GROUP BUSINESS DESCRIPTION

GENERAL

TNT N.V. is a public limited liability company and was incorporated under the laws of the Netherlands on 29 December 1997. We changed our name from TNT Post Group N.V. to TPG N.V. on 6 August 2001 and from TPG N.V. to TNT N.V. on 11 April 2005. Our registered office’s address is Neptunusstraat 41-63, 2132 JA Hoofddorp, the Netherlands. Our telephone number is +31 20 500 6000. We are a holding company. We were formed in connection with the consummation of a demerger transaction pursuant to which our former parent company, Koninklijke PTT Nederland N.V. (KPN), demerged its mail, express and logistics divisions. Although the demerger became effective on 28 June 1998, its arrangements were effective retroactive to 1 January 1998.

We provide a wide range of mail, express, freight management and logistics services worldwide, although we are discontinuing most of our logistics business. Our services involve the collection, storage, sorting, transport and distribution of a wide variety of items for our customers within specific time­frames, and related data and document management services.

Although TNT N.V. has existed as an independent company only since 1998, our history goes back over a much longer period of time. The roots of our mail division stretch back more than 200 years and are firmly embedded within the operations of Royal TPG Post B.V. Our express business has been meeting the need for time-sensitive door-to-door delivery services for 60 years.

We have evolved from being the public postal company in the Netherlands into an international group providing mail, express, freight management and logistics services. As a result, we have broadened the range of our activities from mainly postal operations in the Netherlands to include worldwide express and logistics services. Our mail business in the Netherlands is subject to regulations (such as price cap mechanisms) imposed by the Dutch Postal Act and other postal regulations. Our other services are not subject to such specific regulations. Other than for reserved postal services, which our mail business has the exclusive right to provide under the Dutch Postal Act, our mail business, as well as our other businesses, are subject to competition.

We are subject to the Enabling Act, as last amended by act of 1 November 2001. Pursuant to the Enabling Act in connection with the Dutch Postal Act, we have been granted the Postal Concession, which is performed by our subsidiary Royal TPG Post B.V. See chapters 3 and 13. Pursuant to the Enabling Act we are furthermore subject to the full large company regime. See for more details chapter 7.

The State of the Netherlands is our largest shareholder, owning approximately 10% of our outstanding ordinary shares. The State of the Netherlands furthermore has always held and holds a special share that gives it the right to approve certain decisions that lead to fundamental changes in our group structure.

We are currently listed on the Amsterdam, New York, London and Frankfurt stock exchanges. On 20 February 2006 we announced our intention to delist from the London and Frankfurt stock exchanges in the first half of 2006, as the costs and requirements for these listings are not justified by the low trading volume in our shares at both stock exchanges.

Based on our refined strategy we will now manage our business through two divisions: mail and express, with the express division including both our express and our freight management businesses. The parts of our former logistics division that we intend to exit are reported as discontinued operations/assets held for sale. Optimisation of our organisation will be considered during 2006.

REBRANDING

To highlight the increasing internationalisation of our company, we changed the statutory name of our company to TNT N.V. On 7 April 2005, our annual general meeting of shareholders approved this change, and the name change came into effect on 11 April 2005. We intend to operate globally under the TNT brand for all our activities in the course of 2006. Operating under one brand increases the recognition of our group worldwide and allows for more efficient communication on the services we provide.

In the Netherlands, we currently offer our postal services mainly under the brand TPG Post. We recently started changing this to TNT Post. Royal TPG Post B.V. will officially change its name to Royal TNT Post B.V. in the autumn of 2006. We have been granted the right to affix the designation “Royal” to our subsidiary TNT Post B.V. after the name change. We presently offer postal services in eight European countries, partly under the name TNT. Starting in 2006, all our international postal activities will be rebranded to TNT. The change of our name is being accompanied by a change of colour to orange for the remainder of the group.

SEASONALITY

Our domestic mail business is seasonal in that it is affected by public and local holiday patterns and especially by the distribution of Christmas greeting cards and presents during December.

The express business is seasonal in that it is affected by public and local holiday patterns and adverse weather conditions.

MARKET TRENDS

We believe that globalisation is one of the major trends driving the world economy. We believe that globalisation will continue, but it will affect our divisions in different ways.

In the mail industry, operators are still organised on largely national lines. However, with European Mail Networks and other international ambitions, we seek to establish a leading international position in mail. Consolidation in this industry has not yet happened, however with the entry of private equity into the industry in 2005, future changes in the landscape are possible.

In the express industry, we see that the majority of flows of documents and parcels remain within continental boundaries. Thus, our strategy is to build operational excellence within regions, particularly within Europe and Asia. As we expand our position in Asia we intend to also build leading connectivity between Europe and Asia.

In the freight management industry, we have observed that the flow of goods continues to grow in all regions, including China and emerging markets. Thus, our strategy is to continue to expand our global network in all regions, particularly Asia.

In 2004 we prepared our consolidated financial statements in accordance with Dutch GAAP. As of 2005 all European listed companies are required to prepare their consolidated financial statements in accordance with IFRS as adopted by the European Union. For TNT, there are no differences between the IFRS as adopted by the European Union and the IFRS as issued by the International Accounting Standards Board. As a result our 2005 consolidated financial statements have been prepared in accordance with IFRS and the comparative 2004 data has been adjusted. A detailed explanation of the transition to IFRS and the impact on our financial data is given in chapter 12.

The information in chapters 2, 3, 4, 5 and 11 should be read in combination with our consolidated financial statements which can be found in chapter 12.

Key factors that affect our results of operations include:

• the volumes of mail we deliver,
• the number of shipments transported through our networks,
• the mix of services we provide to our customers,
• the prices we obtain for our services,
• the average number of working days in a year,
• our ability to manage our capital expenditures and
• operating expenses, and
• our ability to match our operating expenses to shifting volume levels.

Our mail and express businesses provide services to customers and account for revenues for those services on a daily basis.

GROUP OVERVIEW

Total operating revenues increased by 11.0% in 2005 compared to 2004. Operating income increased by 3.9%, mainly due to an increase in our express business.

In our mail business, operating revenues increased by 2.4% in 2005, mainly due to substantial addressed volume growth in European Mail Networks, partly offset by the continued decrease in addressed Mail Netherlands volumes (-3.1%). These volumes continued to decline resulting from competition and substitution. Our mail business in the Netherlands is focused on service quality and margin to defend its market position. Operating income of our mail business decreased by 3.6%. This decrease is mainly due to a structural cost increase in salaries and social security contributions in Mail Netherlands, partly offset by continued progress in improving productivity and cost control in Mail Netherlands and expansion of European Mail Networks.

Our express business achieved 8.3% higher operating revenues compared to 2004, mainly due to continued growth in its international businesses. Express operating income increased by 26.4%, primarily due to good volume growth, particularly in the international business across all customer segments, good cost control, including increased utilisation of the European networks, and continued yield improvements.

Total operating expenses increased by €986 million (12.3%) to €8,984 million compared to 2004. Overall, the organic growth in operating expenses was 5.3%, the increase due to acquisitions effective in 2004 (including Wilson, Prime Vision B.V., Seducom B.V. and our joint venture with Essent N.V., named Cendris BSC Customer Contact B.V.) and in 2005 (including Euro Mail B.V., Door-to-Door d.o.o., Asinus d.o.o. and assets of Rheinkurier GmbH) was 6.6%. Changes in foreign exchange rates had a positive effect of 0.4%. Our gross margin, defined as total operating income as a percentage of total operating revenues, decreased from 12.3% in 2004 to 11.5% in 2005.

Total cost of materials increased by €66 million (19.3%) compared to 2004. Organically, cost of materials increased by €65 million (19.0%), mainly due to higher fuel costs in our express division. Acquisitions effective in 2004 and 2005 contributed €1 million (0.3%) to the increase.

Work contracted out and other external expenses relate to fees paid for subcontractors, external temporary staff, rent and leases. Total work contracted out and other external expenses increased by €639 million (18.0%) compared to 2004. Acquisitions effective in 2004 and 2005 contributed €409 million (11.5%) to the increase. The organic increase of €209 million (5.9%) was mainly related to growth of European Mail Networks in our mail business and higher linehaul, pick-up, and delivery costs in our express business. Changes in foreign exchange rates contributed €21 million (0.6%) to the increase.

Salaries and social security contributions increased by €165 million (5.1%) compared to 2004. Acquisitions effective in 2004 and 2005 contributed €67 million (2.1%) to the increase. Salaries and social security contributions increased organically by €88 million (2.7%), mainly due to higher pension costs. Furthermore, during 2004 there was a positive effect from the settlement for future wage guarantees which resulted in a €134 million refund from an insurance company. In addition, the increase was caused by a 5% increase in average full-time employee equivalents (FTEs) as a result of organic growth in our express business, partly offset by lower costs due to a decline in FTEs in our mail business in connection with our cost flexibility programme. The trend of replacing more expensive labour with less expensive labour to reduce operating costs in our mail division continued in 2005. Changes in foreign exchange rates added €10 million (0.3%) to these cost increases.

In 2005, non-allocated operating loss amounted to €103 million. Included in these costs is €61 million for business initiatives, of which €33 million was used to further develop our operations in China. During 2005 we strengthened our China corporate headoffice and started our domestic parcel express business. The remaining €28 million of business initiatives was used for several other strategic projects (building alliances with other organisations and postal operators, the TNT-1 project, rebranding costs of non-TNT branded organisations into the TNT brand and a cost efficiency project for lean warehousing). Costs made to support the United Nations World Food Programme (WFP) were €9 million; including costs for knowledge transfer, hands-on support, raising awareness and funds for the WFP and cash donations. The other costs were €45 million, representing an increase of €21 million compared to 2004. This increase mainly related to costs made for tax investigations, which amounted to €23 million compared to €13 million in 2004 and to costs for the uninsured part of the damage caused by major fires in three warehouses, one in the United States, one in Spain and one in the United Kingdom, and employer liability in the United Kingdom. These costs were partly offset by the gain on the sale of Global Collect B.V. (€12 million).

Interest and similar income: 115 million (2004: 99)
Interest and similar income in 2005 of €115 million (2004: 99) mainly relates to interest income on funding our discontinued logistics business of €72 million (2004: 66) and the interest of €21 million relating to an income tax refund. The interest income in 2004 also relates to a one-off gain of €11 million on the unwind of a US dollars 435 million swap.

Group income taxes amounted to €379 million, an increase of 1.1% compared to 2004. Our effective tax rate for 2005 was 32.9% compared to 34.2% for 2004. The effective tax rate was positively influenced by the decrease in statutory income tax rate in the Netherlands from 34.5% in 2004 to 31.5% in 2005.

The total accumulated losses that were available to carry forward at 31 December 2005 amounted to €662 million (2004: 627). With these losses carried forward, future tax benefits of €211 million (2004: 202) could be recognised.

DISCONTINUED OPERATIONS

In 2005, the loss from discontinued operations was €111 million. Included in this was the pre-tax result of the sale transaction of the French logistics activities amounting to €102 million. Losses relating to our operations in France, including restructuring expenses, amounted to €52 million. The operating income for the remainder of our discontinued logistics business amounted to €136 million, offset by €63 million of net financial expense and €30 million of income tax expense. The discontinued operations are further described in chapter 5.

GROUP NET INCOME

In 2005, profit for the period attributable to shareholders was €659 million, a decrease of €93 million (12.4%) compared to 2004. This decrease was mainly the result of an increase in loss from discontinued operations of €142 million and €4 million higher income taxes. The decrease in profit for the period was partly offset by an increase in operating income of €43 million, mainly driven by our express business, and a reduction of net financial expenses of €12 million.