 2005, Tables 3.4.3.2, 3.4.3.3, 3.4.3.7.

At year-end 2005, Germany’s general government debt (as defined in the Maastricht Treaty) amounted to EUR 1,520.7 billion, or 67.7% of GDP.

Source: Deutsche Bundesbank, Monatsbericht März 2006, p. 53*.

The following table summarizes the direct debt of the Federal Government at December 31, 2005:

Summary of the Direct Debt of the Federal Government


	Principal Amount
	Outstanding as of
	December 31, 2005
	(EUR in millions)
Federal bonds		541,218
Five-year special Federal bonds		178,500
Federal Treasury notes		111,000
Federal savings bonds		11,055
Treasury discount paper		35,817
Federal Treasury financing paper		1,155
Borrowers’ note loans, of which:		26,796
— from residents		26,067
— from non-residents		728
Old debt (1), of which:		4,484
Equalization claims		4,118
Other		40
Repurchased debt		(37,723)
Medium term notes of Treuhandanstalt		266


Total		872,608


(1)		Mainly equalization and covering claims of the Deutsche Bundesbank, other banks and insurance companies in connection with the currency reform of 1948.

Source:

Bundesministerium der Finanzen, Übersicht über den Stand der Schuld der Bundesrepublik Deutschland am 31. Dezember 2005, Bundesanzeiger Nr. 34 of February 17, 2006, page 1039.”

Exhibit (d) is hereby amended by replacing the section “KfW — Recent Developments” with the following text:

“KFW

GENERAL

Overview

KfW is a public law institution (Anstalt des öffentlichen Rechts) serving domestic and international public policy objectives of the Federal Government. KfW operates under the umbrella brand name KfW Bankengruppe. It conducts its business in the following four areas, which operate under the brand names noted in italics:

•

Investment finance:

	•		KfW Förderbank (KfW Promotional Bank), offering financing products for housing, environmental, education and infrastructure projects;

	•		KfW Mittelstandsbank (KfW SME Bank), promoting small and medium-sized enterprises (“SMEs”), business founders, start-ups and self-employed professionals;

•

Export and project finance:

•

KfW IPEX-Bank, offering customized financing for exports and project and corporate financings world-wide;

•

Financial cooperation:

	•		KfW Entwicklungsbank (KfW Development Bank), dealing with KfW’s public sector development cooperation activities;

	•		DEG (DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH, German Investment and Development Company), financing private-sector investments in developing countries; and

•

Advisory and other services.

At December 31, 2005, KfW Bankengruppe had total assets of EUR 341.1 billion, including EUR 254.8 billion in loans outstanding. In addition, KfW Bankengruppe had EUR 74.2 billion in guarantees outstanding, of which an amount of EUR 68.4 billion relate to its PROMISE and PROVIDE securitization programs. Of its EUR 254.8 billion in outstanding loans at December 31, 2005, EUR 187.1 billion were for investment finance, EUR 46.1 billion for export and project finance, and EUR 21.5 billion for financial cooperation.

KfW’s offices are located at Palmengartenstraße 5-9, 60325 Frankfurt am Main, Federal Republic of Germany. KfW’s telephone number is 011-49-69-74310. KfW also maintains branch offices in Berlin and Bonn, as well as a liaison office to the European Union in Brussels.

Ownership, Legal Status and Relationship with the Federal Republic

Ownership. The Federal Republic holds 80% of KfW’s capital, and the German federal states (each a “Land” and together, the “Länder”) hold the remaining 20%. Shares in KfW’s capital may not be pledged or transferred to entities other than the Federal Republic or the Länder. Capital contributions have been, and are expected to continue to be, made to KfW in such proportions as to maintain the relative share of capital held by the Federal Republic and the Länder.

Legal Status. KfW is organized under the Law Concerning Kreditanstalt für Wiederaufbau (the “KfW Law”) as a public law institution with unlimited duration. As a public law institution serving public policy objectives of the Federal Government, KfW is not subject to corporate taxes (although certain of its subsidiaries

are) and does not seek to maximize profits. KfW does, however, seek to maintain an overall level of profitability that allows it to strengthen its equity base in order to support the growth in the volume of its business. KfW is prohibited from distributing profits, which are instead allocated to statutory and special reserves. KfW is also prohibited from taking deposits, conducting current account business or dealing in securities for the account of others.

Guarantee of the Federal Republic. The KfW Law expressly provides that the Federal Republic guarantees all existing and future obligations of KfW in respect of money borrowed, bonds issued and derivative transactions entered into by KfW, as well as obligations of third parties that are expressly guaranteed by KfW (KfW Law, Article 1a). Under this statutory guarantee (the “Guarantee of the Federal Republic”), if KfW fails to make any payment of principal or interest or any other amount required to be paid with respect to securities issued by KfW, or if KfW fails to make any payment required to be made under KfW’s guarantee when that payment is due and payable, the Federal Republic will be liable at all times for that payment as and when it becomes due and payable. The Federal Republic’s obligation under this statutory guarantee ranks equally, without any preference, with all of its other present and future unsecured and unsubordinated indebtedness. Holders of securities issued by KfW or issued under KfW’s guarantee may enforce this obligation directly against the Federal Republic without first having to take legal action against KfW. The Guarantee of the Federal Republic is strictly a matter of statutory law and is not evidenced by any contract or instrument. It may be subject to defenses available to KfW with respect to the obligations covered.

Institutional Liability (“Anstaltslast”). Under the German administrative law principle of Anstaltslast, the Federal Republic has an obligation to safeguard KfW’s economic basis. Under Anstaltslast, the Federal Republic must keep KfW in a position to pursue its operations and enable it, in the event of financial difficulties, through the allocation of funds or in some other appropriate manner, to perform its obligations when due. Anstaltslast is not a formal guarantee of KfW’s obligations by the Federal Republic, and creditors of KfW do not have a direct claim against the Federal Republic. Nevertheless, the effect of this legal principle is that KfW’s obligations, including the obligations to the holders of securities issued by it or issued under KfW’s guarantee, are fully backed by the credit of the Federal Republic. The obligation of the Federal Republic under Anstaltslast would constitute a charge on public funds that, as a legally established obligation, would be payable without the need for any appropriation or any other action by the German Parliament.

Understanding with the European Commission. In order to clarify that the Federal Republic’s responsibility for KfW’s obligations is compatible with prohibitions under European Union (“EU”) law against state aid, the German Federal Ministry of Finance and the European Commissioner for Competition held discussions which were formalized in an understanding reached on March 1, 2002. In the understanding, it was agreed that, in respect of the promotional activities for which KfW is responsible, KfW will continue to benefit from Anstaltslast and the statutory guarantee of the Federal Republic. The understanding acknowledges that KfW’s role in providing financing in particular for small and medium-sized enterprises, risk capital, environmental protection, technology/innovation, infrastructure and housing, as well as its co-operation with developing countries, is promotional and thus compatible with EU rules.

However, in the area of export and project finance, the understanding with the Commission requires KfW to transfer to a legally separate subsidiary that portion of export and domestic and international project finance activities which the Commissioner has deemed to fall outside the scope of the promotional activities of KfW. While the legislative basis for the establishment of the subsidiary and the transfer of such export and project financing activities had to be adopted by March 31, 2004, the actual transfer of such activities to the subsidiary must be effected by December 31, 2007. As from that date, KfW may not fund the subsidiary at other than market rates of interest or extend to the subsidiary any benefits of Anstaltslast or the statutory guarantee. The subsidiary will have to obtain a banking license, be subject to the German Banking Act and be required to pay corporate taxes. KfW will continue to be permitted, however, to engage directly in the following export and project finance activities:

	•		implementation of international promotional programs, such as the interest-rate subsidized programs CIRR (Commercial Interest Reference Rate) and LASU (Large Aircraft Sector Understanding) (these are recognized as promotional activities in accordance with the OECD consensus);

	•		participation in syndicated financing activities outside the EU, the European Economic Area and the countries currently being considered for EU membership, subject to certain conditions,

			and sole financing activities in countries in which sufficient sources of financing do not exist; and

	•		participation in projects in the interest of the EU that are co-financed by the European Investment Bank or similar European financing institutions.

In accordance with the rules of the EC Treaty, the Commission transformed the understanding into a “decision” of the Commission. The Federal Republic has formally accepted the decision with respect to the understanding. Part of the Promotional Bank Restructuring Act (Förderbankenneustrukturierungsgesetz) implemented the understanding with the Commission and amended the KfW Law and by-laws accordingly. For more information on KfW’s spin-off of KfW IPEX-Bank, see “Business — KfW IPEX-Bank”.

Supervision. KfW is generally exempt from the requirements of the German Banking Act. Under the KfW Law, the Federal Ministry of Finance supervises KfW and monitors KfW’s compliance with applicable laws and KfW’s by-laws. These powers of supervision do not include the right to exercise influence over business decisions by the Board of Managing Directors or the Board of Supervisory Directors of KfW. KfW’s overall activities are supervised by its Board of Supervisory Directors, which was enlarged pursuant to the Promotional Bank Restructuring Act and now consists of seven Federal Ministers, seven appointees of the Bundesrat, seven appointees of the Bundestag and representatives of various sectors and institutions of the German economy. For more information on the Board of Managing Directors and the Board of Supervisory Directors, see “Management”.

In addition to the annual audit of its financial statements, KfW, as a government-owned entity, is also subject to an audit that meets the requirements of the Budgeting and Accounting Act (Haushaltsgrundsätze-Gesetz). The Budgeting and Accounting Act requires that this audit and the resulting reporting be designed in such a way as to enable the Board of Supervisory Directors, the responsible Federal Department, and the Federal Court of Auditors to form their own opinions and to take action as and when required. One of the specific aspects to be covered by this audit and the related reporting is the proper conduct of KfW’s business by its management.

Under the terms of the various agreements concluded between KfW and the government authorities sponsoring KfW’s programs, KfW is also required to have an auditor to report on the proper discharge of KfW’s duties and the efficiency and the effectiveness of its administration.

Corporate Background

KfW was established in 1948 by the Administration of the Combined Economic Area, the immediate predecessor of the Federal Republic. Originally, KfW’s purpose was to distribute and lend funds of the European Recovery Program (the “ERP”or Marshall Plan). Even today, several of KfW’s programs to promote the German economy are financed using funds from the so-called “ERP Special Fund”. KfW has expanded and internationalized its operations over the last decades. In 1994, following the re-unification of the Federal Republic and the former German Democratic Republic (“GDR”), KfW succeeded to the operations of the former Staatsbank of the GDR (“Staatsbank”) which was located in Berlin.

In September 2001, KfW acquired Deutsche Investitions- und Entwicklungsgesellschaft mbH (“DEG”) from the Federal Republic. DEG is a limited liability corporation that acts as the German development finance institution for the promotion of private enterprises in developing countries and countries in transition.

In 2003, the former Deutsche Ausgleichsbank (“DtA”), which was based in Bonn, merged into KfW. DtA was formed in 1950 as a public law institution and promotional bank particularly active in the area of lending to SMEs and start-up businesses. The merger was accomplished through the Promotional Bank Restructuring Act and was designed to restructure and simplify promotional banking in the Federal Republic and harmonize it with the understanding reached with the European Commission. The Promotional Bank Restructuring Act became effective on August 22, 2003 and implemented the merger of DtA into KfW with retroactive effect as of January 1, 2003. The merger was effected by a transfer of the Federal Republic’s shares in DtA into a special capital reserve of KfW. In connection with the combination of the separate KfW and DtA SME businesses, the new separately-branded KfW Mittelstandsbank was created to serve as a platform for all SME related financing instruments. In addition, a Mittelstandsrat (SME advisory council) was established at KfW, which consults and decides on proposals concerning KfW’s SME-related business, taking into consideration KfW’s overall business plan. The Mittelstandsrat is chaired by the Federal Minister of Economics and Technology and includes other members of the Federal Government.

BUSINESS

KfW Bankengruppe conducts its business in four principal areas: investment finance; export and project finance; financial cooperation; and advisory and other services. The following table shows the relative size of each of the investment finance, export and project finance and financial cooperation areas in terms of total loans outstanding and total loan commitments for each of the years indicated. The table also shows securitization commitments outstanding and securitization transactions made in each year. No loans or loan commitments are made in the advisory and other services area, given the nature of its business.

Loans Outstanding And Loan Commitments By Business Area and securitization


	As of December 31,
	2005		2004
	(EUR in millions)
Loans outstanding
Investment finance (1)		187,135		182,895
Export and project finance		46,114		46,387
Financial cooperation (1)		21,521		21,920
Total		254,770		251,202

Loan commitments(2)
Investment finance		33,973		33,271
Export and project finance		11,984		11,820
Financial cooperation		1,718		1,775
Total		47,675		46,866

Securitization commitments outstanding(3)		70,339		57,124
Securitization transactions (4) (5)		20,088		15,003


(1)		Since 2005, outstanding loans extended by the former Staatsbank have been included in financial cooperation. The previous year’s figures have been restated accordingly.

(2)		Commitments represent the volume of funds committed for loans and other business transactions (including guarantees) in the relevant year, including amounts to be disbursed in future years, and do not include amounts disbursed in the relevant year pursuant to commitments made in prior years. Totals may not add due to rounding.

(3)		Includes commitments in connection with credit default swaps in the amount of EUR 68,413 million in 2005 and EUR 56,361 million in 2004, as well as irrevocable loan commitments in the amount of EUR 1,926 million in 2005 and EUR 763 million in 2004. For more information on KfW’s securitization activities, see “– Investment Finance – Securitization Programs”, “Notes to Financial Statements – Other Required Notes on the Liabilities – Contingent Liabilities” and “Notes to Financial Statements – Other Required Notes on the Liabilities – Other Obligations”.

(4)		Includes only transactions under the synthetic programs PROVIDE, PROMISE and its variations. For more information on these programs, see “– Investment Finance – Securitization Programs”.

(5)		Includes new commitments in connection with credit default swaps in the amount of EUR 19,536 million in 2005 and EUR 15,003 million in 2004, as well as new irrevocable commitments in the amount of EUR 552 million in 2005 (zero in 2004).

Investment Finance

Within its investment finance business, KfW offers a broad range of loan programs in Germany and elsewhere in Europe, as well as loan securitization programs for banks, to support the economic and policy objectives of the Federal Government.

Under the KfW Law, KfW must generally involve banks or other financing institutions when granting financings in its investment finance business. In its traditional investment finance lending business, KfW involves commercial banks in the handling of its loans by extending loans to commercial banks, which in turn on-lend the funds to the ultimate borrowers. By lending to commercial banks, KfW in principle insulates itself from credit exposure to the ultimate borrower and gains the benefit of the commercial banks’ knowledge of their customers as well as their administrative and servicing expertise. KfW monitors its exposure to, and the credit standing of, each banking institution to which it lends. In its investment finance business, KfW currently lends to approximately 300 banks.

Borrowers can apply for a KfW promotional loan with their regular bank or with any other bank or savings bank of their choice. The intermediate bank appraises the financial and business situation of the applicant, takes security for the loan and assumes liability for repayment to KfW. Loans made by commercial banks are normally collateralized by real property or other assets, or are guaranteed by the Federal Republic, by a government of one of the Länder or by a German municipality.

In its traditional pricing model, the commercial banks to which KfW lends are permitted to on-lend the funds at fixed spreads over the applicable interest rate payable to KfW. This fixed spread pricing model is still applied in KfW’s loan programs to individuals, which represent most of KfW’s lending under KfW Förderbank’s programs, as well as in KfW’s loan programs for start-up financing. However, effective April 1, 2005, for new commitments in many of its promotional loan programs targeted at commercial enterprises, KfW replaced the fixed-spread model with a risk-adjusted pricing model.

In its risk-adjusted pricing model, KfW establishes pricing categories based on a combination of the borrower’s creditworthiness and the collateral securing the loan. In each promotional program, KfW sets maximum interest rates for each pricing category. The on-lending banks assess the risk profile of the borrower and the collateral securing the loan to determine the applicable pricing category for each loan and the applicable interest rate up to the maximum for the pricing category. KfW’s role in the pricing process is limited to verifying that banks derive the appropriate maximum interest rate from the ultimate borrower’s creditworthiness and the collateral provided.

In addition to its traditional loan programs, KfW extends so-called “global loans” to promotional institutions and commercial banks to finance investments of SMEs and housing projects. Global loans are extended in the form of a lump sum, which the commercial bank or promotional institution breaks down and grants as individual loans. KfW expects that receiving banks will on-lend these funds within a reasonable period of time. In contrast to KfW’s program loans, global loans offer a more flexible loan structure, as the mode of repayment may be agreed individually between the bank and its customer and the interest rate may be variable or fixed. The interest rate for the ultimate borrower is composed of KfW’s funding rate to the bank plus an individual risk-adjusted margin. The margin is determined by the ultimate borrower’s creditworthiness, which is determined on the basis of the bank’s rating system. The bank and KfW agree on the methodology used for the calculation of the margin. Global loans result in lower administrative costs for both KfW and the on-lending bank compared with KfW’s traditional lending programs.

Included among KfW’s many German commercial banking on-lending customers are the 11 German Landesbanken. The Landesbanken are German public law financial institutions whose functions have traditionally focused on the banking business for and in the German federal state (Land) in which they operate. Until July 2005, obligations of the Landesbanken benefited from government credit support (Gewährträgerhaftung). According to a settlement reached with the European Commission in July 2001 relating to state aid to the Landesbanken, however, borrowings by the Landesbanken incurred after the settlement date and maturing after December 31, 2015 and all borrowings after July 19, 2005 no longer benefit from the government credit support. KfW’s long-term receivables from on-lending operations involving Landesbanken amounted to EUR 44 billion at December 31, 2005. Of this amount, EUR 21.8 billion (49.5%) continues to benefit from Gewährträgerhaftung. Since the settlement, KfW’s credit line management has increased its focus on the individual financial strength of each institution. In addition, most of the loans to the Landesbanken have been, and will continue to be, secured by collateral. Over time, the risk profile of the loans to the Landesbanken will shift further from government risk to a profile comparable to KfW’s other loans to the banking sector.

Another focus of KfW’s investment finance business is cooperation with the promotional institutions of the federal states (Landesförderinstitute) in their on-lending activities, partly by way of extending global loans. Many of the promotional institutions were initially part of the German Landesbanken. In order to comply with the decision of the European Commission to separate commercial and promotional business activities, many of these institutions became, or are currently in the process of becoming, independent public law institutions that benefit from explicit government guarantees.

In 2005, KfW’s principal investment finance activities included the provision of funding to SMEs under its KfW Mittelstandsbank brand and financing for other government policy objectives under its KfW Förderbank brand. The following table shows KfW’s commitments for investment finance in Germany and elsewhere in Europe for each of the years indicated:

Investment Finance Commitments(1)


	As of December 31,
	2005		2004
	(EUR in millions)
Total commitments in Germany and elsewhere in Europe		54,207.6		48,440.1

*KfW Mittelstandsbank*		15,520.1		13,971.2
Promotional Loans		11,556.9		10,232.8
Loan Programs		10,673.7		9,285.9
of which global loans		5,353.1		2,764.8
Mezzanine Programs		583.1		618.8
Equity Participation Programs		300.1		328.1

PROMISE(2)(3)		3,905.8		3,640.4

*KfW Förderbank*		38,687.5		34,468.9
Promotional Loans		22,415.8		23,038.3
Housing Investment Programs		10,903.6		11,929.5
of which global loans		2,008.0		2,887.0
Education Programs		875.0		811.6
Municipal Infrastructure Programs		2,770.4		4,195.3
of which global loans		120.2		–
Environmental Investment Program		4,241.6		2,165.5
Global loans to Landesförderinstitute		3,625.2		3,936.5

PROVIDE(4)(5)		16,210.4		11,401.0


(1)		Commitments represent the volume of funds committed for loans and other business transactions in the relevant year, including amounts to be disbursed in future years, and do not include amounts disbursed in the relevant year pursuant to commitments made in prior years. Discrepancies in the totals are due to rounding.

(2)		Includes guarantees in the amount of EUR 28 million in 2005 and EUR 38 million in 2004, new commitments in connection with credit default swaps in the amount of EUR 3,479 million in 2005 and EUR 3,602 million in 2004, as well as new irrevocable loan commitments in the amount of EUR 399 million in 2005 (zero in 2004).

(3)		Also includes commitments for a transaction called SEAS 2005-1 in the amount of EUR 639 million and for a transaction called PROSCORE-VR 2005-1 in the amount of EUR 734 million. See “Securitization Programs” below.

(4)		Includes new commitments in connection with credit default swaps in the amount of EUR 16,057 million in 2005 and EUR 11,401 million in 2004, as well as new irrevocable loan commitments in the amount of EUR 153 million in 2005 (zero in 2004).

(5)		The figure for 2005 includes a commitment for a transaction called Stichting PROFILE Securitization I in the amount of EUR 557 million, and the figure for 2004 includes commitments for a transaction called EPIC in the amount of EUR 554 million. See below under “Securitization Programs”.

To support the German and European economies, KfW committed a volume of EUR 54.2 billion (including securitization transactions) in 2005, compared to EUR 48.4 billion in the previous year. In 2005, the volume of commitments by KfW Mittelstandsbank and KfW Förderbank amounted to EUR 15.5 billion and EUR 38.7 billion, respectively. The increase of commitments of KfW Mittelstandsbank was mainly due to the increase of global loans. The increase of commitments of KfW Förderbank was principally due to strong securitization activities in the PROVIDE program.

KfW Mittelstandsbank (KfW SME Bank)

Under its KfW Mittelstandsbank programs, KfW provides funding for SMEs in the form of loan financing (including global loans), mezzanine financing and equity participation programs. In 2005, the commitments under KfW Mittelstandsbank programs amounted to EUR 15.5 billion (including securitizations) compared to EUR 14.0 billion in the previous year. At EUR 11.6 billion, the volume of commitments for SME loans in 2005 increased substantially compared to the previous year (EUR 10.2 billion), mainly due to the increase of global loans, while commitments under the PROMISE program remained relatively stable.

In 2004, based on the latest available statistics published by the Institute for SME research in Bonn (Institut für Mittelstandsforschung Bonn), SMEs contributed 40.8% to the total turnover generated in Germany and 99.7% of all companies in Germany were SMEs. Moreover, SMEs employed 70.5% of all employees in the private sector in 2004. Under the definition used by the Institute for SME research, companies with a maximum annual turnover of EUR 50 million are considered SMEs. The criteria used for some of KfW’s lending

programs differ from this definition and vary between the various programs, sometimes covering larger SMEs typical of Germany’s economy. For example, some programs are open to enterprises with an annual group turnover of up to EUR 500 million in which the public sector does not hold a majority stake.

In its SME loan programs (including global loans), the on-lending banks are liable to KfW and bear the risk of customer default. KfW Mittelstandbank’s mezzanine programs, equity participation programs and its special programs for investments of micro-enterprises, however, are designed so that KfW takes on direct exposure to the credit risk of the ultimate borrower. KfW’s risk under these programs is covered or compensated in different ways, including by a risk pool funded by the Federal Government or KfW, by risk premiums included in the interest rate charged to the ultimate borrower or by guarantees from the Federal Government or the European Investment Fund.

In the course of 2005, KfW continued the process of reworking and renewing its SME financing programs. The focus was on completing the range of products with new loan programs for innovation financing and early-stage equity participations.

Loan Programs. At EUR 10.7 billion, the volume of commitments under KfW’s SME loan programs increased significantly in 2005 compared to the previous year. This growth in SME loan commitments was chiefly due to a substantial increase of global loan agreements with banks to fund SME activities. Commitments for global loans rose from EUR 2.8 billion in 2004 to EUR 5.4 billion in 2005. The increase in global loans principally reflected the increased demand for such loans by the Landesbanken in mid-2005 due to the fact that, as described above, borrowings incurred by them after mid-July 2005 no longer benefit from government credit support (Gewährträgerhaftung).

Among the SME loan programs, the Unternehmerkredit (entrepreneurial loan) program is the most important. The Unternehmerkredit program, which was introduced in September 2003, offers financing for a broad range of investments, such as construction and purchase of machinery. Commitments amounted to EUR 4.8 billion in 2005 compared to EUR 5.7 billion in 2004. KfW believes that this decline was mainly due to the lower level of investment by German SMEs as well as combined with increased availability of financing from internal sources.

KfW also offers several smaller loan programs for special financing purposes, such as micro-finance and acquisition finance. Under the Acquisition Finance program, KfW participates in the financing of mergers and acquisitions of SMEs. Commitments under this program amounted to EUR 134 million in 2005, compared to EUR 236 million in 2004.

Mezzanine Programs. KfW’s Mezzanine Programs comprise the Unternehmerkapital (entrepreneurial capital) program family and the new ERP-Innovation Program. KfW extends mezzanine capital in form of unsecured subordinated loans, which contain quasi-equity elements combining characteristics of debt and equity capital. The on-lending bank is not liable to KfW for the subordinated loan. In its mezzanine financing, KfW seeks to tailor the terms and conditions of its lending to each borrower’s risk profile in order to provide better correlation between yield and risk weighting. As a result, the interest rate of the subordinated loan takes account of both the prevailing rates in the capital markets and the borrower’s credit standing. The borrower’s creditworthiness is first assessed by the on-lending bank. However, as KfW fully assumes the risk of the subordinated loan, it reserves the right to review and, if necessary, to revise the bank’s assessment by applying KfW’s own rating standards.

In light of the importance of innovation for economic growth and employment, KfW has also developed a mezzanine product in the area of innovation finance – the ERP-Innovation Program. This program, offered in cooperation with the ERP Special Fund, was launched in December 2005. It serves to finance market-oriented research and the development of new products as well as their introduction in the market. Interest rates under this program are particularly favorable to the borrower.

KfW’s mezzanine programs have been well received by the market. Commitments in all mezzanine programs amounted to EUR 583 million in 2005, compared to EUR 619 million in 2004.

Equity Participation Programs. KfW provides loans to equity investors, typically private equity companies and venture capital companies. These investors in turn make equity investments in SMEs. In addition, KfW provides new equity for innovative SMEs by direct investment, provided that a private investor provides at least the same amount in equity.

New equity for early-stage investments into technology-based companies is now provided through the ERP-Startfonds program. In the past, KfW’s subsidiary tbg Technologie-Beteiligungs-Gesellschaft mbH (“tbg”) also provided equity funding. tbg’s programs were terminated in connection with a restructuring of this area.

In 2005, KfW participated in the creation of the High-Tech-Gründerfonds, which finances the founding of companies focusing on research and development. This entity is a public/private partnership of the Federal Republic and German industry. KfW holds a minority stake in this company.

The programs through which KfW funds equity investments in start-ups and innovative SMEs have been particularly affected by the slow economic growth of the last years. KfW’s commitments under its equity investment programs declined substantially from EUR 1,075 million in 2000 to EUR 344 million in 2004. However, there has been continued consolidation in the international risk capital markets and there are signs that the negative development is coming to a halt. In 2005, KfW’s commitments dropped only slightly to EUR 300 million.

KfW Förderbank (KfW Promotional Bank)

Under its KfW Förderbank programs, KfW provides housing-related loans as well as financing for other government policy objectives, such as municipal infrastructure, environmental protection and education. Most of the loans of KfW Förderbank programs are extended to private individuals. In 2005, the commitments under KfW Förderbank programs amounted to EUR 38.7 billion, including securitizations, compared to EUR 34.5 billion in the previous year. This increase in commitments was mainly due to securitization transactions under KfW’s PROVIDE program.

As of February 1, 2006, the government of the Federal Republic and KfW launched a new initiative called “Housing, Environment, Growth”, which makes additional federal funds available to subsidize certain of KfW Förderbank’s existing programs. This initiative will substantially improve loan conditions for those programs by lowering interest rates and raising maximum loan amounts. Thus, KfW expects a significant increase of commitments to be issued under the relevant programs.

Housing. KfW’s housing programs provide funds for the promotion of home ownership, for repairs and modernization, and for the reduction of CO₂ emissions.

In terms of loan commitments, the Home Ownership Promotion Program is KfW’s most important housing program. Under this program, any individual who purchases or builds housing in Germany for his or her own use can obtain a promotional loan. In 2005, KfW committed EUR 5.6 billion under the Home Ownership Promotion Program, compared to EUR 4.6 billion in 2004, supporting an additional 97,830 owner-occupied houses and apartments, compared to 84,892 in 2004.

KfW’s CO₂ Building Rehabilitation Program provides long-term financing for coordinated renovation plans designed to reduce energy consumption in residential buildings constructed prior to 1979 through measures such as thermal insulation of the exterior walls, roofs and basements, renewal of windows, and heating systems. In 2005, KfW committed EUR 1.2 billion under this program. The CO₂ Building Rehabilitation Program makes use of federal funds to subsidize interest rates.

Under the Housing Modernization Program KfW provides long-term financing for individual energy-saving modernization measures of the same kind financed under the CO₂ Building Rehabilitation Program, as well as for standard modernization measures (e.g., renewals of floors, and bathrooms and extensions of balconies) in existing residential buildings. In 2005, KfW committed EUR 1.3 billion under this Housing Modernization Program.

Under the Ecological Construction program KfW supports the construction of highly energy-efficient new buildings (e.g., energy-efficient houses and “passive” houses that have no central heating and use almost no energy) and the use of renewable energies for heating in new buildings.

In addition, KfW extended global loans to banks for on-lending to private home owners in the amount of EUR 2.0 billion in 2005, a decline from EUR 2.9 billion in 2004. As global loans involve a small number of transactions but are large in amount, a slight decrease or increase in the number of transactions can have a relatively high impact on total loan volume under KfW’s housing programs.

Education. Under its Education Programs, KfW supports students and employees in advanced occupational training. In 2005, KfW committed a volume of EUR 875 million compared to EUR 812 in the prior year. Loans under these Education Programs are guaranteed by the Federal Government. In 2006, a new student loan program called KfW-Studienkredit will be launched. As of April 1, 2006, German or other EU citizens and their dependants who study at a state or state-approved university in Germany can draw a monthly amount of between EUR 100 and EUR 650. The beneficiaries of the program have to be between 18 and 30 years of age. KfW expects an initial loan volume of approximately EUR 50 million in 2006, rising to approximately EUR 70 million and EUR 135 million in 2007 and 2008, respectively. Loans under the KfW-Studienkredit program will be at KfW’s own risk.

Infrastructure. Under the KfW Infrastructure Programs, municipalities and municipally-owned enterprises have for many years been offered a range of products to finance investments in the municipal and social infrastructure. As of August 1, 2005, KfW restructured its infrastructure program to focus on three target areas: “Municipal Investment” (loans on-lent through banks to companies that are majority-owned by municipal authorities); “Social Investment” (loans on-lent through banks to non-profit organizations); and the “KfW Municipal Loan” (direct loans to municipalities). The previous KfW Infrastructure Program has now been replaced with these new products. In 2005, EUR 2.8 billion in commitments were granted under the KfW Infrastructure Programs compared with EUR 4.2 billion in 2004. This decline of 33% is due to the phasing-out in 2004 of the special fund “Growth Impulses” which had been subsidized by government funds.

Environmental Protection/Renewable Energy. Under its environmental protection programs, KfW finances environmental protection projects, mostly undertaken by private companies. Financing under these programs is provided especially for measures to save energy, to reduce greenhouse gas emissions and to promote the use of renewable energy sources. Under the “Solar Power Generation” program, financing is provided for investments in the installation of small photovoltaic systems. In 2005, KfW made commitments of EUR 4.2 billion under these programs, a large share of which represents commitments for investments in the sector renewable energy.

Global Loans to State Promotional Institutions (Landesförderinstitute). In 2005, KfW extended global loans to promotional institutions owned by the Länder in the amount of EUR 3.6 billion for the funding of their own promotional activities, compared to EUR 3.9 billion in the prior year.

Securitization Programs

Synthetic Programs. In 2000, in order to foster the promotion of SMEs through the support of the on-lending German commercial banks, by easing the transfer of credit risk on their SME loans to the capital markets, KfW established a synthetic securitization program known as PROMISE (Program for “Mittelstand”-Loan Securitization). Under its brand KfW Mittelstandsbank, KfW has securitized 19 portfolios of commercial loans of German and other European banks in the aggregate amount of EUR 26.6 billion from 2000 through 2005. Although most of this amount was under the PROMISE program, it also includes two variations of PROMISE–namely, SEAS 2005-1, a portfolio of SME loans of IKB Deutsche Industriebank AG, and PROSCORE VR 2005-1, a portfolio of small commercial mortgages of Deutsche Genossenschafts-Hypothekenbank AG, each in the amount of EUR 0.7 billion in 2005.

In 2001, KfW also established PROVIDE, a synthetic securitization program for residential mortgages. Under its brand KfW Förderbank, KfW securitized 32 portfolios of German and other European banks in the aggregate amount of EUR 59.4 billion from 2001 through 2005. Although most of this amount was under the PROVIDE program, it also includes Stichting PROFILE Securitization 1, a transaction securitizing the credit risk related to a portfolio of private loans for public infrastructure investments in the amount of EUR 0.6 billion in 2005. Through PROMISE and PROVIDE, KfW has contributed decisively to the establishment of SME loans and residential mortgages as new asset classes in the German capital markets.

All securitization transactions to date have followed a standardized basic structure whereby KfW acts as intermediary credit default swap provider between lending commercial banks and mortgage banks and the capital markets. As such, KfW generally enters into a credit-default swap with the originating bank to provide cover for specified credit risks of the assets being securitized. KfW then contractually lays off the risks assumed under the credit-default swap with third parties by (i) entering into further credit-default swaps with highly rated credit institutions (or, upon provision of highly-rated collateral, other financial institutions) and, in most cases, (ii) issuing credit-linked certificates of indebtedness to a special purpose vehicle (SPV) as collateral against the SPV’s obligations under mirroring credit-linked notes (CLNs), issued by the SPV to investors.

The proceeds from the sale of CLNs are used by the SPV to purchase the certificates of indebtedness from KfW on the issue date of the CLN. KfW uses the cash proceeds to fulfill its payment obligations under its certificates of indebtedness to the SPV, and, to the extent obligations arise in respect of KfW’s credit-default swap with the originating bank (i.e., any realized losses occurred in the reference portfolio), to pay a compensation to the originating bank. In this case, the payment obligations of KfW under the certificates of indebtedness are reduced simultaneously in an amount matching the compensation payments under the credit-default swap with the originating bank. KfW’s potential obligation under the credit-default swap with the originating bank is disclosed as a contingent liability in KfW’s financial statements. In transactions securitizing loan portfolios that may be replenished during the life of the transaction, KfW discloses its obligation to increase the credit default swap upon replenishment of the portfolio by the originating bank as an irrevocable loan commitment (other obligation) in its financial statements.

Since December 2005, KfW has operated a new promotional program called ABS–Mittelstandsportfolio (ABS–SME-Portfolio). Under this program, KfW invests in tranches of SME portfolios that were or will be securitized in order to foster the tradeability of SME risks and thereby encourage the creation of liquid capital markets for this asset class. By providing this liquidity, the ABS–SME-Portfolio promotes the approval of new loans for SMEs by the originators.

In 2005, KfW invested in three SME securitization transactions in the amount of EUR 448 million. Of this amount, 98% (EUR 438 million) was invested in “AAA”-rated tranches; the remainder was invested in tranches rated “BBB” or better. In total, KfW plans to invest EUR 2 billion into the ABS–SME-Portfolio.

True Sale Initiative. In July 2003, 13 German and international banks, including KfW joined forces to develop a market for so-called true sale securitization transactions in Germany (the “True Sale Initiative”). KfW’s role in the initiative was to act as a neutral coordinator and to provide the expertise it has gained in recent years in securitization transactions to strengthen Germany as a financial center.

The True Sale Initiative sought to establish a legal framework and the necessary infrastructure for true sale securitization transactions. The infrastructure consists of two elements. The first element is True Sale International GmbH, a company with limited liability that provides services to the securitization industry in Germany. Its primary task is to promote asset backed securities transactions and to certify them as transactions meeting certain quality standards. The second element is a securitization platform that may be used by any interested bank, including banks not participating in the True Sale Initiative or True Sale International GmbH. This securitization platform comprises three non-profit foundations (charitable trusts) whose function is to become the shareholders of separate SPVs. The SPVs are created for individual transactions in which the SPV buys the portfolio to be securitized from a bank, financing such purchase by issuing tradable securities collateralized through the portfolio (i.e., asset-backed securities), which are sold to investors in the capital markets.

KfW is one of 13 stakeholders in True Sale International GmbH, holding a 7.7% stake. KfW is also the founder of the charitable trusts forming part of the securitization platform. KfW does not give any guarantee or similar support to True Sale International GmbH or the charitable trusts. The True Sale International GmbH and the securitization platform were launched in Summer 2004.

KfW IPEX-Bank

The activities of KfW IPEX-Bank include project and corporate financing within Germany and abroad, as well as export and trade financing. KfW IPEX-Bank operates on a worldwide basis and offers the full range of short- and long-term financing including structured financing and lease financing. As part of KfW IPEX-Bank’s strategy to expand the present product portfolio, in January 2005, KfW acquired a 50% stake in IKB Immobilien Leasing GmbH (subsequently renamed Movesta Lease and Finance GmbH) to develop independent lease finance operations. In addition, KfW IPEX-Bank established new departments for its mezzanine products and syndication activities.

Loans in this area are generally extended directly to the ultimate borrower, with KfW IPEX-Bank frequently making a significant portion of its loans at its own risk. KfW IPEX-Bank extends loans to companies in basic and manufacturing industries, as well as in the commerce, health, power and energy, environmental protection, telecommunications, shipping, aviation, rail and road, airport and harbors and other industry sectors.

In the export and project finance area, KfW IPEX-Bank increasingly cooperates with other financial institutions. In 2005, approximately 65% of its export and project finance commitments were made together with other banks extending commitments on identical terms. In some cases, KfW IPEX-Bank may also arrange for commercial banks to assume the risk on portions of loans made by KfW IPEX-Bank through so-called “risk-participations”, for which KfW IPEX-Bank pays a fee to the bank assuming the risk.

In 2005, total commitments of KfW IPEX-Bank amounted to EUR 12.1 billion, of which EUR 4.5 billion represented commitments for financings within Germany and EUR 7.6 billion for financings in other countries (most of which were in other European countries).

In accordance with the understanding between the European Commissioner for Competition and the German Federal Ministry of Finance reached in March 2002, KfW is required, by no later than December 31, 2007, to transfer to a legally separate subsidiary that portion of its export and domestic and international project finance activities which the Commissioner has deemed to fall outside the scope of the promotional activities of KfW. See “– General – Ownership, Legal Status and Relationship with the Federal Republic – Understanding with the European Commission”.

In 2003, KfW started to implement this understanding and set up a separate business unit under the brand name KfW IPEX-Bank, which is organized as a bank-in-the-bank within KfW and is responsible for all lending activities at purely commercial terms and conditions in competition with other financial institutions. In 2005, KfW continued the institutional structuring of KfW IPEX-Bank’s activities, completing its preparation for independent compliance with applicable banking law and regulation and the organizational and functional separation of various activities including treasury, controlling, internal accounting and risk management. Establishment of internal auditing is underway. KfW expects the separation to be timely completed by year-end 2007.

The following table shows the volume of KfW IPEX-Bank’s commitments divided by sectors, for each of the years indicated.

KfW IPEX-Bank(1)


	As of December 31,
	2005		2004
	(EUR in millions)
Basic Industries		2,267		1,968
Manufacturing Industries, Commerce and Health		1,897		2,395
Power, Renewables, Water		1,225		1,224
Telecommunications, Media		776		736
Shipping		2,513		2,557
Rail and Road		1,555		1,270
Aviation		741		879
Airports and Harbors, Construction Industries		749		534
Refinancing Facility for AKA(2)		261		257
thereof:
from ERP special fund		11		82
from market funds		250		175
Total loan commitments(3)		11,984		11,820
Grants and other commitments		164		95


(1)		Commitments represent the volume of funds committed for loans and other business transactions (including grants and guarantees) in the relevant year, including amounts to be disbursed in future years, and do not include amounts disbursed in the relevant year pursuant to commitments made in prior years. Totals may not add due to rounding.

(2)		AKA (Ausfuhrkreditgesellschaft mbH) is a consortium of German banks active in export financing.

(3)		Total loan commitments include guarantees of EUR 1,360 million in 2005 and EUR 1,870 million in 2004.

In 2005, commitments for project and corporate financings within Germany declined slightly to EUR 4.5 billion compared to EUR 5.7 billion in 2004. Project and corporate financings within Germany included loans to manufacturing and service companies, projects in the shipping, energy sectors and land-based traffic infrastructure, of which the manufacturing industries, commerce and shipping accounted for a major part of new commitments in 2005.

The decrease in KfW IPEX-Bank’s commitments for financings within Germany was more than offset by an increase in commitments to other countries amounting to EUR 7.6 billion in 2005 compared to EUR 6.2 billion in 2004. The increase in new commitments in export and project finance to other countries mainly reflects improved market conditions in certain sectors, such as shipping and basic industries and rail and road.

KfW IPEX-Bank divides its export and project finance business to countries outside Germany into two categories:

	•		medium- and long-term loans for the financing of the export of German and other European capital goods to foreign buyers, including related deliveries from other, mainly European, countries (so-called “supply-tied loans”); and

	•		loans not tied to the purchase of products from the Federal Republic or other European countries that finance direct investments by German and other European companies, corporate financings, as well as loans that finance projects by foreign borrowers which nevertheless serve German or European interests (so-called “untied loans”).

In 2005, commitments for supply-tied loans amounted to EUR 2.6 billion, of which 34% related to deliveries from other, mainly European, countries compared to EUR 2.4 billion or 27% in 2004. In 2005, commitments for untied loans amounted to EUR 5.0 billion, compared to EUR 3.7 billion in 2004.

Supply-tied loans are generally secured by collateral and often benefit from a payment guarantee or other security arrangement acceptable to KfW IPEX-Bank. Traditionally, a substantial portion of the supply-tied loans were guaranteed by the Federal Republic through EULER HERMES Kreditversicherungs AG, the official German export credit insurer (“HERMES”). HERMES insurance can cover a maximum of 95% of KfW IPEX-Bank’s risk, with the result that the portion covered becomes the equivalent of a German government risk. HERMES also provides coverage for related deliveries from other, mainly European, countries provided that it does not exceed a certain portion of the total delivery for which a supply-tied loan was extended. In addition to HERMES insurance, KfW IPEX-Bank frequently obtains a guarantee from a foreign export credit agency or a government instrumentality in the buyer’s country.

In recent years, for borrowers in other European and Organization for Economic Cooperation and Development (the “OECD”) countries where the country risk is not considered high, KfW IPEX-Bank has increasingly extended loans on the basis of ordinary banking collateral (e.g., mortgages on aircraft or ships) without seeking the benefit of HERMES or similar coverage. In addition, even where HERMES coverage is sought, KfW IPEX-Bank frequently extends loans on which the insured portion is less than 95%. As of December 31, 2005, KfW IPEX-Bank’s outstanding supply-tied loans amounted to EUR 22.6 billion, 46% of which was guaranteed by HERMES.

A significant portion of KfW IPEX-Bank’s untied loans is used to finance direct investments by German enterprises and other corporate financings. This area of business has become increasingly important to KfW in recent years. Untied loans are also used to acquire sources of raw materials for German industry and are conditioned upon raw material deliveries into the Federal Republic for the term of the loan. Other untied loans serve to co-finance large-scale infrastructure projects in the European transport sector. Untied loans extended to finance direct investments may benefit from an investment guarantee against political risk from the Federal Government if the host country risk is assessed to be substantial. As of December 31, 2005, KfW IPEX-Bank’s outstanding untied loans amounted to EUR 14.1 billion.

The funds for KfW IPEX-Bank’s international project and export finance commitments are provided by KfW through borrowings in the capital markets and from public funds, including the ERP Special Fund. See “– Sources of Funds”. The ERP Special Fund is a revolving fund that, by law, may be used only to promote the German economy. In 2005, of the EUR 2.6 billion committed for supply-tied loans, EUR 2.4 billion, or 92%, was raised in the capital markets and EUR 204 million, or 8%, was supported by the ERP Special Fund. Untied loans are solely funded through borrowings in the capital markets.

The terms of export and project finance loans funded in the capital markets are based on the cost of funds to KfW plus a margin intended to cover the administrative cost of the loan, the credit risk and a return on KfW’s capital. In connection with the sale of ships, KfW IPEX-Bank provides grants for the benefit of German shipyards that are financed from federal budget funds. Because the Federal Republic is a member of the OECD, loans financed with ERP Special Fund monies must comply with OECD regulations, which provide for

minimum interest rates and maximum credit periods. Margins on these loans are also intended to cover, on average, all the risks of such loans as well as administrative costs and a return on capital. KfW IPEX-Bank also charges customary banking fees for reserving and providing financing and for handling. Foreign currency-denominated loans are hedged through matched funding or other mechanisms. See “– Funding and Investment Policy”.

After KfW IPEX-Bank has been spun off as a legally separate subsidiary in late 2007, KfW will continue to fund KfW IPEX-Bank’s international project and export finance business at market rates based on a stand-alone rating for KfW IPEX-Bank. KfW IPEX-Bank intends to initiate a dialogue with ratings agencies prior to completion of the spin-off.

Financial Cooperation

In its financial cooperation business, KfW provides on behalf of the Federal Republic financial assistance to developing countries and countries in transition, either under its KfW Entwicklungsbank (KfW Development Bank) brand, promoting mainly public sector development cooperation activities, or through DEG, promoting private-sector investments in developing countries.

KfW Entwicklungsbank (KfW Development Bank)

In furtherance of the Federal Republic’s financial cooperation programs, KfW acts as an international development bank, extending loans and disbursing grants to foreign governments. To a large extent, these loans and grants are made according to instructions from the government of the Federal Republic from federal budget funds provided to KfW. Grants, by their nature, do not appear on KfW’s balance sheet.

KfW extends financial cooperation loans in three ways. First, KfW makes traditional financial cooperation loans that are extended for the account of the Federal Republic.

KfW also makes Financial Cooperation Development Loans (FZ-Entwicklungskredite), in which KfW offers its own funds as an additional source of financing. For these loans, federal budget funds at low interest rates or grant funds are combined with funds from KfW that are refinanced in the capital markets. For the majority of these loans, the portion refinanced with KfW funds is usually guaranteed either by a special guarantee facility of the Federal Republic or by export credit agencies and therefore meets the requirements for recognition as official development assistance. Interest rates and related terms of Financial Cooperation Development Loans are significantly more favorable to the borrower than market terms.

Finally, KfW offers Financial Cooperation Promotional Loans (FZ-Förderkredite), which are funded solely through funds raised by KfW in the capital markets and do not include interest reduction elements from the federal budget.

Generally, interested foreign governments submit applications for financial cooperation to the Federal Government, which then asks KfW to appraise the proposed projects. In the case of Financial Cooperation Promotional Loans, project sponsors can submit their proposals directly to KfW. KfW maintains a staff of economists, engineers and other specialists to assist in the appraisal and development of such projects, for which the Federal Government pays fees to KfW, calculated as a percentage of outstanding loans and grants. Based on KfW’s appraisal and its recommendation, the Federal Government decides whether or not to fund the project. Upon a favorable decision and upon determination of the terms and conditions of the financing, KfW enters into a loan or grant agreement with the recipient country or, if applicable, the individual agency responsible for the project, in which case the liabilities would then be fully guaranteed by the respective recipient country.

Financial cooperation loans and grants are disbursed in accordance with the progress of the relevant project, and KfW monitors the utilization of funds in order to verify compliance with the provisions of the loan or grant agreements.

The following table shows the volume of KfW’s financial cooperation commitments for each of the years indicated.

Financial Cooperation Commitments


	As of December 31,
	2005		2004
	(EUR in millions)
Total commitments		1,900		1,944
Loan commitments		1,046		1,212
Financial Cooperation Loans		307		298
Financial Cooperation Development Loans		492		754
of which federal funds		157		321
Financial Cooperation Promotional Loans		247		160
Grant commitments		770		713
Mandates(1)		84		18


(1)		Mandates are grants funded by governmental or supranational entities and distributed using KfW’s expertise and channels.

After an unusually high level of Financial Cooperation Development Loan commitments in 2004, due to a large commitment for a power project in India, loan commitments in 2005 dropped to EUR 1,046 million.

In 2005, Asia accounted for 36% of financial cooperation financing commitments, Europe/Caucasus for 17%, sub-Saharan Africa for 23%, Middle East/North Africa for 15%, and Latin America for 9%. The most significant commitments in 2005 were for projects for the development of social infrastructure (such as water, sewage, health and education projects) and economic infrastructure (such as power, transportation and communication projects), and for the financing of small and medium-sized projects in industry and agriculture through local and regional development banks. Funds were also allocated to finance projects for environment and resource protection, agency assistance in preparing, executing and initiating projects co-financed by KfW, the training of local personnel to implement the projects, and structural assistance to support economic reforms.

Project-tied commitments to finance development projects and programs amounted to EUR 1,852 million in 2005. The greatest share of financial cooperation funds was committed to social infrastructure projects, with commitments totaling EUR 574 million, or 30% of total commitments (2004, 30%) and economic infrastructure projects, with commitments totaling EUR 556 million, or 29% (2004, 39%). Commitments in the financial sector amounted to a volume of EUR 487 million, or 26% (2004, 16%). Commitments for non-project-tied aid, in the form of structural assistance to support economic reforms in developing countries, amounted to EUR 48 million in 2005.

DEG – Deutsche Investitions– und Entwicklungsgesellschaft mbH (German Investment and Development Company)

DEG’s activities extend to various countries in Africa, Asia, Latin America and Central and Eastern Europe. DEG aims to establish and expand private enterprise structures in these countries as a contribution to sustainable growth and lasting improvement in the living conditions of the local population. To this end, DEG provides long-term capital for private enterprises investing in developing countries. In addition, DEG provides both finance and consultancy services in customized packages on a project basis.

DEG pursues four key economic aims in its private sector development policy:

	•		Promoting direct investment, including with DEG’s own venture capital;

	•		Providing long-term debt finance to investment projects;

	•		Supporting pioneer investors in new countries and regions; and

	•		Strengthening local capital markets through financial sector development.

DEG conducts its activities in cooperation with commercial banks rather than in competition with them. In its activities, DEG acts in accordance with commercial principles. Accordingly, it does not provide

subsidized finance, but instead offers finance solely on commercial terms and conditions. DEG also seeks to mobilize other partners to provide additional capital for investment in its projects.

As an instrumentality serving public policy objectives of the Federal Government, DEG has been granted a favorable tax status under which only part of DEG’s activities are subject to corporate income tax. Like KfW, DEG does not distribute profits but instead rechannels them into new investments.

DEG’s obligations do not benefit from the Guarantee of the Federal Republic or from Anstaltslast, and while DEG’s indebtedness is reflected in KfW’s consolidated balance sheet, its debt represents obligations of DEG and not of KfW. In June 2001, KfW and DEG entered into a refinancing agreement, pursuant to which KfW acts as sole issuer in the capital markets and provides DEG with mid- and long-term capital market funds according to DEG’s capital needs. In addition, internal agreements have been reached concerning the respective fields of business activities, the mutual use of offices abroad, joint public relations activities and joint information technology management.

As of December 31, 2005, DEG had total assets of EUR 2,750 million, compared with EUR 2,044 million in 2004, and recorded net income of EUR 119 million, compared with EUR 44 million in 2004. DEG’s new commitments in 2005 amounted to EUR 672 million, compared with EUR 563 million in 2004. In addition, in 2005, commitments in the amount of EUR 30 million were made in connection with risk participations by third parties.

Advisory and Other Services

Advisory and other services have gained importance for KfW in recent years. In its branches in Berlin, Bonn and Frankfurt, KfW maintains Advisory Centers to inform individuals and enterprises about the various promotional programs of the federal and Länder governments. Through partial funding of coaching and advisory services, KfW supports individual entrepreneurs in the early start up-phase of their business ventures, as well as SMEs in determining the necessary turnaround steps in case of a temporary crisis.

In its Berlin branch, KfW’s information services keep government authorities informed about the various promotional programs of the federal and Länder governments, the EU and development banks. A separate information service is available to assist with financing and promotional plans for investment projects outside Germany.

In addition to these activities, KfW provides services for and on behalf of the Federal Government in connection with activities associated with Germany’s reunification. KfW administers certain claims transferred to the Federal Government under the 1990 Unification Treaty between the Federal Republic and the former GDR, assists the Federal Government in privatization initiatives associated with reunification, and performs other services in connection with the assets and obligations taken over from the former GDR. In 2005, KfW continued to make progress in resolving the remaining open cases, claims and accounts.

KfW has also implemented, on behalf of the Federal Government, the Transform Program to support the transition process in Eastern Europe. In this program, KfW provides economic and legal advice to governments and institutions, today mainly to Ukraine and Russia. The program is complemented by measures designed to stimulate and foster the development of SMEs in Eastern Europe. These measures include providing refinancing for local banks that work with SMEs and the refinancing of loans to SMEs, as well as advisory services.

In furtherance of the privatization initiatives of the Federal Government, KfW has acquired and sold shares of both Deutsche Telekom AG and Deutsche Post AG in various transactions since 1997. KfW has sold those shares through, among other transactions, German and international public offerings, private placements, block trades, exchangeable bonds and other transactions. Pursuant to an arms-length agreement with the Federal Government, KfW is protected against the market risk of these transactions. The agreement provides that KfW will receive a percentage of any market value increase in the shares acquired and sold plus a fee for its services.

In the case of Deutsche Telekom AG, in 2005, KfW, in the aggregate, has acquired approximately 308 million shares from the Federal Government and sold approximately 22 million shares to holders of call warrants issued by KfW in 2004 who exercised their right under these warrants to purchase Deutsche Telekom shares. As of December 31, 2005, KfW held a stake of approximately 22% in Deutsche Telekom AG. To

KfW’s knowledge, the Federal Republic continued to hold a stake of approximately 15% in Deutsche Telekom AG as of December 2005.

In the case of Deutsche Post AG, KfW, in the aggregate, sold approximately 127 million shares in 2005 and acquired approximately 81 million shares from the Federal Government in July 2005. As of December 31, 2005, KfW held a stake of approximately 42% in Deutsche Post AG. To KfW’s knowledge, the Federal Republic now holds no shares of Deutsche Post AG.

The Federal Government may sell further stakes in Deutsche Telekom AG to KfW in 2006. However, KfW expects its holdings in Deutsche Telekom AG and Deutsche Post AG shares to be reduced in the medium term.

Other Activities

KfW holds all its subsidiaries and equity participations that are subject to German taxation through its two investment holding companies: KfW Beteiligungsholding GmbH and KfW IPEX-Beteiligungsholding GmbH. As of December 31, 2005, the assets of KfW Beteiligungsholding GmbH consisted of a 37.8% stake in IKB Deutsche Industriebank AG (“IKB”), and 100% stakes in Finanzierungs-und Beratungsgesellschaft mbH (FuB), ASTRA-Grundstücksgesellschaft mbH and tbg Technologie-Beteiligungs-Gesellschaft mbH (formerly owned by DtA Beteiligungs-Holding AG). KfW IPEX-Beteiligungsholding GmbH was established in 2005 principally to become the holding company for KfW IPEX-Bank’s participations. KfW IPEX-Bank is scheduled to become a legally separate subsidiary at the end of 2007. KfW IPEX-Beteiligungsholding GmbH holds a 50% share in Movesta Lease and Finance GmbH which KfW acquired from IKB in 2005.

KfW holds 37.8% of the total share capital of IKB. A German foundation that promotes research and industry holds 11.7%, and the remaining shares of IKB are publicly held.

IKB’s activities include the provision of medium- and long-term loans, equity and real estate financings and structured financings for SMEs, as well as leasing services. IKB is located in Düsseldorf, and its activities are conducted primarily in Germany. IKB’s obligations do not benefit from a guarantee of the Federal Republic or from Anstaltslast. Joint activities of KfW and IKB currently include the promotion of mezzanine-debt and promissory notes, particularly in the area of acquisition financing and the financing of European SMEs. The total value of assets on IKB’s balance sheet as of March 31, 2005 amounted to EUR 38.3 billion.

Credit Risks

The following table shows the credit support backing loans and guarantees (including securitization transactions under PROMISE, PROVIDE and variations of these transaction types) extended by the consolidated KfW Bankengruppe at the dates set forth below. Only the portion of each loan or guarantee backed by the relevant credit support is included.

CREDIT SUPPORT(1)


	As of December 31,
	2005					2004
	(EUR in					(EUR in
	billions)			(%)		billions)			(%)
Total loans(2) and guarantees outstanding		328.9	(3)		100.0		312.6	(4)		100.0

Of which:
- Amounts guaranteed by the Federal Republic or insured by HERMES on behalf of the Federal Republic(5)		35.7	(6)		10.9		38.6			12.3

- Amounts that are the primary liability of Länder, municipal governments or local public authorities or that are guaranteed by one of the Länder governments		34.6			10.5		31.0			9.9

- Trust loans(7)		8.3			2.5		8.1			2.6

- Loan and guarantee amounts mostly to small and medium-sized German companies for which commercial banks assume primary liability to KfW Bankengruppe(8)		140.7			42.8		140.4			44.9

- Securitization commitments outstanding for which commercial banks assume primary liability to KfW Bankengruppe		68.4			20.8		56.3			18.0

- Loan(2) and guarantee amounts at KfW Bankengruppe’s risk partially secured by collateral or other security arrangements customary in the banking business		41.3			12.5		38.2			12.2
of which:

Risk covered by collateral or other security arrangements(9)		12.0	(11)		3.6		11.5			3.7
Commercial risk to KfW Bankengruppe after valuation of collateral and other security arrangements(9)(10)		29.3	(12)		8.9		26.7			8.5


(1)		Totals may not add due to rounding. All amounts include accrued interest and are net of reserves and provisions.

(2)		Includes loans extended in the private equity business.

(3)		Includes EUR 74.2 billion of guarantees provided by KfW Bankengruppe.

(4)		Includes EUR 61.4 billion of guarantees provided by KfW Bankengruppe.

(5)		Includes amounts guaranteed by other EU or OECD member states or insured by other credit export agencies.

(6)		Of which EUR 1.1 billion are guaranteed by other EU or OECD member states, and EUR 0.6 billion are insured by other credit export agencies.

(7)		Trust loans involve no risk to KfW, as they are made in KfW’s name but on behalf of, at the sole risk of and with funds provided entirely by, the entity for which they are made. Substantially all of such loans are made on behalf of the Federal Government. See “Notes to Financial Statements — Notes on the Assets — Loans and Advances to Banks and Customers and Loans on a Trust Basis and other Trust Business”.

(8)		Including global loans in Western Europe.

(9)		The collateral is valued by KfW and may be subject to future revaluations depending on the development of the value of the collateral.

(10)		This position includes deductibles and uninsured portions of HERMES-covered loans, portions of loan and guarantee amounts secured by collateral but not covered by the expected safe market value of the collateral, and unsecured loans and guarantees. These figures also include loan amounts to foreign public borrowers/guarantors in countries that are not highly rated.

(11)		Of which EUR 3.0 billion represents risk covered by guarantees and similar non-physical security arrangements, and EUR 9.0 billion represents risk covered by mortgages, pledges of collateral and similar security arrangements.


(12)		Of which: promotional investment financing programs 26%; rail and road transport 14%; shipping 11%; aviation 6%; basic industries 11%; energy and environmental technology 12%; industry 7%; airports, seaports construction 6%; telecommunication/new media 4%; and others 3%.

Loan Loss Provisions

KfW Bankengruppe enters only into risks that it determines to be acceptable in the context of its current and future earnings. All risks entered into are assessed and provided for according to standards considered by KfW to be conservative. The risk of default is the main component, and it is partially limited due to the structure of KfW Bankengruppe’s business as described below and as shown in the Credit Support table above.

Generally, the intermediating banks to which KfW lends bear the risk on investment loans. For export and project finance loans, a great part of the risks is limited through Federal Government guarantees or through risk participations by commercial banks. For financial cooperation loans, agreements with the Federal Government largely exclude risks to KfW. Accordingly, since the public authorities and banks bear the main liability for loans extended by KfW in each of its main areas of business, only a relatively small portion of the risk remains with KfW in its lending business. This residual risk is largely covered by guarantees of domestic suppliers or foreign companies, or by mortgages and other asset-based collateral. KfW accepts only highly rated guarantees and annually reviews its collateral using conservative valuation principles. After such valuation, any remaining amount of loans and guarantees at commercial risk is the basis for evaluating identified and latent risks and making appropriate provisions.

KfW controls the risks of default relating to loans and guarantees for which it has retained risk by means of an internal rating and evaluation process, in which the risks of individual borrowers and country risks are assessed separately.

For loans and guarantees where KfW identifies a risk of default (so called impaired or non-performing loans), it makes an appropriate specific loss provision taking into account the potential amount of loss. The identification of impaired loans is based on the relevant current Basel II criteria for non-performing-loans and IAS/IFRS loss events. KfW reviews and adjusts its specific provisions for impaired loans on a quarterly basis. An additional provision is made for the remaining part of the exposure on impaired loans.

For loans and guarantees in respect of which no specific risk of default is presently identifiable, KfW has general loan loss provisions for latent country risks and latent counterparty or project risks. Part of these general loan loss provisions are made pursuant to Section 340(g) of the German Commercial Code (Handelsgesetzbuch, or HGB), as described below. KfW adjusts its provisions for loan losses for latent risks at the end of each fiscal year as part of the annual loan portfolio rating process and believes its policy in this respect is prudent.

In accordance with German GAAP, the aggregate amount for loan loss provisions as of year-end is set off against loan balances on the balance sheet and is not included in the reserves disclosed in the balance sheet under the position “Equity Capital”. However, since 1999, Section 340(g) of the German Commercial Code has permitted banks to show general provisions as a reserve, which KfW has done as to a portion of its general provisions for loan losses. See “Management’s Comments on the Financial Statements — The Balance Sheet — Own funds”.

The annual increases on loan loss provisions are charged to income under the item “Write-downs of and value adjustments on loans and certain securities and increases of provisions for possible loan losses” on the income statement.

For additional information regarding the group’s risk provisions and valuations, see “Management’s Comments on the Financial Statements — Risk Provisioning and Valuation Result”.

At December 31, 2005, the group had EUR 41.3 billion in loans and guarantees that it considers (and categorizes in the Credit Support table above) as being at its own risk, of which a portion is secured by collateral and other security arrangements. The group’s exposure to non-performing loans, net of collateral, in that category aggregated EUR 1,852 million in 2005, compared with EUR 2,811 million in 2004. The collateral is valued by KfW and may be subject to future revaluations depending on the development of the value of the collateral. At December 31, 2005, specific allowances for non-performing loans amounted to EUR 1,387

million, compared with EUR 1,749 million in 2004, and additional provisions amounted to EUR 115 million, compared with EUR 115 million in 2004. Accordingly, at December 31, 2005, KfW Bankengruppe had total specific loan provisions covering 75% of its exposure, net of collateral, to non-performing loans, compared with 62% at December 31, 2004. In addition, specific provisions for DEG’s private equity business amounted to EUR 122 million at December 31, 2005, compared to EUR 130 million at December 31, 2004.

At December 31, 2005, outstanding loans on which KfW Bankengruppe bears a political risk totaled EUR 33.7 billion. At December 31, 2005, the group’s general loan loss provisions for country risks amounted to approximately EUR 0.4 billion, compared with EUR 1.1 billion at December 31, 2004.

Loans and payments made under guarantees are written off when management determines that there is no chance of recovery. The aggregate amount of loans and guarantee payments written off by KfW Bankengruppe during the ten-year period ended December 31, 2005, net of recoveries on such loans and guarantee payments, was EUR 2,405 million, compared with EUR 1,609 million in the ten-year period to 2004. Most of these loans had been fully provided for in years prior to their write-off. In 2005, the aggregate amount of loans and guarantee payments written off amounted to EUR 799 million, EUR 728 million of which related to KfW, mainly caused by KfW’s private equity finance and write-downs on aircraft finance. In 2004, the aggregate amount of loans and guarantee payments written off amounted to EUR 373 million, EUR 330 million of which related to KfW, mainly caused by the areas private equity finance and infrastructure finance.

Risk Control

To promote its sustainable long-term development, KfW Bankengruppe continuously attempts to improve its group-wide risk-management function.

Ultimate responsibility for risk management and for its transparent presentation to the appropriate oversight bodies rests with the Board of Managing Directors, which reports to the Board of Supervisory Directors. An independent risk management and controlling department is in charge of managing and controlling all categories of risk in the entire group and of establishing a uniform standard of assessing and addressing risks on a group-wide basis. This department is functionally independent from those business units that enter into the risks and reports to group risk management structures, such as the Risk Management Committee and its sub-committees for market and credit risk. Further, the department co-operates with operational units that are also involved in the process of risk supervision. The Risk Management Committee includes the members of the Board of Managing Directors, thus providing for timely and adequate risk reporting. In line with the minimum requirements for the credit business of credit institutions (MaK), the complete risk profile of the group – including credit, market and operational risks – is reported to the Risk Management Committee and to the Board of Supervisory Directors on a quarterly basis.

The risk management systems in KfW Bankengruppe identify, assess and control the risks on lending, liquidity, fluctuations in foreign currency rates and interest rates, and operations. KfW Bankengruppe is constantly developing and expanding the range of instruments designed to meet its requirements to limit, control and supervise risks. As a general rule, KfW assumes or enters only into those risks that it determines to be acceptable in the context of its risk bearing capacity and current and expected future earnings.

In 2005, KfW continued to develop further its risk assessment and evaluation systems on the basis of an economic capital concept in order to improve the internal transparency of earnings, costs and risks. Special attention was paid to the validation and improvement of internal rating systems and to the further improvement of Exposure-at-Default and Loss-Given-Default concepts. KfW applies the economic capital concept to determine the economic capital requirements for its credit and market risks based on internal models for portfolio credit risk – taking into account portfolio concentration and diversification effects – and market risk. The capital needed to cover operational risks is determined using the Basel II standard approach for operational risk.

KfW is not subject to the risk management provisions of the German Banking Act, but applies them on a voluntary basis. This Act provides for the implementation of appropriate systems for the management, supervision and control of risk, based on the use of the ratio of equity (regulatory capital) to risk as a limitation on business volume and the ability to assume additional risk. KfW voluntarily complies with the minimum requirements for the lending activities of banks (MaK) and prepares to do so with the newly developed minimum requirements for the risk management of banks (MaRisk). In addition, KfW is also developing systems to enable it to comply adequately with the Basel II accord by its scheduled implementation in 2007.

The main risks KfW faces are credit risk, market risk, liquidity risk and operational risks.

Credit Risk. KfW bears the credit risk of the end borrower mainly in connection with its export and project financing business and programs for equity participation, start-up finance, and, increasingly, in its financial cooperation business. In particular, in its investment finance business, KfW is exposed to the credit risk of the on-lending banks and monitors this risk on a continuous basis.

The assessment of credit risk is made using internal rating procedures. All material lending decisions are based on two votes, one by the operational departments (market) and one by the market independent risk management department. Country risks and individual commercial or project-related risks are assessed separately. The rating procedures used by KfW Bankengruppe are based on a consistent model architecture and are designed for relevant homogenous customer segments or type of financing. By regularly evaluating the rating procedures and developing them further, KfW ensures fast response to any changes in the framework conditions.

The risk profiles of KfW’s loan portfolio are assessed by means of a credit risk portfolio model. On the basis of the concept of economic capital, the risk management and controlling department assesses the risk concentrations by individual borrower, industry and country. The results form the basis for managing the loan portfolio and are included in the risk reporting and group unit business planning.

To control credit risk, KfW also uses a limits framework and a range of hedging instruments that are customary in the banking business. These instruments include credit default swaps, which are concluded with OECD banks and used for risk management of sub-portfolios and individual counterparties. In mid-2004, risk principles were introduced to uniformly govern the group-wide management, valuation and netting of securities. The default risk on securities investments and derivatives are limited by a restrictive choice of counterparties, all of whom are first-class standing, and through collateral agreements.

For more information on KfW’s credit risk exposures, see above under “– Loan Loss Provisions”.

Market Risk. Due to the nature of its business, KfW’s market risk is limited mainly to foreign currency and interest rate risks. Currency risks associated with loans outstanding are limited by refinancing these loans in the same currency as the respective loan and through currency hedging instruments when the refinancing takes place in a different currency. Exchange rate risks have mainly an affect on foreign currency margins earned in the lending business. Interest rate risk is incurred and limited as follows. Depending on its interest rate expectations, KfW may take limited interest rate risk by accepting a certain mismatch in the duration of its assets and liabilities. In addition, KfW is subject to a potential asset liability duration mismatch for structural reasons, since KfW permits prepayment for most of its investment finance loans. When an increase of prepayments can be expected as a result of interest rate developments, KfW takes into account the possibility of prepayments by entering into transactions on the funding side with short- and medium-term maturities and buying alternative assets, mainly bonds. The Risk Management Committee monitors KfW’s interest rate risk exposure on the basis of specific instruments for risk control. The risk of changes in interest rates is managed using an internal model that is linked to all the relevant internal and external data. This process enables KfW regularly to undertake up-to-date value-at-risk calculations for changes in interest rates and adjust its funding decisions accordingly. In addition, monthly reports show open positions that are interest rate sensitive.

Liquidity Risk. KfW’s liquidity risk is monitored by software that evaluates, on a daily, monthly and yearly basis, the liquidity situation of KfW in accordance with the guidelines set forth in the KfW Law and Principle II (governing liquidity) of the German Banking Act. To ensure liquidity, KfW maintains a portfolio of liquid securities, including a U.S. dollar-denominated liquidity reserve. The use of asset swaps limits the price risk associated with holding bond portfolios as a liquidity reserve. In addition, KfW maintains a balanced medium- and long-term liquidity structure as part of its asset/liability management.

Operational and other risks. The control of operational risks has become increasingly important in banking practice and in the development of banking supervisory instruments, particularly with regard to the Basel II accord. Operational risks are evaluated through an internal control system. An internal review group evaluates on a regular basis KfW’s operational processes and systems. For operational risks, KfW maintains a general contingency plan. For unforeseeable events such as outage of technical equipment, KfW has installed and further developed contingency plans and maintains sufficient insurance coverage. In addition, KfW maintains an in-house back-up system, on which data is stored on a daily basis and an off-site back-up system, on which data is stored on a monthly basis. In 2005, KfW continued to implement a comprehensive

“Operational Risks” project in order to prepare KfW to be in compliance with the Basel II requirements. To fulfill these regulatory requirements, KfW evaluates the operational risk capital based on the standardized approach. Furthermore, KfW expects to be in compliance with all the principles named in the “Sound Practices for the Management and Supervision of Operational Risk” in 2007. An appropriate risk management environment has been well developed as have methods for the identification, assessment, monitoring and mitigation of operational risk., KfW began to collect loss data in the beginning of 2005 and performed the first risk assessments shortly thereafter. In addition, KfW attempts to limit legal risks through the early involvement of KfW’s own legal department as well as close cooperation with external legal counsel.

Sources of Funds

KfW Bankengruppe’s principal sources of funds are the capital markets and public funds. After deduction of EUR 8.4 billion in liabilities on a trust basis, EUR 450 million in unpaid capital and EUR 27 million in the special loss account maintained in accordance with Article 17(4) of the D-Mark Balance Sheet Law, KfW Bankengruppe’s balance sheet total at December 31, 2005 was EUR 332.3 billion. EUR 310.1 billion, or 93% of this amount, was financed through borrowings. The following table shows KfW Bankengruppe’s borrowings by source of funds:

Borrowings of KfW Bankengruppe by Source of Funds (1)


	As of December 31, 2005
	(EUR in billions)		(%)
Capital Market Funds
Bonds, notes and commercial paper issued by KfW and KfW Finance		238.9		77.0
of which Funds borrowed from KfW Finance(2)		22.7		7.3
Funds borrowed from banks		23.0		7.4
Funds borrowed from customers		17.9		5.8

Total capital market funds		279.8		90.2
Public Funds
Federal budget		14.1		4.6
ERP Special Fund		16.2		5.2

Total public funds		30.3		9.8

Total funds		310.1		100.0


(1)		Totals may not add due to rounding.

(2)		Represents net proceeds of KfW Finance’s bond, note and commercial paper issues on-lent to KfW against Schuldscheindarlehen.

In line with the maturity pattern of KfW Bankengruppe’s loan portfolio, 73.9% of the group’s total borrowings outstanding at the end of 2005 had remaining maturities of one year or more.

Capital Markets. KfW Bankengruppe raises funds in the capital markets through the issuance of bonds and notes and by incurring loans against debt certificates (Schuldscheindarlehen). Capital market funding has gained importance in the last several years as KfW Bankengruppe has increased the volume of its loan portfolio. The proportion of capital market funds in KfW Bankengruppe’s new borrowings with initial maturities of more than one year decreased from 88.4% in 2004 to 81.9% in 2005. For information on the range of interest rates paid by KfW Bankengruppe on its capital market liabilities at the end of 2005, see “Supplementary Information on Funded Debt of KfW”.

The most important source of capital market funds for KfW is bond and note issues in the international capital markets, both directly and indirectly through its wholly-owned finance subsidiary in the United States, KfW International Finance Inc., a Delaware corporation (“KfW Finance”). At December 31, 2005, the amount of outstanding bonds and notes issued by KfW Bankengruppe (including KfW Finance) totaled EUR 238.9 billion, representing a EUR 28.1 billion increase from the EUR 210.8 billion outstanding at December 31, 2004. In 2005, KfW Finance only issued commercial paper in the U.S. market. The net proceeds of KfW Finance’s issues are on-lent to KfW in the form of Schuldscheindarlehen. All of KfW Finance’s securities are fully and unconditionally guaranteed by KfW.

With respect to outstanding borrowings, Schuldscheindarlehen are KfW Bankengruppe’s second most important funding instrument in the capital markets, with EUR 27.1 billion outstanding at December 31, 2005 (excluding Schuldscheindarlehen borrowed from KfW Finance), of which EUR 14.4 billion are included in

funds borrowed from banks and EUR 12.7 billion in funds borrowed from customers (non-bank). Schuldscheindarlehen are a special instrument of the German capital market, whereby the lending entity, generally a bank, insurance company or public pension fund, receives a certificate evidencing its loan to the borrower and the terms of such loan. Maturities on Schuldscheindarlehen range from one to 30 years, thereby providing a high degree of flexibility to both borrower and lender. The certificate generally authorizes three assignments, which provides limited liquidity for the Schuldscheindarlehen in the interbank secondary market.

Public Funds. Mirroring the increasing importance of capital market funding to KfW Bankengruppe, the proportion of public funds in the group’s borrowings declined from 12.0% in 2004 to 9.8% in 2005. The most important source of public funds for KfW is the budget of the Federal Republic. Total long-term and short-term borrowings from funds provided by the federal budget (excluding loans on a trust basis) amounted to EUR 14.1 billion at December 31, 2005. Public funds available to KfW Bankengruppe also include amounts borrowed from the ERP Special Fund. The group’s long-term and short-term borrowings from the ERP Special Fund amounted to EUR 16.2 billion at December 31, 2005.

Use of Funds. The majority of KfW Bankengruppe’s lending in connection with investment finance and export and project finance is financed from funds raised by KfW in the capital markets. Public funds are made available to the group for use in special categories of investment finance and certain export and project finance transactions with developing countries. Loans made within the framework of the Federal Republic’s financial cooperation programs are mainly financed with funds appropriated in the federal budget for loans by KfW Bankengruppe. Grants, the vast majority of which are made in connection with the Federal Republic’s financial cooperation program, are also financed with funds appropriated from the federal budget. Grants, by their nature, do not appear on the group’s balance sheet.

Funding and Investment Policy

KfW’s funding policy pursues a dual aim: to achieve the most favorable terms possible for funds raised in the capital markets and to minimize the effects of changes in interest rates by matching funding liabilities with loan assets, mainly through interest rate hedging instruments, to the extent practicable. In order to achieve favorable terms for funds raised, KfW maintains an active presence in all major capital markets and utilizes a broad range of funding instruments in various currencies, covering a range of maturities.

KfW’s funding is based on three pillars: its benchmark programs (Euro benchmark program and USD program); publicly placed bonds outside the benchmark programs; and private placements. In 2005, benchmark bonds accounted for a funding volume of EUR 18.6 billion, or 37%, of the total funding volume of EUR 50.6 billion. The two other pillars accounted for EUR 22.2 billion, or 44%, and EUR 7.2 billion, or 14%, respectively, with the remaining 5% being mainly funded by issuance of credit-linked certificates of indebtedness in connection with securitization transactions. Under the Euro benchmark program, KfW issued three notes, two in an amount of EUR 4 billion each (maturities of five and ten years) and one in an amount of EUR 5 billion (three-year maturity). Under the USD program KfW issued one five-year note of USD 2 billion, and two three-year notes of USD 2 billion and USD 3 billion, respectively.

At the end of 2005, KfW held two medium-term portfolios of public sector issues as well as bonds issued by banks and other borrowers, all of high credit quality, in the aggregate amount of EUR 17.3 billion and USD 1.0 billion, respectively, which are managed by KfW. KfW holds such bonds as a liquidity reserve. The portfolio of bonds denominated in euro enables KfW to enter into repurchase agreements and secured loans under the refinancing operations of the European Central Bank via the Deutsche Bundesbank. More than half of the remaining bonds in KfW’s eurobond portfolio (excluding compensation claims) will mature by 2010.

In addition, KfW holds short-term securities as well as other money market assets in connection with its liquidity management.

In order to diversify its sources of liquidity in euro and U.S. dollar, KfW owns two portfolios of securities denominated in euro and U.S. dollar, both of which are managed by external portfolio managers. As of December 31, 2005, the amount invested reached EUR 3.7 billion and USD 1.1 billion, respectively.

SHORT-TERM INDEBTEDNESS AND CAPITALIZATION

In accordance with German GAAP applicable to banks, KfW classifies borrowed funds on its balance sheet into (i) debt with remaining maturities of five years or more, (ii) debt with remaining maturities of one year up to five years, (iii) debt with remaining maturities of three months up to one year, (iv) debt with remaining maturities of up to three months and (v) debt at call. This classification differs from U.S. GAAP, which requires a dual classification into current debt with initial maturities of up to one year and long-term debt with initial maturities in excess of one year.

The following table has been prepared in accordance with the German GAAP presentation format. Long-term debt consists of borrowings and bonds issued with remaining maturities of one year or more.

Short-term Indebtedness and Capitalization of KfW Bankengruppe as of December 31, 2005(1)


	(EUR in millions)
Short-term indebtedness(2)		72,665

Long-term borrowings from
Federal Government		12,354
ERP Special Fund		13,687
Banks		14,692
Other lenders		10,700

Total long-term borrowings		51,433
Bonds		177,614

Total long-term debt		229,047
Equity
Paid-in capital(3)		3,300
Reserves(4)		5,699
Fund for general bank risks		4,600

Total equity		13,599

Total capitalization(5)		315,311

(1)		Totals may not add due to rounding.

(2)		With a remaining term of one year or less.

(3)		KfW’s equity capital, 80% of which is held by the Federal Government and the remaining 20% by the Länder, amounted to EUR 3,750 million in 2005. EUR 3,300 million has been paid in pro rata by the Federal Government and the Länder.

(4)		Consists of capital reserves of EUR 1,604 million, retained earnings of EUR 3,393 million and reserves from the ERP Special Fund of EUR 703 million.

(5)		Excludes accrued interest in the amount of EUR 8.4 billion.

MANAGEMENT

The executive bodies of KfW are the Board of Managing Directors (Vorstand) and the Board of Supervisory Directors (Verwaltungsrat).

Board of Managing Directors

The Board of Managing Directors presently consists of six members, which are appointed by the Board of Supervisory Directors. The Board of Managing Directors is responsible for the day-to-day conduct of KfW’s business and the administration of its assets. The names of the members of the Board of Managing Directors and the dates of their appointments to the Board are set forth below:


Name		Date of Initial Appointment
Dr. Peter Fleischer		August 22, 2003
Dr. Peter Klaus		October 1, 1999
Wolfgang Kroh		December 1, 2000
Detlef Leinberger		October 1, 1999
Ingrid Matthäus-Maier		July 1, 1999
Hans W. Reich (official spokesman)		December 15, 1990

Members of the Board of Managing Directors are full-time employees of KfW and are generally appointed for five-year terms of office. Reappointment is permitted. Each Managing Director is responsible for certain aspects of KfW’s activities but shares the responsibility for all actions taken by the Board. There is no chief executive officer of KfW. The official spokesman of the Board of Managing Directors is Hans W. Reich.

On December 9, 2005, the Board of Managing Directors elected its member Ingrid Matthäus-Maier to become spokeswoman of the Board of Managing Directors as of October 1, 2006. Ms. Matthäus-Maier will replace Hans W. Reich, who will retire as of September 30, 2006. Also on December 9, 2005, the Board of Supervisory Directors appointed Dr. Günther Bräunig, currently General Manager of KfW, to the Board of Managing Directors as of October 1, 2006.

On March 31, 2006, the Board of Supervisory Directors appointed Dr. Norbert Kloppenburg, currently a director of KfW, to the Board of Managing Directors as of January 1, 2007. Dr. Kloppenburg will replace Dr. Peter Klaus, who will retire as of April 30, 2007.

Board of Supervisory Directors

The Board of Supervisory Directors has 37 members at present and consists of the Federal Minister of Finance, the Federal Minister of Economics and Technology, the Federal Minister of Foreign Affairs, the Federal Minister of Consumer Protection, Food and Agriculture, the Federal Minister of Transport, Construction and Housing, the Federal Minister for Economic Cooperation and Development, the Federal Minister for the Environment, Nature Conservation and Nuclear Safety, seven members appointed by the Bundesrat, seven members appointed by the Bundestag, five representatives of commercial banks, two representatives of industry, one representative each of the local municipalities, agriculture, crafts, trade and the housing industry and four representatives of the trade unions. The representatives of the commercial banks, industry, the local municipalities, agriculture, crafts, trade, the housing industry and the trade unions are appointed by the Federal Government after consultation with their constituencies.

The Federal Minister of Finance and the Federal Minister for Economics and Technology are appointed by the Federal Government as Chairman and Deputy Chairman of the Board of Supervisory Directors on a year-by-year rotating basis. The term of office of all Federal Ministers is five years while the other members of the Board of Supervisory Directors are appointed for three years. There are two committees of the Board of Supervisory Directors, the Legal and Administrative Committee and the Credit Committee, which approves all loan commitments to a single borrower of between EUR 50 million and EUR 100 million.

The Board of Supervisory Directors supervises the overall conduct of KfW’s business and the administration of its assets. It may give the Board of Managing Directors general or special directives. In particular, the Board of Supervisory Directors approves all loan commitments to a single borrower exceeding EUR 100 million and may reserve the right to approve other transactions or types of transactions. It is not, however, authorized to represent KfW or to commit funds on KfW’s behalf.

The members of the Board of Supervisory Directors are:


Name		Position
Dietrich Austermann		Minister of State Schleswig-Holstein, appointed by the Bundesrat

Dr. Günter Baumann		Member of the Board of Managing Directors of Deutscher Industrie- und Handelskammertag, Representative of Industry

Anton F. Börner		President of the Bundesverband des Deutschen Groß- und Außenhandels e.V.; Representative of Trade

Dr. Ulrich Brixner		Chairman of the Board of Managing Directors of DZ BANK AG; Representative of the Cooperative Banks

Rüdiger Dorn		President of Haus & Grund Deutschland; Representative of the Housing Industry

Professor Dr. Kurt Faltlhauser		Minister of Finance of the Free State of Bavaria; appointed by the Bundesrat

Dr. Thomas R. Fischer		Spokesman of the Board of Managing Directors of WestLB; Representative of the Mortgage Banks

Sigmar Gabriel		Federal Minister for the Environment, Nature Conservation and Nuclear

Michael Glos		Federal Minister of Economics and Technology; Chairman

Prof. Dr. Hans-Günter Henneke		Chairman of Deutscher Landkreistag, Representative of the Municipalities

Dr. Dietrich H. Hoppenstedt		President of the Deutscher Sparkassen- und Giroverband e.V.; Representative of the Savings Banks

Bartholomäus Kalb		Member of Parliament, appointed by the Bundestag

Roland Koch		Minister President of the State of Hesse; appointed by the Bundesrat

Jürgen Koppelin		Member of Parliament, appointed by the Bundestag

Oskar Lafontaine		Member of Parliament, appointed by the Bundestag

Prof. Dr. Wolfgang Methling		Minister of State of Mecklenburg-Vorpommern, appointed by the Bundesrat

Dr. Horst Metz		Minister of the Free State of Saxony, appointed by the Bundesrat

Franz-Josef Möllenberg		Chairman Trade Union for Food and Restaurants; Representative of the Trade Unions

Hartmut Möllring		Minister of State of Lower Saxony, appointed by Bundesrat

Margret Mönig-Raane		Deputy Chairman ver.di e.V., Representative of the Trade Unions

Klaus-Peter Müller		President of the Bundesverband Deutscher Banken e.V.; Representative of the Commercial Banks

Stefan Ortseifen		Spokesman of the Board of Managing Directors of IKB Deutsche Industriebank AG; Representative of the Industrial Loan Banks

Ronald Pofalla		Member of Parliament, appointed by the Bundestag

Heinz Putzhammer		Member of the Executive Board of the Deutscher Gewerkschaftsbund; Representative of the Trade Unions

Christine Scheel		Member of Parliament, appointed by the Bundestag

Hanns-Eberhard Schleyer		Secretary General of the Zentralverband des Deutschen Handwerks; Representative of the Crafts

Horst Seehofer		Federal Minister of Food, Agriculture and Consumer Protection

Michael Sommer		Chairman of the Deutscher Gewerkschaftsbund; Representative of the Trade Unions

Gerhard Sonnleitner		President of the Deutscher Bauernverband e.V.; Representative of Agriculture

Jörg-Otto Spiller		Member of Parliament, appointed by the Bundestag

Peer Steinbrück		Federal Minister of Finance; Deputy Chairman

Dr. Frank-Walter Steinmeier		Federal Minister of Foreign Affairs

Ludwig Stiegler		Member of Parliament, appointed by the Bundestag

Erwin Teufel		Former Minister President representing the State of Baden-Württemberg, appointed by the Bundesrat


Name		Position
Jürgen R. Thumann		President of the Bundesverband der Deutschen Industrie; Representative of Industry

Wolfgang Tiefensee		Federal Minister of Transport, Building and City Development

Heidemarie Wieczorek-Zeul		Federal Minister for Economic Cooperation and Development

See “Notes to Financial Statements — Other Notes Required — Remuneration, Advances and Loans to Members of the Board of Managing Directors and the Board of Supervisory Directors” for information on the remuneration of the Board of Managing Directors and the Board of Supervisory Directors.

EMPLOYEES

At December 31, 2005, KfW employed 3,452 persons, compared to 3,370 persons at December 31, 2004. Approximately 36% of KfW’s staff is covered by collective bargaining agreements. KfW provides employee benefits such as pensions to its employees.

Of KfW’s staff, approximately 28% are engaged in investment finance, 10% in financial cooperation, 10% in export and project finance, and the balance in KfW’s accounting, disbursements, collateral, funding and lending support departments and in general administrative and staff functions.

FINANCIAL SECTION

FINANCIAL STATEMENTS AND AUDITORS

The financial statements and the consolidated financial statements of KfW have been prepared in accordance with the German Commercial Code and the more specific requirements of the Accounting Regulation for Banks and Financial Service Institutions (Verordnung über die Rechnungslegung der Kreditinstitute und Finanzdienstleistungsinstitute - the “Bank Accounting Regulation”), as well as various additional practices, laws and regulations of the Federal Republic of Germany (collectively, “German GAAP”). German GAAP emphasizes the principle of prudence (Vorsichtsprinzip) in the presentation of the financial statements to protect the interests of creditors. German GAAP differs in certain significant respects from accounting principles generally accepted and financial reporting practices followed in the United States (“U.S. GAAP”), and, as a result, KfW’s consolidated financial statements included in this annual report may differ substantially from financial statements prepared in accordance with U.S. GAAP.

Pursuant to the KfW Law, the annual financial statements of KfW are examined by a Wirtschaftsprüfer (Certified Public Accountant) who is appointed by the Federal Minister of Finance in consultation with the Board of Directors and the Bundesrechnungshof (Federal Court of Auditors). KfW’s external auditors are PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (“PwC”), a member of PricewaterhouseCoopers International.

The annual audit is conducted in accordance with German Generally Accepted Auditing Standards (“German GAAS”).

The audit report of PwC for the year ended December 31, 2005, dated February 28, 2006, refers to a combined management report (“Lagebericht”). The examination of and the audit report upon such combined management report are required under German GAAS. This examination was not made in accordance with U.S. Generally Accepted Auditing Standards (“U.S. GAAS”) or U.S. attestation standards. Therefore, PwC does not provide any opinion on the aforementioned examination, on the combined management report or on the financial statements included in this Annual Report in accordance with U.S. GAAS or U.S. attestation standards.

MANAGEMENT’S COMMENTS ON THE CONSOLIDATED FINANCIAL STATEMENTS

KfW Bankengruppe comprises KfW and eight affiliated enterprises. Six of these affiliated enterprises are consolidated into the group. The figures in the financial statements for the group are determined mainly by the financial condition and results of operations of KfW. Significant differences between the results or financial position of KfW Bankengruppe and those of KfW are discussed below.

Composition of KfW Bankengruppe


	Balance Sheet Total
	(EUR in millions)
	December 31,		December 31,
	2005		2004
KfW		340,316		327,841
Finanzierungs- und Beratungsgesellschaft mbH (FuB)		48		45
KfW International Finance Inc. (KfW-Finance)		22,693		30,513
DEG-Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG)		2,221		1,922
tbg Technologie-Beteiligungs-Gesellschaft mbH (tbg)		718		676
KfW Beteiligungsholding GmbH		1,490		1,524
KfW IPEX-Beteiligungsholding GmbH		33		–
IKB Deutsche Industriebank AG (associated enterprise)		38,303		36,956
Movesta Finance and Lease GmbH (associated enterprise)		1,902		1,699

Macroeconomic developments

The pace of the world economy slowed down only slightly in 2005 despite significantly higher oil prices. According to preliminary data, global gross domestic product (“GDP”) increased by between 4% and 4.5% in real terms. This increase shows that growth still remained strong following the very high GDP growth rate of 5.1 % in 2004. Global economic growth in 2005 was driven primarily by strong demand in the United States and China. Growth in the euro area, by comparison, was weaker.

Germany’s price-adjusted gross domestic product increased by only 0.9% in 2005. Adjusted for the different number of working days, the performance of the German economy did not change overall against the previous year. Once again, exports were the strongest contributors to growth. Capital goods investments also provided positive impulses. As in preceding years, low building and construction investment hampered growth, while consumer spending did not increase in comparison with the previous year. Given the persistently subdued domestic demand, the business climate among small and medium-sized enterprises in the first half was weak but clearly improved after the summer.

The Balance Sheet

The following table shows the development of the group’s main balance sheet items in 2005:

Balance Sheet Trends (1)


	December 31,		December 31,		Increase (Decrease) in 2005
Assets	2005		2004		Compared to 2004
	(EUR in millions)							(%)
Cash reserves		26		27		(1	)		(4	)
Loans and advances to banks(2)		180,193		176,736		3,457			2
Loans and advances to customers(2)(3)		95,384		95,245		139			0
Bonds and other fixed-income securities(2)		30,244		26,752		3,492			13
Shares and other non-fixed income securities		21,511		16,249		5,262			32
Investments and shares in affiliated enterprises		1,382		1,357		25			2
Assets on a trust basis		8,372		8,106		266			3
Compensation claims on public authorities(4)		0		64		(64	)		(100	)
Other assets(5)		4,031		4,060		(29	)		(1	)

Balance Sheet Total		341,143		328,596		12,547			4


(1)		Totals may not add due to rounding.

(2)		Includes accrued interest.

(3)		Includes corporate borrowers such as airlines and shipping companies (export finance) and steel and energy companies (investment finance). See “Business”.

(4)		Credit institutions with head offices in the former GDR were allocated an interest-bearing claim on the Currency Conversion Compensation Fund as from July 1, 1990, to the extent that their assets were not sufficient to cover the liabilities, including reserves, resulting from the introduction of the Deutsche Mark and the conversion of the currency of the former GDR. The level of the claim was determined by the terms of Article 40(2) of the D-Markbilanzgesetz (D-Mark Balance Sheet Law). Following the merger between KfW and the former Staatsbank in 1994, these compensation claims were included in KfW’s balance sheet.

(5)		Includes mainly prepaid expenses and deferred charges.


	December 31,		December 31,		Increase (Decrease) in 2005
Liabilities and Shareholders’ Equity	2005		2004		Compared to 2004
	(EUR in millions)							(%)
Liabilities to banks(1)		23,025		25,294		(2,269	)		(9	)
Liabilities to customers(1)(2)		48,136		55,309		(7,173	)		(13	)
Bonds		238,928		210,806		28,122			13
Loans on a trust basis		8,372		8,106		266			3
Compensation liabilities under Art. 41 of the D-Mark Balance Sheet Law(3)		2		2		0			0
Capital and reserves(4)		13,599		11,655		1,944			17
Other liabilities(5)		9,081		17,425		(8,344	)		(48	)

Balance Sheet Total		341,143		328,596		12,547			4

Memo Item: Guarantees		74,170		61,375		12,795			21


(1)		Includes accrued interest.

(2)		Includes the Federal Government, the ERP Special Fund and certain non-bank lending institutions, such as insurance companies.

(3)		Credit institutions with head offices in the former GDR were required to include their liabilities towards the Currency Conversion Compensation Fund (“compensation liabilities”) in their opening balance sheets as of July 1, 1990, if their equity exceeded the limits determined by Article 40(2) of the D-Mark Balance Sheet Law. With the merger between KfW and the Staatsbank in 1994, these compensation liabilities accrued to KfW.

(4)		Includes the fund for general bank risks in accordance with Section 340(g) of the German Commercial Code.

(5)		Includes deferred income, other liabilities and accrued estimated liabilities.

During 2005 the group balance sheet total increased by EUR 12.5 billion, or 4%, to EUR 341.1 billion. Domestic investment loans accounted for most of the growth in the lending business; at EUR 187 billion, they were EUR 4 billion higher than in the previous year. In addition, the volume of securities rose in the course of the year, especially as a result of new privatization transactions (“Platzhaltergeschäfte”).

With the asset securitization transactions conducted in 2005, which led to an increase in guarantees to EUR 74.2 billion, the group’s volume of business (which includes off-balance sheet items) rose by 7% to EUR 454.2 billion.

KfW Bankengruppe views 2005 as a successful business year. The positive development of the group’s earnings position is marked by stable income from current operations and significantly lower risk provisions due to a general improvement in the risk situation. The group’s income from current operations before risk provisions was EUR 1,281 million, exceeding the previous year’s figure by EUR 45 million. Interest income and net commissions received were EUR 75 million higher than in the previous year. Administrative expenses rose moderately by EUR 30 million to EUR 582 million in 2005. The risk provisioning and valuation result improved substantially and totaled EUR 603 million, which was EUR 205 million, or 25%, lower than in the previous year. The positive overall result is mainly due to the further improvements in the risk situation in the lending business, especially in export and project finance and private equity finance. Overall, as in previous years, careful account was taken of all identifiable risks. As a result of the improved risk situation, net income for the year rose to EUR 625 million, a substantial increase over the previous year’s level of EUR 368 million.

Volume of Lending

The volume of lending of KfW Bankengruppe (loans and advances, including loans on a trust basis and guarantees) rose to EUR 328.9 billion at December 31, 2005 from EUR 312.6 billion at December 31, 2004.

The following table shows the volume of lending by business area in 2005:

Volume of Lending


					Increase (Decrease) in
	December 31,		December 31,		2005
	2005		2004		Compared to 2004
	(EUR in millions)							(%)
Investment finance (1)		187,135		182,895		4,240			2
Export and project finance		46,114		46,387		(273	)		(1	)
Financial cooperation (1)		21,521		21,920		(399	)		(2	)
Other items:
Guarantees		74,170		61,375		12,795			21

Total loans		328,940		312,577		16,363			5

of which: Loans on a trust basis and other trust business		8,304		8,050		254			3


(1)		Since 2005, outstanding loans extended by the former Staatsbank have been included in financial cooperation. The previous year’s figures have been restated accordingly.

This increase was mainly the result of the increase of EUR 12.8 billion in guarantees (to EUR 74.2 billion), which was due to the expansion of the SME and housing loan securitization transactions. Thus, guarantees accounted for 23% of the total lending volume. In addition, despite off-schedule repayments of EUR 17.0 billion, investment loans granted to German enterprises rose by EUR 4.2 billion against the previous year. The share of these loans in the group lending volume dropped slightly to 57%.

The volume of export and project finance, which accounted for 14% of the lending volume, remained almost constant. Loans to promote developing countries (6% of the volume of lending) decreased by EUR 0.4 billion, or 2%.

Funding

As in fiscal year 2004, in 2005 the expansion of KfW’s volume of business was refinanced mainly by the issuance of bonds and notes in the capital markets. In 2005, KfW Bankengruppe raised a total of EUR 50 billion in long-term funds. It was the fourth year in a row that its funding volume was near the EUR 50 billion mark. Bonds and notes were the main source of funds, accounting for EUR 238.9 billion (an increase of EUR 28.1 billion) or 77% (2004: 72%) of borrowed funds. Of these bonds and notes, EUR 22.7 billion was issued by KfW Finance. The share of funds borrowed from banks and customers (excluding federal and ERP funds) continued to fall from 16% to 13% in 2005. The funds provided from the federal budget and the ERP Special Fund amounted to 10% of borrowed funds (after 12% in the previous year).

The following table shows the sources of funding for KfW Bankengruppe’s loan portfolio for the periods shown.

Funding of the group’s Own Loan Portfolio


	December 31, 2005				December 31, 2004
	(EUR in millions)		(%)		(EUR in millions)		(%)
Funds borrowed from banks		23,025		7		25,294		9
Funds borrowed from customers		48,136		16		55,309		19
ERP Special Fund		16,179		5		20,551		7
Federal budget funds		14,071		5		14,253		5

		30,250		10		34,804		12
Other lenders		17,886		6		20,505		7
Bonds issued		238,928		77		210,806		72

Total		310,089		100		291,409		100

The share of bonds issued rose by 5% to 77% over the previous year.

Bonds Issued


	2005				2004
	(EUR in millions)		(%)		(EUR in millions)		(%)
Debt issues		101,854		43		106,509		51
Bearer bonds (including commercial paper)		133,258		56		100,916		48
Accrued interest		3,816		1		3,381		1
Total		238,928		100		210,806		100

Own funds

In 2005, KfW Bankengruppe substantially increased its own funds (paid-in subscribed capital, reserves and the fund for general bank risks pursuant to § 340(g) of the German Commercial Code). KfW Bankengruppe’s own funds amounted to EUR 13.6 billion at December 31, 2005. Most of the increase of EUR 1.9 billion, or 17%, resulted from a further allocation of EUR 1.3 billion made to the fund for general bank risks in 2005. The remaining allocations to KfW’s own funds resulted from the increase of the reserve from the ERP Special Fund by EUR 49 million, from the allocation of KfW’s net income for the year of EUR 475 million to the special reserves and from the increase of EUR 120 million in other retained earnings through the inclusion of the results and the consolidation of the capital of the subsidiaries. KfW’s own funds are EUR 12.9 billion. The requirements for equity capital and reserves for banks operating internationally are fulfilled by KfW and the group.

Capital and Reserves(1)


	Additions/
	(Deductions)		December 31, 2005
	(EUR in millions)
Subscribed capital		0.0		3,750.0
Unpaid capital		0.0		(450.0	)
Capital reserves		0.0		1,603.8
Reserve from the ERP Special Fund		48.7		702.6
Retained earnings
In accordance with Art. 10(2) of the KfW Law		280.5		1,087.0
In accordance with Art. 10(3) of the KfW Law		194.8		1,558.8
In accordance with Art. 17(4) of the D-Mark Balance Sheet Law (2)		0.0		47.6
Other retained earnings		120.0		699.1
Fund for general bank risks in accordance with Section 340(g) of the German Commercial Code		1,300.0		4,600.0

		1,944.0		13,598.9


(1)		Totals may not add due to rounding.

(2)		To be adjusted for the special loss account shown under Assets in KfW’s balance sheet in accordance with Article 17(4) of the D-Mark Balance Sheet Law (EUR 27 million).

Changes in Other Balance Sheet Items

The value of the portfolio of money market paper, bonds and debentures of other issuers held by KfW increased by EUR 3.6 billion to EUR 25.2 billion at December 31, 2005. The majority of these securities are held by KfW to ensure constant liquidity. These securities are assigned to treasury securities portfolios, which are denominated mainly in euro, but also include U.S. dollar-denominated securities. The euro-denominated portfolios account for 80% of the total portfolios of money market paper, bonds and debentures, and are used as collateral in funding operations with the European Central Bank. In addition to its treasury securities portfolios, KfW holds a portfolio of asset-backed securities in connection with its securitization activities.

For the purpose of providing secondary market liquidity for the securities issued by it, KfW Bankengruppe held EUR 5,077 million par value of its own bonds at year-end 2005 (EUR 4,894 million at year-end 2004), representing 2% of the bonds and notes issued by KfW Bankengruppe.

The portfolio of shares and other non-fixed income securities held by KfW Bankengruppe increased by EUR 5.3 billion to EUR 21.5 billion in 2005 as a result of KfW taking over additional shares of Deutsche Telekom AG and Deutsche Post AG in the course of the further privatization of the two corporations. The holdings of money market paper, bonds and debentures of other issuers held for liquidity purposes remained almost constant at EUR 4.4 billion.

The major part of the prepaid expenses and deferred charges consists of interest expenditure mainly for leasing obligations in project finance applicable to the following period. This item also includes differences between issue amounts and repayment amounts incurred in the context of borrowing transactions (discounts and placing commissions). The item deferred income shows, in particular, the discounts from lending operations deferred over the loan terms.

Accrued estimated liabilities increased by EUR 65 million over the previous year. Allocations to accrued estimated liabilities amounted to EUR 206 million, EUR 69 million of which were for staff pensions and EUR 133 million was mainly unsettled bank operating and payroll expenses and provisions in KfW’s lending and private equity finance business. EUR 83 million was used, while EUR 61 million was returned to income.

The assets on a trust basis totaled EUR 8.4 billion at December 31, 2005, an increase of approximately EUR 0.3 billion compared with year-end 2004. This item comprises mainly loans on a trust basis extended in the context of the promotion of developing countries.

Earnings Position

The following table shows the development of the group’s earnings position for 2005:


	Earnings Position(1)
	2005			2004			Change
	(EUR in millions)									(%)
Interest income(2)		12,299			11,812			487			4
Interest expense		10,661			10,237			424			4

Interest received, net		1,638			1,575			63			4
Commissions received, net		203			190			13			7
Net earnings (expenditure) on financial transactions(3)		2			1			1			100
General administrative expenses(4)		582			552			30			5
Other operating income and expenses		20			22			(2	)		(9	)


Income from current operations before risk provisions and valuations		1,281			1,236			45			4
Risk provisions/valuations, net(5)		(603	)		(808	)		205			(25	)

Income from current operations		678			428			249			58

Contractual allocation of interest to reserves from the ERP Special Fund		49			47			2			4
Taxes on income and revenues		4			13			(9	)		(69	)


Net income for the year		625			368			257			70


(1)		Totals may not add due to rounding.

(2)		Balance of interest earnings on lending and money market business, fixed-interest securities and debt register claims, with current income from shares and other non-fixed interest securities, investments and shares in affiliated enterprises.

(3)		Balance of gains and losses on currency conversions.

(4)		Including the depreciation and value adjustments on intangible and tangible assets.

(5)		Including write-downs on the special loss account and allocation to the fund for general bank risks in accordance with Section 340(g) of the German Commercial Code. Net of the item “Earnings on all allocations of investments, shares in affiliated enterprises and securities treated as fixed assets”.

The group’s income from current operations before risk provisions and valuations in 2005 was EUR 1,281 million, an increase of EUR 45 million over the previous year (KfW: increase of EUR 28 million or 3% to EUR 1,162 million).

The group’s most important source of income continued to be net interest received, which contributed EUR 1,638 million to net income in 2005. Thus, net interest increased by EUR 63 million, or 4%, over the previous year’s figure of EUR 1,575 million. The stronger US dollar had a major influence on this development.

Net commissions received increased by EUR 13 million, or 7%, to EUR 203 million. This was mostly due to higher income from counter-guarantees and higher handling fees earned on export loans.

The following table sets forth the group’s administrative expenses for 2005 and 2004:

Administrative Expenses(1)


	2005		2004		Change
	(EUR in millions)							(%)
Salaries and wages		260.1		246.1		14.0			6
Social security contributions		43.0		40.7		2.3			6
Expenditure on pensions and support		51.7		48.6		3.1			6

Total expenditure on personnel		354.8		335.4		19.4			6

Other administrative expenses		190.4		175.0		15.4			9
Depreciation and value adjustments on intangible and tangible assets		36.4		41.3		(4.8	)		(12	)

Total expenditure on material and equipment		226.8		216.3		10.6			5

Total administrative expenses		581.6		551.7		30.0			5


(1)		Totals may not add due to rounding.

In 2005, administrative expenses amounted to EUR 582 million, which was 5% higher than in the previous year. The increase included an increase in personnel expenditure of EUR 20 million, or 6% to EUR 355 million which was due to the growth in the number of staff and adjustments of collectively agreed and performance-related salaries. Project-related consulting expenses, including those related to the changeover of accounting to IFRS, Basel II, and the separation of KfW IPEX-Bank, as well as one-time expenses related to land and buildings used by KfW, caused an increase of EUR 11 million (5%) in the expenditure on material and equipment to EUR 227 million.

Risk Provisioning and Valuation Result

The risk provisioning and valuation result is composed of the following items in the statement of income:

	•		write-downs of and value adjustments on loans and certain securities and increase of allowances for possible loan losses (including allocation to the fund for general bank risks);

	•		write-downs and value adjustments on investments, shares in affiliated enterprises and securities treated as fixed assets; and

	•		earnings on allocations to investments, shares in affiliated enterprises and securities treated as fixed assets.

In 2005, the risk provisioning and valuation result improved substantially compared with the previous year by EUR 205 million, or 25%, and amounted to EUR 603 million.

This was mainly due to the improved risk situation in the lending business, especially in export and project finance and private equity finance. The net transfer to specific loan loss provisions, which decreased by 55%, underscores this positive development. In addition, the successful exit by DEG from various equity investments contributed to the improved valuation result.

Compared with 2004, specific loan loss provisions and allowances for possible loan losses for the group fell by EUR 0.4 billion, or 20%, to EUR 1.5 billion (previous year: EUR 1.9 billion). In 2005, as in 2004, most of the provisions were for aircraft and equity finance. Net provisions made for the group amounted to EUR 226 million (previous year: EUR 497 million). During 2005, non-performing loans and advances totaling EUR 799 million (previous year: EUR 373 million) were written off. Payments received by KfW on claims that had been written off amounted to EUR 34 million in the year under review (previous year: EUR 26 million).

With a view to the forthcoming changeover of accounting to International Financial Reporting Standards (IFRS) in 2007, KfW Bankengruppe has already started to change its risk provisioning in the framework of accounting according to HGB (German Commercial Code). For this purpose, KfW increased the fund for general bank risks, which is disclosed in the balance sheet, by EUR 1,300 million, which only partly affected the income position due to the reallocation of funds already set aside for internal risk provisioning.

By maintaining its conservative risk policy and taking into account the future requirements of IFRS accounting, KfW has made adequate provision for all acute and latent risks.

After risk provisions and valuations, the group’s income from current operations was EUR 678 million, a substantial increase of EUR 250 million, or 58%, over the previous year’s result.

The group’s net income for the year was EUR 625 million compared with EUR 368 million in the previous year. KfW’s net income for the year was EUR 475 million.

The positive development of the assets, financial situation and earnings is further evidence of the strong overall financial condition of KfW Bankengruppe, which provides it with a solid foundation from which to continue its promotional activities in the future.

Subsequent to the end of the 2005 business year, there have not been any events or incidents that would have a material effect on the assessment of KfW and KfW Bankengruppe’s assets, financial situation or earnings (as of February 28, 2006).

FINANCIAL STATEMENTS OF KFW

Balance Sheet(1)


	As of December 31,
	2005			2004
	(EUR in thousands)
Assets
Cash reserves
Cash on hand		142			220
Balance with Deutsche Bundesbank		25,699			27,067
Balance in postal giro accounts		0	25,841		0	27,287

Loans and advances to banks
At call		2,749,542			25,384
Other		177,610,889	180,360,431		176,590,909	176,616,293

Loans and advances to customers			95,032,476			95,112,541
Bonds and other fixed-income securities
Money market paper(2)		914,752			858,569
Bonds and debentures of public and other issuers(3)		25,424,854			22,083,604
KfW’s own bond issues		3,881,174	30,220,780		3,804,215	26,746,388

Shares and other non-fixed income securities			21,318,678			16,238,318
Investments			61,300			37,471
Shares in affiliated enterprises			1,136,236			1,084,940
Loans on a trust basis and other trust business			8,198,919			7,905,292
Compensation claims on public authorities including bonds from their conversion			0			64,291
Intangible assets			7,431			6,706
Fixed assets			692,664			619,962
Other assets			64,110			89,957
Prepaid expenses and deferred charges			3,170,455			3,264,759
Special loss account consisting of provisions under Art. 17(4) of the D-Mark Balance Sheet Law			26,777			26,843

Total assets			340,316,098			327,841,048

See also the accompanying Notes to Financial Statements.


	As of December 31,
	2005				2004
	(EUR in thousands)
Liabilities and Shareholders’ Equity
Liabilities to banks
At call		1,315,803				785,896
With agreed terms or periods of notice		21,728,145	23,043,948			24,453,232	25,239,128

Liabilities to customers
At call		427,063				417,426
With agreed terms or periods of notice		70,616,032	71,043,095			85,515,134	85,932,560

Bonds			216,234,720				180,371,306
Loans on a trust basis			8,198,919				7,905,292
Other liabilities			1,625,588				10,206,846
Deferred income			5,970,802				5,887,493
Accrued estimated liabilities			797,023				721,038
Compensation liabilities under Art. 41 of the D-Mark Balance Sheet Law			2,281				1,591
Subordinated liabilities			500,000				500,000
Fund for general bank risks			4,600,000				3,300,000
Subscribed capital			3,750,000				3,750,000
Unpaid capital			(450,000	)			(450,000	)
Capital reserves			1,603,764				1,603,764
Reserve from ERP Special Fund			702,582				653,868
Retained earnings			2,693,376				2,218,162

Total liabilities and shareholders’ equity			340,316,098				327,841,048


Contingent liabilities
On bills discounted and charged		0				0
On guarantees		74,235,711				61,423,187
Liability under collateral provided for third party liabilities		0	74,235,711			0	61,423,187
Other obligations
Repurchase obligations on non-genuine repurchase transactions		0				0
Placing and underwriting obligations		0				0
Irrevocable loan commitments		38,476,115	38,476,115			36,044,195	36,044,195


(1)		Totals may not add due to rounding.

(2)		In 2005, EUR 40,047 million (2004: EUR 50,195 million) were eligible as collateral with the Deutsche Bundesbank.

(3)		In 2005 and 2004, EUR 17,721 million and EUR 15,075 million, respectively, were eligible as collateral under the refinancing operations of the European Central Bank via the Deutsche Bundesbank.

See also the accompanying Notes to Financial Statements.

Statement of Income(1)


	For the year ended December 31,
	2005			2004
	(EUR in thousands)
Income
Interest income
From lending and money market		11,325,411			10,981,507
From fixed-income securities and debt register claims		682,515	12,007,926		666,534	11,648,041

Current income
From shares and other non-fixed income securities		107,198			4,270
From investments		6,352			471
From shares in affiliated enterprises		0	113,550		0	4,741
Commissions and similar service charges earned			403,073			369,870
Net earnings on financial transactions			1,525			3,929
Earnings on allocations of investments, shares in affiliated enterprises and securities treated as fixed assets			18,546			33,497
Other operating income			13,377			20,685

Total income			12,557,997			12,080,763

Expenses
Interest expenses			10,657,838			10,232,714
Contractual appropriation of interest to reserve from the ERP Special Fund			48,713			47,368
Commissions and similar service charges payable			205,099			185,938
General administrative expenses Salaries and wages		229,654			216,271
Social security contributions and expenditure on pensions and support		77,492			75,111
Other administrative expenses		168,712	475,858		157,740	449,122

Depreciation and value adjustments on intangible and tangible assets			35,442			39,301
Other operating expenses			3,035			6,452
Write-downs of and value adjustments on loans and certain securities and increases of allowances for possible loan losses(2)			656,732			802,837
Write-downs of and value adjustments on investments, shares in affiliated enterprises and securities treated as fixed assets			0			0
Losses absorbed under profit and loss transfer agreements			0			0
Write-downs on the special loss account under Art. 17(4) of the D-Mark Balance Sheet Law			66			177
Net income for the year			475,214			316,854

Total expenses			12,557,997			12,080,763


(1)		Totals may not add due to rounding.

(2)		Including EUR 1,300 million allocation to the fund for general bank risks in accordance with Section 340(g) of the German Commercial Code (2004 EUR 1,300 million; 2003 EUR 370 million).

See also the accompanying Notes to Financial Statements.

FINANCIAL STATEMENTS OF KFW BANKENGRUPPE

Balance Sheet(1)


	As of December 31,
	2005			2004
	(EUR in thousands)
Assets
Cash reserves
Cash on hand		144			223
Balance with Deutsche Bundesbank		25,699			27,067
Balance in postal giro accounts		0	25,843		0	27,290

Loans and advances to banks
At call		2,790,824			52,385
Other		177,401,962	180,192,786		176,683,975	176,736,360

Loans and advances to customers			95,384,216			95,244,732
Bonds and other fixed-income securities
Money market paper(2)		914,752			858,569
Bonds and debentures of public and other issuers(3)		24,252,290			20,760,250
KfW’s own bond issues		5,076,562	30,243,604		5,132,815	26,751,634

Shares and other non-fixed income securities			21,511,295			16,248,927
Investments			750,195			749,241
Investments in affiliated enterprises			620,194			595,784
Shares in affiliated enterprises			11,844			11,843
Loans on a trust basis and other trust business			8,372,010			8,106,039
Compensation claims on public authorities, including bonds from their conversion			0			64,291
Intangible assets			9,068			7,115
Fixed assets			710,654			637,352
Other assets			114,264			123,916
Prepaid expenses and deferred charges			3,170,521			3,264,764
Special loss account consisting of provisions under Art. 17(4) of the D-Mark Balance Sheet Law			26,777			26,843

Total assets			341,143,271			328,596,131

See also the accompanying Notes to Financial Statements.


	As of December 31,
	2005				2004
	(EUR in thousands)
Liabilities and Shareholders’ Equity
Liabilities to banks
At call		1,295,645				746,176
With agreed terms or periods of notice.		21,729,032	23,024,677			24,547,950	25,294,126

Liabilities to customers
At call		159,486				168,156
With agreed terms or periods of notice.		47,976,645	48,136,131			55,140,499	55,308,655

Bonds			238,928,062				210,805,588
Loans on a trust basis			8,372,010				8,106,039
Other liabilities			1,671,097				10,165,106
Deferred income			5,973,382				5,887,927
Accrued estimated liabilities			936,745				872,195
Compensation liabilities under Art. 41 of the D-Mark Balance Sheet Law			2,281				1,591
Subordinated liabilities			500,000				500,000
Fund for general bank risks			4,600,000				3,300,000
Subscribed capital			3,750,000				3,750,000
Unpaid capital			(450,000	)			(450,000	)
Capital reserves			1,603,764				1,603,765
Reserve from ERP Special Fund			702,582				653,868
Retained earnings			3,392,540				2,797,271

Total liabilities and shareholders’ equity			341,143,271				328,596,131

Contingent liabilities
On bills discounted and charged		0				0
On guarantees		74,169,511				61,375,774
Liability under collateral provided for third party liabilities		0	74,169,511			0	61,375,774
Other obligations
Repurchase obligations on non-genuine repurchase transactions		0				0
Placing and underwriting obligations		0				0
Irrevocable loan commitments		38,888,218	38,888,218			36,458,444	36,458,444


(1)		Totals may not add due to rounding.

(2)		In 2005, EUR 40,047 million (in 2004 EUR 50,195 million) were eligible as collateral with the Deutsche Bundesbank.

(3)		In 2005 and 2004, EUR 17,518 million and EUR 1,818 million, respectively, were eligible as collateral with the Deutsche Bundesbank.

See also the accompanying Notes to Financial Statements.

Statement of Income(1)


	For the year ended December 31,
	2005			2004
	(EUR in thousands)
Income
Interest income
From lending and money market		11,405,326			11,056,522
From fixed-income securities and debt register claims		683,292	12,088,618		666,853	11,723,375

Current income
From shares and other non-fixed income securities		107,198			4,270
From investments		51,671			53,941
From shares in affiliated enterprises		50,995	209,864		30,408	88,619
Commissions and similar service charges earned			411,485			378,172
Net earnings on financial transactions			2,035			1,060
Earnings on allocations of investments, shares in affiliated enterprises and securities treated as fixed assets			–			15,832
Other operating income			25,716			29,117

Total income			12,737,718			12,236,175

Expenses
Interest expenses			10,661,069			10,236,997
Contractual appropriation of interest to reserve from the ERP Special Fund			48,713			47,368
Commissions and similar service charges payable			208,591			187,872
General administrative expenses
Salaries and wages		260,134			246,099
Social security contributions and expenditure on pensions and support		94,617			89,322
Other administrative expenses		190,415	545,166		175,004	510,425

Depreciation and value adjustments on intangible and tangible assets			36,446			41,254
Other operating expenses			5,704			7,374
Write-downs of and value adjustments on loans and certain securities and increases of allowances for possible loan losses(2)			584,831			823,005
Write-downs of and value adjustments on investments, shares in affiliated enterprises and securities treated as fixed assets			18,469			0
Write-downs on the special loss account under Art. 17(4) of the D-Mark Balance Sheet Law			66			177
Taxes on income			3,812			13,254

Net income for the year			624,851			368,449

Total expenses			12,737,718			12,236,175


(1)		Totals may not add due to rounding.

(2)		Including EUR 1,300 million allocation to the fund for general bank risks in accordance with Section 340(g) of the German Commercial Code (in 2004 EUR 1,300 million, in 2003 EUR 370 million).

See also the accompanying Notes to Financial Statements.

Cash Flow Statement of KfW Bankengruppe(1)


	For the year ended December 31,
	2005			2004
	(EUR in millions)
Cash flows from operating activities
Net income (before income tax)		629			382
Non-cash positions in net income and adjustments to reconcile net income to net cash provided by (used for) operating activities
Write-downs, depreciation and adjustments		640			849
Changes in accrued estimated liabilities		147			86
Change in other non-cash positions		(27	)		(4	)
Profit from the sale of financial instruments, investments, property and equipment		(33	)		(29	)
Other adjustments (net)		(10,031	)		(679	)

Sub-total		(8,675	)		604
Change in assets and liabilities from operating activities after correction for non-cash components
Loans and advances to banks		(3,747	)		(10,582	)
Loans and advances to customers		860			(4,397	)
Securities available for sale		(7,693	)		(492	)
Funds borrowed from banks		(2,269	)		(2,173	)
Funds borrowed from customers		(7,172	)		(1,964	)
Securitized Liabilities		28,122			16,251
Other assets from operating activities		3			(33	)
Other liabilities from operating activities		(104	)		(172	)
Interest receipts		12,089			11,723
Interest paid		(10,661	)		(10,237	)
Income tax paid		(4	)		(13	)

Net cash provided by (used for) operating activities		749			(1,485	)


Cash flows from investing activities
Proceeds from the sale of investments		1,030			1,774
Proceeds from the sale of property and equipment		74			62
Payments for the acquisition of investments		(1,819	)		(247	)
Payments for the acquisition of property and equipment		(116	)		(156	)
Other investing activities (net)		27			4

Net cash provided by (used for) investing activities		(804	)		1,437


Cash flows from financing activities
Proceeds on equity capital		49			47
Other financing activities (net)		0			0

Net cash provided by (used for) financing activities		49			47


Cash and cash equivalents at the end of previous period		27			27
Net cash provided by (used for) operating activities		749			(1,485	)
Net cash provided by (used for) investing activities		(804	)		1,437
Net cash provided by (used for) financing activities		49			47
Effect of exchange rate changes on cash and cash equivalents		5			1
Cash and cash equivalents at the end of period		26			27


(1)		Totals may not add due to rounding.

See also the accompanying Notes to Financial Statements.

NOTES TO FINANCIAL STATEMENTS

THE CONSOLIDATED ENTERPRISES AND THE PRINCIPLES
OF CONSOLIDATION.

The consolidated financial statements include, besides KfW, KfW International Finance Inc., Delaware, USA, Finanzierungs- und Beratungs-gesellschaft mbH, Berlin, DEG-Deutsche Investitions- und Entwicklungsgesellschaft mbH, Cologne, KfW Beteiligungsholding GmbH, Frankfurt am Main, KfW IPEX-Beteiligungsholding GmbH, Frankfurt and tbg Technologie-Beteiligungsgesellschaft mbH, Bonn.

§ 296 (1) No. 3 of the German Commercial Code (HGB) has been utilized with regard to one subsidiary, whose shares were held exclusively for the purpose of resale. In accordance with § 296 (2) HGB two affiliated enterprises are not included in the consolidated financial statements, because their results are of only minor significance for the presentation of the assets, financial situation and earnings of the Group. Furthermore, in accordance with § 311 (2) HGB the at-equity consolidation method was not used for two enterprises.

The annual financial statements for the individual enterprises in the Group were drawn up in accordance with the accounting and valuation methods applying to KfW. Loans and advances and liabilities, and income and expenditure between the consolidated enterprises were netted. The first consolidation was made by the book value method with the values stated on the Group’s balance sheet date.

The capital was consolidated on the basis of the values stated on the date the enterprises were first included in the Group’s accounts. The differences in the liabilities resulting from the capital consolidation total EUR 446 million and are included in the Group’s retained earnings.

Movesta Finance and Lease GmbH was included for the first time; this was done by the book value method, The valuation, which was made on the basis of the values stated on the date of the first inclusion in the consolidated financial statements, led to a difference in the amount of EUR 33 million on the assets side, which was netted against the retained earnings. The annual financial statements for KfW International Finance Inc. are drawn up in foreign currency and the amounts were converted at the official middle rate on December 31, 2005.

ACCOUNTING AND VALUATION METHODS.

The Financial Statements for 2005 for KfW and for KfW Bankengruppe have been drawn up in accordance with the requirements of the Commercial Code (HGB), the Ordinance Regarding the Accounting System for Banks (RechKredV) and the Law Concerning KfW. The special provisions of the D-Mark Balance Sheet Law (DMBilG) have also been observed. In the Financial Statements the reserves from the ERP Special Fund and the contractual allocation of interest earnings to these are shown separately, as is the allocation to the capital reserves, which are shown as a memo item. Statements on individual items in the Balance Sheet, which may be made either in the Balance Sheet or an Annex, are given in the Annex.

The cash in hand, loans and advances to banks and customers, investments, investments in associated enterprises and shares in affiliated enterprises and the other assets have been shown at cost, par or a lower value. Differences between notional amounts and lower disbursement amounts of loans or advances have been included in the deferred income.

The securities held as a liquidity reserve (including securitised compensation claims on public authorities) are valued strictly at the lower of cost or market, where they are not covered by off-balance sheet business. Securities held as fixed assets are shown on a modified application of this principle. In part, securities are aggregated with the derivatives contracts (interest swap contracts) concluded for price hedging to form separately documented valuation units. No allocations of securities to the trading stock have been made. The statutorily required writeups were made.

Fixed assets are shown at acquisition or production cost, reduced by straight line depreciation in accordance with the expected useful life of the items. Minor items were fully written off in the year of acquisition.

Liabilities are shown at repayment value; differences between agreed higher repayment amounts and issue amounts have been included in the item “Prepaid expenses and deferred charges”. Accrued pension liabilities and similar obligations were valued in accordance with actuarial principles on the basis of “Richttafeln für die Pensionsversicherung” (Mortality and Disability Tables) of 2005 by Dr. Klaus Heubeck. For KfW the part-value method was used, with interest rates for accounting purposes of 3% and 6%, respectively. The other accrued estimated liabilities are shown at their expected recourse value.

Sufficient allowance has been made for risks, most of which are on loans as a result of the structure of KfW’s business, through provisions and allocations to the Fund for general bank risks in accordance with § 340g of the Commercial Code. The allocations are shown in the item “Write-downs of and value adjustments on loans and certain securities and increase of allowances for possible loan losses”. The possibility for netting in the Statement of Income in accordance with § 340 f (3) and § 340 c (2) of the Commercial Code has been utilized.

NOTES ON THE ASSETS.

Loans and Advances to Banks
EUR million

At call

Remaining term

Pro rata interest

Total

Up to 3

More than 3 months

More than 1 year

More than

months

to 1 year

to 5 years

5 years

Dec. 31, 2005 KfW

2,750

17,667

12,283

40,465

103,597

3,598

180,360

Dec. 31, 2005 Group

2,791

17,681

12,339

40,635

103,129

3,618

180,193

Dec. 31, 2004 KfW

23,042

11,100

40,286

99,175

2,988

176,616

Dec. 31, 2004 Group

23,191

11,143

40,499

98,841

3,010

176,736

KfW

Group

of which to:

affiliated enterprises

822

enterprises, in which KfW holds a stake

1,535

without on-lending banks’ liability

2,241

minor assets

Loans and Advances to Customers
EUR million

With no fixed maturity

Remaining term

Pro rata interest

Total

Up to 3

More than 3 months

More than 1 year

More than

months

to 1 year

to 5 years

5 years

Dec. 31, 2005 KfW

4,118

6,874

31,730

50,401

1,909

95,032

Dec. 31, 2005 Group

4,172

6,899

32,111

50,279

1,924

95,384

Dec. 31, 2004 KfW

4,687

7,011

30,609

51,082

1,724

95,113

Dec. 31, 2004 Group

4,725

7,053

30,809

50,924

1,734

95,245

KfW

Group

of which to:

affiliated enterprises

672

enterprises, in which KfW holds a stake

158

minor assets

411

BONDS AND OTHER FIXED-INCOME SECURITIES.

Amounts shown under “Bonds and other fixed-income securities” due in the year following the balance sheet date:

Due the following year
EUR million

Balance sheet date

Dec. 31, 2005

Dec. 31, 2004

Dec. 31, 2005

Dec. 31, 2004

KfW

Group

Money market paper, bonds and notes

6,521

5,908

6,330

5,794

Par value

6,460

5,862

6,269

5,753

Own bond issues

272

842

463

956

Par value

266

838

457

947

Total

6,793

6,750

6,793

6,750

Par value

6,726

6.700

6,726

6,700

The item “Bonds and other fixed-income securities” includes loans and advances to:

EUR million


	KfW		Group
Affiliated enterprises		1,196		0
Enterprises in which KfW holds a stake		0		0

The item “Bonds and other fixed-income securities” includes:

EUR million


	KfW		Group
Listed securities		27,898		27,921
Unlisted securities		1,303		1,303

Marketable securities		29,201		29,224

SECURITIES TRANSACTIONS UNDER REPURCHASE AGREEMENTS.

In the context of genuine repurchase transactions (sell & buy back transactions, repos) securities to the book value of EUR 1,174 million were repurchased.

FIXED ASSETS.

Fixed Assets as per December 31, 2005 KfW
EUR thousand


	Changes¹⁾		Residual book		Residual book
	2005		value as per		value as per
			Dec. 31, 2005		Dec. 31, 2004
	(7)		(8)		(9)
Investments		23,829		61,300		37,471
Shares in affiliated enterprises		51,296		1,136,236		1,084,940
Securities treated as fixed assets		946,769		3,825,963		2,879,194

Total		1,021,894		5,023,499		4,001,605


Acquisition/			Inflows		Outflows		Transfers		Allocations				Write-downs/		Residual book		Residual book
production costs²⁾													Adjustments		value as per		value as per
											Total		2005		Dec. 31, 2005		Dec. 31, 2004
	(1)		(2)		(3)		(4)		(5)		(6)		(7)		(8)		(9)
Intangible assets		47,287		4,742		17,747		0		0		26,851		4,016		7,431		6,706
Tangible assets³⁾		798,439		108,479		56,178		0		0		158,076		31,426		692,664		619,962

Total		845,726		113,221		73,925		0		0		184,927		35,442		700,095		626,668

Sum																5,723,594		4,628,273


¹⁾		Including price changes.

²⁾		The Relief Facility under § 31 (6) of the EC Commercial Code has been utilised.

³⁾		Of which as per December 31, 2005: – total value of land and buildings used for the bank’s activities EUR 665,621,000 – total value of office furniture and equipment EUR 27,043,000

Fixed Assets as per December 31, 2005 Group
EUR thousand


	Changes¹⁾		Residual book		Residual book
	2005		value as per		value as per
			Dec. 31, 2005		Dec. 31, 2004
	(7)		(8)		(9)
Investments		25,364		1,370,389		1,345,025
Shares in affiliated enterprises		1		11,844		11,843
Securities treated as fixed assets²⁾		946,769		3,825,963		2,879,194

Total		972,134		5,208,196		4,236,062


Acquisition/			Inflows		Outflows		Transfers		Allocations				Write-downs/		Residual book		Residual book
production costs²⁾													Adjustments		value as per		value as per
											Total		2005		Dec. 31, 2005		Dec. 31, 2004
	(1)		(2)		(3)		(4)		(5)		(6)		(7)		(8)		(9)
Intangible assets		50,777		6,355		17,748		0		0		30,316		4,348		9,068		7,115
Tangible assets³⁾		829,623		109,869		56,720		0		0		172,118		32,098		710,654		637,353

Total		880,400		116,224		74,468		0		0		202,434		36,446		719,722		644,468

Sum																5,927,918		4,880,530


¹⁾		Including price changes.

²⁾		The Relief Facility under § 31 (6) of the EC Commercial Code has been utilised.

³⁾		Of which as per December 31, 2005: – total value of land and buildings used for the bank’s activities EUR 671,797,000 – total value of office furniture and equipment EUR 28,574,000

Bonds and other fixed-income securities, as well as shares and other non-fixed income securities, intended as a permanent part of operations and so usually held until maturity, have been included with the securities treated as fixed assets. They are shown separately in the accounts and valued following the lower of cost or market principle (modified).

The book value of the marketable bonds not valued at the lower of cost or market and included in the item “Bonds and other fixed-income securities” is EUR 3,826 million. This includes investments in securities, whose book value of EUR 396 million was EUR 1 million higher than the present value of EUR 395 million. Since these securities are to be held until maturity they were not written down. Overall, the securities treated as fixed assets contain hidden reserves.

The item “Shares and other non-fixed income securities” includes:

EUR million


	KfW		Group
Listed securities		16,858		16,867
Unlisted securities		4,462		4,462

Marketable securities		21,320		21,329

The total holding is valued at the lower of cost or market.

Information on Equity Investments
EUR thousand and %

The enterprises are included in the consolidated financial statements as subsidiaries


Name and domicile of company		Share held		Equity Capital¹⁾			Net income
							for the year¹⁾
		in %		EUR thousand			EUR thousand
1.	DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH, Cologne		100.0		1,014,297			118,900
2.	Finanzierungs- und Beratungsgesellschaft mbH (FuB), Berlin		100.0		13,054			3,112
3.	KfW International Finance Inc., Delaware, USA		100.0		8	²⁾		0	²⁾
4.	KfW Beteiligungsholding AG, Bonn		100.0		799,893			18,794
5.	tbg Technologie-Beteiligungs-Gesellschaft mbh, Bonn		100.0		479,800			0
6.	KfW IPEX-Beteiligungsholding GmbH, Frankfurt		100.0		32,544			44


¹⁾		As per Dec. 31, 2005.

²⁾		Converted at the rate on Dec. 31, 2005 (EUR 1 = USD 1.1797).

The full list of shareholdings in accordance with §§ 285, Para. 11 and 313, No 2 of the Commercial Code is deposited with the district court in Frankfurt am Main.

The item “Investments” includes:

EUR thousand


	KfW		Group
Listed securities		0		663,515
Unlisted securities		35,213		57,201

Marketable securities		35,213		720,716

Assets on a trust basis
EUR million


	KfW			Group
Loans and advances to banks
a) At call		204			204
b) Other loans and advances		828	1,032		943	1,147
Loans and advances to customers			7,146			7,171
Investments			20			53
Shares			1			1

Sum			8,199			8,372

OTHER ASSETS.

The item “Other Assets” of KfW consists mainly of claims on the federal government in the amount of EUR 45 million. For the Group the item also includes claims by KfW Beteiligungsholding on the financial administration in the amount of EUR 47 million.

PREPAID EXPENSES AND DEFERRED CHARGES.

The difference contained in the item “Prepaid expenses and deferred charges” between the repayment amount and the lower issue amount of liabilities is EUR 597 million.

NOTES ON LIABILITIES.

Maturities Structure of Borrowed Funds
EUR million

At call

Remaining term

Pro rata interest

Total

Up to 3

More than 3 months

More than 1 year

More than

months

to 1 year

to 5 years

5 years

Funds borrowed from banks with agreed term or period of notice

KfW

1,316

1,795

1,637

11,774

2,876

3,646

23,044

Group

1,296

1,753

1,637

11,801

2,891

3,647

23,025

as per Dec. 31, 2004 KfW

786

3,027

2,774

10,000

5,070

3,582

25,239

as per Dec. 31, 2004 Group

746

3,052

2,795

10,028

5,087

3,586

25,294

Funds borrowed from customers

- Other borrowed funds with agreed term or period of notice

KfW

427

12,128

5,517

30,094

21,522

1,355

71,043

Group

159

7,466

2,856

17,985

18,756

914

48,136

as per Dec. 31, 2004 KfW

417

10,588

12,785

36,034

24,619

1,489

85,932

as per Dec. 31, 2004 Group

168

8,120

2,942

22,229

20,896

954

55,309

KfW

1,743

13,923

7,154

41,868

24,398

5,001

94,087

Group

1,455

9,219

4,493

29,786

21,647

4,562

71,161

in %

KfW

100

Group

100

Due the following year


	KfW		Group
Securitised liabilities – bonds issued		50,175		57,497
as per December 31, 2004		33,688		46,007

Liabilities to Affiliated Enterprises and Enterprises in which KfW/KfW Bankengruppe holds a stake

EUR million


	Securitised and non-securitised liabilities
	To affiliated enterprises				To enterprises in which KfW/
					KfW Bankengruppe holds a participation
	KfW		Group		KfW		Group
Funds borrowed from banks		66		0		0		0
Funds borrowed from customers		22,976		0		0		3
Securitised liabilities		0		0		0		397	¹⁾

Total		23,042		0		0		400


¹⁾		As far as can be ascertained.

Liabilities on a trust basis
EUR million


	KfW			Group
Funds borrowed from banks
a) At call		0			0
b) With agreed term or period of notice		69	69		69	69
Funds borrowed from customers
a) Savings deposits
b) Other liabilities
ba) At call		928			928
bb) With agreed term or period of notice		7,202	8,130		7.375	8,303

Total			8,199			8,372

OTHER LIABILITIES.

The “Other liabilities” are mainly the difference on the conversion of foreign currency positions hedged with swaps to the amount of EUR 1.1 billion.

DEFERRED INCOME.

The item “Deferred income” includes discounts on loans and advances totalling EUR 1,201 million.

SUBORDINATED LIABILITIES.

In connection with the acquisition of shares of Deutsche Telekom AG and Deutsche Post AG for the further privatisation of these corporations the German government granted KfW a subordinated loan of EUR 500 million. The loan bears an agreed interest rate of 3.9475 % and is due for repayment on November 11, 2008. KfW is not obligated to repay the subordinate loan ahead of schedule. The terms of subordination of this loan are in line with the requirements of the German Banking Act (KWG).

Interest expenses for the subordinate loan amounted to EUR 19.7 million. This interest accrued but not yet due in the amount of EUR 2.7 million is reported under the item “Other liabilities”.

EQUITY CAPITAL.

Group Equity according to GAS No. 7
EUR million

Dec. 31, 2004

Group’s

Other changes

Dec. 31, 2005

net income

KfW’s subscribed capital

3,750.0

0.0

3,750.0

Outstanding contributions, not requested

–450.0

0.0

–450.0

Capital reserves

1,603.8

0.0

1,603.8

Reserve from the ERP Special Fund

653.9

0,0

48.7

702.6

Retained Group earnings

a) Statutory reserve under § 10 (2) of the KfW Law

806.5

280.5

0.0

1,087.0

b) Special reserve under § 10 (3) of the KfW Law

1,364.0

194.7

0,0

1,558.7

c) Special reserve under § 17 (4) D-Mark Balance Sheet Law

47.6

0.0

47.6

d) Other retained earnings

579.1

149.7

–29.6

699.2

Group equity

8,354.9

624.9

19.1

8,998.9

Of the Group’s net income for the year of EUR 625 million, an amount corresponding to KfW’s net income for the year of EUR 475 million was allocated to the statutory reserve (EUR 280 million) and to the special reserve (EUR 195 million) in accordance with § 10 (2) and (3) of the KfW Law. The net income for the year of EUR 150 million achieved by the consolidated subsidiaries was allocated to the other retained earnings. KfW’s equity capital is EUR 8,300 million.

OTHER REQUIRED NOTES ON THE LIABILITIES.

CONTINGENT LIABILITIES.

The Group’s liabilities under guarantees total EUR 74,170 million. Of the total amount as per Dec. 31, 2005 EUR 68,413 million was credit default swaps, EUR 5,757 million was credit guarantees (of which guarantees for special loans totalled EUR 1,315 million, guarantees for aircraft finance EUR 926 million, guarantees for energy loans EUR 636 million and guarantees for housing construction EUR 426 million).

The new guarantees for third party risks given in 2005 amounted to EUR 28,218 million; they result mainly from the assumption of third party risks of credit default in connection with securitisation transactions of a total of EUR 27,071 million. Altogether EUR 16,609 million was redeemed.

OTHER OBLIGATIONS.

The Group’s irrevocable loan commitments total EUR 38,888 million, of which EUR 12,911 million is export and project finance, EUR 17,832 million is investment finance, EUR 3,975 million is loans to promote the developing countries, EUR 2,244 million is guarantees and EUR 1,926 million is asset securitisation.

NOTES ON THE STATEMENT OF INCOME.

SEGMENT REPORTING.

The segment reporting in accordance with DRS 3-10 follows the structure of the internal control of the business units of KfW Bankengruppe.

The composition of our segments is shown in the following overview:

Segment Reporting

Investment Finance Germany/Europe

n		Equity Finance (incl. tbg – Technologie-Beteiligungs-Gesellschaft mbH)

n		Corporate Investments/Industrial Pollution Control Finance

n		Education and Social Finance

n		Infrastructure and Housing Finance

n		Global Loans

n		Asset Securitisation

Export and Project Finance

n		Promotion of German and European Exports

n		Financing of Direct and Other Corporate Investment

Promotion of the Developing Countries

n		Promotion of the Developing and Transition Countries on behalf of the German Federal Government (budget funds) and with Complementary Market Funds raised by KfW

n		DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH, (Promotion of the Private Sector)

Advisory and other Services/Participations

n		Holding Arrangements for the Federal Government

n		Shareholdings

n		Securities Investments

n		Other services

A detailed description of the products and services offered by the individual business units is contained in the statements presented under “KfW — Business” of this annual report.

Annex and Group Annex.

The operative business units are measured on the basis of the net operating result and the allocated equity capital. The individual positions are based on the following methods:

n		Net interest income was itemised according to the principle of the market interest rate method¹⁾. The position also includes internally calculated return on equity.

n		The allocation of administrative expenses by cost centres to the individual segments is based on the results of activity-based costing²⁾.

n		Risk provisioning was for the first time determined on the basis of the concept of expected losses (standard risk costs) and charged to the individual segments (IF, EP, DC and AS). For reasons of comparability this change was also applied retrospectively to the year 2004.

n		The segment assets contain the total asset positions. The allocation of the own funds³⁾to the segments is effected on the basis of the corresponding risk position (pursuant to Principle I of the German Banking Act).

Contributions to income that accrue outside the segments are allocated to the central segment. The risk provisions of the central segment mainly comprise the increase in the Fund for general bank risks, which affects the income statement.

The transference/consolidation column contains all adjustment measures necessary for transferring the internal accounting measures into the corresponding data in the external financial reporting.

Segment Reporting by Business Unit
EUR million

Primary Segments

Investment

Project-/

Promotion

Advice/

Central

Trans-

KfW

Finance

Export-

of the

Services/

Segment

ference/

Banken-

Germany/

Finance

Developing

Partici-

Consoli-

gruppe

Europe

Countries

pations

dation

+ Interest received, net

2005

316

447

188

219

411

1.638

2004

320

433

134

484

143

1.575

+ Commissions received, net

2005

102

104

101

–132

203

2004

101

–134

190

– Administrative expenses

2005

260

116

169

582

2004

257

154

552


¹⁾		Under this method the calculation of interest margins is based on the assumption of a refinancing at matching maturities.

²⁾		The costs incurred in the organisational units are allocated to the individual products by means of business processes.

³⁾		The own funds include the paid-in subscribed capital, reserves and the Fund for general bank risks pursuant to § 340 g of the German Commercial Code.

(cont.)


Primary Segments	Investment		Project-/		Promotion		Advice/		Central		Trans-		KfW
	Finance		Export-		of the		Services/		Segment		ference/		Banken-
	Germany/		Finance		Developing		Partici-				Consoli-		gruppe
	Europe				Countries		pations				dation
+ Net result from financial transactions/other operating result
2005		5		0		4		1		42		–30		22
2004		3		0		0		2		108		–89		23

– Risk provisions/ valuations, net
2005		100		163		70		18		361		–108		603
2004		107		177		69		14		524		–84		808
= Income from current operations
2005		63		272		53		197		93		0		678
2004		57		251		11		41		67		0		428

Assets
2005		187,628		46,421		21,173		72,943		12,978		0		341,143
2004		183,342		46,435		21,938		68,769		8,112		0		328,596

Liabilities
2005		181,892		42,312		20,015		68,881		12,746		1,698		327,544
2004		178,094		43,034		20,917		65,361		7,927		1,608		316,941

Risk-weighted positions
2005		50,899		39,702		2,900		40,845		2,249		0		136,595
2004		48,286		33,883		2,431		35,238		1,835		0		121,673

Own funds
2005		5,736		4,109		1,157		4,062		233		–1,698		13,599
2004		5,249		3,401		1,021		3,408		184		–1,608		11,655

In %
Return on average allocated own funds¹⁾
2005		1,2		7,2		4,9		5,3						5,4
2004		1,2		7,8		1,1		1,3						4,0

Cost/income ratio²⁾
2005		61,4		21,0		57,7		13,3						31,2
2004		61,0		18,3		65,8		42,8						30,9


¹⁾		Ratio of income from current operations to average allocated own funds.

²⁾		Ratio of administrative expenses to net income (net interest received, net commissions received, other operating income).

SEGMENT REPORTING BY REGION.

As KfW Bankengruppe maintains no foreign branch offices the geographic segmentation of the volume of lending is made on the basis of the customers’ country of domicile. The remaining asset positions are allocated to the domestic activities.

Segment Reporting by Region
EUR million


Secondary Segments	Germany		Euroland		Other		North		Latin		Asia/		Africa		Trans-		KfW
			(without		Europe		America		America		Australia				ference/		Banken-
			Germany)						including						Consoli-		gruppe
									Caribbean						dation
+ Interest received, net
2005		1,064		49		172		16		82		132		65		57		1,638
2004		938		55		129		30		114		132		34		143		1,575

+ Commissions received, net
2005		165		18		30		8		16		59		38		–132		203
2004		157		31		37		4		11		52		32		–134		190

– Administrative expenses
2005		293		64		64		21		30		69		36		4		582
2004		298		56		55		18		27		80		15		3		552

+ Net result from financial transactions/other operating result
2005		48		0		1		0		1		1		1		–30		22
2004		112		0		1		0		0		–1		0		–89		23

– Risk provisions/ valuations, net
2005		491		34		76		23		30		58		0		–108		603
2004		679		30		73		24		41		16		30		–84		808

= Income from current operations
2005		493		–30		63		–20		39		64		68		0		678
2004		231		0		39		–8		57		88		22		0		428

Assets
2005		245,111		30,506		22,673		9,399		6,771		20,871		5,812		0		341,143
2004		229,796		27,379		23,084		9,027		7,243		24,808		7,259		0		328,596

Liabilities
2005		235,738		28,681		20,834		8,818		6,235		20,015		5,526		1,698		327,544
2004		221,390		25,963		21,615		8,513		6,733		24,118		7,002		1,608		316,941

(cont.)

Secondary Segments

Germany

Euroland

Other

North

Latin

Asia/

Africa

Trans-

KfW

(without

Europe

America

Australia

ference/

Banken-

Germany)

including

Consoli-

gruppe

Caribbean

dation

Risk-weighted positions

2005

87,339

17,628

15,454

5,613

3,660

5,559

1,342

136,595

2004

80,725

14,102

12,449

5,126

3,475

4,733

1,064

121,673

Own funds

2005

9,373

1,824

1,840

581

536

857

286

–1,698

13,599

2004

8,406

1,416

1,469

515

511

689

258

–1,608

11,655

In %

Return on average allocated own funds¹⁾

2005

5.6

–1.9

3.8

–3.6

7.5

8.3

24.8

5.4

2004

2.9

0.0

3.0

–1.7

10.7

13.5

8.8

4.0

Cost/income ratio²⁾

2005

22.9

94.2

31.7

87.9

30.5

36.0

34.8

31.2

2004

24.7

65.0

32.8

54.4

21.4

43.6

23.1

30.9


¹⁾		Ratio of income from current operations to average allocated own funds.

²⁾		Ratio of administrative expenses to net income (net interest received, net commissions received, other operating income).

OTHER NOTES REQUIRED.

ASSETS AND DEBTS IN FOREIGN CURRENCIES.

The assets and debts in foreign currencies and the cash transactions not completed on the balance sheet date have been converted into euros at the official middle exchange rates quoted on December 31, 2005. Irrevocable loan commitments, for which forward transactions were concluded, were converted at the hedging rate.

Expenditure and earnings on currency conversion have been included in the “Net earnings on financial transactions”; the imparity principle (Imparitätsprinzip) has been observed.

Revaluations of provisions for loan losses in foreign currencies were included in the item “Net expenditure on financial transactions”.

Forward transactions in connection with on-balance sheet business were converted with due observance of the regulations on special cover or cover in the same currency. There were no effects from these on the Statement of Income.

As per December 31, 2005 total assets in foreign currencies were EUR 50.4 billion, converted in accordance with § 340 h (1) of the Commercial Code.

Total debts in foreign currencies were EUR 135.0 billion.

DERIVATIVES REPORTING.

KfW Bankengruppe uses the following forward transactions/derivative products, mainly to hedge against the risk of changes in interest rates and exchange rates, and other price and credit risks:

Interest-rate related forward transactions/derivative products

	n		Interest rate swaps

	n		Interest rate options

	n		Caps and floors

	n		Spreadlocks

	n		Forward Rate Agreements

Currency-related forward transactions/derivative products

	n		Cross-currency swaps

	n		FX swaps

	n		Spot exchange deals

	n		Forward exchange deals

Share price-related and other price risk-related forward transactions/derivative products

Share options under standstill agreements

Credit derivatives

Single Name Credit Default Swaps

The following presentation of the derivatives business was adjusted in accordance with the requirements of § 285 No. 18 of the German Commercial Code. It discloses the positive and negative market values of the derivatives positions as of December 31, 2005.

As derivatives instruments are used to hedge market risks of on-balance sheet business, whose values move in opposite directions, these instruments are treated as off-balance sheet items.

All types of contracts are valued according to the mark-to-market method. In cases where market prices were not available for derivatives instruments, fair values were established by means of market parameters based on generally acknowledged option price models and present value estimates.

Purchased and written options are classified as other assets or other liabilities in the amounts paid as premiums.

KfW 2005
EUR million


	Nominal values		Nominal values		Fair values		Fair values
					positive		negative
	Dec. 31, 2005		Dec. 31, 2004		Dec. 31, 2005		Dec. 31, 2005
Volumes
Contracts with interest rate risks
Interest swaps		278,615		252,410		9,507		10,932
Interest options of which: Purchases		0		220		0		0
Sales		1,230		784		0		22
Caps and Floors¹⁾		604		615		1		1
Spreadlocks		169		0		0		0
Total		280,618		254,029		9,508		10,955
Contracts with currency risks
Cross-currency swaps		103,624		77,862		3,220		4,475
FX swaps		18,434		20,410		282		61
Forward exchange swaps		140		29		0		6
Spot exchange deals		17		0		0		0
Total		122,215		98,301		3,502		4,542
Share and other price risks¹⁾		342		1.000		1		0
Credit derivatives²⁾
of which: Purchases		850		40		0		1
Sales		0		0		0		0

Total		850		40		0		1


¹⁾		Derivative financing instruments are shown without embedded derivatives.

²⁾		here: Single name credit default swaps


Nominal values	Interest risks¹⁾				Currency risks				Other price risks¹⁾				Credit derivatives²⁾
EUR million	Dec. 31, 2005		Dec. 31, 2004		Dec. 31, 2005		Dec. 31, 2004		Dec. 31, 2005		Dec. 31, 2004		Dec. 31, 2005		Dec. 31, 2004
Maturity
Remaining term of
n up to 3 months		6,987		14,344		18,827		20,297		342		1,000		0		0
n > 3 months to 1 year		38,364		29,606		16,988		14,313		0		0		0		0
n > 1 to 5 years		135,723		119,236		65,002		44,000		0		0		850		40
n > 5 years		99,544		90,843		21,398		19,691		0		0		0		0

Total		280,618		254,029		122,215		98,301		342		1,000		850		40


¹⁾		Derivative financing instruments are shown without embedded derivatives.

²⁾		here: Single name credit default swaps

EUR million


	Nominal values		Nominal values		Fair values		Fair values
					positive		negative
	Dec. 31, 2005		Dec. 31, 2004		Dec. 31, 2005		Dec. 31, 2005
Counterparties
OECD Banks		329,417		282,268		10,495		12,439
Banks outside the OECD		0		0		0		0
Other counterparties		74,420		69,062		2,505		3,058
Public authorities		188		2,040		11		1

Total		404,025		353,370		13,011		15,498

KfW group 2005
EUR million


	Nominal values		Nominal values		Fair values		Fair values
					positive		negative
	Dec. 31, 2005		Dec. 31, 2004		Dec. 31, 2005		Dec. 31, 2005
Volumes
Contracts with interest risks
Interest swaps		279,732		253,764		9,537		10,949
Forward Rate Agreements		13		0		0		0
Interest options of which: Purchases		0		270		0		0
Sales		1,230		784		0		22
Caps and floors¹⁾		613		671		1		1
Spreadlocks		169		0		0		0

Total		281,757		255,489		9,538		10,972


Contracts with currency risks
Cross-currency swaps		104,269		78,373		3,234		4,509
FX swaps		18,434		20,410		282		61
Forward exchange swaps		140		29		0		6
Spot exchange deals		17		0		0		0

Total		122,860		98,812		3,516		4,576


Share and other price risks¹⁾		342		1.000		1		0
Credit derivatives²⁾
of which: Purchases		850		40		0		1
Sales		0		0		0		0

Total		850		40		0		1


¹⁾		Derivative financing instruments are shown without embedded derivatives.

²⁾		here: Single name credit default swaps


Nominal values	Interest risks¹⁾				Currency risks				Other price risks¹⁾				Credit derivatives²⁾
EUR million	Dec. 31, 2005		Dec. 31, 2004		Dec. 31, 2005		Dec. 31, 2004		Dec. 31, 2005		Dec. 31, 2004		Dec. 31, 2005		Dec. 31, 2004
Maturity
Remaining term of
n up to 3 months		7,103		14,350		18,851		20,325		342		1,000		0		0
n > 3 months to 1 year		38,291		29,747		17,064		14,382		0		0		0		0
n > 1 to 5 years		136,396		120,025		65,398		44,165		0		0		850		40
n > 5 years		99,967		91,367		21,547		19,940		0		0		0		0

Total		281,757		255,489		122,860		98,812		342		1.000		850		40


¹⁾		Derivative financing instruments are shown without embedded derivatives.

²⁾		here: Single name credit default swaps

EUR million


	Nominal values		Nominal values		Fair values		Fair values
					positive		negative
	Dec. 31, 2005		Dec. 31, 2004		Dec. 31, 2005		Dec. 31, 2005
Counterparties
OECD Banks		331,200		284,234		10,539		12,490
Banks outside the OECD		2		3		0		0
Other counterparties		74,420		69,066		2,505		3,058
Public authorities		187		2.038		11		1

Total		405,809		355,341		13,055		15,549

In addition, KfW has taken on the default risks on SME and housing loans (EUR 67.6 billion) as well as risks in connection with the sale of debt owed to the Federal Republic of Germany (EUR 0.8 billion) and transferred them to the capital market. These risks assumed through credit derivatives in the total amount of EUR 68.4 billion (2004: EUR 56.3 billion) are shown under the item “Contingent liabilities”. The transfer of the risk to the capital market was made through credit default swaps (EUR 60.7 billion) or credit linked notes (EUR 7.7 billion).

LOANS IN THE NAME OF THIRD PARTIES FOR THIRD PARTY ACCOUNT.

The loans outstanding in the name of third parties and for third party account totalled EUR 3,168 million as per December 31, 2005.

PERSONNEL.

The average number of staff, not including the Board of Managing Directors and trainees, but including temporary staff, is calculated from the figures at quarter endings during the year under review.


	2005 KfW		2004 KfW		2005 Group		2004 Group
Female employees		1,592		1,589		1,828		1,828
Male employees		1,711		1,665		1,912		1,869
Staff not covered by collective agreements		2,140		1,883		2,402		2,141
Staff covered by collective agreements		1,163		1,371		1,338		1,556

Total		3,303		3,254		3,740		3,697

REMUNERATIONS AND LOANS TO MEMBERS OF THE BOARD OF MANAGING DIRECTORS AND THE BOARD OF SUPERVISORY DIRECTORS.

The total remuneration paid to members of the Board of Managing Directors for 2005 in the Group was EUR 2,495,490.77. This includes EUR 37,795.49 for non-cash benefits and other remuneration. The current salary components were uniformly fixed at EUR 409,615.88 for all members of the Board of Managing Directors.

The remuneration paid to members of the Board of Supervisory Directors of KfW was EUR 211,200.52. It is composed as follows:

The remuneration for the Chairman of the Board of Supervisory Directors is EUR 12,782.00 annually, for the Deputy Chairman of the Board of Supervisory Directors it is EUR 10,226.00 annually, for the members of the Board of Supervisory Directors it is EUR 5,113.00 annually, for the members of the Loan Approvals Committee it is 614.00 annually and for the members of the Legal and Administrative Committee it is EUR 307.00 annually. Remuneration is paid on a pro-rata basis if members join or leave the Board of Supervisory Directors during the current year.

A liability of EUR 32,567,001 had been accrued at Dec. 31, 2005 for obligations under pension arrangements for retired members of the Board of Managing Directors and their surviving dependants. Current payments amounted to EUR 3,228,452.42.

Loans to members of the Board of Managing Directors amounted to a total of EUR 35,987.92 as of Dec. 31, 2005. The interest rates range from 2% to 5%.

RELATED PARTY DISCLOSURES.

Related parties or companies in the sense of GAS 11 are natural and legal persons and companies over which the reporting company may exercise an influence or which may exercise an influence over the reporting company. KfW is a public law institution owned 80 % by the Federal Republic of Germany and 20 % by the federal states. Transactions concluded in the year under review with the German government and individual companies in which the German government holds stakes and which are shown in the annual report on state shareholdings (Beteiligungsbericht des Bundes) were conducted within the framework set by the KfW Law. The objective of the holdings of the German government is to fulfil the promotional mission laid down in the KfW Law.

In addition to the members of the Board of Managing Directors and the Board of Supervisory Directors, other management staff may also be related parties in accordance with GAS 11. Related parties, defined in this sense, are shown in the list of mandates and the organisation chart of KfW. Transactions with any of these persons or their close relatives may be entered into at the usual terms and conditions of KfW in the framework of its loan programmes open to the general public. Internal transactions (advances and loans) entered into with Directors of KfW are not reported here for reasons of materiality.

REMUNERATION OF THE AUDITOR OF THE ANNUAL FINANCIAL STATEMENTS.

The expenses for the year 2005 contain the following remuneration of the auditor of the Annual Financial Statements:

EUR thousand


	2005 KfW		2005 Group
Audit		1,006		1,548
Other certifications and valuations		1,751		1,770
Tax consultancy services		70		84
Other services		416		420

Sum		3,243		3,822

MANDATES HELD BY STATUTORY REPRESENTATIVES OR OTHER REPRESENTATIVES ON SUPERVISORY BOARDS OF MAJOR JOINT STOCK COMPANIES IN ACCORDANCE WITH §267 (3) COMMERCIAL CODE.

Hans W. Reich
Aareal Bank AG, Wiesbaden
HUK-Coburg Haftpflicht-Unterstützungs-Kasse kraft-
fahrender Beamter Deutschlands a. G. in Coburg, Coburg
HUK-Coburg-Holding AG, Coburg
Deutsche Telekom AG, Bonn
IKB Deutsche Industriebank AG, Düsseldorf
ThyssenKrupp Steel AG, Duisburg
Deutsche Post AG, Bonn

Dr. Peter Klaus
Georgsmarienhütte Holding GmbH, Georgsmarienhütte
STEAG AG, Essen
ThyssenKrupp Technologies AG, Essen
Lufthansa Technik AG, Hamburg

Ingrid Matthäus-Maier
DEG – Deutsche Investitions- und
Entwicklungsgesellschaft mbH, Cologne
Salzgitter Mannesmann Handel GmbH,
Düsseldorf RAG AG, Essen

Wolfgang Kroh
DEG – Deutsche Investitions- und
Entwicklungsgesellschaft mbH, Cologne

Heinrich Heims
EKO Stahl GmbH, Eisenhüttenstadt

Waltraud Wolff
Saarstahl AG, Völklingen

As of Dec. 31, 2005

BOARD OF SUPERVISORY DIRECTORS.

Peer Steinbrück
Federal Minister of Finance
(since November 22, 2005)
Deputy Chairman
(since January 1, 2006)
Chairman
(from November 29 until
December 31, 2005)

Michael Glos
Federal Minister of Economics and Technology
(since November 22, 2005)
Chairman
(since January 1, 2006)
Deputy Chairman
(from November 29 until
December 31, 2005)

Hans Eichel
Federal Minister of Finance
Chairman
(until November 21, 2005)

Wolfgang Clement
Federal Minister of Economics and Labour
Deputy Chairman
(until November 21, 2005)

Dietrich Austermann
Member of the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag
(until June 6, 2005)

Dietrich Austermann
Ministry of Science, Economics and Transport of the State of Schleswig-Holstein
Member appointed by the Bundesrat
(Upper House)
(since July 8, 2005)

Dr. Günter Baumann
Member of the Board of Managing Directors of DIHK Deutscher
Industrie- und Handelskammertag
Representative of Industry

Anton F. Börner
President of the Bundesverband
des Deutschen Groß- und Außen-
handels e.V.
Representative of Trade

Dr. Rolf-E. Breuer
President of the Bundesverband
deutscher Banken e.V. (ret.)
Representative of the Commercial Banks
(until April 8, 2005)

Dr. Ulrich Brixner
Chairman of the Board of Managing
Directors of DZ BANK AG
Representative of the Cooperative Banks

Rüdiger Dorn
President Haus & Grund Deutschland
Representative of the Housing Industry

Prof. Dr. Kurt Faltlhauser
Minister of Finance of the Bavarian
State Ministry of Finance
Member appointed by the Bundesrat
(Upper House)

Joschka Fischer
Federal Minister of Foreign Affairs
(until November 21, 2005)

Dr. Thomas R. Fischer
Chairman of the Board of Managing
Directors of WestLB
Representative of the Mortgage Banks

Dr. Rolf-Jürgen Freyberg
Chairman of the Board of Managing
Directors of BGAG
Beteiligungsgesellschaft der
Gewerkschaften AG (ret.)
Representative of the Trade Unions
(until September 30, 2005)

Sigmar Gabriel
Federal Minister of the Environment,
Nature Protection and Nuclear Safety
(since November 22, 2005)

Prof. Dr. Hans-Günter Henneke
Managing Director of the Deutscher
Landkreistag
Representative of the Municipalities

Dr. Dietrich H. Hoppensted
President of the Deutscher Sparkassen-
und Giroverband e.V.
Representative of the Savings Banks

Bartholomäus Kalb
Member of the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag

Roland Koch
Minister President of the State of Hesse
Member appointed by the Bundesrat
(Upper House)

Jürgen Koppelin
Member of the German Bundestag (Federal Parliament)
Member appointed by the Bundestag
(since January 1, 2006)

Renate Künast
Federal Minister of Consumer
Protection, Food and Agriculture
(until October 4, 2005)

Oskar Lafontaine
Member of the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag
(since January 1, 2006)

Waltraud Lehn
Member of the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag
(until December 31, 2005)

Prof. Dr. Wolfgang Methling
Minister for the Environment of the
State of Mecklenburg-West Pomerania
Member appointed by the Bundesrat
(Upper House)

Dr. Horst Metz
Minister of Finance of the Free State
of Saxony
Member appointed by the Bundesrat
(Upper House)

Franz-Josef Möllenberg
Chairman of the Gewerkschaft
Nahrung-Genuss-Gaststätten
Representative of the Trade Unions
(since November 29, 2005)

Hartmut Möllring
Minister of Finance of the
State of Lower Saxony
Member appointed by the Bundesrat
(Upper House)

Margret Mönig-Raane
Deputy Chairman of ver.di e.V.
Representative of the Trade Unions

Klaus-Peter Müller
President of the Bundesverband
deutscher Banken e.V.
Representative of the Commercial Banks
(since May 4, 2005)

Stefan Ortseifen
Spokesman of the Board of Managing
Directors of IKB
Deutsche Industriebank AG
Representative of the Industrial Loan Banks

Ronald Pofalla
Member of the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag

Heinz Putzhammer
Member of the Executive Board of
the Deutscher Gewerkschaftsbund
Representative of the Trade Unions

Christine Scheel
Member of the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag

Hanns-Eberhard Schleyer
Secretary-General of the Zentral-
verband des Deutschen Handwerks
Representative of the Crafts

Horst Seehofer
Federal Minister of Food, Agriculture
and Consumer Protection
(since November 22, 2005)

Michael Sommer
Chairman of the Deutscher Gewerk-
schaftsbund
Representative of the Trade Unions

Gerhard Sonnleitner
President of the Deutscher
Bauernverband e.V.
Representative of Agriculture

Jörg-Otto Spiller
Member of the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag

Dr. Ralf Stegner
Minister of Finance of the State of
Schleswig-Holstein (ret.)
Member appointed by the Bundesrat
(Upper House)
(until May 19, 2005)

Dr. Frank-Walter Steinmeier
Federal Minister of Foreign Affairs
(since November 22, 2005)

Ludwig Stiegler
Member of the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag

Dr. Manfred Stolpe
Federal Minister of Transport,
Building and Housing
(until November 21, 2005)

Erwin Teufel
Minister President of the State of
Baden-Württemberg
Member appointed by the Bundesrat
(Upper House)

Jürgen R. Thumann
President of the Bundesverband der
Deutschen Industrie e.V.
Representative of Industry
(since January 1, 2005)

Wolfgang Tiefensee
Federal Minister of Transport,
Building and Urban Development
(since November 22, 2005)

Jürgen Trittin
Federal Minister of the Environment,
Nature Protection and Nuclear Safety
(until November 21, 2005)

Heidemarie Wieczorek-Zeul
Federal Minister of Economic
Cooperation and Development

THE BOARD OF MANAGING DIRECTORS.


Dr. Peter Fleischer		Dr. Peter Klaus		Wolfgang Kroh


Detlef Leinberger		Ingrid Matthäus-Maier		Hans W. Reich (Chairman)



Dr. Peter Fleischer	Dr. Peter Klaus	Wolfgang Kroh


Detlef Leinberger	Ingrid Matthäus-Maier	Hans W. Reich (Chairman)

Frankfurt am Main, January 30, 2006
KfW

AUDITOR’S REPORT REPRINT.

After concluding our audit we gave the following unqualified report:

AUDITOR’ S REPORT.

We have audited the annual financial statements – consisting of balance sheet, income statement and notes – together with the bookkeeping system of KfW, Frankfurt am Main, and the consolidated financial statements – consiting of balance sheet, income statement, notes, cash flow statement, statement of changes in equity and segment report as well as the combined management report of KfW and the Group for the business year from January 1 to December 31, 2005. The bookkeeping system and the preparation of these documents in accordance with German commercial law and the regulations in the Law on the KfW and its By-Laws are the responsibility of the Board of Managing Directors of KfW. Our responsibility is to express an opinion on the annual financial statements, together with the bookkeeping system, as well as on the consolidated financial statements and the combined management report of KfW and the Group based on our audit.

We conducted our audit of the annual and consolidated financial statements in accordance with § 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer in Deutschland (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the annual und consolidated financial statements in accordance with German principles of proper accounting and in the combined management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of KfW and the Group and evaluations of possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the books and records, the annual and consolidated financial statements and the combined management report are examined primarily on a test basis within the framework of the audit. The audit includes for the annual financial statements assessing the accounting principles used and for the consolidated financial statements assessing the annual financial statements of the companies included in consolidation, the determination of the companies to be included in consolidation, the accounting and consolidation principles used as well as for both statements the evaluation of significant estimates made by the Board of Managing Directors, and evaluating the overall presentation of the annual and consolidated financial statements and the combined management report. We believe that our audit provides a reasonable basis for our opinion.

Our audit has not led to any reservations.

In our opinion based on the results of our audit, the annual financial statements and the consolidated financial statements are in compliance with the legal legislations and the regulations in the Law on the KfW and its By-Laws and give a true and fair view of the net assets, financial position and results of operations of KfW and the Group, respectively, in accordance with German principles of proper accounting. The combined management report is in accordance with the annual financial statements and the consolidated financial statements and provides on the whole a suitable understanding of KfW’s and the Group’s position and suitably presents the chances and risks of future development.

Frankfurt am Main, February 28, 2006
PricewaterhouseCoopers
Aktiengesellschaft
Wirtschaftsprüfungsgesellschaft



Wagener		ppa. Dr. Ott
Wirtschaftsprüfer		Wirtschaftsprüfer

SUPPLEMENTARY INFORMATION ON FUNDED DEBT OF KFW BANKENGRUPPE(1)(2)

Funded Debt Outstanding


									Principal
									Amount
									Outstanding at
					Year of				December 31,
	Interest Rate (%)				Incurrence		Maturity		2005
									(EUR in
	nominal(8)		effective(8)						millions)
1. Borrowed Funds
Schuldscheindarlehen(3)		0.50-15.25		2.00-15.82		1980-2005		2006-2056		24,883
Loans from
Federal Republic(4)		0.00-5.82		0.00-5.82	various(5)		various(5)			12,675
ERP Special Fund		0.00-8.00		0.00-8.00	various(5)		various(5)			15,711
Other lenders		2.54-6.51		2.57-6.49		1996-2005		2006-2019		1,632
Securities account(6)		2.01-7.37		2.01-7.37	various		various			3,511

										58,412
2. Bonds and Notes Issued
Bonds and Notes		0.00-15.50		0.24-16.72		1992-2005		2006-2045		225,752
Total funded debt(7)										284,164


(1)		Issues of KfW International Finance are included in the item Bonds. Issues of DEG — Deutsche Investitions- und Entwicklungsgesellschaft mbH are included in the item Schuldscheindarlehen.

(2)		Includes all debt with initial maturities of more than 1 year. The presentation in this table follows neither German GAAP applicable to KfW nor the U.S. GAAP classification of debt according to maturities as described under “KfW — Capitalization”. All funded debt of KfW is unsecured.

(3)		Including credit-linked Schuldscheindarlehen with their legal maturity. Interest rates of credit-linked Schuldscheine include a risk premium in accordance with the probability of default of the underlying loan portfolio.

(4)		The item “Federal Republic” includes a subordinated loan extended by the Federal Republic in the context of the purchase of shares of Deutsche Telekom AG and Deutsche Post AG by KfW from the Federal Republic in 2003.

(5)		Dates of incurrence and maturities of loans from the Federal Republic or the ERP Special Fund match the dates of incurrence and maturities of loans made with such funds.

(6)		Debt for prepaid interest and insurance fees in connection with export finance loans and other security deposits.

(7)		Includes the following debt in currencies (before any related swap transactions).

(8)		The interest rates indicated always represent an interval giving the maximum and minimum interest rate of the liabilities outstanding.


	Principal
	Amount
	Outstanding at
	December 31,
Currency	2005
	(in millions)
Australian Dollars		6,187
Brasilian Real		50
Canadian Dollars		1,812
Czech Korunas		12,000
Euro		167,435
Hong Kong Dollars		2,150
Hungary Forint		76,500
Iceland Kronas		28,000
Japanese Yen		1,681,340
Mexican Peso		3,450
New Zealand Dollars		4,142
Norwegian Kroner		13,350
Polish Zloty		100
Pounds Sterling		22,663
Singapore Dollar		400
South African Rand		4,750
Swedish Kronor		2,000
Swiss Francs		3,000
Turkey Lira (01/2005)		770
U.S. Dollars		67,493

Repayment Schedule for Funded Debt (1)(2)(3)(4)(5)


																					After
	2006		2007		2008		2009		2010		2011		2012		2013		2014		2015		2015		Total
	(EUR in millions)
1. Borrowed Funds:
Schuldscheindarlehen:
Principal		2,442		2,820		3,179		3,076		2,805		974		284		308		615		636		7,744		24,883
Interest		1,059		1,010		867		714		556		475		458		444		433		428		11,350		17,795
Loans from ERP Special Fund:
Principal		1,698		1,595		1,550		1,445		1,366		1,282		1,238		1,137		994		893		2,514		15,711
Interest		559		494		403		315		238		177		128		83		40		17		22		2,477
Other lenders:
Principal		180		318		178		338		269		39		53		24		80		27		127		1,632
Interest		78		71		52		39		23		15		14		12		9		7		16		336
2. Bonds and Notes issued:
Principal		34,069		38,792		34,460		25,535		19,775		8,735		9,088		7,929		7,944		9,109		30,316		225,752
Interest		9,376		7,924		6,342		5,171		4,081		3,326		2,913		2,448		2,121		1,753		16,097		61,552

Total Borrowed Funds and Bonds and Notes issued:
Principal		38,389		43,524		39,368		30,393		24,215		11,031		10,662		9,397		9,634		10,665		40,701		267,979
Interest		11,072		9,500		7,664		6,239		4,899		3,992		3,513		2,988		2,603		2,205		27,484		82,160


Total		49,461		53,023		47,031		36,632		29,114		15,023		14,175		12,385		12,237		12,871		68,186		350,138


(1)		No repayment schedule for loans from the Federal Republic has been provided, since the terms of such loans provide for repayment by KfW at the time and solely to the extent that KfW has been repaid by the ultimate recipient of such loans.

(2)		Floating rate interest for each loan is calculated on the basis of the most recent interest rate adjustment made before December 31, 2005.

(3)		Contracts with embedded early redemption options which are not exercised until December 31, 2005 are considered with their initial final maturities.

(4)		Totals may not add due to rounding.

(5)		Includes all debt with initial maturities of more than 1 year.”

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrants KfW and KfW International Finance Inc. have each duly caused this amendment to be signed on their respective behalves by the undersigned, thereunto duly authorized.



	KfW

	By:	/s/ Hans W. Reich

		Hans W. Reich
		Managing Director

	By:	/s/ Wolfgang Kroh

		Wolfgang Kroh
		Managing Director

	KfW INTERNATIONAL FINANCE INC.

	By:	/s/ Frank Czichowski

		Dr. Frank Czichowski
		Vice President and Treasurer

Date: April 3, 2006

KfW 18-K/AAnnual report (foreign governments) (amended)