Our R&D plays a key role in the realization of our innovation strategy. Most of our annual R&D expenditure is directed towards business-focused R&D programs. In addition we have a Corporate Research Program in place to build and strengthen the technological competences we need to execute our development projects.

Expenditure on R&D in 2007 amounted to €372 million (4.2% of net sales), a 7% rise compared to the €347 million (4.2% of net sales) in 2006. The R&D expenditure reported for 2007 includes the associated IP expenditure. This will be standard practice from now on. To enable comparison with 2006, the overview of R&D expenditure for 2006 has been updated to include IP expenditure.

R&D expenditure in the Nutrition cluster amounted to €136 million, compared to €140 million in the previous year. R&D expenditure in the Pharma cluster was at a level of €68 million (2006: €59 million). In Performance Materials, R&D expenditure amounted to €131 million (2006: €115 million) and in Industrial Chemicals to €23 million (2006: €21 million). At 31 December 2007, a total of 2,130 staff were employed in R&D activities, representing some 9% of the total workforce.

Given the organizational and geographic spread of our R&D activities, we seek to ensure synergy and knowledge sharing across the company with a Global Virtual Lab. We have a company-level system for the management of competences, projects and project portfolios and human resources. This enables us to efficiently steer through our innovation process. In 2007 we defined the key competence areas for the company which will be the focus of our company-level competence development efforts. We see a lot of technological synergy between Life Sciences and Materials Sciences, our two key focus areas.

In 2007 we made major progress in establishing a company-wide open innovation process, in which internal and external collaboration, licensing, venturing and spinning in and out play an important part. In line with our open innovation approach, our R&D activities are carried out in ongoing interaction with the outside world.

In 2007 we successfully completed the implementation of our new Innovation Awards Program, which seeks to recognize and reward exceptional achievements by our employees as well as by experts working outside DSM. The awards are an important means of stimulating innovation and are also useful in inspirational human resource management.

Our top internal award for outstanding team-based innovative achievements is the DSM Innovation Award. The 2007 award went to a combined DSM Pharmaceutical Products / DSM Anti-Infectives team that solved a big problem for a major pharmaceutical customer by developing a recombinant pig liver esterase (PLE) to replace animal-derived PLE. The development involved an intensive multi-disciplinary and multi-site effort and was achieved in record time.

The DSM Nutrition Award is one of the awards we have in place for outside specialists. It is granted every two years, alternately for human and animal nutrition. The 2007 award was granted to Dr R. John Wallace, of the Rowett Research Institute in Aberdeen, Scotland (UK), in recognition of his pioneering research in the field of animal nutrition. Dr Wallace is one of the world’s leading ruminant nutritionists and has published over 150 original scientific papers that have had a great impact on ruminant nutrition research. The award was presented to Dr Wallace at the 58th Annual Meeting of the European Association for Animal Production in Dublin (Ireland) on 28 August 2007.

The DSM Science & Technology Awards for outstanding PhD research by doctoral students were for the first time granted in two European regions in 2007. The awards went to Dutch researcher Maaike Kroon of the Delft University of Technology (Netherlands) and Swiss researcher Bernd Bodenmiller of the Swiss Federal Institute of Technology in Zurich (Switzerland).

Maaike Kroon was rewarded for her PhD research in the field of combined reactions and separations. Bernd Bodenmiller was rewarded for his PhD research in proteomics (the study of proteins in a cell).

We have a Corporate Research Program in place that not only enables us to develop our competences but also lays the basis for new developments achieved by the different R&D groups in our company. In 2007, various projects were carried out within the framework of the Corporate Research Program in the six key competence areas of DSM: Advanced Synthetic Methods, the Biotechnology Platform, the Nutrition Platform, Chemistry & Technology of Polymers & Resins, the Materials Science Platform and Process Technology & Process Design.

In 2007 R&D in the Nutrition cluster resulted in the launch of a number of new ingredients developed in-house or in cooperation with partners in the human nutrition, animal nutrition and personal care industries. Examples are i-flex^™ for joint health, BeauActive^™ MTP for an instantly smoother skin and a more youthful appearance and Ronozyme^® P, a more thermostable phytase complemented by product forms for different application fields. The innovation capabilities of DSM's Nutrition cluster are increasingly being recognized by major food, beverage and dietary supplement manufacturers as well as cosmetics companies.

Innovations in specialty ingredients include InsuVital^™, a new and safe ingredient for blood glucose management. Another Food Specialties development is Claristar^™, an ingredient derived from yeast for the reduction of tartrate in high- quality white wines.

A new process for a vitamin B1 intermediate was developed by DSM's Nutrition cluster R&D. Launched in 1937, the synthesis of vitamin B1 is still a challenge for organic chemists. The new process invented by DSM is a major breakthrough in the manufacturing of the 6-ring part of the molecule, as it reduces the number of steps and greatly enhances atom efficiency.

A new process was also developed for sodium beta-alaninate, the first commercially applicable NaAla process that combines chemistry and process technology know-how to enable less raw-material and energy use and less waste production compared to the state-of-the-art processes. A new riboflavin 'self clone' strain – the first ultra-high-performance B2 producing strain in the world – was developed, significantly improving B2 yield on C-source and leading to increased productivity.

Anti-Infectives R&D successfully scaled up mycophenolate mofetil. Registration batches were produced and first sales realized. Pharmaceutical Products R&D developed the XD^™ process, involving a high-cell-density cell culture with human PER.C6^® cells.

A major achievement in Engineering Plastics R&D was the development of PA4T, the first new polymer to be introduced in the 21st century worldwide. Also Stanyl^® Diablo was introduced, an innovative new generation of Stanyl^® grades. A third breakthrough was the development of halogen-free flame-retardant solutions as now brought to the market under Arnite^® XG and Arnitel^® XG.

DSM Dyneema’s R&D developed new Dyneema^® grades for life-protection applications and introduced these to the market. Through partnerships with our customers extended applications were developed. Dyneema^® HB50 Unidirectional results in a lower weight of body armor. Dyneema^® HB51 Unidirectional was introduced for best-in-class behind-strike-face inserts for the US market.

In another application area, Dyneema^®-based lightweight composite panels are now replacing aluminum panels in aviation products such as air cargo containers. On a weight-for-weight basis, the panels are at least three times as strong as aluminium. They are also twice as light as aluminum.

Fish-farming nets were developed for aquaculture cages that help reduce the number of fish escapes and require less maintenance. Cages made with Dyneema^® are only one third of the weight of conventional nets and have smaller twines and therefore better water flow.

One of the highlights in Resins R&D was the development of NeoRad^®, the world’s first waterborne UV-curing resin offering the wear resistance, stain resistance and mechanical properties required for the coating of flexible resilient flooring (PVC and linoleum). The development of Turane^™ resin technology for the automotive market was another major step forward for DSM Resins.

In the field of elastomers, based on Keltan ACE^™ technology DSM is developing a unique Keltan^® product line for peroxide cure applications (12-15% of the global EPDM market). The first product will be launched in 2008. Keltan ACE™ provides the basis for significant energy reduction in the production of EPDM and also enables customers to reduce the use of the hazardous and smelly peroxides required for their curing process.

Industrial Chemicals R&D is mainly directed at process improvement for existing businesses, development of new processes for existing products and increasing efficiency and sustainability. Industrial Chemicals vigorously continues to maintain its technology leadership based on proprietary IP positions. The R&D work links up well with that of other clusters and enables DSM-wide synergy in various areas.

New applications for existing products are being scouted continuously. Melamine R&D and the DSM Licensing Center together developed and launched Freshure^®, a range of high-performance clear vacuum barrier coatings for food packaging. Created using our patented Symphase^® technology and based on the vapor deposition of melamine on plastic film, Freshure^® coatings not only increase the storage life of foods, but also offer several benefits for both packaging producers and consumers.