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

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 18-K/A

For Foreign Governments and Political Subdivisions Thereof

AMENDMENT NO. 5

to

ANNUAL REPORT

of

KfW

(Name of Registrant)

Date of end of last fiscal year: December 31, 2005

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

	AMOUNT AS TO WHICH
	REGISTRATION IS	NAMES OF EXCHANGES ON
TITLE OF ISSUE	EFFECTIVE	WHICH REGISTERED
N/A	N/A	N/A

* The registrant files 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 82

The undersigned registrant hereby amends its Annual Report on Form 18-K for the fiscal year ended December 31, 2005, as subsequently amended, as follows:

Exhibit (d) is hereby amended by adding the text on page 1 of this Amendment No. 5 to the section “Exchange Rate Information.”

Exhibit (d) is hereby amended by replacing the section “KfW” with the text on pages 2 to 77 of this Amendment No. 5.

Exhibit (d) is hereby amended by replacing the section “Recent Developments—The Federal Republic of Germany” with the text on pages 78 to 83 of this Amendment No. 5.

Exhibit (e) is hereby replaced by Exhibit (e) attached to this Amendment No. 5.

This report is intended to be incorporated by reference into KfW’s prospectus dated December 21, 2006 and any future prospectus filed by KfW with the Securities and Exchange Commission to the extent such prospectus indicates that it intends to incorporate by reference this report.

TABLE OF CONTENTS

	Page
EXCHANGE RATE INFORMATION		1
KFW		2
General		2
Business		6
Short-term Indebtedness and Capitalization		28
Management		29
Employees		31
Financial Section		32
Financial Statements and Auditors		32
Management’s Comments on the Consolidated Financial Statements		33
Financial Statements of KfW		40
Financial Statements of KfW Bankengruppe		43
Notes to Financial Statements		47
Supplementary Information on Funded Debt of KfW Bankengruppe		74
THE FEDERAL REPUBLIC OF GERMANY		77
Recent Developments		77

i

EXCHANGE RATE INFORMATION

     We file reports with the Securities and Exchange Commission giving financial and economic data expressed in euro.

     The following table shows the average noon buying rates for euro, expressed as U.S. dollars per €1.00, for the periods and dates indicated.

Year ended December 31,	Period end		Average (1)		High		Low
2006		1.3197		1.2661		1.3327		1.1860

Quarter ended March 31,	Period end		Average (1)		High		Low
2007		1.3374		1.3201		1.3374		1.2904

(1) The average of the noon buying rates on the last business day of each month during the relevant period.

     No representation is made that the euro or U.S. dollar amounts referred to herein could have been or could be converted into euro or U.S. dollars, as the case may be, at any particular rate.

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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, three of which operate under the respective brand names noted in italics:

• Investment finance:

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

• 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; and

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

• Shareholdings, treasury and services.

     At December 31, 2006, KfW Bankengruppe had total assets of EUR 359.6 billion, including EUR 265.7 billion in loans outstanding. In addition, KfW Bankengruppe had EUR 79.1 billion in guarantees outstanding, of which an amount of EUR 72.4 billion relate to its PROMISE and PROVIDE securitization programs. Of its EUR 265.7 billion in outstanding loans at December 31, 2006, EUR 203.1 billion were for investment finance, EUR 42.0 billion for export and project finance, and EUR 20.6 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 KfW (Gesetz über die Kreditanstalt für Wiederaufbau, or 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

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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 (the “Commissioner”) held discussions which were formalized in an understanding reached on March 1, 2002. In the understanding with the European Commission (the “Commission”), 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.

     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 was required 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 Guarantee of the Federal Republic. The subsidiary is to obtain a banking license and will 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), which 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 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.

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     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, in consultation with the Federal Ministry for Economics and Technology, 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 subject to an audit that meets the requirements of the Budgeting and Accounting Act (Haushaltsgrundsätzegesetz). The Budgeting and Accounting Act requires that this audit and the resulting reporting be designed so as to enable the Board of Supervisory Directors, the responsible Federal Department, and the Federal Court of Auditors (Bundesrechnungshof) 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 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 and European 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 DEG 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 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.

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Recent Developments

     GTZ. The Federal Government currently provides aid to developing countries mainly through two organizations: financial cooperation with developing countries through KfW Entwicklungsbank, and technical cooperation through Deutsche Gesellschaft für Technische Zusammenarbeit GmbH (“GTZ”), a private company owned by the Federal Government. GTZ provides solutions for political, economic, ecological and social development worldwide – frequently in cooperation with KfW. GTZ operates on a non-profit basis, and any surpluses generated by it are channeled back into development projects. According to its 2005 annual report, GTZ had a business volume (defined by GTZ as total income in the public benefit sector and total operating performance of GTZ International Services) of EUR 950 million, had approximately 1,000 employees in Germany and maintained offices in 67 countries.

     The Federal Government is currently considering various ways to coordinate more closely its financial and technical cooperation programs and commissioned a study outlining models to enhance the cooperation between GTZ and KfW Entwicklungsbank. The study proposed various models, ranging from closer cooperation within the two existing separate organizations to combination of the two organizations into a single institution.

     In October 2006, the Budget Committee (Haushaltsausschuss) of the Bundestag commissioned a follow-on study by the Federal Court of Auditors (Bundesrechnungshof) that was released in February 2007. In its study, the Federal Court of Auditors affirms a need for structural reform in German development cooperation and recommends that financial and technical cooperation be combined. It also expresses the view that financial cooperation should remain within KfW. However, the Federal Court of Auditors does not make a specific recommendation as to which of the models currently under consideration should be implemented.

     The decision as to whether and how to proceed with reform now lies with the Federal Government. KfW is currently unable to predict whether, when or in what form the reform will occur.

     ERP. The Federal Government is planning to reorganize the ERP Special Fund. In this context, assets of the ERP Special Fund in the amount of up to EUR 9.3 billion may be transferred to KfW, partly as equity capital and partly as a subordinated loan. The corresponding draft bill was approved by the Federal Government, but is subject to change until the further legislative process is completed. The Federal Government plans to implement the reorganization in mid-2007. The funds contributed to KfW by the ERP Special Fund will continue to be tied to the specific purpose of ERP economic promotion.

     EADS. On February 9, 2007, KfW IPEX-Beteiligungsholding GmbH, together with 14 other investors, agreed to jointly acquire an indirect participation of approximately 7.5% in the issued share capital of European Aeronautic Defence and Space Company EADS N.V. For more information on this participation, see “Shareholdings, Treasury and Services — Privatization Initiatives and Other Shareholdings — Other Shareholdings.”

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BUSINESS

     KfW Bankengruppe conducts its business in four principal areas: investment finance; export and project finance; financial cooperation; and shareholdings, treasury and 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 the volume of securitization transactions in each year. KfW’s securitization activities are part of its investment finance business. No loans or loan commitments are made in the shareholdings, treasury and services area, given the nature of its business.

Loans Outstanding And Loan Commitments By Business Area and securitization

	As of December 31,
	2006		2005
	(EUR in millions)
Loans outstanding
Investment finance		203,091		187,135
Export and project finance		42,039		46,114
Financial cooperation		20,605		21,521
Total		265,735		254,770
Loan commitments(1)
Investment finance		40,484		33,525
Export and project finance		15,001		11,984
Financial cooperation		2,414		1,718
Total		57,899		47,227
Securitizations
Securitization commitments outstanding(2)		76,696		70,339
Securitization transaction volume(3)		17,892		20,683

(1)	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.
(2)	Consists of commitments in connection with credit default swaps in the amount of EUR 72,403 million in 2006 and EUR 68,413 million in 2005, as well as irrevocable loan commitments in the amount of EUR 4,293 million in 2006 and EUR 1,926 million in 2005.
(3)	Includes commitments for the ABS-SME-Portfolio in the amount of EUR 781 million in 2006 and EUR 448 million in 2005 as well as first-loss pieces (i.e., the tranche of a transaction to which losses on the underlying loan portfolio are allocated first) retained by the originating banks in the amount of EUR 64 million in 2006 and EUR 119 million in 2005.

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. In 2006, 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.

     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 350 banks.

     Borrowers may 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

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banks are normally collateralized by real property or other assets, or are guaranteed by the Federal Republic or by a government of one of the Länder.

     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 SMEs and other 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.

     As described above, in the traditional SME loan programs offered by KfW, the on-lending banks are liable to KfW and bear the risk of customer default. In recent years, KfW Mittelstandsbank has been reworking and renewing its SME financing programs to further its support for SMEs. The recent focus has been on enhancing the support under its most important SME loan program (the Unternehmerkredit, or Entrepreneurial Loan, program) and on complementing its products with a new equity mezzanine program.

     KfW plans to offer to share a portion of the credit risk by offering the on-lending banks the option of up to a 50% exemption from liability under its Unternehmerkredit program described below, which uses the risk-adjusted pricing model. If the on-lending bank applies for this exemption, KfW bears the risk not retained by the bank and the risk margin is shared between KfW and the bank. Launch of this offer is planned for the end of April or beginning of May. In addition, KfW Mittelstandsbank’s mezzanine and equity participation programs and special programs for investments of micro-enterprises 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 addition to its traditional loan programs, KfW extends “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.

     KfW’s many German commercial banking on-lending customers include 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 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 51 billion at December 31, 2006. Of this amount, EUR 20.4 billion (40.2%) 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.

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     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 Commission to separate commercial and promotional business activities, many of these institutions became independent public law institutions that benefit from explicit government guarantees.

     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 Government and Länder governments. For an in-depth analysis of their investment and business plans, entrepreneurs and SMEs may also turn to KfW’s advisory service (KfW-Beratungssprechtage). This service is offered at 50 different locations in Germany in cooperation with other institutions dealing with the promotion of the economy. 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.

     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,
	2006		2005
	(EUR in millions)
Total commitments in Germany and elsewhere in Europe		58,375.3		54,207.6
KfW Mittelstandsbank		22,827.2		15,520.1
Promotional Loans		12,577.1		11,108.9
Loan Programs		10,156.7		10,225.7
of which global loans		3,643.1		5,353.1
Mezzanine Programs		2,139.6		583.1
Equity Participation Programs		280.8		300.1
PROMISE(2)		10,250.1		4,411.2
KfW Förderbank		35,548.1		38,687.5
Promotional Loans		27,906.6		22,415.8
Housing Investment Programs		15,147.4		10,903.6
of which global loans		1,200.0		2,008.0
Education Programs		1,341.8		875.0
Municipal Infrastructure Programs		3,211.7		2,770.4
of which global loans		43.8		120.2
Environmental Investment Program		4,609.6		4,241.6
Global loans to Landesförderinstitute		3,596.0		3,625.2
PROVIDE(3)		7,641.5		16,271.7

(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 also transactions under variations of the PROMISE program, guarantees and the ABS-SME-Portfolio. Guarantees amounted to EUR 27.2 million in 2006 and EUR 28.3 million in 2005 and commitments for the ABS-SME-Portfolio amounted to EUR 780.6 million in 2006 and EUR 448.0 million in 2005. First-loss pieces retained by the originating banks amounted to zero in 2006 and EUR 57.3 million in 2005.
(3)	Includes also transactions under variations of the PROVIDE program. First-loss pieces retained by the originating banks amounted to EUR 64.3 million in 2006 and EUR 61.2 million in 2005.

     To support the German and European economies, KfW committed a volume of EUR 58.4 billion (including securitization transactions) in 2006, compared to EUR 54.2 billion in the previous year. In 2006, the volume of commitments by KfW Mittelstandsbank and KfW Förderbank amounted to EUR 22.8 billion and EUR 35.5 billion, respectively. The increase of commitments of KfW Mittelstandsbank was mainly due to a significantly larger securitization transaction volume. The decrease of commitments of KfW Förderbank was

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due to a substantially lower volume of commitments in securitization transactions, which was partly offset by a marked increase in loan commitments.

KfW Mittelstandsbank (KfW SME Bank)

     The KfW Mittelstandsbank programs consist of its loan programs (including global loans), mezzanine programs and equity participation programs, as well as securitization activities conducted principally through the PROMISE program, all of which are described below. In 2006, the commitments under KfW Mittelstandsbank programs amounted to EUR 22.8 billion (including securitizations) compared to EUR 15.5 billion in the previous year. At EUR 12.6 billion, the volume of commitments (excluding securitizations) under these programs in 2006 increased substantially compared to the previous year (EUR 11.6 billion), mainly due to the increase of commitments under the Unternehmerkredit (Entrepreneurial Loan) program and the new ERP-Innovation Program, which more than offset a decline in global loans. Furthermore, commitments under the PROMISE program increased substantially from EUR 4.0 billion in 2005 to EUR 9.5 billion in 2006. For more information on the PROMISE program, see “–Securitization Programs” below.

     In 2005, based on the KfW-Mittelstandspanel 2006, there were 3.5 million SMEs (including enterprises with an annual group turnover of up to EUR 500 million) in Germany. SMEs conducted 50% of the gross investment by the German corporate sector, employed almost two-thirds of the workforce and trained 73% of the apprentices in 2005.

     Loan Programs. The volume of commitments under KfW’s loan programs amounted to EUR 10.2 billion in 2006, compared to EUR 10.7 billion in the previous year. Commitments for global loans decreased from EUR 5.4 billion in 2005 to EUR 3.6 billion in 2006. 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 SME loan programs.

     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 6.1 billion in 2006 compared to EUR 4.8 billion in 2005, an increase of over 30%. KfW believes that this increase was mainly due to the higher level of investment by German SMEs combined with stronger credit demand. In the Unternehmerkredit program, KfW applies the risk-adjusted rate system and plans to offer its on-lending banks a partial risk-sharing as described above.

     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 78 million in 2006, compared to EUR 134 million in 2005.

     Mezzanine Programs. Commitments under KfW’s mezzanine programs increased from EUR 583 million in 2005 to EUR 2,140 million in 2006.

     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.

     KfW’s largest mezzanine program is the ERP-Innovation Program, which was launched in December 2005. This program, which KfW developed in recognition of the importance of innovation for economic growth and employment, is offered in cooperation with the ERP Special Fund and 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. EUR 1,634 million of the 2006 commitments was attributable to the new ERP-Innovation Program, which was well received by the market. KfW’s other mezzanine programs comprise the Unternehmerkapital (Entrepreneurial Capital) family, which consists of three components: ERP-Kapital für Gründung (ERP-Capital for Start-ups), which addresses start-ups and young

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companies up to a period of two years after the start of the business; ERP-Kapital für Wachstum (ERP-Capital for Growth) for young companies that have been in business for more than two years but less than five years; and Kapital für Arbeit und Investitionen (Capital for Work and Investments), which addresses established companies that have been operating in the market for more than five years.

     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. KfW extends these loans for equity participations under various programs.

     In recent years, the programs through which KfW funds equity investments in start-ups and innovative SMEs have been particularly affected by the consolidation in the market for equity financing of early-stage and technology companies. While there are signs that the downward trend has ceased and that early-stage and technology companies are benefiting from strong economic growth in Germany, the financing conditions for early-stage investments remain difficult. In 2006, KfW’s overall commitments in equity participation programs amounted to EUR 281 million compared to EUR 300 million in 2005.

     Under the ERP-Startfonds program, which was launched in 2004, KfW provides new equity for early-stage investments into technology-based companies. Commitments under this program amounted to EUR 43 million in 2006, compared with EUR 35 million in the previous year.

     2006 was also the first complete operational business year of the High-Tech-Gründerfonds, a public/private partnership of the Federal Republic and German industry in which KfW holds a minority stake. This entity, which finances the founding of companies focusing on research and development, had commitments totaling EUR 29 million in 2006, which are not included in KfW’s commitments.

     In December 2006, KfW launched a new program, the KfW-Genussrechtsprogramm (KfW-Equity-Mezzanine Program), which aims at improving the equity ratio of small and medium-sized companies with an annual turnover of up to EUR 150 million by offering hybrid equity financings. The KfW-Equity-Mezzanine Program is offered in cooperation with private equity companies, with which KfW shares the risk.

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 2006, the commitments under KfW Förderbank programs, including securitizations, amounted to EUR 35.5 billion compared to EUR 38.7 billion in the previous year. This decrease in commitments was due to a substantially lower volume of commitments in securitization transactions, which was only partly offset by a marked increase in loan commitments, especially under the new “Housing, Environment, Growth” initiative.

     The “Housing, Environment, Growth” initiative was launched by the Federal Government and KfW in February 2006 and makes additional federal funds available to subsidize certain of KfW Förderbank’s existing programs. This initiative substantially improves loan conditions for those programs by lowering interest rates and raising maximum loan amounts. As a result, commitments under the relevant programs increased significantly from EUR 2.9 billion in 2005 to EUR 9.5 billion in 2006. At the beginning of 2007, as a second step of the promotional initiative, KfW’s CO₂ Building Rehabilitation Program was further developed as described below and special promotional targets were added under the infrastructure-based “KfW Municipal Loan” and “Social Investments” 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 may obtain a promotional loan. In 2006, KfW committed EUR 4.4 billion under the Home Ownership Promotion Program, compared to EUR 5.6 billion in 2005, supporting an additional 77,753 owner-occupied houses and apartments compared to 97,830 in 2005.

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     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 1984 through measures such as thermal insulation of exterior walls, roofs and basements, renewal of windows, and heating systems. In 2006, KfW committed EUR 3.5 billion under this program compared to EUR 1.2 billion in 2005. The CO₂ Building Rehabilitation Program makes use of federal funds to subsidize interest rates. In 2007, a new form of subsidy was introduced under KfW’s CO₂Building Rehabilitation Program to further promote energy-saving measures by individuals.

     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 in existing residential buildings (e.g., renewals of floors, updating of bathrooms and extensions of balconies). In 2006, KfW committed EUR 3.9 billion under this Housing Modernization Program compared to 1.3 billion in 2005.

     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 1.2 billion in 2006, compared to 2.0 billion in 2005. 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 various education programs, KfW supports students and employees in advanced occupational training. In 2006, KfW committed a volume of EUR 1,342 million compared to EUR 875 million in the previous year. Loans under these education programs are guaranteed by the Federal Government.

     In April 2006, KfW launched a new student loan program called “KfW-Studienkredit” (KfW Student Credit) pursuant to which KfW grants loans at its own risk. Under this program, 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 for a maximum period of ten semesters. KfW-Studienkredit loans are designed as framework agreements, so that the committed volume is the maximum amount, which is not necessarily fully drawn. Students between 18 and 30 years of age are eligible for the program. In 2006, total commitments of EUR 505 million were granted under the new program. KfW expects the KfW-Studienkredit loan volume to reach approximately EUR 550 million in 2007 and to rise moderately in future years.

     New programs also were launched in 2006 on behalf of some Länder governments to finance tuition fees in those Länder whereby KfW cooperates with the Länder governments in the area of loan processing. These programs are guaranteed by the Länder. Additional Länder are expected to follow.

     Infrastructure. Through KfW’s 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. KfW’s current infrastructure programs 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). In 2006, EUR 3.2 billion in commitments were granted under the KfW infrastructure programs compared with EUR 2.8 billion in 2005.

     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, in particular, 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 2006, KfW commitments under these programs amounted to EUR 4.6 billion compared with EUR 4.2 billion in 2005. A large share of these commitments represents commitments for investments in the sector of renewable energy.

     Global Loans to State Promotional Institutions (Landesförderinstitute). In 2006, 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, the same amount as in the prior year.

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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 KfW Mittelstandsbank brand, KfW has securitized 23 portfolios of commercial loans of German and other European banks comprising approximately 79,000 SME loans in the aggregate amount of EUR 36 billion from 2000 through 2006. In 2006, due to higher demand from banks, a record loan volume of EUR 9.45 billion was securitized under the PROMISE program and variations of this platform compared to EUR 4.0 billion in 2005. One of the most important transactions in 2006 was “ROOF CEE 2006-1”, the first synthetic multiseller transaction for SME loans in Central and Eastern Europe.

     In 2001, KfW also established PROVIDE, a synthetic securitization program for residential mortgages. Under its KfW Förderbank brand, KfW securitized 38 portfolios of German and other European banks comprising approximately 1.1 million loans in the aggregate amount of EUR 67 billion from 2001 through 2006. In 2006, a loan volume of EUR 7.64 billion was securitized under the PROVIDE program and variations of this platform. The transaction “primus MULTI HAUS 2006” focused for the first time exclusively on loans to residential construction companies in the former GDR. With the transaction “EPIC II”, a multinational portfolio of public/private partnership loans for public infrastructure was securitized. 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. KfW plans to increase its focus on transactions with smaller portfolio sizes to reach more regionally bound or smaller banks.

     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. In general, 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 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.

     In 2006, KfW started to selectively retain parts of AAA-rated super senior swap tranches in transactions under the PROMISE and PROVIDE programs. The overall exposure of KfW relating to these tranches amounts to EUR 1.1 billion as of December 31, 2006.

     In a few transactions under the PROMISE and PROVIDE programs, KfW developed for short periods bridge solutions in order to bring portfolios to the market at an appropriate point of time. During such time, KfW’s risk is either hedged by highly rated credit institutions in a private transaction or KfW retains a portfolio risk, which, if classified, would be equivalent to a single A-rated level.

     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 loan-portfolios which were or will be securitized in order to foster the tradability 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.

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     In addition to three SME securitization transactions in the amount of EUR 448 million in 2005, KfW invested in ten additional SME securitization transactions in the amount of EUR 781 million in 2006. In total, KfW plans to build a EUR 2 billion ABS-SME-Portfolio over the next few years. Under the ABS-SME-Portfolio, KfW also invests selectively in non-rated tranches, including the first loss piece (i.e., the tranche to which losses on the underlying loan portfolio are allocated first) against appropriate market risk premiums. To date, KfW has invested in one first loss piece out of a total of 13 investments.

     In 2006, there was no material change with respect to the level of risk that KfW incurred as a result of changes in the ratings of transactions concluded under the PROMISE and PROVIDE platforms.

     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 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 was established in 2004 and 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 when certain quality standards are met. 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 in individual securitization transactions.

     KfW is one of 13 stakeholders in True Sale International GmbH, holding a 7.7% stake, and is 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.

KfW IPEX-Bank

Business

     KfW IPEX-Bank operates on a worldwide basis, offering project and corporate financing within Germany and abroad, as well as export and trade financing. It offers a full range of financing products with a focus on long-term financing, including structured financing, investment financing, acquisition financing and project financing. Through its 50% stake in Movesta Lease and Finance GmbH (formerly IKB Immobilien Leasing GmbH), KfW IPEX-Bank conducts independent lease finance operations. More recently, KfW IPEX-Bank has increasingly offered short-term instruments, such as performance and payment bonds and non recourse purchase of receivables discounted at market rates.

     KfW IPEX-Bank’s principal customers are large corporations with international operations and larger medium-sized 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. Traditionally, loans extended by KfW IPEX-Bank are used for export and project financings. In recent years, KfW has increasingly extended loans to finance direct investments by German enterprises and other corporate purposes. Loans are also used to acquire sources of raw materials for the German industry and are conditioned upon raw material deliveries into the Federal Republic for the term of the loan. In addition, loans serve to co-finance large-scale infrastructure projects in the European transport sector.

     KfW IPEX-Bank’s loans are generally extended directly to the ultimate borrower, and KfW IPEX-Bank makes a significant portion of its loans at its own risk. KfW IPEX-Bank regularly cooperates with other financial institutions by way of consortia and syndications and intends to expand its syndication activities. In some cases, KfW IPEX-Bank may 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.

     KfW IPEX-Bank also enters from time to time into framework loan agreements with foreign banks, which enable such banks to extend loans to their customers for the purpose of importing equipment from German or other European exporters. Because the amount of individual loans is usually small, the related transaction costs are relatively high. The framework agreements help to reduce these transaction costs.

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     Loans extended by KfW IPEX-Bank are generally secured by collateral and often benefit from a payment guarantee or other security arrangement. 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.

     A substantial portion of export finance loans is guaranteed by the Federal Republic through Euler Hermes Kreditversicherungs-AG, the official German export credit insurer (“HERMES”). HERMES insurance covers up to 95% of KfW IPEX-Bank’s risk, with the result that the portion covered becomes the equivalent of 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 an export finance 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 been increasingly extending 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 when HERMES coverage is sought, KfW IPEX-Bank often extends loans on which the insured portion is less than 95%. As of December 31, 2006, KfW IPEX-Bank’s outstanding export finance loans amounted to EUR 18.8 billion, 46% of which was guaranteed by HERMES.

Understanding with the European Commission

     In accordance with the understanding between the Commissioner 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. KfW IPEX-Bank has been 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 2006, 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 has been completed. Applications for a banking license and for registration as IRB (internal rating based)-advanced bank under the Basel II rules have also been made. The procedures for approval as such bank by the supervisory authorities – the Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority) and Deutsche Bundesbank (German Federal Bank) – are scheduled for the first half of 2007. In addition, the bank is seeking to obtain an independent rating from international rating agencies, which will follow in the second half of 2007. KfW IPEX-Bank expects to receive a rating of AA minus or A plus. The bank further expects the separation from KfW as a legally independent institution, but wholly owned by KfW, to be timely completed by year-end 2007.

Commitments

     In 2006, total commitments of KfW IPEX-Bank amounted to EUR 15 billion (EUR 12 billion in 2005). This increase was, in part, attributable to large commitments for single projects in the basic industries and rail and road sectors. However, at December 31, 2006, KfW IPEX-Bank’s total outstanding loans declined to EUR 42 billion from EUR 46 billion at December 31, 2005, mainly due to the weaker US dollar and because a portion of the increase in new commitments represented renewals of old commitments.

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

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KfW IPEX-Bank(1)

	As of December 31,
	2006		2005
	(EUR in millions)
Basic Industries		2,614		2,267
Manufacturing Industries, Commerce and Health		2,277		1,897
Power, Renewables, Water		2,453		1,225
Telecommunications, Media		704		776
Shipping		2,826		2,513
Rail and Road		2,152		1,555
Aviation		949		741
Airports and Harbors, Construction Industries		1,004		749
Refinancing Facility for AKA(2)		0		261
of which from ERP special fund		0		11
of which from market funds		0		250
Total loan commitments(3)		14,979		11,984
Grants and other commitments		21		164

(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 2,962 million in 2006.

     Commitments by Geographic Area. In 2006, commitments for project and corporate financings within Germany rose to EUR 5.2 billion compared to EUR 4.5 billion in 2005. This increase was primarily due to guarantees extended in connection with participations in corporate financings. 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, power and energy and shipping accounted for a significant part of new commitments in 2006.

     KfW IPEX-Bank’s commitments to other countries increased from EUR 7.6 billion in 2005 to EUR 9.8 billion in 2006, mainly reflecting improved market conditions in certain sectors, such as shipping, basic industries, and rail and road. KfW IPEX-Bank’s export and project finance business to countries outside Germany includes loans that finance corporate investments in Germany and abroad, loans that finance direct investments by German and other European companies in countries abroad, and loans that finance projects by foreign borrowers which nevertheless serve German or European interests such as projects in natural resources.

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

	As of December 31,
	2006		2005
	(EUR in millions)
Structured Finance		4,324		2,570
Direct Loans		2,777		2,530
Guarantees		2,648		1,912
Acquisition Finance		1,314		1,262
Project Finance		1,195		1,147
Credit Lines		1,079		871
ECA Export Finance		815		612
Lease Finance		703		555
Mezzanine and Other Products		145		689
Total loan commitments		15,001		12,148

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     In recent years, KfW IPEX-Bank has expanded its product portfolio. In addition to its core products (project finance, structured finance, acquisition finance and corporate finance), it now offers trade finance (including bid and performance bonds and non recourse purchase of receivables discounted at market rates), mezzanine products, lease finance and derivatives as hedging instrument.

Funding

     The funds for KfW IPEX-Bank’s commitments are mainly provided by KfW through borrowings in the capital markets. For export finance loans to developing countries, funds from the ERP Special Fund may also be used. 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 2006, EUR 350 million in funding for loans was supported by the ERP Special Fund.

     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 the bank’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 funds must comply with OECD regulations, which provide for minimum interest rates and maximum credit periods. Margins on these loans are also generally intended to cover all the risks of such loans as well as administrative costs and a return on capital. In addition, KfW IPEX-Bank 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 commences operations as a legally separate subsidiary on January 1, 2008, KfW will continue to fund KfW IPEX-Bank’s international project and export finance business at market rates based on stand-alone ratings for KfW IPEX-Bank. Funds from the ERP Special Fund will be available only in those areas of export finance which the Commissioner has deemed to fall within the scope of the promotional activities of KfW. See “KfW – General – Ownership, Legal Status and Relationship with the Federal Republic – Understanding with the European Commission.”

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, which promotes mainly public sector development cooperation activities, or through DEG, which promotes private-sector investments in developing countries.

KfW Entwicklungsbank (KfW Development Bank)

     KfW acts as the Federal Republic’s international development bank, extending loans and disbursing grants to foreign public sector borrowers or recipients. To a large extent, these loans and grants are made according to instructions from the Federal Government 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:
•	Traditional financial cooperation loans that are extended for the account of the Federal Republic;
•	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. Interest rates and related terms of Financial Cooperation Development Loans are significantly more favorable to the borrower than market terms and, therefore, meet the requirements for recognition as official development assistance; and

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• 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 may 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 a particular 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 obligations under that agreement 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,
	2006		2005
	(EUR in millions)
Total commitments		2,483		1,900
Loan commitments		1,496		1,046
Financial Cooperation Loans		280		307
Financial Cooperation Development Loans		704		492
of which federal funds		198		157
Financial Cooperation Promotional Loans		512		247
Grant commitments		902		770
Mandates(1)		85		84

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

     Total commitments of KfW Development Bank increased by 31% to EUR 2,483 million in 2006 compared with EUR 1,900 million in 2005. This growth was mainly due to an increase of Development Loans and Promotional Loans commitments, which are funded partly or solely from KfW’s own funds.

     Consistent with KfW’s policy to increase its own funding of financial cooperation commitments, the share of commitments that were refinanced in the capital markets increased by 75% from EUR 583 million in 2005 to EUR 1,018 million in 2006. This amount corresponds to 41% of the total commitments of KfW Development Bank (compared with 31% in 2005).

     In 2006, Asia accounted for 41% of financial cooperation financing commitments, Middle East/North Africa for 18%, Europe/Caucasus for 17%, sub-Saharan Africa for 15%, and Latin America for 10%. The most significant commitments in 2006 were for projects for the development of social infrastructure (such as water, sewage, health and education projects) and economic infrastructure (such as power (including renewable energy), transportation and communication projects), and for the financing of small and medium-sized projects in industry and agriculture through local and regional development banks as well as micro-finance institutions. Funds were also allocated to finance projects for environment and resource protection, agency assistance in preparing, executing and initiating projects co-financed by KfW, 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 2,398 million in 2006 compared with EUR 1,852 million in 2005. The greatest share of financial cooperation funds was committed to social infrastructure projects, with commitments totaling EUR 734 million,

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or 30% of total commitments (2005: 30%) and economic infrastructure projects, with commitments totaling EUR 724 million, or 29% (2005: 29%). Commitments in the financial sector amounted to a volume of EUR 600 million, or 24% (2005: 26%). Commitments for non-project-tied aid, in the form of structural assistance to support economic reforms in developing countries, amounted to EUR 85 million in 2006 compared with EUR 48 million in 2005.

     KfW has also implemented, on behalf of the Federal Government, the Transform Program to support the transition process in Eastern Europe. Under this program, KfW provides economic and legal advice to governments and institutions – now 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.

DEG – Deutsche Investitions– und Entwicklungsgesellschaft mbH

     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 to support 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: 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 re-channels 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, under 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, 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, 2006, DEG had total assets of EUR 2,794 million, compared with EUR 2,343 million in 2005, and recorded net income of EUR 110 million, compared with EUR 119 million in 2005. DEG’s new commitments (at own risk) in 2006 amounted to EUR 918 million, compared with EUR 672 million in 2005. In addition, in 2006, commitments in the amount of EUR 12 million were made in connection with risk participations by third parties, compared with EUR 30 million in 2005.

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Shareholdings, Treasury and Services

Privatization Initiatives and Other Shareholdings

     Privatization Initiatives. 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, KfW sold, in the aggregate, approximately 192 million shares in 2006. As of December 31, 2006, KfW held a stake of approximately 17% in Deutsche Telekom AG. To KfW’s knowledge, the Federal Republic continued to hold a direct stake of approximately 15% in Deutsche Telekom AG as of December 31, 2006.

     In the case of Deutsche Post AG, KfW sold, in the aggregate, approximately 73 million shares in 2006 by means of an accelerated bookbuilding. In addition, approximately 14 million shares were delivered to investors of bonds exchangeable for shares in Deutsche Post AG, which had been issued by KfW in 2004 and matured on January 8, 2007. As of December 31, 2006, KfW held a stake of approximately 34% in Deutsche Post AG. Because the exchange of the bonds into Deutsche Post AG shares was only completed in January 2007 when the bonds matured, KfW’s stake has been further reduced to approximately 31%. To KfW’s knowledge, the Federal Republic holds no shares of Deutsche Post AG anymore.

     The Federal Government may sell further stakes in Deutsche Telekom AG to KfW in 2007. However, KfW expects its holdings in Deutsche Telekom AG and Deutsche Post AG shares to be reduced in the medium term.

     Other Shareholdings. 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, 2006, 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, 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 itself will initially be a subsidiary of KfW IPEX-Beteiligungsholding GmbH. 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.

     IKB. 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, 2006 amounted to EUR 44.8 billion.

     EADS. On February 9, 2007, KfW IPEX-Beteiligungsholding GmbH, together with 14 other investors, agreed to acquire jointly from DaimlerChrysler group an indirect participation of approximately 7.5% in the issued share capital (the “EADS stake”) of European Aeronautic Defence and Space Company EADS N.V. (“EADS”), a public limited liability company (naamlose vennootschap) organized under the laws of the Netherlands. EADS is a European aerospace and defense company, which holds, among others participations, a majority interest in Airbus S.A.S., the European aircraft manufacturer.

     The economic interest in the EADS stake is held by a partnership limited by shares (Kommanditgesellschaft auf Aktien) organised under German law in which KfW IPEX-Beteiligungsholding GmbH holds an interest of 13%. As a result, KfW is exposed to the economic risk equivalent to holding an

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equity stake of approximately 0.975% in EADS. The interests of KfW and the 14 other investors in the partnership and the EADS stake are subject to various resale restrictions. KfW and the 14 other investors will benefit from a special dividend distribution. Voting rights in the EADS stake remain with the DaimlerChrysler group, and neither KfW nor any of the other investors are entitled – directly nor indirectly – to exercise any voting rights attached to the EADS stake.

     The investment of KfW IPEX-Beteiligungsholding GmbH, which amounted to approximately EUR 202 million, was made under a special mandate of the Federal Government in accordance with Article 2, paragraph 4 of the KfW Law.

Treasury and Funding

     KfW’s treasury and funding activities in the capital markets comprise all treasury-related activities, including, among others, liquidity management as well as providing short- and long-term funding for KfW Bankengruppe by issuing a variety of different securities and commercial paper. For more information, see “Sources of Funds” and “Funding and Investment Policy.”

Other Services

     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 the reunification, and performs other services in connection with the assets and obligations taken over from the former GDR. In 2006, KfW continued to make progress in resolving the remaining open cases, claims and accounts.

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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,
	2006					2005
	(EUR in					(EUR in
	billions)			(%)		billions)			(%)
Total loans(2) and guarantees outstanding		344.9	(3)		100.0		328.9	(4)		100.0
Of which:
- Amounts guaranteed by the Federal Republic or insured by HERMES on behalf of the Federal Republic(5)		34.1	(6)		9.9		35.7			10.9
- Amounts that are the primary liability of Länder, municipal governments or local public authorities or that are guaranteed by one of the Länder governments		46.2			13.4		40.2	(13)		12.2
- Trust loans(7)		7.4			2.1		8.3			2.5
- Loan and guarantee amounts mostly to small and medium-sized German companies for which commercial banks assume primary liability to KfW Bankengruppe(8)		144.2			41.8		135.0	(13)		41.0
- Securitization commitments outstanding for which commercial banks assume primary liability to KfW Bankengruppe		70.9			20.6		68.4			20.8
- Loan(2) and guarantee amounts at KfW Bankengruppe’s risk partially secured by collateral or other security arrangements customary in the banking business		42.1			12.2		41.3			12.6
of which:
Risk covered by collateral or other security arrangements(9)		12.5	(11)		3.6		12.0			3.6
Commercial risk to KfW Bankengruppe after valuation of collateral and other security arrangements(9)(10)		29.6	(12)		8.6		29.3			8.9

(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 79.2 billion of guarantees provided by KfW Bankengruppe.
(4)	Includes EUR 74.2 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 1.6 billion are guaranteed by other EU or OECD member states, and EUR 0.5 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 these loans are made on behalf of the Federal Government.
(8)	Includes 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 2.6 billion represents risk covered by guarantees and similar non-physical security arrangements, and EUR 10.0 billion represents risk covered by mortgages, pledges of collateral and similar security arrangements.
(12)	Of which: promotional investment financing programs account for 26%; rail and road transport, 12%; shipping, 8%; aviation, 5%; basic industries, 9%; energy and environmental technology, 14%; industry, 9%; airports, seaports construction, 8%; telecommunication/new media, 3%; and others, 6%.
(13)	Reclassified to account for guarantees provided by German Länder to the promotional institutions of the federal states (Landesförderinstitute, or LFI). Before reclassification, an amount of EUR 5.6 billion was included in the commercial banks’ liability (thus amounting to EUR 140.7 billion), which is now included in the line item “Amounts that are the primary liability of Länder, municipal governments or local public authorities or that are guaranteed by one of the Länder governments”. Prior to the reclassification, this line item therefore amounted to EUR 34.6 billion. For more information on the Federal Government’s guarantees to LFIs, see “ – Investment Finance” above.

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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. In the case of loans extended by KfW IPEX-Bank, a substantial 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 this valuation process, 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 reflecting the potential amount of loss and taking into account, among other factors, any collateral securing such loans. 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 under the “Capital reserves” item in the balance sheet. 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 “Write-downs of and value adjustments on loans and certain securities and increases of provisions for possible loan losses” item 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, 2006, EUR 3.0 billion of group loans and guarantees were classified as non-performing loans compared to EUR 5.1 billion in 2005. At December 31, 2006, specific allowances for non-performing loans amounted to EUR 1,315 million, compared with EUR 1,387 million in 2005. In addition, specific provisions for DEG’s private equity business amounted to EUR 125 million at December 31, 2006, compared to EUR 122 million at December 31, 2005. Total specific provisions of EUR 1,440 million thus covered 48% of the group’s exposure to non-performing loans at December 31, 2006. Further, KfW had additional provisions relating to the remaining part of the exposure on certain impaired loans amounting to EUR 115 million at year-end 2006 (unchanged from the 2005 level).

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     As discussed elsewhere in this document, KfW plans to report under International Financial Reporting Standards (IFRS) beginning with its financial statements for the full-year 2007. Under IFRS, in addition to making specific provisions for non-performing loans, KfW will record provisions for losses on performing loans incurred but not yet reported, which will be calculated on the basis of an internal expected-loss-model.

     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, 2006, net of recoveries on such loans and guarantee payments, was EUR 2,735 million, compared with EUR 2,405 million in the ten-year period to 2005. Most of these loans had been fully provided for in years prior to their write-off.

     In 2006, the aggregate amount of loans and guarantee payments written off by the group amounted to EUR 356 million. Of this amount, EUR 319 million related to KfW, mainly investment finance and aircraft finance loans. In 2005, the aggregate amount of loans and guarantee payments written off by the group amounted to EUR 799 million, including EUR 728 million relating to KfW, mainly in the areas of private equity finance and aircraft finance.

Risk Control

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

     KfW is not subject to the risk management provisions of the German Banking Act, but applies them on a voluntary basis. The German Banking Act provides for the implementation of appropriate systems for the management, supervision and control of risk, based on 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 Risk Management of banks (MaRisk).

     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 for 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 the business units that enter into the risks and reports to group risk management bodies, such as the Risk Management Committee and its sub-committees for market and credit risk. In addition, the department co-operates with operational units that are involved in the process of risk supervision. The Risk Management Committee includes the members of the Board of Managing Directors. In line with the Minimum Requirements for Risk Management of banks (MaRisk), 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, thus providing for timely and adequate risk reporting.

     The risk management systems in KfW Bankengruppe identify, assess and control the following risk categories: credit and counterparty risks; liquidity risk; foreign exchange and interest rates risks; and operational risks. 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 2006, KfW continued to develop further its risk assessment and evaluation systems with a clear focus on validation and improvement of internal rating systems and the 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.

     The risk of loss from a credit risk bearing position is measured by means of two risk parameters: expected; loss and required economic capital.

     The expected loss is the average loss statistically expected to occur over a longer period of time. Expected losses are calculated, among others, for the pricing and are covered by the risk margin. The expected loss is defined as the product of the probability of default of a borrower, the exposure at default and loss given default. The probability of default is estimated for every borrower by means of rating procedures. The central

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result of the rating procedure is a statement about the probability that a counterparty cannot meet its payment obligations in the next twelve months. The estimation of the loss given default is based in particular on the assessment of collateral value and guarantees. Expected losses are not backed by capital because they are, on average, offset by the risk margins on non-defaulting loans (insurance principle).

     In case the losses incurred in any one year exceed the expected loss, these losses are covered from KfW’s own resources. The risk controlling department quantifies the potential loss to be backed by capital by means of statistical models. For credit risks, the potential loss is calculated using a credit portfolio model and the risk measure ‘credit value at risk’ at a given confidence level. KfW applies a one-year forecast period and a confidence level of 99.99%, which corresponds to AAA standard, for the calculation of ‘credit value at risk’. The difference between the credit value at risk and the expected loss is the required economic capital.

     KfW uses a similar procedure in the area of market price risk calculating the value at risk by means of statistical models. The required economic capital is set equal to the value at risk of a market risk bearing position. The capital required to cover credit and market price risks is aggregated taking into account diversification effects. The capital required to cover operational risks is calculated using the regulatory standard approach of Basel II. The required economic capital is matched against the available financial resources.

     Throughout the business year 2006 the required economic capital was matched at any time by sufficient financial resources. In addition, KfW ensures in the framework of the Group business unit planning that its risk-bearing capacity is maintained in the future, too. KfW covers liquidity and other risks by monitoring suitable key figures and through regular checks on processes in KfW’s operation.

     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 measures 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. KfW established risk principles that are obligatory on a group-wide level and that set standards for rating procedures and valuation of collateral, among other things. The default risk on securities investments and derivatives are limited by a restrictive choice of counterparties and through collateral agreements.

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

     Market Risk. Due to the nature of its business, KfW’s market risk is limited mainly to foreign currency, stock price 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. Stock price risks arise from minor capital market investments. Currency and stock price risks are measured and reported on a quarterly basis.

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     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 without compensatory payments. 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 on a monthly basis 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 a liquidity control system that evaluates, on a daily, monthly and yearly basis, the liquidity situation of KfW in accordance with the guidelines set forth in the Principle II of the German Banking Act, which governs liquidity. In addition, KfW applies the Basel II principles for the management of liquidity. 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. The reserve is assessed on a regular basis in order to fulfill all payment obligations even in a worst case scenario as defined by KfW within its contingency plans. In addition, KfW maintains a balanced medium- and long-term liquidity structure as part of its asset/liability management.

     Operational Risk. The revised German Banking Act addresses the management and control of operational risk. The rules governing the capital adequacy of institutions, groups of institutions and financial holding groups and the Minimum Requirements for Risk Management of banks (MaRisk) set new standards to manage operational risk. KfW decided to manage and control its operational risk according to these rules and to use the standardized approach for capital calculation. On this basis, KfW defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal, regulatory and reputation risk, but excludes strategic risk.

     Operational Risk Control is an independent centralized function within KfW and is responsible for defining the operational risk framework and related policies as well as developing instruments and methodologies. Operational risk managers within the business divisions manage operational risk independently but under the supervision of Operational Risk Control. KfW has developed an appropriate risk management environment which includes methods for the identification, assessment, monitoring and mitigation of operational risk. In 2006, Operational Risk Control completed various projects to meet the requirements under the Basel II criteria. In addition, KfW attempts to limit legal risk by involving KfW’s legal department at an early stage as well as by close cooperation with external legal counsel.

     Business Continuity Management (BCM). In anticipation of the new high-level principles for business continuity from the Basel Committee on Banking Supervision and according to German banking regulations, KfW has established a central business continuity team, which is responsible for setting up a crisis management function, the coordination and implementation of business and IT contingency tests, and the maintenance of a general contingency plan. For unforeseeable events such as outage of technical equipment, KfW has installed and is further developing 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 runs an off-site back-up system.

Sources of Funds

     KfW Bankengruppe’s principal sources of funds are the capital markets and public funds. After deduction of EUR 7.5 billion in liabilities on a trust basis (i.e., for which the Federal Government provides the funding and assumes all risks), 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 adjusted balance sheet total at December 31, 2006 was EUR 351.6 billion. EUR 323.5 billion, or 92% of this amount, was financed through borrowings. The following table shows KfW Bankengruppe’s borrowings by source of funds:

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Borrowings of KfW Bankengruppe by Source of Funds (1)

	As of December 31, 2006
	(EUR in billions)		(%)
Capital Market Funds
Bonds, notes and commercial paper issued by KfW and KfW Finance		246.0		76.1
of which Funds borrowed from KfW Finance(2)		3.0		0.9
Funds borrowed from banks		21.9		6.8
Funds borrowed from customers		24.6		7.6
Total capital market funds		292.6		90.4
Public Funds
Federal budget		14.1		4.4
ERP Special Fund		16.8		5.2
Total public funds		30.9		9.6
Total funds		323.5		100.0

(1)	Totals may not add due to rounding.
(2)	Represents net proceeds of KfW Finance’s commercial paper issues on-lent to KfW against Schuldscheindarlehen.

     In line with the maturity structure of KfW Bankengruppe’s loan portfolio, 72.2% of the group’s total borrowings outstanding at the end of 2006 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 was 79.8% in 2006 compared with 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 2006, 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”). During 2006, all obligations of KfW Finance under its outstanding bonds were assumed by KfW. At December 31, 2006, the amount of outstanding bonds and notes issued by KfW Bankengruppe (including KfW Finance) totaled EUR 246 billion, representing a EUR 7.1 billion increase from the EUR 238.9 billion outstanding at December 31, 2005. In 2006, KfW Finance issued commercial paper only 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 28.8 billion outstanding at December 31, 2006 , of which EUR 11.4 billion are included in funds borrowed from banks and EUR 17.4 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 the borrower and the lender. The certificate generally authorizes three assignments, which provides limited liquidity for the Schuldscheindarlehen in the interbank secondary market.

     Public Funds. Consistent with the increasing importance of capital market funding to KfW Bankengruppe, the proportion of public funds in the group’s borrowings remained almost unchanged at 10% in 2006. 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, 2006. 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 16.8 billion at December 31, 2006.

     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

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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, to the extent practicable, the effects of changes in interest rates by matching funding liabilities with loan assets, mainly through interest rate hedging instruments. 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 U.S. dollar program); publicly placed bonds outside the benchmark programs; and private placements. In 2006, benchmark bonds accounted for a funding volume of EUR 21.8 billion, or 40%, of the total funding volume of EUR 54.2 billion. The two other pillars accounted for EUR 23.4 billion, or 43%, and EUR 5.8 billion, or 11%, respectively, with the remaining 6% being mainly funded by issuance of credit-linked certificates of indebtedness in connection with securitization transactions. Under the Euro benchmark program, KfW issued three bonds, two in an amount of EUR 5 billion each (maturities of fifteen and three years) and one in an amount of EUR 3 billion (five-year maturity). Under the U.S. dollar program, KfW issued one ten-year note with an initial aggregate principal amount of USD 1 billion, which was subsequently increased by a further USD 1 billion to an outstanding volume of USD 2 billion, and three notes with an amount of USD 3 billion each (two three-year notes and one five-year note).

     At the end of 2006, 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 amounts of EUR 18.7 billion and USD 1.2 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 liquidity portfolios of securities denominated in euro and U.S. dollar, both of which are managed by external portfolio managers. As of December 31, 2006, the amounts invested reached EUR 3.8 billion and USD 1.1 billion, respectively. For purposes of investing a portion of its own funds, KfW owns a further portfolio of securities denominated in euro, which is also managed by external portfolio managers. The amount invested in this portfolio was EUR 1.5 billion as of December 31, 2006.

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SHORT-TERM INDEBTEDNESS AND CAPITALIZATION

     In accordance with German GAAP applicable to banks, KfW classifies borrowed funds on its balance sheet as (i) debt with remaining maturities of more than five years, (ii) debt with remaining maturities of more than one year up to five years, (iii) debt with remaining maturities of more than 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, 2006(1)

	(EUR in millions)
Short-term indebtedness(2)		80,324
Long-term borrowings from
Federal Government		12,375
ERP Special Fund		14,483
Banks		10,915
Other lenders		17,963
Total long-term borrowings		55,736
Bonds		177,775
Total long-term debt		233,511
Equity
Paid-in capital(3)		3,300
Reserves(4)		6,728
Fund for general bank risks		5,300
Total equity		15,328
Total capitalization(5)		329,163

(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 2006. 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 4,367 million and reserves from the ERP Special Fund of EUR 757 million.
(5)	Excludes accrued interest in the amount of EUR 10.2 billion.

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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 seven 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. Günther Bräunig	October 1, 2006
Dr. Peter Fleischer	August 22, 2003
Dr. Peter Klaus	October 1, 1999
Dr. Norbert Kloppenburg	January 1, 2007
Wolfgang Kroh	December 1, 2000
Detlef Leinberger	October 1, 1999
Ingrid Matthäus-Maier (official spokeswoman)	July 1, 1999

     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 spokeswoman of the Board of Managing Directors is Ingrid Matthäus-Maier.

     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 replaced Hans W. Reich as official spokesman, who retired as of September 30, 2006. Also on December 9, 2005, the Board of Supervisory Directors appointed Dr. Günther Bräunig, at that time 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, at that time 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 currently has 37 members 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 Food, Agriculture and Consumer Protection, the Federal Minister of Transport, Building and Urban Affairs, 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.

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     The members of the Board of Supervisory Directors are:

Name	Position
Dr. Günter Baumann	Member of the Board of Managing Directors of DIHK Deutscher Industrie- und Handelskammertag; Representative of the industry
Anton F. Börner	President of the Bundesverband des Deutschen Groß- und Außenhandels e.V.; Representative of the wholesale and foreign trade sector
Dr. Uwe Brandl	President of Bayerischer Gemeindetag; Representative of the local municipalities
Frank Bsirske	Chairman of ver.di – Vereinigte Dienstleistungsgewerkschaft; Representative of the trade unions
Prof. Dr. Ingolf Deubel	Minister of Finance of the State of Rhineland-Palatinate; appointed by the Bundesrat
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	Chairman of the Board of Managing Directors of WestLB; Representative of the mortgage banks
Sigmar Gabriel	Federal Minister for the Environment, Nature Conservation and Nuclear Safety
Michael Glos	Federal Minister of Economics and Technology; Deputy Chairman
Heinrich Haasis	President of the Deutscher Sparkassen- und Giroverband ; Representative of the savings banks
Peter Jacoby	Minister of Finance of the State of Saarland; appointed by the Bundesrat
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
Claus Matecki	Member of the Board of Managing Directors of Deutscher Gewerkschaftsbund; Representative of the trade unions
Dr. Michael Meister	Member of Parliament, appointed by the Bundestag
Franz-Josef Möllenberg	Chairman Trade Union for Food and Restaurants; Representative of the trade unions
Hartmut Möllring	Minister of Finance of the State of Lower Saxony, appointed by the Bundesrat
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
Matthias Platzeck	Minister President of the State Brandenburg; appointed by the Bundesrat
Dr. Christopher Pleister	President of Bundesverband der Deutschen Volks- und Raiffeisenbanken e.V. (BVR); Representative of the cooperative banks
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 the agricultural sector
Jörg-Otto Spiller	Member of Parliament, appointed by the Bundestag
Peer Steinbrück	Federal Minister of Finance; Chairman
Dr. Frank-Walter Steinmeier	Federal Minister of Foreign Affairs
Ludwig Stiegler	Member of Parliament, appointed by the Bundestag
Erwin Teufel	Former Minister President of the State of Baden-Württemberg, appointed by the Bundesrat
Jürgen R. Thumann	President of the Bundesverband der Deutschen Industrie e.V.; Representative of the industry
Wolfgang Tiefensee	Federal Minister of Transport, Building and Urban Development
Heidemarie Wieczorek-Zeul	Federal Minister for Economic Cooperation and Development

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     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, 2006, KfW employed 3,580 persons, compared to 3,452 persons at December 31, 2005. 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 29% are engaged in investment finance, 12% in financial cooperation, 11% 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.

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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 Supervisory Directors and the Federal Court of Auditors. KfW’s external auditors for the fiscal year 2006 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, 2006, dated March 8, 2007, refers to a combined management report (“Lagebericht”). The examination of, and the audit report upon, this 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.

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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,
	2006		2005
KfW		358,774		340,316
Finanzierungs- und Beratungsgesellschaft mbH (FuB)		47		48
KfW International Finance Inc. (KfW Finance)		3,008		22,693
DEG-Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG)		2,672		2,221
tbg Technologie-Beteiligungs-Gesellschaft mbH (tbg)		600		718
KfW Beteiligungsholding GmbH		1,436		1,490
KfW IPEX-Beteiligungsholding GmbH		33		33
IKB Deutsche Industriebank AG (associated enterprise)		44,788		39,503
Movesta Finance and Lease GmbH (associated enterprise)		1,842		1,902

The Balance Sheet

     The following table shows the development of the group’s main balance sheet items in 2006:

Balance Sheet Trends (1)

	December 31,		December 31,		Increase (Decrease) in 2006
Assets	2006		2005		Compared to 2005
	(EUR in millions)							(%)
Cash reserves		26		26		0			0
Loans and advances to banks(2)		198,056		180,193		17,863			10
Loans and advances to customers(2)(3)		90,959		95,384		(4,425	)		(5	)
Bonds and other fixed-income securities(2)		38,280		30,244		8,036			27
Shares and other non-fixed income securities		19,511		21,511		(2,000	)		(9	)
Investments and shares in affiliated enterprises		1,477		1,382		95			7
Assets on a trust basis		7,454		8,372		(918	)		(10	)
Compensation claims on public authorities(4)		0		0		0			0
Other assets(5)		3,150		4,031		(188	)		(22	)
Balance Sheet Total		359,606		341,143		18,463			5

(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.

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	December 31,		December 31,		Increase (Decrease) in 2006
Liabilities and Shareholders’ Equity	2006		2005		Compared to 2005
	(EUR in millions)							%
Liabilities to banks(1)		21,933		23,025		(1,092	)		(5	)
Liabilities to customers(1)(2)		55,535		48,136		7,399			15
Bonds		246,025		238,928		7,097			3
Loans on a trust basis		7,454		8,372		(918	)		(11	)
Compensation liabilities under Art. 41 of the D-Mark Balance Sheet Law(3)		2		2		0
Capital and reserves(4)		15,328		13,599		1,729			13
Other liabilities(5)		13,329		9,081		4,248			47
Balance Sheet Total		359,606		341,143		18,463			5
Memo Item: Guarantees		79,185		74,170		5,015			7

(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 2006, the group balance sheet total increased by EUR 18.5 billion, or 5%, to EUR 359.6 billion. Domestic investment loans accounted for most of the growth in the lending business; at EUR 202.9 billion, they were EUR 15.8 billion higher than in the previous year. Moreover, the volume of securities (bonds and shares) rose in the course of the year, especially as a result of the purchase of new fixed-income securities held for liquidity management purposes.

     With the asset securitization transactions conducted in 2006, and the increase in new loan commitments in domestic investment finance, the volume of business (which includes off-balance sheet items) rose by 7 % to EUR 485.3 billion.

     KfW Bankengruppe views 2006 as a successful business year. The positive development of the group’s earnings position was marked by significantly lower risk provisions attributable to the generally improved risk situation, and by an increase in income from current operations. The group’s income from current operations before risk provisions was EUR 1.352 million, exceeding the previous year’s figure by EUR 71 million. Interest income and net commissions received were EUR 81 million higher than in the previous year. Administrative expenses rose moderately by EUR 12 million to EUR 594 million in 2006. The risk provisioning and valuation result improved substantially and totaled EUR 306 million, which was EUR 297 million, or 49%, lower than in the previous year. The group’s overall result was 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 974 million, a substantial increase over the previous year’s level of EUR 625 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 344.9 billion at December 31, 2006 from EUR 328.9 billion at December 31, 2005.

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     The following table shows the volume of lending by business area in 2006:

					Increase (Decrease) in
	December 31,		December 31,		2006
	2006		2005		Compared to 2005
	(EUR in millions)							(%)
Investment finance		203,091		187,135		15,956			9
Export and project finance		42,039		46,114		(4,075	)		(9	)
Financial cooperation		20,605		21,521		(916	)		(4	)
Other items:
Guarantees		79,185		74,170		5,015			7
Total loans		344,920		328,940		15,980			5
of which: Loans on a trust basis and other trust business		7,365		8,304		(940	)		(11	)

     The increase in the volume of lending was mainly the result of the increase of EUR 16.0 billion in investment loans to the German economy (to EUR 203.1 billion), which was mainly due to the high volume of commitments in the context of the promotional “Housing, Environment, Growth” initiative. The share of domestic investment loans in the total lending volume of KfW Bankengruppe rose from 57% in 2005 to 59% in 2006. Another growth factor was guarantees, which rose by EUR 5.0 billion to EUR 79.2 billion. Guarantees, which are mainly related to the securitization activities of KfW, accounted for a share of 23% of KfW’s lending volume.

     Despite a positive development in new commitments, the volume of export and project finance, which accounted for 12% of the lending volume, fell by EUR 4 billion to EUR 42 billion due to the weaker U.S. dollar. Loans to promote developing countries (6% of the volume of lending) remained relatively stable compared to the previous year.

Funding

     As in fiscal year 2005, in 2006 the expansion of KfW’s volume of business was refinanced mainly by the issuance of bonds and notes in the capital markets. In 2006, KfW Bankengruppe raised long-term funds in a total amount of EUR 54.2 billion, and thus was at the upper end of the range of EUR 50 billion to EUR 55 billion announced in the previous year. Bonds and notes were the main source of funds, accounting for EUR 246.0 billion (an increase of EUR 7.1 billion) or 76% (2005: 77%) of borrowed funds. Of these bonds and notes, EUR 3.0 billion was issued by KfW Finance. The share of funds borrowed from banks and customers (excluding federal funds) remained almost unchanged at 14%. The funds provided from the federal budget and the ERP Special Fund amounted to 10% of borrowed funds, as 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, 2006				December 31, 2005
	(EUR in millions)		(%)		(EUR in millions)		(%)
Funds borrowed from banks		21,933		7		23,025		7
Funds borrowed from customers		55,535		17		48,136		16
of which:
ERP Special Fund		16,832		5		16,179		5
Federal budget funds		14,089		4		14,071		5
		30,921		10		30,250		10
Other lenders		24,614		8		17,886		6
Bonds issued		246,025		76		238,928		77
Total		323,492		100		310,089		100

     The share of bonds issued fell by 1% to 76% over the previous year.

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Bonds Issued

	2006				2005
	(EUR in millions)		(%)		(EUR in millions)		(%)
Debt issues		81,847		33		101,854		43
Bearer bonds (including commercial paper)		160,079		65		133,258		56
Accrued interest		4,099		2		3,816		1
Total		246,025		100		238,928		100

Own funds

     In 2006, 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 15.3 billion at December 31, 2006. The increase of EUR 1.7 billion, or 13%, resulted from the allocation of EUR 55 million to the reserve from the ERP Special Fund, the allocation of KfW’s net income of EUR 822 million to the special reserves and the increase of EUR 152 million in other retained earnings through the inclusion of the subsidiaries and the consolidation of this capital. In addition, in 2006, the amount of EUR 700 million was allocated to the fund for general bank risks, which is disclosed in the balance sheet, mainly through the reallocation of internal reserves set aside for risk provisioning, which did not affect the income position. This reallocation of internal reserves was made in anticipation of the transition of KfW’s financial reporting from German GAAP to International Financial Reporting Standards (IFRS) during 2007. The requirements for equity capital and reserves for banks operating internationally are comfortably fulfilled by KfW and the group.

Capital and Reserves(1)

	Additions/		December 31,
	(Deductions)		2006
	(EUR in millions)
Subscribed capital		0.0		3,750.0
Unpaid capital		0.0		(450.0	)
Capital reserves		0.0		1,604
Reserve from the ERP Special Fund		55		758
Retained earnings
In accordance with Art. 10(2) of the KfW Law		487		1,574
In accordance with Art. 10(3) of the KfW Law		334		1,893
In accordance with Art. 17(4) of the D-Mark Balance Sheet Law(2)		0.0		47.6
Other retained earnings		152		851
Fund for general bank risks in accordance with Section 340(g) of the German Commercial Code		700.0		5,300
		1,729		15,328

(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 8.2 billion to EUR 33.4 billion at December 31, 2006. 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 84% 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 4,622 million par value of its own bonds at year-end 2006 (EUR 4,821��million at year-end 2005), representing 2% of the bonds and notes issued by KfW Bankengruppe.

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     The portfolio of shares and other non-fixed income securities held by KfW Bankengruppe decreased in 2006 by EUR 2.0 billion to EUR 19.5 billion. This decline is mainly due to the sale of shares of Deutsche Telekom AG and Deutsche Post AG in the course of the further privatization of these two companies (EUR 4 billion), which was partly offset by the externally managed special and money market funds held for liquidity purposes, which rose by EUR 2.3 billion to EUR 6.7 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 12 million to EUR 949 million. Allocations to accrued estimated liabilities amounted to EUR 159 million, EUR 71 million of which was for staff pensions and EUR 88 million was mainly for unsettled bank operating and payroll expenses, provisions in KfW’s lending and private equity finance business and provisions for tax. EUR 86 million was used, while EUR 61 million was returned to income.

     The assets on a trust basis totaled EUR 7.5 billion at December 31, 2006, a decline by EUR 0.9 billion compared with year-end 2005. This item comprises, in particular, 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 2006:

	Earnings Position(1)
	2006			2005			Change
	(EUR in millions)									(%)
Interest income(2)		13,364			12,299			1,065			9
Interest expense		11,669			10,661			1,008			9
Interest received, net		1,695			1,638			57			3
Commissions received, net		227			203			24			12
Net earnings (expenditure) on financial transactions(3)		(2	)		2			(4	)		(200	)
General administrative expenses(4)		594			582			12			2
Other operating income and expenses		26			20			6			30
Income from current operations before risk provisions and valuations		1,352			1,281			71			6
Risk provisions/valuations, net(5)		(306	)		(603	)		297			(49	)
Income from current operations		1,046			678			368			54
Contractual allocation of interest to reserves from the ERP Special Fund		55			49			6			12
Taxes on income		17			4			13			325
Net income for the year		974			625			349			56

(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 and current income from shares and other non-fixed income securities and investments.
(3)	Balance of gains and losses on currency conversions.
(4)	Including the depreciation and impairment 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 2006 was EUR 1,352 million, an increase of EUR 71 million over the previous year. For KfW itself, income from current operations increased by EUR 60 million, or 5%, to EUR 1,222 million in 2006.

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     The group’s most important source of income continued to be net interest received, which contributed EUR 1,695 million to net income in 2006. Thus, net interest increased by EUR 57 million, or 3%, over the previous year’s figure of EUR 1,638 million in spite of the US dollar, which was weaker in 2006 than in 2005.

     Net commissions received increased by EUR 24 million, or 12%, to EUR 227 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 2006 and 2005:

Administrative Expenses(1)

	2006		2005		Change
	(EUR in millions)							(%)
Salaries and wages		270.3		260.1		10.2			3.9
Social security contributions		40.4		39.3		1.1			2.9
Expenditure on pensions and support		51.7		51.7		0			(0.1	)
Total expenditure on personnel		362.4		351.1		11.3			3.2
Other administrative expenses		198.2		194.1		4.1			2.1
Depreciation and value adjustments on intangible and tangible assets		33.1		36.4		(3.3	)		(9.3	)
Total expenditure on material and equipment		231.3		230.5		0.8			0.3
Total administrative expenses		593.7		581.6		12.1			2.1

(1) Totals may not add due to rounding.

     In 2006, administrative expenses amounted to EUR 594 million, which was 2% higher than in the previous year. The increase included an increase in personnel expenditure of EUR 11 million, or 3%, to EUR 362 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 1 million in the expenditure on material and equipment to EUR 231 million.

Risk Provisioning and Valuation Result

     The risk provisioning and valuation result is composed of the following line 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

• write-ups of investments, shares in affiliated enterprises and securities treated as fixed assets.

     In 2006, the risk provisioning and valuation result improved substantially compared with the previous year and declined by almost one half to EUR 306 million compared to EUR 603 million in the prior year.

     This result 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 again decreased against the previous year underscores this positive development. In addition, the successful exit by DEG from various equity investments contributed to the improved valuation result.

     Specific loan loss provisions and allowances for possible loan losses for the group at December 31, 2006 were EUR 1.4 billion, or EUR 0.1 billion lower than the EUR 1.5 billion at year-end 2005. In 2006, as in 2005, most of the provisions were for aircraft and equity finance. Net additions to provisions made for the group fell sharply to EUR 34 million in 2006 compared to EUR 226 million in 2005. Non-performing loans and

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advances totaling EUR 356 million were written off in 2006 compared to EUR 799 million in 2005. Payments received by KfW on claims that had been written off amounted to EUR 24 million in 2006 compared to EUR 34 million in 2005.

     In light of the transition during 2007 of its financial reporting from German GAAP to International Financial Reporting Standards (IFRS), KfW Bankengruppe largely completed the reallocation of internal reserves to the fund for general bank risks, which was increased by EUR 700 million in the year under review. KfW made adequate provision for all acute and latent risks, while consistently pursuing its conservative risk policy and observing the high requirements on transparency under IFRS. As a result, the fund for general bank risks totaled a volume of EUR 5.3 billion. KfW thereby ensures that it can still fulfill its promotional tasks on a sustainable basis even in potential stress situations.

     After risk provisions and valuations, the group’s income from current operations was EUR 1,046 million, a substantial increase of EUR 368 million, or 54%, over the previous year’s result.

     The group’s net income for the year was EUR 974 million compared with EUR 625 million in the previous year.

     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 with which to continue its promotional activities in the future.

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FINANCIAL STATEMENTS OF KFW

Balance Sheet(1)

	As of December 31,
	2006			2005
	(EUR in thousands)
Assets
Cash reserves
Cash on hand			191		142
Balance with Deutsche Bundesbank			25,806		25,699
Balance in postal giro accounts			25,997		0	25,841
Loans and advances to banks
At call			883,842		2,749,542
Other		197,773,846	198,657,688		177,610,889	180,360,431
Loans and advances to customers			90,343,916			95,032,476
Bonds and other fixed-income securities
Money market paper(2)		1,471,915			914,752
Bonds and debentures of public and other issuers(3)		31,923,615			25,424,854
KfW’s own bond issues		4,844,319	38,239,849		3,881,174	30,220,780
Shares and other non-fixed income securities			19,141,057			21,318,678
Investments			144,220			61,300
Shares in affiliated enterprises			1,184,312			1,136,236
Loans on a trust basis and other trust business			7,302,362			8,198,919
Intangible assets			7,193			7,431
Fixed assets			747,032			692,664
Other assets			17,397			64,110
Prepaid expenses and deferred charges			2,936,429			3,170,455
Special loss account consisting of provisions under Art. 17(4) of D-Mark Balance Sheet Law			26,737			26,777
Total assets			358,774,189			340,316,098

See also the accompanying Notes to Financial Statements.

-40-

	As of December 31,
	2006				2005
	(EUR in thousands)
Liabilities and Shareholders’ Equity
Liabilities to banks
At call			1,662,311			1,315,803
With agreed terms or periods of notice		20,281,669	21,943,980			21,728,145	23,043,948
Liabilities to customers
At call		453,831				427,063
With agreed terms or periods of notice		58,392,067	58,845,898			70,616,032	71,043,095
Bonds			243,017,322				216,234,720
Loans on a trust basis			7,302,362				8,198,919
Other liabilities			6,171,339				1,625,588
Deferred income			5,699,280				5,970,802
Accrued estimated liabilities			815,456				797,023
Compensation liabilities under Art. 41 of D-Mark Balance Sheet Law			1,967				2,281
Subordinated liabilities			500,000				500,000
Fund for general bank risks			5,300,000				4,600,000
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			757,453				702,582
Retained earnings			3,515,368				2,693,376
Total liabilities and shareholders’ equity			358,774,189				340,316,098
Contingent liabilities
On bills discounted and charged			0			0
On guarantees		79,210,808				74,235,711
Liability under collateral provided for third party liabilities		0	79,210,808			0	74,235,711
Other obligations
Repurchase obligations on non-genuine repurchase transactions		0				0
Placing and underwriting obligations		0				0
Irrevocable loan commitments		46,123,915	46,123,915			38,476,115	38,476,115

(1)	Totals may not add due to rounding.
(2)	In 2006, EUR 0 (2005: EUR 40,047 thousand) were eligible as collateral with the Deutsche Bundesbank.
(3)	In 2006 and 2005, EUR 28,294 million and EUR 17,721 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.

-41-

Statement of Income(1)

	For the year ended December 31,
	2006			2005
	(EUR in thousands)
Income
Interest income
From lending and money market			12,072,015		11,325,411
From fixed-income securities and debt register claims		1,069,090	13,141,105		682,515	12,007,926
Current income
From shares and other non-fixed income securities		15,924			107,198
From investments		1,393			6,352
From shares in affiliated enterprises		0	17,317		0	113,550
Commissions and similar service charges earned			425,534			403,073
Net earnings on financial transactions			—			1,525
Earnings on allocations of investments, shares in affiliated enterprises and securities treated as fixed assets			48,663			18,546
Other operating income			28,133			13,377
Total income			13,660,752			12,557,997
Expenses
Interest expenses			11,646,591			10,657,838
Contractual appropriation of interest to reserve from the ERP Special Fund			54,872			48,713
Commissions and similar service charges payable			215,418			205,099
General administrative expenses
Salaries and wages		239,112			229,654
Social security contributions and expenditure on pensions and support		76,007			73,787
Other administrative expenses		176,339	491,458		172,417	475,858
Depreciation and value adjustments on intangible and tangible assets			31,693			35,442
Other operating expenses			4,488			3,035
Write-downs of and value adjustments on loans and certain securities and increases of allowances for possible loan losses(2)			394,014			656,732
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 D-Mark Balance Sheet Law			40			66
Net income for the year			821,992			475,214
Total expenses			13,660,752			12,557,997

(1)	Totals may not add due to rounding.
(2)	Including EUR 700 million allocation to the fund for general bank risks in accordance with Section 340(g) of the German Commercial Code (2005 EUR 1,300 million; 2004 EUR 1,300 million).

See also the accompanying Notes to Financial Statements.

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FINANCIAL STATEMENTS OF KFW BANKENGRUPPE

Balance Sheet(1)

	As of December 31,
	2006			2005
	(EUR in thousands)
Assets
Cash reserves
Cash on hand		193			144
Balance with Deutsche Bundesbank		25,806			25,699
Balance in postal giro accounts		0	25,999		0	25,843
Loans and advances to banks
At call		888,313			2,790,824
Other		197,168,010	198,056,323		177,401,962	180,192,786
Loans and advances to customers			90,959,185			95,384,216
Bonds and other fixed-income securities
Money market paper(2)		1,471,914			914,752
Bonds and debentures of public and other issuers(3)		31,963,274			24,252,290
KfW’s own bond issues		4,844,319	38,279,507		5,076,562	30,243,604
Shares and other non-fixed income securities			19,510,624			21,511,295
Investments			810,436			750,195
Investments in affiliated enterprises			652,852			620,194
Shares in affiliated enterprises			14,206			11,844
Loans on a trust basis and other trust business			7,454,256			8,372,010
Intangible assets			8,752			9,068
Fixed assets			769,060			710,654
Other assets			102,003			114,264
Prepaid expenses and deferred charges			2,936,496			3,170,521
Special loss account consisting of provisions under Art. 17(4) of D-Mark Balance Sheet Law			26,737			26,777
Total assets			359,606,436			341,143,271

See also the accompanying Notes to Financial Statements.

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	As of December 31,
	2006				2005
	(EUR in thousands)
Liabilities and Shareholders’ Equity
Liabilities to banks
At call		1,628,816				1,295,645
With agreed terms or periods of notice		20,304,372	21,933,188			21,729,032	23,024,677
Liabilities to customers
At call		140,908				159,486
With agreed terms or periods of notice		55,394,582	55,535,490			47,976,645	48,136,131
Bonds			246,024,584				238,928,062
Loans on a trust basis			7,454,256				8,372,010
Other liabilities			6,179,094				1,671,097
Deferred income			5,700,707				5,973,382
Accrued estimated liabilities			949,381				936,745
Compensation liabilities under Art. 41 of D-Mark Balance Sheet Law			1,967				2,281
Subordinated liabilities			500,000				500,000
Fund for general bank risks			5,300,000				4,600,000
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			757,453				702,582
Retained earnings			4,366,551				3,392,540
Total liabilities and shareholders’ equity			359,606,436				341,143,271
Contingent liabilities
On bills discounted and charged						0
On guarantees		79,185,211				74,169,511
Liability under collateral provided for third party liabilities		0	79,185,211			0	74,169,511
Other obligations
Repurchase obligations on non-genuine repurchase transactions		0				0
Placing and underwriting obligations		0				0
Irrevocable loan commitments		46,525,255	46,525,255			38,888,218	38,888,218

(1)	Totals may not add due to rounding.
(2)	In 2006, EUR 0 (in 2005 EUR 40,047 thousand) were eligible as collateral with the Deutsche Bundesbank.
(3)	In 2006 and 2005, EUR 25,941 million and EUR 17,518 million, respectively, were eligible as collateral with the Deutsche Bundesbank.

See also the accompanying Notes to Financial Statements.

-44-

Statement of Income(1)

	For the year ended December 31,
	2006			2005
	(EUR in thousands)
Income
Interest income
From lending and money market		12,167,011			11,405,326
From fixed-income securities and debt register claims		1,070,189	13,237,200		683,292	12,088,618
Current income
From shares and other non-fixed income securities		16,706			107,198
From investments		48,822			51,671
From shares in affiliated enterprises		60,904	126,432		50,995	209,864
Commissions and similar service charges earned			443,246			411,485
Net earnings on financial transactions			—			2,035
Earnings on allocations of investments, shares in affiliated enterprises and securities treated as fixed assets			25,345			—
Other operating income			33,995			25,716
Total income			13,866,218			12,737,718
Expenses
Interest expenses			11,668,951			10,661,069
Contractual appropriation of interest to reserve from the ERP Special Fund			54,872			48,713
Commissions and similar service charges payable			216,727			208,591
General administrative expenses
Salaries and wages		270,275			260,134
Social security contributions and expenditure on pensions and support		92,087			90,912
Other administrative expenses		198,155	560,517		194,120	545,166
Depreciation and value adjustments on intangible and tangible assets			33,186			36,446
Other operating expenses			7,553			5,704
Write-downs of and value adjustments on loans and certain securities and increases of allowances for possible loan losses(2)			331,638			584,831
Write-downs of and value adjustments on investments, shares in affiliated enterprises and securities treated as fixed assets			—			18,469
Write-downs on the special loss account under Art. 17(4) of D-Mark Balance Sheet Law			40			66
Taxes on income			17,608			3,812
Net income for the year			973,541			624,851
Total expenses			13,866,218			12,737,718

(1)	Totals may not add due to rounding.
(2)	Including EUR 700 million allocation to the fund for general bank risks in accordance with Section 340(g) of the German Commercial Code (2005 EUR 1,300 million; 2004 EUR 1,300 million).

See also the accompanying Notes to Financial Statements.

-45-

Cash Flow Statement of KfW Bankengruppe(1)

	For the year ended December 31,
	2006			2005
	(EUR in millions)
Cash flows from operating activities
Net income (before income tax)		991			629
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		339			640
Changes in accrued estimated liabilities		99			147
Change in other non-cash positions		(28	)		(27	)
Profit from the sale of financial instruments, investments, property and equipment		30			(33	)
Other adjustments (net)		2,975			(10,031	)
Sub-total		4,405			(8,675	)
Change in assets and liabilities from operating activities after correction for non-cash components
Loans and advances to banks		(17,904	)		(3,747	)
Loans and advances to customers		4,854			860
Securities available for sale		(4,974	)		(7,693	)
Funds borrowed from banks		(1,091	)		(2,269	)
Funds borrowed from customers		7,399			(7,172	)
Securitized Liabilities		7,097			28,122
Other asset from operating activities		10			3
Other liabilities from operating activities		(114	)		(104	)
Interest receipts		13,237			12,089
Interest paid		(11,669	)		(10,661	)
Income tax paid		(18	)		(4	)
Net cash provided by (used for) operating activities		1,232			749
Cash flows from investing activities
Proceeds from the sale of investments		902			1,030
Proceeds from the sale of property and equipment		11			74
Payments for the acquisition of investments		(2,128	)		(1,819	)
Payments for the acquisition of property and equipment		(98	)		(116	)
Other investing activities (net)		28			27
Net cash provided by (used for) investing activities		(1,285	)		(804	)
Cash flows from financing activities
Proceeds on equity capital		55			49
Other financing activities (net)		0			0
Net cash provided by (used for) financing activities		55			49
Cash and cash equivalents at the end of previous period		26			27
Net cash provided by (used for) operating activities		1,232			749
Net cash provided by (used for) investing activities		(1,285	)		(804	)
Net cash provided by (used for) financing activities		55			49
Effect of exchange rate changes on cash and cash equivalents		(2	)		5
Cash and cash equivalents at the end of period		26			26

(1) Totals may not add due to rounding.

See also the accompanying Notes to Financial Statements.

-46-

NOTES TO FINANCIAL STATEMENTS

ANNEX AND GROUP ANNEX.

THE CONSOLIDATED ENTERPRISES AND THE PRINCIPLES
OF CONSOLIDATION.

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

     § 296 (1) No. 3 of the German Commercial Code (HGB) has been utilised with regard to one subsidiary, whose shares were held exclusively for the purpose of resale. In accordance with § 296 (2) HGB four 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. Equally in accordance with § 311 (2) HGB two enterprises were not included in the at-equity consolidation.

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.

     The annual financial statements for KfW International Finance Inc. are drawn up in foreign currency and the amounts were converted at the ECB reference rates quoted on 31 December 2006.

ACCOUNTING AND VALUATION METHODS.

The Financial Statements for 2006 for KfW and for KfW Bankengruppe have been drawn up in accordance with the requirements of the German 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 (DM-BilG) 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.

-47-

The securities held as a liquidity reserve 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 write-ups 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 § 340 g of the German 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 German Commercial Code has been utilised. In the event of non-performing loans interest income is generally calculated on the basis of expected income.

-48-

NOTES ON THE ASSETS.

Loans and advances to banks
EUR million

			Remaining term
			Up to 3		More than 3 months		More than 1 year		More than
	At call		months		to 1 year		to 5 years		5 years		Pro rata interest		Total
31 Dec 2006 KfW		884		21,874		11,173		46,103		113,469		5,155		198,658
31 Dec 2006 Group		888		21,840		11,240		46,148		112,772		5,168		198,056
31 Dec 2005 KfW		2,750		17,667		12,283		40,465		103,597		3,599		180,361
31 Dec 2005 Group		2,791		17,681		12,339		40,635		103,129		3,618		180,193

	KfW		Group
of which to:
affiliated enterprises		1,255		0
enterprises, in which KfW holds a stake		4		5,403
without on-lending banks’ liability		1,771		1,771
minor assets		10		10

Loans and advances to customers
EUR million

		Remaining term
			Up to 3		More than 3 months		More than 1 year		More than
	With no fixed maturity		months		to 1 year		to 5 years		5 years		Pro rata interest		Total
31 Dec 2006 KfW	0			3,684		6,699		30,472		47,500		1,989		90,344
31 Dec 2006 Group	0			3,736		6,721		30,870		47,624		2,008		90,959
31 Dec 2005 KfW	0			4,118		6,874		31,730		50,401		1,909		95,032
31 Dec 2005 Group	0			4,172		6,899		32,111		50,279		1,924		95,384

	KfW		Group
of which to:
affiliated enterprises		576		0
enterprises, in which KfW holds a stake		52		101
minor assets		7,058		7,058

-49-

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

	31 Dec 2006		31 Dec 2005		31 Dec 2006		31 Dec 2005
Balance sheet date	KfW		KfW		Group		Group
Money market paper, bonds and notes		9,353		6,521		9,353		6,330
Par value		9,231		6,460		9,231		6,269
Own bond issues		726		272		726		463
Par value		719		266		719		457
Total		10,079		6,793		10,079		6,793
Par value		9,950		6,726		9,950		6,726

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

EUR million

	KfW		Group
Listed enterprises		35,594		35,616
Unlisted securities		1,112		1,112
Marketable securities		36,706		36,728

-50-

SECURITIES TRANSACTIONS UNDER REPURCHASE AGREEMENTS.

In the context of genuine repurchase transactions (sell & buy back transactions, repos) securities to the book value of EUR 1,260 million were repurchased.

FIXED ASSETS.

Fixed assets as at 31 December 2006 KfW
EUR thousand

			Residual book		Residual book
	Changes1)		value as at		value as at
	2006		31 Dec 2006		31 Dec 2005
	(7)		(8)		(9)
Investments		82,920		144,220		61,300
Shares in affiliated enterprises		48,076		1,184,312		1,136,236
Securities treated as fixed assets		1,205,130		5,031,093		3,825,963
Total		1,336,126		6,359,625		5,023,499

													Write-downs/		Residual book		Residual book
	Acquisition/												adjustments		value as at		value as at
production costs2)			Inflows		Outflows		Transfers		Allocations		Total		2006		31 Dec 2006		31 Dec 2005
	(1)		(2)		(3)		(4)		(5)		(6)		(7)		(8)		(9)
Intangible assets		34,282		3,171		1,397		0		0		28,863		3,074		7,193		7,431
Tangible assets3)		850,740		89,675		9,057		0		0		184,326		28,619		747,032		692,664
Total		885,022		92,846		10,454		0		0		213,189		31,693		754,225		700,095
Sum																7,113,850		5,723.594

1)	Including price changes.
2)	The Relief Facility under § 31 (6) of the EC Commercial Code has been utilised.
3)	Of which as at 31 December 2006: — total value of land and buildings used for the Bank’s activities EUR 710,291,000
	— total value of office furniture and equipment EUR 36,741,000

-51-

Fixed assets as at 31 December 2006 Group
EUR thousand

			Residual book		Residual book
	Changes1)		value as at		value as at
	2006		31 Dec 2006		31 Dec 2005
	(7)		(8)		(9)
Investments		92,899		1,463,288		1,370,389
Shares in affiliated enterprises		2,362		14,206		11,844
Securities treated as fixed assets2)		1,222,428		5,048,391		3,825,963
Total		1,317,689		6,525,885		5,208,196

													Write-downs/		Residual book		Residual book
		Acquisition/											adjustments		value as at		value as at
		production costs2)	Inflows		Outflows		Transfers		Allocations		Total		2006		31 Dec 2006		31 Dec 2005
	(1)		(2)		(3)		(4)		(5)		(6)		(7)		(8)		(9)
Intangible assets		39,331		3,747		1,397		0		0		32,929		3,727		8,752		9,068
Tangible assets3)		882,628		94,649		9,284		0		0		198,933		29,458		769,060		710,654
Total		921,959		98,396		10,681		0		0		231,862		33,185		777,812		719,722
Sum																7,303,697		5,927,918

1)	Including price changes.
2)	The Relief Facility under § 31 (6) of the EC Commercial Code has been utilised.
3)	Of which as at 31 December 2006: — total value of land and buildings used for the Bank’s activities EUR 716,261,000
	— total value of office furniture and equipment EUR 38,212,000

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 5,048 million. This includes investments in securities, whose book value of EUR 718 million was EUR 1 million higher than the present value of EUR 717 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 of EUR 4 million.

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

EUR million

	KfW		Group
Listed securities		12,791		12,859
Unlisted securities		6,350		6,349
Marketable securities		19,141		19,209

The total holding is recorded as current assets.

Information on equity investments
EUR thousand and %

The enterprises listed below are included in the consolidated financial statements as subsidiaries.

							Net income
		Share held		Equity capital 1)			for the year 1)
Name and domicile of company		in %		EUR thousand			EUR thousand
1.	DEG — Deutsche Investitions- und Entwicklungsgesellschaft mbH, Cologne		100.0		1,129,247			114,950
2.	Finanzierungs- und Beratungsgesellschaft mbH (FuB), Berlin		100.0		16,812			3,270
3.	KfW International Finance Inc., Delaware, USA		100.0		8	2)		0	2)
4.	KfW Beteiligungsholding AG,Bonn		100.0		847,970			48,077
5.	tbg Technologie-Beteiligungs-Gesellschaft mbh, Bonn		100.0		479,800			0
6.	KfW IPEX-Beteiligungsholding GmbH, Frankfurt		100.0		32,601			57

1)	As of 31 Dec 2006.
2)	Converted at the rate quoted on 31 Dec 2006 (EUR 1 = USD 1.317)

The full list of shareholdings in accordance with § 285 No 11 and § 313 (2) of the German Commercial Code (HGB) is disclosed as part of the Annual Financial Statements in the electronic corporate register and made available as part of the Annual Financial Statements in the Electronic Federal Gazette.

-53-

The item “Investments” includes:

EUR thousand

	KfW		Group
Listed securities		0		680,574
Unlisted securities		108,805		108,805
Marketable securities		108,805		789,379

Assets on a trust basis
EUR million

	KfW			Group
Loans and advances to banks
a) At call		212			213
b) Other loans and advances		762	974		860	1,073
Loans and advances to customers			6,277			6,292
Securities			1			1
Investments			50			88
Total			7,302			7,454

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 646 million.

-54-

NOTES ON LIABILITIES.

Maturities structure of borrowed funds
EUR million

			Remaining term
			Up to 3		More than 3 months		More than 1 year		More than
	At call		months		to 1 year		to 5 years		5 years		Pro rata interest		Total
Funds borrowed from banks with agreed term or period of notice
KfW		1,663		2,471		2,053		7,897		3,002		4,858		21,944
Group		1,629		2,471		2,053		7,898		3,017		4,865		21,933
as at 31 Dec 2005 KfW		1,316		1,795		1,637		11,774		2,876		3,646		23,044
as at 31 Dec 2005 Group		1,296		1,753		1,637		11,801		2,891		3,647		23,025
Funds borrowed from customers
- Other borrowed funds with agreed term or period of notice
KfW		454		9,015		3,837		15,326		28,986		1,228		58,846
Group		141		6,757		3,088		15,326		28,995		1,228		55,535
as at 31 Dec 2005 KfW		427		12,128		5,517		30,094		21,522		1,355		71,043
as at 31 Dec 2005 Group		159		7,466		2,856		17,985		18,756		914		48,136
KfW		2,117		11,486		5,890		23,223		31,988		6,086		80,790
Group		1,770		9,228		5,141		23,224		32,012		6,093		77,468
in %
KfW		3		14		7		29		40		7		100
Group		2		12		6		30		42		8		100

Due the following year

	KfW		Group
Securitised liabilities — bonds issued		61,178		61,178
as at 31 December 2005		50,175		57,497

-55-

Liabilities to affiliated enterprises and enterprises in which KfW/KfW Bankengruppe holds a stake
EUR million

	Securitised and non-securitised liabilities
					To enterprises in which KfW/
	To affiliated enterprises				KfW Bankengruppe holds a stake
	KfW		Group		KfW		Group
Funds borrowed from banks		49		0		0		0
Funds borrowed from customers		3,338		0		0		0
Securitised liabilities		0		0		0		0	1)
Total		3,387		0		0		0

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		59	59		59	59
Funds borrowed from customers
a) Savings deposits
b) Other liabilities
ba) At call		595			596
bb) With agreed term or period of notice		6,648	7,243		6,769	7,365
Total			7,302			7,454

OTHER LIABILITIES.

The “Other liabilities” are mainly the difference on the currency conversion of derivatives used in the context of the management of foreign currency positions.

-56-

DEFERRED INCOME.

The item “Deferred income” includes discounts on loans and advances totalling EUR 1,180 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 11 November 2008. Notice of cancellation was given in due time. 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

			Group’s
	31 Dec 2005		net income		Other changes		31 Dec 2006
KfW’s subscribed capital		3,750.0		0.0		0.0		3,750.0
Outstanding contributions, not requested		- 450.0		0.0		0.0		- 450.0
Capital reserves		1,603.8		0.0		0.0		1,603.8
Reserve from the ERP Special Fund		702.6		0.0		54.9		757.5
Retained Group earnings
a) Statutory reserve under § 10 (2) of the KfW Law		1,087.0		487.3		0.0		1,574.3
b) Special reserve under § 10 (3) of the KfW Law		1,558.7		334.7		0.0		1,893.4
c) Special reserve under § 17 (4) D-Mark Balance Sheet Law		47.6		0.0		0.0		47.6
d) Other retained earnings		699.7		151.5		0.0		851.2
Group equity		8,999.4		973.5		54.9		10,027.8

Of the Group’s net income for the year of EUR 974 million, an amount corresponding to KfW’s net income for the year of EUR 822 million was allocated to the statutory reserve (EUR 487 million) and to the special reserve (EUR 335 million) in accordance with § 10 (2) and (3) of the KfW Law. The net income for the year of EUR 152 million achieved by the consolidated subsidiaries was allocated to the other retained earnings. KfW’s equity capital is EUR 9,177 million.

-57-

OTHER REQUIRED NOTES ON THE LIABILITIES.

CONTINGENT LIABILITIES.

The Group’s liabilities under guarantees total EUR 79,185 million. Of the total amount as at 31 December 2006 EUR 72,403 million was credit default swaps, EUR 6,782 million was credit guarantees (of which guarantees for special loans totalled EUR 1,541 million, guarantees for aircraft finance EUR 793 million, guarantees for energy loans EUR 599 million, guarantees for ship and shipyard financing EUR 510 million and guarantees for housing construction EUR 282 million).

     The new guarantees for third party risks given in 2006 amounted to EUR 19,184 million; they result mainly from the assumption of third party risks of credit default in connection with securitisation transactions of a total of EUR 17,121 million. Altogether EUR 14,138 million was redeemed.

OTHER OBLIGATIONS.

The Group’s irrevocable loan commitments total EUR 46,525 million, of which EUR 14,029 million is export and project finance, EUR 21,055 million is investment finance, EUR 4,313 million is loans to promote the developing countries, EUR 2,835 million is guarantees and EUR 4,293 million is asset securitisation.

-58-

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 the segments is shown in the following overview:

Segment reporting

Investment Finance Germany/Europe

n	Equity finance (incl. tbg — Technologie-Beteiligungs-Gesellschaft mbH)
n	Corporate finance/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)

Shareholdings, Treasury and Services

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 elsewhere in this annual report.

-59-

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. The itemisation was for the first time based entirely on risk-weighted assets. For reasons of commensurability we refrained from adjusting the previous year’s figures accordingly.
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 determined on the basis of the concept of expected losses (standard risk costs) and charged to the individual segments.
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-weighted position (pursuant to Principle I of the German Banking Act).
n	The risk-weighted position was determined as a representative average for 2006 on the basis of the figures as at 30 September 2006.

Contributions to income that accrue outside the segments are allocated to the central segment.

     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

	Investment				Promotion		Share-				Trans-
	Finance		Project/		of the		holdings/				ference/		KfW
	Germany/		Export		Developing		Treasury		Central		consoli-		Banken-
Primary segments	Europe		Finance		Countries		and Services		segment		dation		gruppe
+ Interest received, net
2006		331		500		192		169		414		88		1.695
2005		316		447		188		219		411		58		1.638
+ Commissions received, net
2006		129		119		100		15		0		– 136		227
2005		102		104		101		28		0		– 132		203
– Administrative expenses
2006		240		121		158		71		0		4		594
2005		260		116		169		33		0		4		582

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.

-60-

(cont)

	Investment				Promotion		Share-				Trans-
	Finance		Project/		of the		holdings/				ference/		KfW
	Germany/		Export		Developing		Treasury		Central		consoli-		Banken-
Primary segments	Europe		Finance		Countries		and Services		segment		dation		gruppe
+ Net result from financial transactions/other operating result
2006		3		0		7		1		29		– 15		25
2005		5		0		4		1		42		– 30		22
– Risk provisions/ valuations, net
2006		107		156		71		23		16		– 67		306
2005		100		163		70		18		361		– 108		603
= Income from current operations
2006		116		342		69		91		428		0		1.046
2005		63		272		53		197		93		0		678
Assets
2006		203,338		42,648		20,281		80,725		12,614		0		359,606
2005		187,628		46,421		21,173		72,943		12,978		0		341,143
Liabilities
2006		197,227		38,924		18,868		75,095		12,391		1,773		344,279
2005		181,892		42,312		20,015		68,881		12,746		1,698		327,544
Risk-weighted positions
2006		59,705		39,479		3,007		48,926		2,366		0		153,483
2005		50,899		39,702		2,900		40,845		2,249		0		136,595
Own funds
2006		6,111		3,724		1,413		5,630		223		– 1,773		15,328
2005		5,736		4,109		1,157		4,062		233		– 1,698		13,599
In %
Return on average allocated own funds1)
2006		2.0		8.7		5.4		1.9						7.2
2005		1.2		7.2		4.9		5.3						5.4
Cost/income ratio2)
2006		51.8		19.6		53.0		38.2						30.5
2005		61.4		21.0		57.7		13.3						31.2

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).

-61-

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

									Latin						Trans-
			Euroland						America						ference/		KfW
			(without		Other		North		including		Asia/				consoli-		Banken-
Secondary segments	Germany		Germany)		Europe		America		Caribbean		Australia		Africa		dation		gruppe
+ Interest received, net
2006		1,224		16		193		– 38		73		108		31		88		1,695
2005		1,064		49		172		16		82		132		65		58		1,638
+ Commissions received, net
2006		156		29		52		10		23		54		39		– 136		227
2005		165		18		30		8		16		59		38		– 132		203
– Administrative expenses
2006		310		57		89		18		30		62		23		4		594
2005		293		64		64		21		30		69		36		4		582
+ Net result from financial transactions/other operating result
2006		33		0		0		0		4		2		0		– 15		25
2005		48		0		1		0		1		1		1		– 30		22
– Risk provisions/ valuations, net
2006		157		33		68		19		35		52		8		– 67		306
2005		491		34		76		23		30		58		0		– 108		603
= Income from current operations
2006		945		– 46		87		– 66		36		49		40		0		1.046
2005		493		– 30		63		– 20		39		64		68		0		678
Assets
2006		250,830		28,344		35,464		8,885		6,891		23,185		6,007		0		359,606
2005		245,111		30,506		22,673		9,399		6,771		20,871		5,812		0		341,143
Liabilities
2006		240,504		26,726		32,707		8,361		6,301		22,198		5,708		1,773		344,279
2005		235,738		28,681		20,834		8,818		6,235		20,015		5,526		1,698		327,544

-62-

(cont)

									Latin						Trans-
			Euroland						America						ference/		KfW
			(without		Other		North		including		Asia/				consoli-		Banken-
Secondary segments	Germany		Germany)		Europe		America		Caribbean		Australia		Africa		dation		gruppe
Risk-weighted positions
2006		93,623		17,157		25,321		5558		3,902		6,469		1,453		0		153,483
2005		87,339		17,628		15,454		5,613		3,660		5,559		1,342		0		136,595
Own funds
2006		10,326		1,618		2,758		524		589		987		299		– 1,773		15,328
2005		9,373		1,824		1,840		581		536		857		286		– 1,698		13,599
In %
Return on average allocated own funds1)
2006		9.6		– 2.7		3.8		– 11.9		6.4		5.4		13.5				7.2
2005		5.6		– 1.9		3.8		– 3.6		7.5		8.3		24.8				5.4
Cost/income ratio2)
2006		22.0		128.6		36.5		n.e.		29.5		37.9		32.9				30.5
2005		22.9		94.2		31.7		87.9		30.5		36.0		34.8				31.2

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 the balance sheet date. 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 has been observed.

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

-63-

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.

     As at 31 December 2006 total assets in foreign currencies were EUR 45.2 billion, converted in accordance with § 340 h (1) of the German Commercial Code.

     Total debts in foreign currencies were EUR 143.4 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:

1. Interest-rate related forward transactions/derivative products

n	Interest rate swaps
n	Interest rate options
n	Caps and floors
n	Spreadlocks

2. Currency-related forward transactions/derivative products

n	Cross-currency swaps
n	FX swaps
n	Spot exchange deals
n	Forward exchange deals

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

n	Share options
n	KfW Carbon Fund forward sales

4. Credit derivatives

n Single name credit default swaps

The following presentation of the derivatives business is 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 at 31 December 2006.

     As derivatives instruments are used to hedge market risks of on-balance sheet business, 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.

-64-

KfW 2006
EUR million

	Nominal values		Nominal values		Fair values		Fair values
					positive		negative
	31 Dec 2006		31 Dec 2005		31 Dec 2006		31 Dec 2006
Volumes
Contracts with interest rate risks
Interest swaps		313,105		278,615		6,584		7,484
Interest options
of which: Purchases		0		0		0		0
Sales		1,245		1,230		0		14
Caps and floors1)		573		604		1		1
Spreadlocks		0		169		0		0
Total		314,923		280,618		6,585		7,499
Contracts with currency risks
Cross-currency swaps		119,598		103,624		1,523		7,181
FX swaps		11,350		18,434		50		449
Forward exchange swaps		71		140		3		0
Spot exchange deals		0		17		0		0
Total		131,019		122,215		1,576		7,630
Share and other price risks1)		93		342		1		3
Credit derivatives2)
of which: Purchases		1,885		850		0		4
Sales		0		0		0		0
Total		1,885		850		0		4

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	31 Dec 2006		31 Dec 2005		31 Dec 2006		31 Dec 2005		31 Dec 2006		31 Dec 2005		31 Dec 2006		31 Dec 2005
Maturity
Remaining term of
n up to 3 months		17,868		6,987		17,052		18,827		8		342		0		0
n > 3 months to 1 year		34,224		38,364		22,480		16,988		0		0		0		0
n > 1 to 5 years		145,843		135,723		65,110		65,002		85		0		1,685		850
n > 5 years		116,988		99,544		26,377		21,398		0		0		200		0
Total		314,923		280,618		131,019		122,215		93		342		1,885		850

1)	Derivative financing instruments are shown without embedded derivatives.
2)	here: Single name credit default swaps

-65-

EUR million

	Nominal values		Nominal values		Fair values		Fair values
					positive		negative
	31 Dec 2006		31 Dec 2005		31 Dec 2006		31 Dec 2006
Counterparties
OECD Banks		372,856		329,417		6,585		12,612
Banks outside the OECD		0		0		0		0
Other counterparties		74,459		74,420		1,555		2,514
Public authorities		605		188		22		10
Total		447,920		404,025		8,162		15,136

KfW Group 2006
EUR million

	Nominal values		Nominal values		Fair values		Fair values
					positive		negative
	31 Dec 2006		31 Dec 2005		31 Dec 2006		31 Dec 2006
Volumes
Contracts with interest rate risks
Interest swaps		313,664		279,732		6,596		7,487
Forward rate agreements		0		13		0		0
Interest options
of which: Purchases		0		0		0		0
Sales		1,245		1,230		0		14
Caps and floors1)		580		613		1		1
Spreadlocks		0		169		0		0
Total		315,489		281,757		6,597		7,502
Contracts with currency risks
Cross-currency swaps		120,006		104,269		1,565		7,174
FX swaps		11,350		18,434		50		449
Forward exchange swaps		78		140		3		0
Spot exchange deals		0		17		0		0
Total		131,434		122,860		1,618		7,623
Share and other price risks1)		93		342		1		3
Credit derivatives2)
of which: Purchases		1,885		850		0		4
Sales		0		0		0		0
Total		1,885		850		0		4

1)	Derivative financing instruments are shown without embedded derivatives.
2)	here: Single name credit default swaps

-66-

Nominal values	Interest risks1)				Currency risks				Other price risks1)				Credit derivatives2)
EUR million	31 Dec 2006		31 Dec 2005		31 Dec 2006		31 Dec 2005		31 Dec 2006		31 Dec 2005		31 Dec 2006		31 Dec 2005
Maturity
Remaining term of
n up to 3 months		17,895		7,103		17,059		18,851		8		342		0		0
n > 3 months to 1 year		34,527		38,291		22,524		17,064		0		0		0		0
n > 1 to 5 years		145,964		136,396		65,330		65,398		85		0		1,685		850
n > 5 years		117,103		99,967		26,521		21,547		0		0		200		0
Total		315,489		281,757		131,434		122,860		93		342		1,885		850

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
	31 Dec 2006		31 Dec 2005		31 Dec 2006		31 Dec 2006
Counterparties
OECD Banks		373,836		331,200		6,639		12,608
Banks outside the OECD		1		2		0		0
Other counterparties		74,459		74,420		1,555		2,514
Public authorities		605		187		22		10
Total		448,901		405,809		8,216		15,132

In addition, KfW has taken on the default risks on SME and housing loans and transferred them to the capital market. These risks assumed through credit derivatives in the total amount of EUR 72.4 billion (2005: EUR 68.4 billion) are shown under the item “Contingent liabilities”. The transfer of the risk in the amount of EUR 71.4 to the capital market was made through credit default swaps (EUR 61.8 billion) or credit linked notes (EUR 9.6 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 3,085 million as at 31 December 2006.

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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.

	2006 KfW		2005 KfW		2006 Group		2005 Group
Female employees		1,635		1,592		1,868		1,828
Male employees		1,763		1,711		1,963		1,869
Staff not covered by collective agreements		2,241		2,140		2,506		2,141
Staff covered by collective agreements		1,157		1,163		1,325		1,556
Total		3,398		3,303		3,831		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 2006 in the Group was EUR 2,589 thousand. This includes EUR 84 thousand for non-cash benefits and other remuneration. The current salary components were uniformly fixed at EUR 418 thousand for all members of the Board of Managing Directors.

     The remuneration paid to members of the Board of Supervisory Directors of KfW was EUR 209 thousand. It is composed as follows:

     The remuneration for the Chairman of the Board of Supervisory Directors is EUR 13 thousand annually, for the Deputy Chairman of the Board of Supervisory Directors it is EUR 10 thousand annually, for the members of the Board of Supervisory Directors it is EUR 5 thousand annually, for the members of the Loan Approvals Committee it is EUR 1 thousand annually and for the members of the Legal and Administrative Committee it is EUR 0,3 thousand annually. Remuneration is paid on a pro-rata basis if member join or leave the Board of Supervisory Directors during the current year.

     A liability of EUR 39,106 thousand had been accrued at 31 December 2006 for obligations under pension arrangements for retired members of the Board of Managing Directors and their surviving dependants. Current payments amounted to EUR 3,336 thousand.

     Loans to members of the Board of Managing Directors amounted to EUR 15 thousand on 31 December 2006. 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

-68-

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 contain the following remuneration of the auditor of the financial statements:

EUR thousand

	2006 KfW		2005 KfW		2006 Group		2005 Group
Audit		1,043		1,006		1,516		1,548
Other certifications and valuations		1,779		1,751		1,821		1,770
Tax consultancy services		0		70		2		84
Other services		632		416		632		420
Total		3,454		3,243		3,971		3,822

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

Ingrid Matthäus-Maier
Deutsche Post AG, Bonn
Deutsche Telekom AG, Bonn
RAG AG, Essen
RAG Beteiligungs-AG, Essen
Salzgitter Mannesmann Handel GmbH, Düsseldorf

Dr Peter Fleischer
DEG – Deutsche Investitions-und
Entwicklungsgesellschaft mbH, Cologne

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

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

Detlef Leinberger
IKB Deutsche Industriebank AG, Düsseldorf

Heinrich Heims
Arcelor Eisenhüttenstadt GmbH, Eisenhüttenstadt

As at 31 December 2006

-69-

BOARD OF SUPERVISORY DIRECTORS.

Michael Glos
Federal Minister of Economics and Technology
Chairman
(Until 31 December 2006)
Deputy Chairman
(From 1 January 2007)

Peer Steinbrück
Federal Minister of Finance
Deputy Chairman
(Until 31 December 2006)
Chairman
(From 1 January 2007)

Dietrich Austermann
Ministry of Science, Economics and Transport of the State of Schleswig-Holstein
Member appointed by the Bundesrat
(Upper House)
(Until 31 December 2006)

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 Uwe Brandl
President of the Bayerischer Gemeindetag
Representative of the Municipalities
(From 1 January 2007)

Dr Ulrich Brixner
Chairman of the Board of Managing Directors of DZ BANK AG (ret)
Representative of the Cooperative Banks
(Until 31 December 2006)

Frank Bsirske
Chairman of ver.di — Vereinigte Dienstleistungsgewerkschaft
Representative of the Trade Unions
(From 1 October 2006)

Prof Dr Ingolf Deubel
Minister of Finance of the State of Rhineland-Palatinate
Member appointed by the Bundesrat
(Upper House)
(From 1 January 2007)

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

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

Sigmar Gabriel
Federal Minister for the Environment, Nature Conserva and Nuclear Safety

Heinrich Haasis
President of the Deutscher Sparkassen- und Giroverband
Representative of the Savings Banks
(From 1 July 2006)

Prof Dr Hans-Günter Henneke
Managing Director of the Deutscher Landkreistag
Representative of the Municipalities
(Until 31 December 2006)

Dr Dietrich H Hoppenstedt
President of the Deutscher Spar-kassen- und Giroverband e.V. (ret)
Representative of the Savings Banks
(until 30 June 2006)

Peter Jacoby
Ministry of Finance of the Saarland
Member appointed by the Bundesrat
(From 1 January 2007)

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

Roland Koch
Minister President of the State of Hessen
Member appointed by the Bundestag

Jürgen Koppelin
Member of the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag

Oskar Lafontaine
Member of the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag

Claus Matecki
Member of the Executive
Board of the Deutscher Gewerkschaftsbund
Representative of the Trade Unions
(From 1 January 2007)

Dr Michael Meister
Member of the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag
(From 1 January 2007)

Prof Dr Wolfgang Methling
Minister for the Environment of the State of Mecklenburg-West Pomerania
Member appointed by the Bundesrat
(Upper House)
(Until 31 December 2006)

Dr Horst Metz
Minister of Finance of the Free State of Saxony
Member appointed by the Bundestag
(Until 31 December 2006)

Franz-Josef Möllenberg
Chairman of the Gewerkschaft Nahrung-Genuss-Gaststätten
Representative of the Trade Unions
(Upper House)

Hartmut Möllring
Minister of Finance of the State of Lower Saxony
Member appointed by the Bundesrat

Margret Mönig-Raane
Deputy Chairperson of ver.di e.V.
Representative of the Trade Unions
(Until 30 September 2006)

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

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

Matthias Platzeck
Minister President of the State of Brandenburg
Member appointed by the Bundestag
(From 1 January 2007)

Dr Christopher Pleister
President of the Bundesverband der Deutschen Volks- und Raiffeisenbanken e.V. (BVR)
Representative of the Cooperative Banks
(From 1 January 2007)

Ronald Pofalla
Member of the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag
(Until 31 December 2006)

Heinz Putzhammer
Member of the Executive Board of the Deutscher Gewerkschaftsbund
Representative of the Trade Unions
(Until 27 June 2006, passed away)

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

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 the German Bundestag
(Federal Parliament)
Member appointed by the Bundestag

Dr Frank-Walter Steinmeier
Federal Minister of Foreign Affairs

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

Erwin Teufel
Minister President (ret) 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

Wolfgang Tiefensee
Federal Minister of Transport, Building and Urban Affairs

Heidemarie Wieczorek-Zeul
Federal Minister for Economic Cooperation and Development

-70-

THE BOARD OF MANAGING DIRECTORS.

Dr Günther Bräunig	Dr Peter Fleischer	Dr Peter Klaus	Dr Norbert Kloppenburg
Wolfgang Kroh	Detlef Leinberger	Ingrid Matthäus-Maier (Spokeswoman)

Dr Günther Bräunig	Dr Peter Fleischer	Dr Peter Klaus	Dr Norbert Kloppenburg

Wolfgang Kroh	Detlef Leinberger	Ingrid Matthäus-Maier (Spokeswoman)

Frankfurt am Main, 23 January 2007
KfW

-71-

Auditor’s Report.

AUDITOR’S REPORT REPRINT.

After concluding our audit we gave the following unqualified report:

AUDITOR’S REPORT.

We have audited the annual financial statements, comprising the balance sheet, the income statement and the notes to the financial statements, which are combined with the notes to the consolidated financial statements, together with the bookkeeping system of KfW, Frankfurt am Main, and the consolidated financial statements, comprising the balance sheet, the income statement, statement of changes in equity, cash flow statement, the segment report and the notes to the consolidated financial statements, which are combined with the notes to the financial statements as well as the combined management report of KfW and the Group for the business year from January 1 to December 31, 2006. 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 ByLaws 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 § (Article) 317 HGB (“Handelsgesetzbuch”: “German Commercial Code”) and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer in Deutschland (Institute of Public Auditors in Germany) (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 expectations as to 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 of KfW, 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.

-72-

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 comply with the legal requirements 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 consistent with the annual financial statements and the consolidated financial statements and as a whole provides a suitable view of KfW’s and the Group’s position and suitably presents the opportunities and risks of future development.

Frankfurt am Main, 8 March 2007
PricewaterhouseCoopers
Aktiengesellschaft
Wirtschaftsprüfungsgesellschaft

/s/ Struwe	/s/ Theobald
Struwe	Theobald
Wirtschaftsprüfer	Wirtschaftsprüfer

-73-

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	2006
							(EUR in
	nominal(8)		effective(8)				millions)
1. Borrowed Funds
Schuldscheindarlehen(3)		0.50-23.57		2.00-24.09	1980-2006	2007-2056		23,469
Loans from
Federal Republic(4)		0.00-5.82		0.00-5.82	various(5)	various(5)		12,154
ERP Special Fund		0.00-8.00		0.00-8.00	various(5)	various(5)		16,460
Other lenders		2.32-6.51		2.32-6.49	1996-2006	2007-2026		5,809
Securities account(6)		2.01-7.37		2.01-7.37	various	various		3,116
								61,008
2. Bonds and Notes Issued
Bonds and Notes		0.01-20.10		0.07-20.64	1992-2006	2007-2045		234,298
Total funded debt(7)								295,306

(1)	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 in connection with export finance loans and other security deposits.
(7)	Includes the following debt in currencies.
(8)	The interest rates indicated always represent an interval giving the maximum and minimum interest rate of the liabilities outstanding.

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	Principal
	Amount
	Outstanding at
	December 31,
Currency	2006
	(in millions)
Australian Dollar		6,770.45
Brasilian Real		550.97
Canadian Dollar		3,262.83
Czech Koruna		11,000.00
Egypt Pound		200.00
Euro		171,338.58
Hong Kong Dollar		1,661.95
Hungarian Forint		51,500.00
Icelandic Korona		86,500.00
Japanese Yen		2,046,500.00
Malaysian Ringgit		500.00
Mexican Pesos		4,956.60
New Zealand Dollar		4,941.00
Norwegian Kroner		19,300.00
Polish Zloty		52.02
Pounds Sterling		24,014.30
Romanian Leu		400.00
Singapore Dollar		370.00
South African Rand		7,288.12
Swedish Krona		2,500.00
Swiss Franc		3,550.00
Turkish Lira		1,495.00
U.S. Dollar		75,365.04

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

																					After
	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		2016		Total
	(EUR in millions)
1. Borrowed Funds:
Schuldscheindarlehen:
Principal		2,812		3,039		2,769		2,303		1,014		521		251		609		634		490		9,026		23,469
Interest		1,144		1,036		871		723		636		611		588		580		560		513		12,547		19,809
Loans from ERP
Special Fund:
Principal		1,610		1,607		1,557		1,485		1,423		1,391		1,332		1,250		1,169		982		2,654		16,460
Interest		542		458		375		302		241		189		140		90		53		22		27		2,437
Other lenders:
Principal		691		899		1,034		792		553		754		521		331		36		31		165		5,809
Interest		101		112		124		109		120		136		154		90		9		7		22		985
2. Bonds and Notes
issued:
Principal		40,026		40,325		34,901		20,546		17,480		9,246		9,960		8,757		9,018		4,469		39,572		234,298
Interest		9,948		8,253		6,773		5,350		4,463		3,754		3,277		2,841		2,449		2,013		24,602		73,722
Total Borrowed
Funds and Bonds
and Notes issued:
Principal		45,139		45,871		40,261		25,125		20,470		11,912		12,065		10,947		10,857		5,972		51,417		280,036
Interest		11,735		9,858		8,143		6,484		5,460		4,689		4,159		3,601		3,071		2,555		37,198		96,594
Total		56,875		55,729		48,404		31,609		25,930		16,602		16,224		14,548		13,928		8,526		88,615		376,990

(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, 2006.
(3)	Contracts with embedded early redemption options which are not exercised until December 31, 2006 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.

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THE FEDERAL REPUBLIC OF GERMANY

RECENT DEVELOPMENTS

     The following economic information regarding the Federal Republic is derived from the public official documents cited below. Certain of the information is preliminary.

Gross Domestic Product

Real Gross Domestic Product (GDP)

(adjusted for price, seasonal and calendar effects)

				Percentage change on
	Percentage change on			the same quarter in
Reference period	previous quarter			previous year
1st quarter 2005		0.6	%		0.4	%
2nd quarter 2005		0.3	%		0.8	%
3rd quarter 2005		0.5	%		1.5	%
4th quarter 2005		0.3	%		1.7	%
1st quarter 2006		0.8	%		1.9	%
2nd quarter 2006		1.2	%		2.8	%
3rd quarter 2006		0.8	%		3.1	%
4th quarter 2006		0.9	%		3.7	%

     Economic growth in the Federal Republic in the fourth quarter of 2006 reflected both domestic and foreign demand, with the dynamic development of foreign trade contributing significantly more to the economic upturn than domestic demand. Because the increase in exports exceeded the increase in imports, price-adjusted net exports contributed 2.1 percentage points to GDP growth in the fourth quarter compared to the third quarter of 2006. The strong rise in exports (+6.0% on the third quarter of 2006) was, however, positively influenced by the delayed reporting of certain foreign trade statistics. Without giving effect to changes in inventories, total domestic uses contributed 0.4 percentage points to GDP growth. Final consumption expenditure of households (+0.3%) as well as fixed capital formation both in construction (+1.2%) and in machinery and equipment (+0.5%) increased compared to the previous quarter. However, the substantial reduction in inventories had a dampening effect (-1.6 percentage points) on the GDP growth rate.

Source: Statistisches Bundesamt, Detailed results on the economic performance in the 4th quarter of 2006, Press release, 22 February 2007 (http://www.destatis.de/presse/englisch/pm2007/p0690121.htm).

     Overall, the German economy grew strongly in 2006. GDP rose by 2.9% (adjusted for calendar effects) compared to 2005. This increase represented the highest rate of economic growth since 2000. Economic growth was attributable to both domestic and foreign demand, with domestic demand contributing more to GDP growth than net exports. This growth in domestic demand was mainly due to gross fixed capital formation, which rose at its highest rate since German reunification, but also reflected increases in consumption. In addition, foreign trade continued its dynamic trend in 2006, with the growth rates of imports and exports nearly doubling compared to 2005.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2006 (March 2007), Tables 2.1.1, 2. 3.2.

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Inflation Rate

Inflation Rate

(based on overall consumer price index)

	Percentage change on			Percentage change on the same
Reference period	previous month			month in previous year
February 2006		0.4	%		2.1	%
March 2006		0.0	%		1.8	%
April 2006		0.4	%		2.0	%
May 2006		0.2	%		1.9	%
June 2006		0.2	%		2.0	%
July 2006		0.4	%		1.9	%
August 2006		-0.1	%		1.7	%
September 2006		-0.4	%		1.0	%
October 2006		0.1	%		1.1	%
November 2006		-0.1	%		1.5	%
December 2006		0.8	%		1.4	%
January 2007		-0.2	%		1.6	%
February 2007		0.4	%		1.6	%

     In February 2007, a decrease in mineral oil product prices had a downward effect on the year-on-year inflation trend. Excluding this effect, the year-on-year rate of price increase would have been 1.9% in February 2007. In contrast, the prices of other sources of household energy, including gas and electricity, continued to rise markedly on a year-on-year comparison. The February/January 2007 month-on-month price increase was mainly due to seasonal price hikes.

Sources: Statistisches Bundesamt, Consumer prices in February 2007: +1.6% on February 2006, Press release, 15 March 2007 (http://www.destatis.de/presse/englisch/pm2007/p1100051.htm).

Unemployment Rate

Unemployment Rate

(percent of unemployed persons in the total labor force according to the
International Labor Organization definition)

Reference period	Original percentages			Seasonally adjusted percentages
January 2006		8.8	%		8.6	%
February 2006		9.4	%		8.6	%
March 2006		8.8	%		8.3	%
April 2006		8.3	%		7.9	%
May 2006		8.3	%		8.1	%
June 2006		7.8	%		8.0	%
July 2006		8.1	%		8.0	%
August 2006		8.5	%		8.2	%
September 2006		8.1	%		8.2	%
October 2006		7.3	%		7.8	%
November 2006		7.0	%		7.7	%
December 2006		6.8	%		7.6	%
January 2007		7.6	%		7.4	%
February 2007		7.5	%		6.9	%

     The number of employed persons increased by 563,000 (+1.5%) in February 2007 as compared with February 2006. The number of unemployed persons declined by 840,000 (-20.9%) in February 2007 as compared with February 2006.

Source: Statistisches Bundesamt, ILO labour market statistics February 2007, Press release, 29 March 2007 (http://www.destatis.de/presse/englisch/pm2007/p1330031.htm).

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     On an annual average, the number of employed persons in 2006 was 39.0 million, which represented an increase of 290,000 persons (+0.7%) over 2005. The number of unemployed persons decreased by 461,000 (-11.8%) to 3.4 million in 2006 as compared with 2005. The percentage of unemployed persons in the total workforce thus was 8.1% on an annual average.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2006 (March 2007), Table 2.1.11.

Current Account and Foreign Trade

Current Account and Foreign Trade

	(balance in EUR billion)
Item	January to December 2006		January to December 2005
Foreign trade		+161.9		+158.2
Services		-24.4		-27.0
Factor income (net)		+9.8		+8.6
Current transfers		-26.5		-28.9
Supplementary trade items		-19.8		-20.1
Current account		+100.9		+90.3

Source: Statistisches Bundesamt, German foreign trade in 2006: Exports +13.7%; imports +16.5%, Press release, 8 February 2007 (http://www.destatis.de/presse/englisch/pm2007/p0520181.htm).

	(balance in EUR billion)
Item	January 2007		January 2006
Foreign trade		+16.2		+12.4
Services		-3.7		-2.6
Factor income (net)		+1.8		+2.4
Current transfers		-1.9		-2.4
Supplementary trade items		-1.3		-2.0
Current account		+11.0		+7.7

Source: Statistisches Bundesamt, German exports in January 2007: +13.4% on January 2006, Press release, 9 March 2007 (http://www.destatis.de/presse/englisch/pm2007/p1000181.htm).

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Fiscal Maastricht Criteria

Fiscal Maastricht Criteria

	(percent of nominal GDP)
Reference period	General government balance	General government gross debt
2005	-3.2%	67.9%
2006	-1.7%	67.9%
2007(1)	-1.2%	66.7%

(1) Projection notified by the German Minister of Finance to the European Commission on March 30, 2007.

Source: Bundesministerium der Finanzen, Maastricht-Defizit 2007: -1.2% des BIP, Press release, 30 March 2007 (http://www.bundesfinanzministerium.de/cln_02/nn_82/DE/Aktuelles/Pressemitteilungen/2007/03/20073003__PM034.html).

     At the end of March 2007, the Minister of Finance submitted the so-called “Maastricht-Notification” to the European Commission. According to the notification, the projections for the general budget deficit in 2007 were lowered to 1.2% of GDP compared to 1¹/2% of GDP reported in the German Stability Programme transmitted to the Council of the European Union and the European Commission at the end of November 2006. Similarly, based on the official results of February 22, 2007 according to which general government net borrowing amounted to EUR 39.5 billion in 2006, the budget deficit in 2006 was reported to have amounted to only 1.7% of GDP compared to the ratio of 2.1% projected in the Stability Programme. At a meeting in October 2006, the Council of the European Union had decided not to take any further steps in the excessive deficit procedure in respect of Germany, but a final decision to dismiss the excessive deficit procedure was not made. Based on the reported expected deficit ratio of 1.2% for 2007, which would be accompanied by a reduction of the structural deficit (i.e., the general government deficit adjusted for cyclical effects) of approximately ¹/2%, the Federal Government expects the deficit procedure to be formally dismissed during Germany’s EU presidency, which will end on June 30, 2007.

Sources: Council of the European Union, 2753^rd Council meeting, Economic and Financial Affairs, Luxembourg, 10 October 2006, Press Release (http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ecofin/91272.pdf); Bundesregierung, EU setzt Defizitverfahren gegen Deutschland aus, Press release, 10 October 2006 (http://www.bundesregierung.de/Content/DE/Artikel/2006/10/2006-10-10-eu-stellt-defizitverfahren-ein,layoutVariant=Druckansicht.html); Bundesministerium der Finanzen, Kurs halten in Deutschland und Europa – Stabilitätsprogramm belegt erfolgreichen Konsolidierungs- und Wachstumskurs der Bundesregierun, Press release, 29 November 2006 (http://www.bundesfinanzministerium.de/DE/Aktuelles/Pressemitteilungen/2006/11/20063011__PM141.html); Federal Ministry of Finance, German Stability Programme, December 2006 Update (http://www.bundesfinanzministerium.de/lang_de/DE/Service/Downloads/Abt__I/0611301a1005,templateId=raw,property=publicationFile.pdf); Statistisches Bundesamt, Maastricht deficit ratio for 2006 amounts to 1.7%, Press release, 22 February 2007 (http://www.destatis.de/presse/englisch/pm2007/p0700121.htm); Deutsche Bundesbank, Maastricht-Schuldenstand 2006 deutlich gestiegen, Schuldenquote unverändert, Press release, 12 March 2007 (http://www.bundesbank.de/download/presse/pressenotizen/2007/20070312.schuldenstand.php); Bundesministerium der Finanzen, Maastricht-Defizit 2007: -1.2% des BIP, Press release, 30 March 2007 (http://www.bundesfinanzministerium.de/cln_02/nn_82/DE/Aktuelles/Pressemitteilungen/2007/03/20073003__PM034.html).

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Public Finance and Debt

     The following table presents receipts and expenditures in the public sector for the years 2002 to 2006:

Public Sector Accounts(1)

	2006		2005		2004		2003		2002
	(EUR in billions)
Federal Government, Länder governments and municipalities
Receipts	633.4		598.3		579.7		584.0		580.0
of which: Taxes(2)	530.2		493.0		481.2		481.8		477.5
Expenditures	676.9		667.4		660.8		663.3		651.5
Balance	(43.5	)	(69.2	)	(81.1	)	(79.3	)	(71.5	)
Social security
Receipts	473.1		468.0		467.3		467.7		458.9
Expenditures	469.2		471.5		468.6		475.4		465.7
Balance	3.9		(3.4	)	(1.4	)	(7.7	)	(6.8	)
Consolidated public sector
Receipts	1,015.0		975.9		957.1		961.2		952.5
Expenditures	1,054.6		1,048.5		1,039.6		1,048.2		1,030.8
Balance	(39.5	)	(72.6	)	(82.5	)	(87.0	)	(78.3	)

(1)	Definition according to the national accounts.
(2)	Excluding taxes of domestic sectors to EU.

Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 – 2006 (March 2007), Tables 3.4.3.2, 3.4.3.3, 3.4.3.7.

At December 31, 2006 Germany’s general government debt (as defined in the Maastricht Treaty) amounted to EUR 1,567 billion, or 67.9% of GDP.

Sources: Deutsche Bundesbank, Maastricht-Schuldenstand 2006 deutlich gestiegen, Schuldenquote unverändert, Press release, 12 March 2007 (http://www.bundesbank.de/download/presse/pressenotizen/2007/20070312.schuldenstand.php); Bundesministerium der Finanzen, Maastricht-Defizit 2007: -1.2% des BIP, Press release, 30 March 2007 (http://www.bundesfinanzministerium.de/cln_02/nn_82/DE/Aktuelles/Pressemitteilungen/2007/03/20073003__PM034.html).

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The following table summarizes the direct debt of the Federal Government at December 31, 2006:

Summary of the Direct Debt of the Federal Government

	Principal Amount
	Outstanding as of
	December 31, 2006
	(EUR in millions)
Federal Bonds		580,718
Five-year Federal Notes		186,000
Federal Treasury Notes		110,000
Federal Savings Notes		10,198
Treasury Discount Paper		35,603
Federal Treasury Financing Paper		3,046
Borrowers’ note loans of which:		24,576
– From residents		24,155
– From non-residents		421
Old debt (1) of which:		4,479
Equalization claims		4,118
Other		40
Repurchased debt		52,858
Medium-term notes of Treuhandanstalt		205
Total		902,007

(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 2006 , Bundesanzeiger Nr. 47 of March 8, 2007, page 2458, and Bundesanzeiger Nr. 63 of March 30, 2007, page 3437)

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SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant KfW has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized.

KfW
By:	/s/ Ingrid Matthäus-Maier
	Name: Ingrid Matthäus-Maier
	Title:   Managing Director
By:	/s/ Dr. Günther Bräunig
	Name: Dr. Günther Bräunig
	Title:   Managing Director

Date: April 2, 2007