Audi Group Finances 2007

Transcription

1 133 Audi Group Finances 2007 Corporate Governance 134 Audi Share Performance 135 Management Report of the Audi Group for the 2007 fiscal year Business and underlying situation 136 The Group 136 Corporate steering 139 Research and development 141 Employee matters 144 Audi in society 146 Environmental aspects 147 Economic environment 150 Course of business 153 Financial performance 159 Net worth 161 Financial position 162 Report on post-balance sheet date events 163 Risk report 163 Report on expected developments 166 Auditor s Report 170 Declaration of the AUDI AG Board of Management 171 Consolidated Financial Statements of the Audi Group at December 31, 2007 Income Statement 172 Balance Sheet 173 Cash Flow Statement 174 Statement of Changes in Equity 175 Notes to the Consolidated Financial Statements 176 Development of fixed assets in the 2007 fiscal year 176 Development of fixed assets in the 2006 fiscal year 178 General information 180 Recognition and measurement principles 184 Notes to the Income Statement 191 Notes to the Balance Sheet 198 Other particulars 211 Segment reporting 224 German Corporate Governance Code 225 Details relating to the Supervisory Board and Board of Management 225 Events occurring subsequent to the balance sheet date 229 Responsibility Statement 230 Statement of Interests held by the Audi Group 231

2 134 Corporate Governance Code amended in 2007 In 2007, the German Federal Ministry of Justice amended the German Corporate Governance Code and promulgated the version dated June 14, The Board of Management and Supervisory Board of AUDI AG discussed the amendments at length during the past fiscal year and passed the appropriate resolutions. Implementation of the recommendations and suggestions The recommendations in the Code, as amended June 12, 2006, had been largely complied with until the announcement of the new version on July 20, Since this announcement, the recommendations in the Code, as amended June 14, 2007, have been conformed to with three exceptions. The Supervisory Board has not formed a nominating committee (Section of the Code). The tasks of the Supervisory Board s Presiding Committee, which has four members, include proposing suitable candidates to the Supervisory Board, which the latter can in turn propose to the Annual General Meeting. The Company takes the view that an additional nominating committee would not improve the work of the Supervisory Board. Furthermore, the restriction applies that the elections to the Supervisory Board do not take the form of elections of individuals (Section 5.4.3, Sentence 1, of the Code). Elections by list are common practice in democratic elections. AUDI AG does not disclose the remuneration of members of the Supervisory Board individually, broken down by components (Section 5.4.7, Para. 3, Sentence 1, of the Code), in order not to infringe on privacy rights. In addition, five departures are made from the suggestions in the Code: The Annual General Meeting will not be broadcast on the Internet (Section of the Code) in order not to infringe on the privacy rights of individual stockholders. For this reason, the provision for absent stockholders to even be able to contact the Company s proxy exercising voting rights (Section 2.3.3, Sentence 3, 2nd half of sentence of the Code) during the Annual General Meeting is superfluous. Furthermore, the suggestion made by the Code to cap compensation paid to Board of Management members who leave office prematurely without cause (Section 4.2.3, Sentences 9 and 10, of the Code) and following a change of control (Section 4.2.3, Sentence 11, of the Code) has not been implemented. There are doubts in professional circles as to the validity of such contractual clauses, which restrict the Supervisory Board s scope of action without creating significant benefits under current law. The Code s suggestion of taking long-term performance into consideration in the remuneration paid to members of the Supervisory Board (Section 5.4.7, Para. 2, Sentence 2, of the Code) and taking non-recurring variable components linked to business success into consideration in the remuneration paid to members of the Board of Management (Section 4.2.3, Para. 2, Sentence 2, of the Code) is not currently being implemented by AUDI AG, as the discussions in professional circles as to the specific form to be taken have not yet been concluded. The outcome of these discussions will be awaited before a decision is made. Particulars pursuant to Section 6.6 of the Code No reportable acquisition or sales transactions were conducted during the past fiscal year. Stock option plans and similar securities-based incentive arrangements AUDI AG does not offer any such plans or incentive arrangements. System of remuneration The basic principles of the remuneration system for the members of the Board of Management are detailed in the Notes to this Annual Report, under Details of the Supervisory Board and Board of Management. This information is also available on the Company s website ( Declaration relating to the Code on the Internet The joint declaration of the Board of Management and the Supervisory Board of AUDI AG relating to the recommendations of the German Corporate Governance Code was posted on the Audi website ( on December 5, 2007.

3 135 Audi Share Performance Stock market developments Under the influence of a robust global economy, outstanding financial performance by many companies and huge confidence among market players, the key international stock markets headed for new record highs in the first half of This euphoria continued unabated until the second half, when growing uncertainty was triggered by the real estate crisis in the U.S. The German stock market developed on a highly positive note in 2007 as a whole. In the first half of the year, the German Share Index (DAX) advanced 21.4 percent before reaching an all-time high of more than 8,100 points in July. In the second half of the year, further growth on German stock markets was hampered by the real estate crisis in America and the mood of uncertainty this engendered on stock markets worldwide. The lead index closed the year at 8,067 points, a year-on-year improvement of 22.3 percent. Audi trading price trend The trading price of Audi shares again rose to new record levels in The shares reached their all-time high in November, occasionally exceeding the EUR 750 mark. From a trading price of EUR 540 at the close of the previous year, Audi shares moved across a range of 7.6 percent to percent during fiscal The shares of AUDI AG ended the year at EUR 625 a gain of 15.7 percent for the year. Over a five-year period, Audi shares have gained around 226 percent, outperforming the German Share Index. This impressive appreciation reflects the capital market s healthy confidence in the Audi Group s strategy for the future, and is also an indication of growing interest in the company on the part of market players. Profit transfer and compensatory payment for stockholders A control and profit transfer agreement is in force between AUDI AG and Volkswagen AG, which controls around 99 percent of the share capital of the former. In lieu of a dividend payment, outside stockholders receive a compensatory payment. The level of this payment is equivalent to the dividend paid on one Volkswagen AG ordinary share for the same fiscal year, as determined by the Annual General Meeting on April 24, Indexed Audi trading price trend (ISIN: DE , WKN: ) 400% 350% 300% 250% 200% 150% 100% 50% Audi share German Share Index (DAX)

4 136 Management Report of the Audi Group for the 2007 fiscal year Business and underlying situation The Group Company The Audi Group, comprising the Audi and Lamborghini brands, is one of the most successful carmakers in the premium segment. At the core of the Company is the Audi brand, whose vehicles captivate customers around the world with their modern design and high build quality. The stated ambition of the Audi brand is to fulfill challenging customer expectations of pioneering innovations through the brand essence of Vorsprung durch Technik as well as the brand values of sportiness, sophistication and progressiveness. Furthermore, the Company is placing increasing emphasis on the sustainability of the technology it uses. Customers experience this brand identity through a diverse range of models, which enabled Audi to further strengthen its good position on car markets worldwide in Audi vehicle sales by region 2007 Share in % Germany 254, Europe excluding Germany 432, China (including Hong Kong) 101, USA 93, Other 82, Total 964, The Italian Lamborghini brand upholds a long-standing tradition in the super sports car segment. The allure of its uncompromising, unrivaled vehicles remains as great as ever. In the past fiscal year, the Lamborghini brand enjoyed another sharp rise in demand. Group structure and principal group companies The Audi Group is headquartered in Ingolstadt. This is where Technical Development, Sales, Administration and substantial portions of the manufacturing operations are based. In addition to the high-selling A3, A3 Sportback and the A4 Sedan and Avant models, the new A5 Coupé and the ultra-sporty S3 and S5 Coupé versions are built there as well. Volume production of the new Audi Q5 will additionally begin in The bodies of the TT Coupé and Roadster and of the A3 Cabriolet are also made in Ingolstadt. At Neckarsulm, the Company s second German location, AUDI AG manufactures the A4 Sedan, A6 Sedan, Avant and allroad quattro, S6 Sedan and Avant models, as well as the A8 luxury sedan, plus its high-performance A8 W12 and S8 versions. The Audi R8 mid-engine sports car, hand-crafted to exceptionally high standards, and the new RS 6 Avant are built by quattro GmbH, which is also based at Neckarsulm. This company, a wholly owned subsidiary of AUDI AG, also supplies an attractive customization program for all Audi models (e.g. S line, exclusive line) and sells exclusive lifestyle articles that embody the spirit of the brand with the four rings. The Belgian plant in Brussels, which became part of the Audi manufacturing network in March 2007, currently builds the A3 Sportback and the VW Polo on behalf of Volkswagen AG.

5 137 AUDI HUNGARIA MOTOR Kft. develops and builds engines for AUDI AG and other Volkswagen Group companies, as well as for third parties, at Győr, Hungary. The Audi TT Coupé and Roadster models and the new A3 Cabriolet are also built there in partnership with the Ingolstadt plant. This Company has advanced to become one of the country s major exporters and highest-revenue businesses. The Bologna region of Italy is home to Automobili Lamborghini S.p.A., which builds the Gallardo Coupé, Gallardo Spyder, Gallardo Superleggera, Murciélago LP640 Coupé, Murciélago LP640 Roadster and Reventón super sports cars. Vehicles of the Audi brand and of other Volkswagen Group brands are sold in Italy by VOLKSWAGEN GROUP ITALIA S.P.A., a subsidiary of Automobili Lamborghini Holding S.p.A., based in Verona. Main companies within the Audi Group AUDI AG AUDI HUNGARIA MOTOR Kft. Automobili Lamborghini Holding S.p.A. quattro GmbH Sales subsidiaries Automobili Lamborghini S.p.A. Lamborghini ArtiMarca S.p.A. MML S.p.A. VOLKSWAGEN GROUP ITALIA S.P.A. VOLKSWAGEN GROUP FIRENZE S.P.A. Audi Australia Pty Ltd. Audi Brasil Distribuidora de Veículos Ltda. Audi Canada Inc. Audi Japan K.K. Audi of America, LLC Audi Retail GmbH Audi Zentrum Hannover GmbH Audi Vertriebsbetreuungsgesellschaft mbh Audi Volkswagen Korea Ltd. Audi Volkswagen Middle East FZE Consolidated companies AUDI AG s largest stockholder is Volkswagen AG, which currently holds around 99 percent of the share capital. A control and profit transfer agreement is in effect between the two companies. Volkswagen AG includes the consolidated financial statements of AUDI AG in its own consolidated financial statements. The following changes to the Audi Group took place during the past fiscal year: Audi Retail GmbH and VOLKSWAGEN GROUP FIRENZE S.P.A. were included in the consolidated financial statements as fully consolidated companies as of January 1, A profit transfer agreement was concluded between Audi Retail GmbH and AUDI AG. Audi Zentrum Hannover GmbH has also been comprehensively consolidated from January 1, 2007, as are Audi of America LLC and Audi Canada Inc. These latter two new companies, established effective January 1, 2007, were consolidated in accordance with the criteria of IAS 27.13, Sentence 2. AUTOGERMA S.p.A. was renamed VOLKSWAGEN GROUP ITALIA S.P.A. effective January 1, Profit transfer agreements exist between AUDI AG and the principal German subsidiaries.

6 138 Additional disclosures pursuant to Section 315, Para. 4, of the German Commercial Code (HGB) Along with the introduction of the German Takeover Directive Implementation Act on July 14, 2006, Directive 2004/25/EC of the European Parliament and Council of April 21, 2004, on takeover bids ( EU Takeover Directive ) has been implemented under German law. Among other things, the law envisages changes to the German Commercial Code and necessitates additional particulars in the Management Report, which are provided below: Capital structure On December 31, 2007, the share capital of AUDI AG remained unchanged at EUR 110,080,000 and comprised 43,000,000 no-par bearer shares. Each share represents a mathematical share of EUR 2.56 of the issued capital. Stockholders rights and obligations Stockholders enjoy property and administrative rights. The property rights include, above all, the right to a share in the profit (Section 58, Para. 4, of the German Stock Corporation Act [AktG]) and in the proceeds of liquidation (Section 271 of the German Stock Corporation Act), as well as a subscription right to shares in the event of capital increases (Section 186 of the German Stock Corporation Act). The administrative rights include the right to participate in the Annual General Meeting and the right to speak, ask questions, table motions and exercise voting rights there. Stockholders may assert these rights, in particular, by means of a disclosure and avoidance action. Each share carries an entitlement to one vote at the Annual General Meeting. The Annual General Meeting elects the members of the Supervisory Board to be appointed by it, as well as the auditors; it decides, in particular, on the ratification of the acts of members of the Board of Management and Supervisory Board, on amendments to the Articles of Incorporation and Bylaws, as well as on capital measures, on authorizations to acquire treasury shares and, if necessary, on the conduct of a special audit, the dismissal of members of the Supervisory Board within their term of office and on liquidation of the Company. The Annual General Meeting normally adopts resolutions by a simple majority of votes cast, unless a qualified majority is specified by statute. A control and profit transfer agreement exists between AUDI AG and Volkswagen AG as the controlling company. This agreement permits Volkswagen to issue instructions. The net profit of AUDI AG available for distribution is transferred to Volkswagen. Volkswagen AG is obliged to make good any loss. Outside Audi stockholders receive a compensatory payment that is linked to the dividend distributed on each Volkswagen share. Composition of the Supervisory Board The Supervisory Board comprises 20 members; half of them are representatives of the stockholders, elected by the Annual General Meeting. The other half of the Supervisory Board members are employee representatives elected by the employees in accordance with the German Codetermination Act. A total of seven of these employee representatives are employees of the Company; the remaining three Supervisory Board members are representatives of the unions. The Chairman of the Supervisory Board, a stockholder representative elected by the members of the Supervisory Board, ultimately has two votes on the Supervisory Board in the event of a tie vote, pursuant to Section 13, Para. 3, of the Articles of Incorporation and Bylaws.

7 139 Statutory requirements and provisions under the Articles of Incorporation and Bylaws on the appointment and dismissal of members of the Board of Management and on the amendment of the Articles of Incorporation and Bylaws The appointment and dismissal of members of the Board of Management are stipulated in Sections 84 and 85 of the German Stock Corporation Act. Members of the Board of Management are accordingly appointed by the Supervisory Board for a period of no more than five years. Reappointment or an extension of the term of office, in each case for no more than five years, is permitted. Section 6 of the Articles of Incorporation and Bylaws further stipulates that the number of members of the Board of Management is to be determined by the Supervisory Board and that the Board of Management must comprise at least two persons. Key agreements by the parent company that are conditional on a change of control following a takeover bid AUDI AG has not reached any agreements that are conditional on a change of control following a takeover bid. Nor has any compensation been agreed with members of the Board of Management or employees in the event of a takeover bid. Corporate steering Strategy The management of the Audi Group has set itself the target of establishing the Audi core brand as the most successful premium brand in the world by A comprehensive, detailed portfolio of measures designed to achieve this goal was again drawn up in fiscal All activities stemming from this annual planning process reflect a quartet of strategic aims: Audi the most successful premium brand Volume growth to 1.5 million vehicles Customer enthusiasm and image leader in emotion and quality Substantial rise in profitability Most attractive employer Volume growth to 1.5 million vehicles Audi plans to sell 1.5 million premium vehicles by the year In order to achieve this ambitious goal, the Company sustained the swift pace of its long-term model initiative in Vehicles such as the Audi A5 Coupé, which made its market debut in the early part of the year, the Audi R8 thoroughbred mid-engine sports car and the new Audi A4 Sedan launched in the fall thrilled customers and trade journalists from all over the world. In 2008, further new models such as the Audi A3 Cabriolet, Audi TTS Coupé and Roadster and the Audi Q5 will extend the Company s youthful, sporty product line. The market launch of the new Audi A4 Avant will round out the glittering array of new products in At the same time, Audi is steadily increasing its engagement in car markets around the world. The Audi sales organization in the important U.S. market was restructured and preparations were made for the nationwide launch of ultra-efficient diesel technology a domain in which Audi has enjoyed outstanding expertise for many years. In key growth markets such as China and Russia, the Company extended its exclusive dealer and service network, and laid the foundations for future success in India by kicking off local CKD assembly of the Audi A6.

8 140 Audi is planning to push its sales of premium vehicles above the one-million mark by as early as The Brussels plant in Belgium was integrated into the Audi manufacturing network in early 2007 in order to guarantee the necessary manufacturing capacity. Customer enthusiasm and image leader in emotion and quality The focus of all activities at Audi is on delivering innovative, sustainable solutions that fully live up to customers high expectations, as well as on offering exciting products that create an emotional bond between customer and brand. One example is the e model line that was launched during the past fiscal year. Aside from their very impressive fuel efficiency and emission values, these cars offer the standard of sportiness that Audi customers have come to expect and are tangible evidence of the Vorsprung durch Technik that typifies the brand. This ultra-efficient vehicle concept has been received with great enthusiasm by customers. Audi again won numerous awards for vehicles in In one of the leading reader polls, conducted by trade magazine auto motor und sport 1), the Audi A3, Audi A6 and Audi Q7 all earned the distinction of Best Cars in their respective categories. Four Audi models were among the prizewinners in the Auto Trophy 2007 awarded by trade magazine Auto Zeitung 2) : The Audi A3, Audi A4, Audi A6 and Audi R8. The brand with the four rings also enjoyed notable success on the international stage. In China, the Company s largest export market, Audi came in at the top of the J.D. Power Asia Pacific Study 3), which analyzes the satisfaction of new car buyers, for the second year in a row. The Audi TT was proclaimed the 2007 World Car Design of the Year by a jury of renowned trade journalists from 22 countries. Numerous motor-racing successes once more underscored the brand s sporting credentials in Audi repeated the legendary triumph of its R10 TDI diesel-powered racing car in the Le Mans 24 Hours and racked up its fifth win in the German Touring Car Masters (DTM) race series. Substantial rise in profitability Within the context of the Audi Group s sustained rapid growth, its management is eager to steadily improve the Company s profitability in order to generate the necessary financial resources for new, forward-looking capital investments. In addition to higher business volume, ongoing analysis and enhancement of all corporate processes play a major role in this respect. Pioneering concepts such as the Production Turntable and modular toolkit systems increase the synergy benefits, helping to implement new vehicle concepts more costeffectively. The Company is also using systematic investment management to make optimum use of the available financial resources. Most attractive employer Audi s ambitious growth will also continue to hinge upon committed, highly qualified employees. One of the Company s core strategic aims is therefore to become an even more attractive employer. The associated activities include creating a working environment in which a highly motivated team can continually develop. In addition to flexible working hour programs, the Company offers performance-based remuneration and pays out a variable share of its profit as a means of acknowledging the hard work and dedication of its employees. 1) Issue 04/2007, p. 120 ff. 2) Issue 26/2007, p. 78 ff. 3) J.D. Power Asia Pacific 2007 China Customer Satisfaction Index (CSI) Study SM, press release dated July 30, 2007

9 141 Both regular internal employee surveys and, for example, a survey conducted by the renowned trendence Institute to identify the most popular employer in ) serve to confirm just how successful these measures have been. In the latter survey, engineering students ranked Audi second. Audi plans further recruitments in fiscal Internal steering system All activities within the Audi Group focus on increasing the long-term value of the Company through a system of financial targets. Internal steering is based on return on investment (RoI), which serves as a gauge of the return on capital employed for various types and scales of investment projects. RoI thus indicates the development of a company s profitability and is calculated according to the following formula: Operating result after tax Return on investment (RoI) = x 100 Average invested assets In view of the varying tax rates applicable for the companies in the Group, the operating result after tax is calculated using an average effective tax rate of 35 percent for the consolidated companies. EUR million Operating result before tax 2,705 2,015 Tax (35%) = Operating result after tax 1,758 1,310 Average operating assets 12,100 11,575 Average non-interest-bearing liabilities 2,639 2,321 = Average invested assets 9,461 9,254 Return on investment (in %) With a return on investment of 18.6 percent, the Audi Group easily exceeded the previous year s figure of 14.2 percent in fiscal 2007 and thus ranks as one of the most profitable companies in the automotive industry worldwide. System of remuneration for the Supervisory Board and Board of Management Information on the system of remuneration for the Supervisory Board and Board of Management is provided in the Notes to the Consolidated Financial Statements under Details relating to the Supervisory Board and Board of Management. Research and development In addition to their high build quality, the Audi Group s premium vehicles are noted, first and foremost, for their innovative technological concepts. Numerous developments again reached production maturity in The total number of employees in the Research and Development area averaged 6,211 (5,946) over the year, comprising 5,973 (5,717) at AUDI AG, 109 (99) at AUDI HUNGARIA MO- TOR Kft. and 129 (130) at Automobili Lamborghini S.p.A. 1) trendence Institute: The 2007 Graduates Barometer Business and Engineering Edition, Berlin 2007

10 142 Research and development expenditure recognized as an expense EUR million Research expenditure and development expenditure not recognized as an intangible asset 1,570 1,077 Amortization and disposals of development expenditure recognized as an intangible asset Total research and development expenditure recognized as an expense 2,226 1,982 Technical innovations Efficient sportiness: The Audi e models The first ultra-efficient Audi e models made their successful market debut at the start of These vehicles achieve truly impressive fuel efficiency and low pollution emissions, while at the same time delivering the sportiness customers have come to expect from Audi. This was made possible by the use of cutting-edge technologies in the field of gasoline and diesel direct injection, as well as by a comprehensive package of measures such as transmission modifications, aerodynamic optimizations, driver assistance systems and ultramodern Audi lightweight construction. The Audi A8 2.8 FSI e, unveiled in the second half of 2007, for example, achieves average fuel consumption of 8.3 liters of premium-grade fuel per 100 kilometers with an engine that boasts a power output of 154 kw (210 hp). This equates to emissions of 199 g of CO 2 /km. Over the course of the next few years, e models will be launched in all high-volume car lines. Audi TDI with ultra low emission system As one of the world leaders in the field of ultra-modern diesel technology, the Audi Group is heralding in a new era for this superior drive concept in launching the latest TDI generation. The proven principle of direct diesel injection with turbocharging has been combined with an array of innovative measures, such as the new piezo common rail system with 2,000-bar injection pressure, further enhanced turbocharging and the world s first use of combustion chamber sensors, bringing a significant reduction in untreated engine emissions. In conjunction with the secondary ultra low emission system that reduces nitrogen oxide emissions by as much as 90 percent, the drive concept becomes a high-tech yet very economical diesel. The engines that have been developed currently satisfy the most stringent exhaust emissions in the world and already meet the 2014 limits under discussion for Europe. The Audi Q7 and Audi A4 will be the first car lines to feature the 3.0 liter TDI engine with ultra low emission system. New 1.4 liter TFSI engine in Audi A3 The new 1.4 liter TFSI engine is another highly efficient, high-performance addition to the successful Audi A3 car line. The engine is based on the successful concept of FSI technology with turbocharging and develops 92 kw (125 hp) with peak torque of 200 Nm. Accelerating from 0 to 100 km/h in 9.6 seconds and with fuel consumption averaging 6.5 liters of premium fuel per 100 kilometers, the new 1.4 TFSI in the Audi A3 delivers impressive driving enjoyment coupled with fuel efficiency and an emissions value of 154 g of CO 2 /km.

11 143 Several vehicles in one: Audi drive select Audi drive select made its first appearance in a production model in the new Audi A4 Sedan. This advanced system enables drivers to fully adapt the vehicle s characteristics to their own personal preferences. Specifically, this is achieved by simultaneously incorporating various technical components with individually variable settings, such as engine management, automatic transmission, steering and shock absorbers. In addition to the three main modes of comfort for a comfortable response, auto for a balanced response and dynamic for an emphatically sporty response, an individual mode is available as an option. This enables a freely configurable combination of settings for the vehicle s individual components. Consequently, Audi drive select offers the customer a high level of individuality, successfully combining several vehicle philosophies into one. Acoustic roof on the Audi A3 Cabriolet A fully automatic acoustic roof was unveiled as an equipment option for the new Audi A3 Cabriolet. Thanks to the soft top s further improved thermal insulation and soundproofing, the noise level inside this vehicle at a speed of 140 km/h is a mere 1 db(a) higher than in an Audi A3 with conventional roof. The acoustic roof opens up a whole new dimension in driving and, powered by a high-performance mechanism, takes a mere nine seconds to open. When folded up in a Z-pattern, it takes up only a small amount of room and leaves more trunk space than a steel roof concept would. The use of a fabric soft top also preserves the classic, timeless convertible silhouette. Innovations for safety LED technology For several years now, the Audi Group has been working extremely successfully on refining LED technology. This offers particular advantages by comparison with conventional concepts. In addition to lower energy consumption and less wear, this form of illumination is closer to natural daylight, produces better contrast and is easier on the eye. The Audi brand, which had already featured the first all-led headlights (low beams, high beams, daytime running lights, turn signals) on a production car in the Audi R8, is now making use of this innovative lighting concept in its new models. The new Audi A4 and Audi A3 Cabriolet, for example, are optionally available with LED daytime running lights. The white light-emitting diodes accentuate the unique character of the brand with the four rings. Comprehensive package of assistance systems for the midsize class The new Audi A4 Sedan is the first midsize model to feature a comprehensive package of assistance systems adapted directly from the full-size category. This vehicle can be optionally equipped with Audi side assist, which alerts the driver to other vehicles in the blind spot when changing lanes. There is also an Audi lane assist feature to alert the driver should the car drift out of lane. The optionally available adaptive cruise control (ACC) system regulates the distance to a preceding vehicle detected by the radar sensor by means of controlled braking and acceleration. If the vehicle in front brakes abruptly, Audi braking guard is activated. This system initially warns the driver by means of visible and audible signals and then, if need be, briefly but forcefully applies the brakes to prompt the driver to brake the car if necessary.

12 144 Employee matters Workforce Audi Group, average for the year 53,347 52,297 of which: AUDI AG 44,698 44,701 Ingolstadt plant 31,369 31,276 Neckarsulm plant 13,329 13,425 AUDI HUNGARIA MOTOR Kft. 5,623 5,204 Lamborghini Group* VOLKSWAGEN GROUP ITALIA S.P.A * excluding VOLKSWAGEN GROUP ITALIA S.P.A. and VOLKSWAGEN GROUP FIRENZE S.P.A. The Audi Group employed an average of 53,347 (52,297) people worldwide in Despite the sharp rise in vehicle sales, the workforce of AUDI AG at its two locations in Ingolstadt and Neckarsulm remained on a par with the previous year at 44,698 (44,701). AUDI HUNGARIA MOTOR Kft. reported 5,623 (5,204) employees. Personnel growth was largely attributable to the expansion of toolmaking operations coupled with a sharp rise in TT manufacturing and the production launch of the Audi A3 Cabriolet. The workforce of the Lamborghini Group (excluding VOLKSWAGEN GROUP ITALIA S.P.A.) grew to 933 (720) employees. VOLKSWAGEN GROUP ITALIA S.P.A. employed 900 (873) people during the period under review. The proportion of severely handicapped individuals at AUDI AG edged up to 5.4 (5.2) percent at year end. Audi furthermore exercises social responsibility in regularly awarding contracts to Lebenshilfe workshops for the handicapped in the Ingolstadt and Neckarsulm regions. These workshops assemble gear lever trims, shock absorbers and other components. Compatibility of job and family Audi attaches high priority to the compatibility of job and family. The Company gives new parents taking parental leave a seven-year guarantee of reemployment. To smooth the way for integration after parental leave, Audi offers the Job&Child program. This enables parents to maintain contact with the Company during parental leave, taking part in further training and other measures. New record ratings for industrial safety Premium-segment vehicles can only be manufactured efficiently and economically with the aid of ultra-modern production facilities. Innovative manufacturing methods are the key to turning out high-quality products. At the same time, this requires that complex processes be handled. Alongside the ongoing quest to maximize productivity, safety at the workplace ranks as one of the overriding concerns here. Audi therefore builds aspects of industrial safety into its processes as early as the planning stage. The results are clearly evident: The rate of reportable accidents per million hours worked at Audi is almost 50 percent lower than the average for the automotive industry.

13 145 An Industrial Safety Award is given each year in recognition of exceptional achievements by management and the workforce. In June 2007, the Board of Management and the General Works Council presented awards and certificates in the three categories of Accident-Free Working, Progress in Reducing Accident Numbers and Industrial Safety Initiative. Labor and management at Audi have concluded a company agreement on industrial safety. Its purpose is to ensure that industrial safety is always understood as a joint, allencompassing task. This principle applies to production operations as well as to the entire value chain. Employee profit-sharing The success of a company is simultaneously also a reflection of what all employees have contributed. AUDI AG has therefore been allocating a variable share of profits to its employees for many years. The previous profit-sharing arrangements were extended in 2005 when the agreement called Audi s Future Performance, Success, Sharing went into effect. The additional bonus is tied directly to the Audi Group s operating result and thus reflects the performance of the Company itself. Together with the previous profit share, AUDI AG employees received an average performance-based bonus of EUR 3,700 in 2007 for the preceding fiscal year. Efficient suggestions award program The ongoing enhancement of products and working processes is one of the main pillars of Audi s huge success. The company-wide suggestions award program is playing an increasingly pivotal role here with a dual effect: It helps the Company become more efficient while at the same time increasing employee motivation by putting their suggestions into practice and awarding bonus payments. The total amount saved thanks to employee suggestions reached a new record level of around EUR 60 million in The number of suggestions assessed as having particular merit (i.e. producing potential savings of over EUR 20,000) was higher than ever last year, as were the actual savings per implemented suggestion. The participation rate showed a marked increase by comparison with the year before. In July 2007, the German Institute of Management awarded AUDI AG its prize for the best suggestions award program in the car industry for the fourth time in a row. Handling demographic change AUDI AG s strategic aim is to become the most successful automobile manufacturer in the premium segment. As it progresses along that path, the average age of the workforce at AUDI AG will rise to around 45 over the next five years due to demographic change. By then, some 5,400 employees engaged in direct manufacturing activities one in four will be over 50 years of age. Some time ago, the Company therefore seized the initiative to develop an appropriate response to this development. The interdisciplinary Audi Demographics Project seeks to shape the working conditions for an aging workforce in such a way that, for example, persons over 60 years of age will still be capable of performing such tasks as vehicle assembly. Audi is conducting a Workplace Structural Analysis of its production operations. Each individual workplace is being analyzed and assessed in terms of physical strain potential. On the basis of these findings, ways of further reducing this physical strain at the workplace are then identified and implemented in order to make that workplace equally suited for employees of all ages. This subject area also encompasses the development of age-appropriate working hour models, including both models for the individual s working life as well as special part-time arrangements. Representative employee surveys are used as a basis for future working hour arrangements.

14 146 Another area covered by the Demographics Project is preventive healthcare: Healthy Living and Working. The Audi Checkup is an important preventive healthcare instrument. This comprehensive, voluntary health exam is offered free of charge to all employees and is available during working hours. The checkup involves various tests, the results of which are then discussed in detail between doctor and patient. The elimination of government subsidies for partial early retirement creates further key task areas which call for expert handling of demographic change. The Demographics Project includes a communication campaign entitled my way that seeks to raise awareness of aging and personal initiative. It highlights the principle that most aspects of aging are not a matter of fate and that individuals have some degree of influence over everything from personal fitness and lifestyle to financial planning for retirement. Audi in society Research partnerships An automobile manufacturer that has embraced Vorsprung durch Technik needs to maintain thriving contacts with the research world. The first systematic partnership with universities was forged through the INI.TUM project, a successful partnership with the Technical University of Munich that was launched in Since then, other partnership projects have been put in place with the Universities of Stuttgart and Karlsruhe, the Ingolstadt University of Applied Science, the Friedrich-Alexander University of Erlangen-Nuremberg and the Ludwig-Maximilians University of Munich. In Hungary, AUDI HUNGARIA MOTOR Kft. partners with the University of Győr and the Technical University of Budapest. There were two objectives in selecting the university-level partners: The partners at the universities needed to have a very good reputation for their research and teaching. And the researchers had to be prepared to come from the major cities to Audi s locations. These requirements ensure that young researchers gain new insights into the way industry uses research findings and also enhance the cities and towns that are home to Audi s operations. As of late 2007, 22 projects under the auspices of these institutes were already up and running, with a further 63 in the pipeline. The Audi university institutes have produced 17 inventions to date. The five German universities with which Audi collaborates have received commendation under the German government s Initiative for Excellence program a fitting tribute to the high standards of these research partners. Location-specific partnerships A company of Audi s caliber bears responsibility for more than just its employees. Audi also seeks to foster education and non-profit organizations. AUDI AG has joined forces with the City of Ingolstadt, other major companies and the districts of Pfaffenhofen, Neuburg-Schrobenhausen and Eichstätt in founding an association named the Regional Management Initiative for the Ingolstadt Region. The goal is to harmonize efforts to promote the entire region around Ingolstadt, where the Company headquarters are located. The association aims to improve the quality of life in the region, promote research and education, and create more jobs. This region already has one of the highest employment rates in Germany. The core aims of the initiative additionally include nurturing and developing the landscape and cultural life. Audi also actively supports the European Metropolitan Region of Munich, where industry has joined forces with political, educational, cultural and administrative bodies in an effort to improve development prospects throughout southern Bavaria.

15 147 Environmental aspects Environmental mission statement As a globally operating company, the Audi Group actively embraces social responsibility. This includes, in particular, the principle of sustainable management, which forms an integral part of the Audi Group strategy. In addition to prevention measures such as efficient resources management, the Company is contributing to major advances in protecting the environment through its many pioneering technological innovations, and proudly bears the European Union s symbol of environmental excellence. On the basis of these ongoing efforts to reconcile economics with ecology, customers can rest assured that conservation of resources ranks right alongside durability, quality and safety as a core aspect in the development and production of every Audi vehicle. High standard of location-based environmental protection The Audi Group is a pioneer in location-based and company-wide environmental protection, both in Germany and internationally. In addition to organizational measures within its environmental management systems, pollution at all locations is being steadily reduced with the aid of pioneering technologies. Regular internal reviews and external auditing of all manufacturing plants help to monitor the progress of these efforts. All AUDI AG locations have been accredited in accordance with the EU Eco-Management and Audit Scheme (EMAS). In 1995, the Company became the first premium-segment carmaker to be awarded this prestigious certification for its Neckarsulm location. Ingolstadt followed two years later, with the Hungarian plant at Győr following suit in The Ingolstadt and Győr manufacturing locations are additionally accredited under the worldwide DIN EN ISO standard. Conserving energy and reducing emissions Environmental protection at the production locations places particular emphasis on conserving energy and reducing emissions to protect the climate. As in previous years, the total energy consumption of the Audi Group was kept stable in 2007, despite the welcome increase in vehicle production output. Steadily improving the energy efficiency of its manufacturing facilities provides a particular focus. Another measure involves gradually increasing the proportion of rail freight. Around 80 percent of freight traffic passing between Ingolstadt and Győr, in Hungary, already goes by rail. Audi is also working on comprehensive logistical processes, such as optimizing truck capacity utilization, in order to reduce essential transportation trips to a minimum. Natural gas, district heating, heat recovery systems and a modern cogeneration plant are just some of the many important examples of how this issue is being addressed. Emissions of organic compounds can be further reduced by the use of modern plant engineering and efficient painting techniques, such as the use of water-based paints. AUDI AG has, for example, reduced emissions of organic compounds at the paint shop in Ingolstadt by around 38 percent since The strong rise in vehicle (up 16.4 percent) and engine production output (up 28.9 percent) since 2004 contrasts with the disproportionately low growth in energy demand of just 3.7 percent:

16 148 Development of total energy consumption, vehicle and engine manufacturing by the Audi Group 1) ,800 2,400 2,000 1,600 1, Vehicle manufacturing 2) (thousand units) Engine manufacturing (thousand units) Total energy consumption (GWh) 1,486 2,114 1,695 2,139 1,896 2,156 1,916 2,193 1) Ingolstadt, Neckarsulm, Győr and Sant Agata Bolognese plants 2) Excluding Audi A4 Cabriolet, RS 4 Cabriolet, Audi Q7 and aspects of A3 production Comprehensive measures for enhancing the fuel efficiency of Audi models Audi already has an established reputation among premium manufacturers thanks to its comprehensive strategy for reducing fuel consumption and emissions across the entire fleet. These efforts will continue in the future, without altering the decidedly sporty character of the brand. Simultaneous action will be taken in four specific areas: Efficiency and sportiness thanks to Vorsprung durch Technik Optimizing gasoline and diesel engines Alternative drive systems and fuels Improvements to the total vehicle Maximizing the contribution by and for the driver Optimizing gasoline and diesel engines Gasoline and diesel engines will remain the bedrock of vehicle drive systems in the coming years. Further optimization of these drive concepts is therefore crucial. Audi has once again demonstrated its immense expertise in the field of ultra-efficient internal combustion engines through such developments as the progressive TFSI and TDI technologies. Audi will be putting the ultra low emission system for diesel engines into production vehicles in the U.S. and Europe in the future. The levels of nitrogen oxides in emissions from modern diesel engines, which are already very low, will then be largely eliminated by controlled injection of an aqueous ammonia solution into the exhaust system. This highly efficient diesel engine will make Audi the first manufacturer ever to comply with the world s strictest emission standard (LEV II BIN 5) in California and achieve the EU6 limits that are currently under discussion for 2014.

17 149 Measures for gasoline engines include such technological innovations as the Audi valvelift system, which has already been used in production in the Audi A6 2.8 FSI since the fall of Controlled valve lift further boosts the torque and power output of the gasoline engine, while appreciably improving fuel efficiency. The fuel consumption of the A6 2.8 FSI, for example, has been cut by one liter of premium-grade fuel per 100 kilometers. Alternative drive systems and fuels Over the medium term, alternative drive systems and fuels will replace classic drive concepts. Optimum ecological and economical implementation of these innovations is a major challenge. Such systems include the Audi Q7 hybrid, which was presented to a select audience of industry specialists in August 2007 at exclusive driving events the Audi TechDays as well as innovative concepts for ethanol and natural gas engines that may be made available beginning in 2009, demand permitting. The widespread introduction of virtually CO 2 -neutral alternative fuels is also in preparation through existing partnerships with fuel manufacturers. These modern, waste-based fuels do not pose competition to food production and satisfy all performance requirements of modern engines. Improvements to the total vehicle Audi views improvements to the total vehicle as a further important means of improving efficiency. These include various thermo-management measures that enable the engine and transmission to reach the most fuel-efficient operating temperature faster, along with braking energy recovery, which will be making its appearance in Audi vehicles in the future. Audi unveiled this type of concept in the new Audi A4 at the Frankfurt Motor Show (IAA) in September The concept also featured Automatic Start/Stop, which switches off the engine while the car is waiting at traffic lights, thereby reducing off-load consumption to zero without in any way diminishing ride comfort. The concept car exhibited, an Audi A4 2.0 TDI developing 105 kw (143 hp), achieves CO 2 emissions of less than 130 g/km, for example. Maximizing the contribution by and for the driver A vehicle s fuel efficiency and emissions are influenced by individual driving style by as much as 30 percent. For many years, Audi has therefore been offering Audi Economy Training courses to instruct drivers in the most relevant methods of more efficient fuel use. Informative assistance systems that provide the driver with comprehensive information to promote fuel-efficient driving have also been exhibited at shows and other events. At the Shanghai Motor Show, Audi presented the Audi Cross Coupé quattro concept car with the specially configured Audi drive select featuring an efficiency driving program in addition to the sport and dynamic driving modes. This new mode modifies the engine map and shift point to produce an ultra-economical driving style. Unless otherwise required, the concept car s system additionally deactivates especially energy-hungry components, such as the air conditioning compressor. The system also uses navigation route data and the radar-based adaptive cruise control system to achieve substantial fuel savings.

18 150 Audi intends to use the above measures, combined in the modular efficiency toolkit, to cut the vehicle fleet s CO 2 emissions by 20 percent by The new generation of the Audi A4 Sedan offers impressive proof of how much has already been achieved; its CO 2 emissions have been cut by 15 percent, while its performance has simultaneously risen by 14 percent. Efficiency gains illustrated by the Audi A4 Sedan Audi A4 (B6) 1.8 T 2000 Audi A4 (B7) 1.8 T 2004 Audi A4 (B8) 1.8 TFSI 2007 Output 110 kw (150 hp) 120 kw (163 hp) 125 kw (170 hp) + 14% Torque 210 Nm 225 Nm 250 Nm + 19% CO g/km 197 g/km 169 g/km - 15% In launching the e models at the start of 2007, Audi has also been able to provide a particularly attractive form of travel that combines resource conservation with dynamism. The first such model to appear was the Audi A3 1.9 TDI e, launched in January 2007, with an output of 77 kw (105 hp) and CO 2 emissions of 119 g/km. Audi vehicles already satisfy the forthcoming EU recycling directive AUDI AG is the first and only volume car manufacturer whose current models already satisfy EU Directive 2005/64/EC on the recyclability and recoverability of motor vehicles, which will take effect in By then, new vehicles must be 85 percent recyclable and up to 95 percent recoverable. The engineers who design the vehicles built by the brand with the four rings select recoverable materials. Every model is therefore subjected to exhaustive recycling tests and material analyses before its market launch. Further information on environmental aspects can be found on the Internet at and on the Group portal at Economic environment Global economic situation In 2007, vigorous economic growth worldwide was sustained at almost the same level as the year before. The powerhouses of growth were principally the national economies in emerging countries in Asia, Latin America and Central and Eastern Europe, which experienced very dynamic expansion. In the industrialized nations, the crisis prompted by the U.S. subprime mortgage market clouded the economic climate on international financial markets in the second half of the year. There was a sharp slowdown in economic growth in the U.S. in Growth in gross domestic product was down as well year on year, at 2.2 (2.9) percent. This was prompted by slower growth in consumer spending in the wake of the financial crisis on the one hand and weakened investment activity, particularly in private-sector housing, on the other.

19 151 The economy in Western Europe maintained the steady progress of the previous year. The economy in the euro zone was thus able to grow by 2.6 (2.8) percent. Its development was driven primarily by corporate investment and consumer spending, which benefited from the continuing improvement in the labor market. The UK once again enjoyed stable economic growth of 3.1 (2.9) percent. The German economy remained buoyant, if slightly less so than the year before. Economic growth was, however, down year on year at 2.5 (2.9) percent. The mainstays of the economy were corporate investment and exports which, despite the strength of the euro, reached a new record level. The sharp rise in energy prices and in particular the VAT rate hike at the start of 2007 impeded economic progress. Consumer spending was down markedly as a result, especially during the first few months of the year. Bolstered by the rise in employment, consumer spending recovered somewhat as the year progressed, but did not quite reach the previous year s level. The national economies in Central and Eastern Europe enjoyed continuing vigorous growth in In Russia, gross domestic product rose by 7.8 (6.7) percent. Exports benefited from the sharp rise in energy and raw materials prices during the course of the year. Economic growth in Latin American countries was again strong. The principal factors here were the sharp rise in world market prices for raw materials and food, which boosted the value of exports from this region. The emerging countries of Asia continued to experience dynamic economic growth. The pulse rate of the economy rose yet again in China. The growth rate for gross domestic product, for example, was up slightly over the previous year s high figure at 11.4 (11.1) percent. The Indian economy, too, maintained a strong rate of expansion, growing by 8.8 (9.4) percent. In contrast, Japan s economic progress remained moderate with GDP growth reaching 1.9 (2.4) percent. International car market Global demand for cars in 2007 was supported to a considerable extent by sustained strong economic growth in emerging countries. Economic dynamism in Asia, Latin America and Central and Eastern Europe was the main factor behind the 4.2 percent rise in vehicle sales worldwide to 58.4 million passenger cars. By contrast, the markets in the U.S. and Japan contracted. The overall market for passenger cars in Western Europe reached only the level seen the year before, due in particular to the sharp decrease in new registrations in Germany. Disregarding the German market, the car market in Western Europe exhibited an upward trend in Total new registrations were up 3.1 percent year on year, at 11.7 million passenger cars. Prompted by the payment of a disposal bonus for end-of-life vehicles, which favored the compact car segment in particular, the Italian car market made distinctly positive progress, posting growth of 6.8 percent. Of the remaining key high-volume markets, the UK and France reported growth of 2.5 and 3.2 percent respectively, while 1.2 percent fewer new vehicles were registered in Spain. Economic growth in the countries of Central and Eastern Europe gained further momentum by comparison with 2006, with new registrations rising by 30.2 percent to a total of 4.2 million vehicles. In Russia, the already booming car market exhibited especially strong growth in response to the economic upturn, increasing by 37.5 percent to 2.3 million passenger cars in the period under review. In the United States, the market remained tight due to the intensive use of sales incentives. The ongoing real estate crisis and high fuel prices had a negative impact on vehicle sales. With 16.1 million registrations of new passenger cars, the car market overall showed a year-on-year decrease of 2.5 percent.

20 152 In contrast, the upward trend on car markets in South America accelerated. In Brazil, passenger car sales rose by 26.9 percent to almost 2.0 million vehicles, while new registrations in Argentina were up 28.9 percent to 402,000 passenger cars. The Asia-Pacific region again witnessed a dynamic market for cars in Unit sales there totaled 14.3 million passenger cars, representing an increase of 7.8 percent. As in previous years, the driving force behind this growth was China, which achieved an aboveaverage growth rate of 22.2 percent, bringing it to second place behind the U.S. with an overall market volume of 5.1 million passenger cars sold. The Indian car market, too, maintained its dynamic progress, with growth of 16.0 percent, bringing total vehicle sales to around 1.2 million units. In contrast, registrations of new cars in Japan fell by 5.2 percent to 4.4 million vehicles. The German car market In the first few months of 2007, the German car market was strongly influenced by consumers moving their purchases of cars into 2006 in order to avoid the rise in the VAT rate on January 1, The situation on the car market improved only marginally as the year progressed due to continuing reticence on the part of consumers. Registrations of new passenger cars in Germany reached around 3.1 million units by year end, down 9.2 percent from the year before. The economic recovery in Germany therefore had no impact on the car market. Demand for more fuel-efficient diesel models rose as a result of further fuel price increases over the course of the year. The percentage of overall registrations accounted for by diesel models gained 3.4 percentage points, to 47.7 percent. German-built vehicles proved to be very popular on international markets, as a result of which high passenger car exports over-compensated for weak domestic demand. In the year under review, exports of passenger cars totaling 4.3 million units bettered the previous year s record figure by 10.6 percent. The countries of Western Europe were the most important sales region, accounting for 2.6 million passenger cars, an increase of 10.7 percent. The strong euro and difficult market conditions had a negative effect on exports to the U.S. in German manufacturers were nevertheless able to nearly equal the previous year s export volume, with attractive new models helping them to a total of 551,000 passenger cars. Bolstered by high export demand, German car manufacturers built 5.7 million cars in 2007, a year-on-year increase of 5.8 percent and therefore a new record total. The number of German-brand cars built abroad was up 10.4 percent over the previous year, at 5.2 million units. Management s overall assessment The economic environment for the automotive industry in 2007 revealed sharp contrasts. Strong global economic growth sparked a rise in passenger car sales in many markets, in particular in emerging countries such as China and India. At the same time, however, car sales in the major volume markets of the U.S., Japan and Germany became divorced from general economic progress and experienced a downturn. Competition intensified even further as a result. Cost pressures also grew following energy and raw materials price increases. In order to safeguard and strengthen its long-term competitiveness, the Audi Group continually strives to improve its own productivity. Thanks to the steady refinement of its product, process and cost management activities, the Company was very well equipped to handle the more difficult conditions encountered in the year under review.

21 153 The Audi Group responded to heightened competitiveness in the automotive sector with extensive measures designed to further enhance the appeal and quality of its products and service. In addition, Audi made substantial efforts to establish a foothold in emerging markets in order to seize opportunities for growth there. This paved the way for high-quality and sustained growth in keeping with Audi s strategy. The new records established in 2007 for production output, unit sales, revenue and, of course, profitability are impressive proof of how effective these measures were. Course of business Procurement Audi Group Purchasing has set itself the goal of establishing long-term bonds with topperforming suppliers worldwide. In addition to the overall economic picture, the selection criteria of reliability, quality, innovativeness, service and price are particularly relevant. In order to make optimal use of any joint synergy potential, this process is handled in close consultation with VW Group Sourcing. The cost of materials for the Audi Group in 2007 amounted to EUR 23,092 (21,627) million. This includes all raw materials and consumables used, as well as purchased goods and services. Breakdown of the consolidated cost of materials by Group company 16.9 % Other Group companies 66.2 % AUDI AG 16.9 % AUDI HUNGARIA MOTOR Kft. The persistently high price levels for raw materials and energy again presented Audi Group Purchasing with major challenges in Financial impact on profitability was nevertheless largely cushioned by close cooperation with suppliers and the existence of long-term price agreements. Sourcing will gain increasing strategic importance with the sharp rise in manufacturing volume and the growing trend toward model derivatization. In order to preempt the challenges of the future, partnerships with suppliers have been further intensified. Suppliers are being involved in product development early on, so that economically advantageous solutions can be identified together. Both ecological and purely economic aspects are taken into account. For example, attention is paid to the recyclability of the materials used. The Audi Group Supplier Meetings are an important tool for interfacing with the supply industry. They provide a platform for informal exchanges and networking. Various events, such as TechShows, provide companies with an opportunity to demonstrate how effective and innovative they are. The extended Web-based supplier platform additionally assures swift, ongoing communication, lastingly enhancing the efficiency of sourcing processes on both sides.

22 154 Production In the past fiscal year the Audi Group increased vehicle production by 5.9 percent to 980,880 (926,180) units, the highest figure in the Company s history. This total comprised 978,300 (924,085) vehicles from the premium brand Audi and 2,580 (2,095) super sports cars from the Italian Lamborghini brand. Vehicle production by model Audi A3 70,744 69,805 Audi A3 Sportback 160, ,581 Audi A3 Cabriolet Audi TT Coupé 40,417 21,461 Audi TT Roadster 16,349 2,214 Audi A4 Sedan 156, ,139 Audi A4 Avant 129, ,027 Audi A4 Cabriolet 23,641 27,735 Audi RS 4 Sedan 2,401 4,384 Audi RS 4 Avant 2,191 2,666 Audi RS 4 Cabriolet Audi A5 Coupé 25, Audi Q5 162 Audi A6 Sedan 157, ,901 Audi A6 Avant 71,945 70,430 Audi A6 allroad quattro 16,340 11,838 Audi RS 6 35 Audi Q7 77,396 72,188 Audi A8 22,182 22,468 Audi R8 4, Total, Audi brand 978, ,085 Lamborghini Gallardo 1,951 1,651 Lamborghini Murciélago Total, Lamborghini brand 2,580 2,095 Total, Group 980, , ,310 (537,039) vehicles were built at the Ingolstadt plant during the past fiscal year. In addition to the successful production launch of the new Audi A4 Sedan, the new Audi A5 Coupé went into volume production in preparation for a sliding market launch. The number of vehicles manufactured at the Company s second German plant in Neckarsulm rose by 6.2 percent to 279,184 (262,851). Under the Production Turntable project, production of the new Audi A4 Sedan began last year in tandem with the Ingolstadt plant. The Brussels plant, in Belgium, which was newly integrated into the Audi manufacturing network, was able to build an impressive 12,087 ( ) vehicles during the past fiscal year. AUDI HUNGARIA MOTOR Kft. in Győr, Hungary, manufactured a total of 56,982 (23,683) vehicles thanks to the huge success of the new-generation Audi TT. The Audi A3 Cabriolet has been built in Hungary since November 2007 in partnership with the Ingolstadt plant.

23 155 Engine production Audi Group 1,915,633 1,895,695 of which AUDI HUNGARIA MOTOR Kft. 1,913,053 1,893,600 of which Automobili Lamborghini S.p.A. 2,580 2,095 The Audi Group stepped up engine production by 1.1 percent to 1,915,633 (1,895,695) units, thus establishing another new record in the past fiscal year. The share of diesel engines in the overall total reached 55.4 (53.5) percent, once again underscoring the Company s impressive expertise in that area. The AUDI HUNGARIA MOTOR Kft. subsidiary built a total of 1,913,053 (1,893,600) engines of which 692,521 (728,191) engines were supplied to Audi Group companies and 1,073,097 (1,056,504) engines to other Volkswagen Group companies, plus 109,612 (91,287) engines to third parties. Automobili Lamborghini S.p.A. built 1,951 (1,651) 10-cylinder engines and 629 (444) 12-cylinder engines during the period under review. Expansion of Audi production network The manufacturing plant in Brussels, Belgium, and its workforce of around 2,100 people were integrated into the Audi production network in May The Audi Group thus gained vital additional capacity for meeting its strategic objective of building more than 1.5 million premium vehicles in the year The Audi A3 Sportback is built at the Belgian plant, together with the VW Polo on behalf of Volkswagen AG. The new Audi A1 is due to go into production there beginning in The Production Turntable concept In order to further boost efficiency, the Audi Group implements the Production Turntable concept for its two highest-volume car lines, the Audi A4 and Audi A3. In addition to being built at the Ingolstadt plant, the new Audi A4 Sedan is also manufactured in Neckarsulm and the Audi A3 Sportback at the Belgian plant in Brussels. Audi can thus respond flexibly to fluctuating demand and make optimal use of the available capacity at its locations. The Production Turntable principle plays a key role in assuring long-term job security. Production ramp-up in India In the fall of 2007, the Audi Group began assembly of the Audi A6 in Aurangabad in western India. This model is delivered to an exclusive zone of the Skoda Auto India Private Ltd. plant in the form of parts sets (CKD), where it is assembled to AUDI AG quality standards. Audi is using these local manufacturing operations to step up its involvement in this emerging market, where it plans to invest some EUR 30 million over the next few years. CKD assembly of the new Audi A4 will follow toward the end of the current fiscal year. Start of production for Audi A3 Cabriolet in Győr, Hungary AUDI HUNGARIA MOTOR Kft. began production of the new Audi A3 Cabriolet in November This model is being built in tandem with the Ingolstadt plant (body manufacturing and paint shop). The plant s peak daily production capacity is 300 units.

24 156 Unit sales and distribution In the past fiscal year, the Audi Group once again increased vehicle sales by an impressive 5.7 percent to 1,200,701 (1,135,554) units. The Audi brand achieved its twelfth record-breaking year in succession last year, with vehicle sales up by 6.5 percent to 964,151 (905,188) units. Audi vehicle sales largest markets Vehicle sales 2007 Year-on-year percentage change 2007 market share, percent Year-on-year percentage change in overall market Audi worldwide 964, Germany 254, China (including Hong Kong) 101, United Kingdom 100, USA 93, Italy 59, Spain 58, France 47, Belgium 26, Netherlands 16, Austria 15, Switzerland 15, Sweden 15, Japan 15, Russia 15, South Africa 12, In Germany, its home market, the brand with the four rings further increased its market share, selling 254,014 (257,792) vehicles. Despite the pressure placed on sales by the VAT rate hike on January 1, 2007, continued stiff competition and the model changeover affecting the Audi A4 Sedan in November 2007, market share grew to an excellent 7.9 (7.6) percent. This represents the highest market share in the history of the Company as a premium manufacturer. Audi also enjoyed notable success on major export markets. Vehicle sales in Western Europe (excluding Germany) grew by 6.1 percent to 396,393 (373,588) units. Sales progressed particularly well in the UK (up 17.1 percent), Spain (up 7.9 percent), France (up 4.4 percent) and Switzerland (up 11.8 percent). In China (including Hong Kong), Audi continued its unabated growth and remains the undisputed leader in the premium segment. Sales rose by 24.8 percent to 101,996 (81,708) Audi models, taking the Company over the 100,000-car mark in China for the very first time. Asia s biggest car market has thus become the most important export market for the brand with the four rings. Audi is involved in numerous sponsoring activities in culture and sport in China, with a view toward further consolidating its strong image there. Audi vehicles, for example, will capture the limelight at this summer s Olympic Games in Beijing in their capacity as Official Premium Cars. Audi sales rose again in the intensely competitive U.S. market, thus bucking the overall market trend. Sales reached 93,506 (90,116) vehicles, representing a year-on-year improvement of 3.8 percent. In an effort to sustain this positive momentum, Audi is stepping up

25 157 measures aimed at optimizing its service and dealer network. In addition, the Company is preparing a diesel initiative in the United States. New TDI engines featuring the ultra low emission system are to be brought to market. They are notable for their high efficiency coupled with low fuel consumption and emissions. Audi also posted significant growth rates in the relatively new markets of Central and Eastern Europe. In Russia, the region s most important growth market, the brand succeeded in increasing vehicle sales by an outstanding 49.3 percent to 15,007 (10,050) premium vehicles. Vehicle sales by model Audi A3 71,701 73,678 Audi A3 Sportback 159, ,886 Audi TT Coupé 38,745 16,753 Audi TT Roadster 13,026 2,745 Audi A4 Sedan 157, ,239 Audi A4 Avant 136, ,302 Audi A4 Cabriolet 23,819 27,410 Audi RS 4 Sedan 2,408 4,375 Audi RS 4 Avant 2,193 2,661 Audi RS 4 Cabriolet Audi A5 Coupé 18, Audi A6 Sedan 149, ,227 Audi A6 Avant 69,567 76,556 Audi A6 allroad quattro 15,622 9,799 Audi Q7 81,775 52,771 Audi A8 21,362 22,601 Audi R8 2, Total, Audi brand* 964, ,188 Lamborghini Gallardo 1,793 1,610 Lamborghini Murciélago Total, Lamborghini brand 2,406 2,087 Other Volkswagen Group brands 234, ,279 Total, Group 1,200,701 1,135,554 * including internal vehicles for launch purposes Sales of the Audi A3 and Audi A3 Sportback totaled 230,849 (235,564) units in the past fiscal year, matching the previous year s outstanding level. In addition, Audi unveiled its first open-top version in the premium compact category to the public in November The new Audi A3 Cabriolet embodies supreme driving enjoyment and will be available with a choice of four powerful four-cylinder gasoline and diesel engines featuring progressive TFSI and TDI technology right from market launch in April The new Audi TT Roadster made its debut in the spring of This sporty two-seater retains the unique styling of its predecessor and, like the Audi TT Coupé, offers particularly dynamic handling. A total of 51,771 (19,498) Coupés and Roadsters were handed over to customers last year. The ultra-sporty Audi TTS Coupé and Roadster versions will be appearing on the market in early summer 2008.

26 158 Distribution of the new Audi A4 Sedan started in November Equipped with a huge array of technological innovations, new efficient powertrain versions and a unique design, this model sets the benchmark in the midsize category. The new Audi A4 Avant will follow in the first half of the current year. Despite the model changeover, demand for models in the Audi A4 car line (Sedan, Avant and Cabriolet) remained satisfyingly high at 317,212 (331,951) units. The Audi A5 Coupé, which made a very successful market entry in June 2007, acquired two further powertrain versions in September. The 3.2 FSI quattro with manual transmission develops 195 kw (265 hp). The 1.8 TFSI entry-level model with an output of 125 kw (170 hp) is a notably efficient version. The total number of Audi A5 Coupés delivered to customers had already reached 18,553 (232) by the end of December. The Audi A6 car line repeated its huge success from the year before, with sales totaling 234,215 (234,582) vehicles. The development of demand for the Audi A6 allroad quattro was particularly pleasing, rising by an impressive 59.4 percent. The new Audi RS 6 Avant will begin appearing on markets this April. This high-performance model is outfitted with a newly developed 10-cylinder engine featuring FSI direct fuel injection and twin turbochargers, quattro permanent all-wheel drive and sports suspension with Dynamic Ride Control. It is thrillingly and uncompromisingly sporty, yet eminently suitable for everyday use. In the premium SUV segment, the Audi Q7 maintained its impressive growth in 2007, with unit sales reaching 81,775 (52,771) vehicles. A version incorporating a 4.2 liter TDI engine, currently the most powerful diesel SUV in the world, appeared last March. The multiple award-winning Audi A8 car line was systematically refined last year. A more precise driving feel, an even better ride and acoustic comfort, as well as subtle enhancements to its design and interior underscore the exceptional status of the sportiest sedan in the luxury category. There is also a particularly efficient version available in the form of the new Audi A8 2.8 FSI e, which achieves average emissions of 199 g of CO 2 /km with a power output of 154 kw (210 hp). Even though the model facelift did not appear on the market until the third quarter of 2007, sales of this luxury sedan reached the previous year s excellent level at 21,362 (22,601) units. Demand for the Audi R8 mid-engine sports car that was brought to market in early 2007 exceeded all expectations. By December, customers had already accepted deliveries of 2,952 (108) of these emotion-packed models that are the very embodiment of Audi s Vorsprung durch Technik thanks to their innumerable technological innovations. In addition to the Audi brand, Italian super sports car manufacturer Lamborghini was extremely successful as well. Vehicle sales were higher than ever before in Sales of the Gallardo car line, which was extended to include the Superleggera model early in the year, rose by 11.4 percent to 1,793 (1,610) sports cars. The top-of-the-line Murciélago recorded sales of 613 (477) units, a year-on-year increase of 28.5 percent. Qualification initiative for Audi dealers During the past fiscal year, the first 40 Audi dealerships completed the qualification program launched by AUDI AG in This modular program examines all areas of an Audi dealer s business and then develops customized measures hand in hand with the dealer. The focus is on aspects that include economic efficiency, customer satisfaction and the quality of repairs and services. Even after successfully completing the implementation phase, all dealerships continue to receive long-term backup to ensure that improvements are maintained long-term. Initial assessments indicated that the improvements in the above focal areas were as high as 50 percent.

27 159 Around 180 Audi dealers are currently participating in the qualification program in Germany, with the total expected to reach 400 by An additional 475 dealers in European countries are expected to join by By the end of 2008, AUDI AG will have invested some EUR 50 million in its comprehensive qualification program and thus in the efficiency of the dealer network as well. Financial performance The Audi Group grew its revenue in fiscal 2007 by an impressive 7.9 percent to EUR 33,617 (31,142) million, the highest total ever in its lengthy history. The Audi brand s vehicle business played a significant role in the Company s huge success by generating revenue amounting to EUR 25,249 (23,404) million. The revenue mainstay was the Audi A4 car line, which made very healthy progress over the year as a whole, despite the changeover to the new sedan version in the second half. Revenue from sales of the Audi A3, A6 and A8 models once again outpaced the previous year s outstanding level, serving as tangible evidence of the high appeal of the brand with the four rings. The new Audi A5 Coupé and the TT car line, including the new Audi TT Roadster that made its market debut at the start of 2007, provided ample impetus for growth. The huge success of the Audi R8 mid-engine sports car from the moment it was launched in April exceeded all expectations. Revenue from sales of the Audi Q7 once again rose impressively in the period under review, making this vehicle a major source of growth for the Audi brand. In addition to Audi-brand vehicles, the VOLKSWAGEN GROUP ITALIA S.P.A., Audi Volkswagen Korea Ltd. and Audi Volkswagen Middle East FZE sales subsidiaries also sold vehicles of the Bentley, SEAT, Škoda, VW Passenger Car and VW Commercial Vehicles brands. The Company once again recorded an increase in revenue from the sale of vehicles from other Volkswagen Group brands in fiscal The cost of sales for the Audi Group rose by 4.3 percent in the period under review to EUR 28,478 (27,309) million as a result of the higher sales volume. Further productivity gains, improved processes and optimized material costs were the main reasons for the disproportionately low rise in cost of sales relative to revenue. Overall, the Audi Group therefore enjoyed a notable increase in gross profit of 34.1 percent to EUR 5,139 (3,833) million. The 26.5 percent rise in distribution costs to EUR 2,737 (2,164) million and the 12.2 percent rise in administrative expenses to EUR 266 (237) million were in large part attributable to initial consolidation of the Audi of America, LLC and Audi Canada Inc. sales subsidiaries, effective January 1, The other operating result was on a par with the previous year. The Audi Group again improved its operating result by an impressive 34.2 percent in the past fiscal year, in spite of a persistently unfavorable exchange rate. At EUR 2,705 (2,015) million, the Company posted the highest result from operating activities in its history, a fitting manifestation of its healthy, sustained growth. The further improvement in net liquidity also boosted the interest income earned on the latter and was consequently a major factor in the rise in the financial result to EUR 210 ( 69) million.

28 160 Development of profit before tax and rate of return before tax ,000 2,000 1,000 0 Profit before tax (EUR million) 1,143 1,310 1,946 2,915 Rate of return before tax (in %) The Audi Group therefore increased its profit before tax by 49.8 percent to EUR 2,915 (1,946) million. The balance after deduction of taxes amounted to a profit after tax of EUR 1,692 (1,343) million, representing a sharp year-on-year rise of 26.0 percent. Key earnings data % Rate of return before tax Equity return after tax Return on investment The Audi Group s highly profitable growth is also reflected in all key return ratios. The rate of return before tax, for instance, rose from 6.2 percent to an excellent 8.7 percent. This means that the Company has already achieved the target of 8 percent it had set itself for The return on investment is no less impressive. This indicator rose from 14.2 percent to 18.6 percent, again underscoring the strong profitability of the Audi Group. The task over the coming years will now be to sustain the rates of return at these high levels.

29 161 Net worth Balance sheet structure EUR million ,379 8,355 7, ,265 8,430 8, ,661 5,269 6,104 5,828 Equity Fixed assets 2,109 4,852 4,610 Other non-current assets Inventories Other current assets Cash and cash equivalents 540 1,832 2,343 1, ,042 2,368 3,105 3,632 4,884 6,740 8,954 7,035 4,202 5,806 4,291 4,785 Non-current liabilities Current liabilities 14,904 16,112 18,910 22,578 22,578 18,910 16,112 14,904 The Audi Group s balance sheet total grew by 19.4 percent over the past fiscal year to EUR 22,578 (18,910) million. Non-current assets remained on a par with the previous year at EUR 8,325 (8,285) million, due in particular to higher property, plant and equipment and higher receivables from derivative currency hedging instruments in conjunction with lower development expenditure recognized as an intangible asset. The 34.1 percent rise in current assets to EUR 14,253 (10,625) million was largely attributable to increased cash and cash equivalents (up EUR 1,856 million) and trade receivables (up EUR 309 million). In addition, inventories grew by EUR 552 million, primarily as a result of initial consolidation of companies in fiscal The overall volume of capital investments rose to EUR 2,115 (1,925) million, mostly as a result of higher product investment. Property, plant and equipment accounted for EUR 1,527 (1,256) million of this total, representing a rise of 21.6 percent. The equity of the Audi Group rose by 15.0 percent to EUR 8,355 (7,265) million. This change was attributable principally to the cash infusion of EUR 428 million by Volkswagen to the capital reserve of AUDI AG and allocation to other retained earnings of the balance remaining after the transfer of profit ( EUR 242 million). The equity ratio for the Audi Group was 37.0 (38.4) percent.

30 162 Non-current liabilities amounting to EUR 5,269 (4,610) million rose year-on-year, primarily as a result of the higher other liabilities and provisions. Current liabilities rose to EUR 8,954 (7,035) million. The higher profit transfer to Volkswagen AG was responsible for this development together with a sales-related increase in trade liabilities. Capital investments and cash flow of the Audi Group ,000 4,000 3,000 2,000 1,000 0 Capital investments (EUR million) 2,056 1,708 1,925 2,115 Cash flow from operating activities (EUR million) 2,690 3,252 4,428 4,876 Financial position The Audi Group increased its cash flow from operating activities by an outstanding 10.1 percent to EUR 4,876 (4,428) million in fiscal The cash used in investing activities equaled the previous year s high level at EUR 2,419 (2,442) million. Investments in property, plant and equipment and other intangible assets were up sharply by 22.1 percent to EUR 1,578 (1,292) million. The priority capital investments in 2007 were the ramp-ups for production of the Audi A4 and Audi A5 product families and the Audi A3 Cabriolet, as well as preparations for volume production of the Audi Q5. As in the previous year, cash flow from operating activities covered the cash used in investing activities in full. This fact is further evidence of the Company s financial strength. Net liquidity as of December 31, 2007, was EUR 7,860 (5,720) million, an increase of 37.4 percent over the previous year.

31 163 Cash flow statement EUR million Cash flow from operating activities 4,876 4,428 Cash flow from investing activities 2,419 2,442 Net cash flow 2,457 1,986 Cash flow from financing activities Net liquidity 7,860 5,720 As of December 31, 2007, the Audi Group had other financial obligations amounting to EUR 1,462 (1,520) million, mainly in the form of ordering commitments. For further particulars, please refer to the Notes, Section 41, Other financial obligations. Report on post-balance sheet date events There were no reportable events of material significance after December 31, Risk report The risk management system within the Audi Group The goal of the Audi Group s risk management system is to minimize or, if possible, avoid the wide-ranging risks associated with entrepreneurial activity in order to safeguard the Company against potential losses and against risks to it as a going concern. Entrepreneurial risks are deliberately taken only where they are moderate and commensurate with the anticipated benefit from that business activity. A Company-wide risk management and early warning system is in place within the Audi Group to actively monitor and steer risks. This covers AUDI AG and all subsidiaries from which significant risks that could threaten the parent company as a going concern could spread. The tasks of risk management in the Audi Group are organized decentrally at the corporate divisions and subsidiaries. Integration into existing business processes helps to promptly identify any risk-prone developments. All task areas as well as reporting and documenting obligations for risk management are clearly defined and regularly monitored to verify that the details on record are up to date. Potential risks are identified through the risk management procedures, based on defined spheres of responsibility. The same applies to compiling and implementing appropriate methods of steering and supervision, as well as to ongoing monitoring of the effectiveness of the measures taken to achieve the objectives. Probabilities are estimated for all individual risks. The anticipated potential losses from them are also quantified. The lost profit contribution and the costs incurred serve as the metric for this purpose. The Board of Management and the Supervisory Board are regularly informed of all significant risks within the Audi Group.

32 164 The Audi Group encounters the key risks listed below within the context of its business activities. The individual risks described relate to the planning horizon of 2008 through 2010: Economic and industry risks As a globally active company, the Audi Group is highly dependent on international economic conditions. This is particularly true with respect to the important sales markets of Europe, the U.S., China and Japan. Although general economic developments in these regions are positive on the whole, car markets reflect this situation to only a limited extent. Furthermore, a possible weakening of the global economy could have an adverse effect on consumer behavior in the automotive sector. Another risk is posed by persistently high or rising costs for energy and raw materials. In addition to having financial implications for sourcing and manufacturing, they may lead to consumer reticence. The premium segment in which the Audi and Lamborghini brands are positioned is generally less susceptible to the negative impact of cyclical fluctuations. Here too, however, a risk to sales from a cooling-down of the general economy and a resulting downturn in the market cannot be entirely excluded. The other Volkswagen Group brands, whose products are sold via the Audi sales subsidiaries in Italy, Korea and the Arab world, are fundamentally more exposed to cyclical sales risks. As a company with worldwide operations, the Audi Group generates a large proportion of its revenue in foreign currency. This revenue is exposed to risks from exchange rate fluctuations that can adversely affect consolidated net profit. In addition to the pound sterling and the Japanese yen, the euro can also fluctuate against the U.S. dollar in particular. The automotive industry is marked by increasingly aggressive predatory competition, in which sales incentives are becoming more and more widespread. This might result in price erosion and could inflate marketing costs in the Audi Group s key sales markets, with a correspondingly detrimental effect on earnings. Negative pricing practices by competitors that Audi might be obliged to match could also have an adverse effect on the Group s revenue and earnings performance. The Audi Group s far-reaching model initiative means that it is entering numerous new product segments. In spite of meticulous planning and the use of market studies from the very start of the product development process, it is not possible to anticipate every facet of the market s response. Furthermore market acceptance of new generations of wellestablished car lines might not meet expectations. Future changes to the political and statutory environment and potential new legislation relating to vehicle safety, fuel efficiency or pollution emissions remain risk factors. The current debate on CO 2 emissions could have an adverse effect on the image of the automotive industry. The Audi Group counters economic and industry risks with anticipatory measures and takes potential negative developments into account as early as the planning stage. The Company also uses appropriate instruments to protect itself to an economically meaningful extent, and regularly examines the economic environment for new and changing risks.

33 165 Risks from operating activities There are diverse risks associated with the Audi Group s operating activities that could substantially undermine its financial position and financial performance. These include critical occurrences such as major fires and explosions that could damage or destroy assets and also cause considerable consequential losses by hindering the production process. Production problems could take the form of disruptions to the energy supply and technical disruptions, in particular to information technology. Although such occurrences harbor considerable potential losses, their probability is viewed as relatively low. In addition, adequate insurance coverage has been taken out on an economically meaningful scope and preventive measures, such as fire protection systems, installed. The high flexibility of the Audi production network also reduces risk. The manufacturing process might also be hampered by supply delays or non-delivery as a result of tool breakage, losses from natural disasters and strikes at suppliers or in the transportation sector. A rise in the number of crises at suppliers, in some cases leading to their insolvency, has furthermore been observed. In addition to taking out appropriate insurance coverage, the Audi Group implements a detailed supplier selection, monitoring and steering process to limit any risks to its financial performance early on. The increasingly close ties between automotive manufacturers and the supply industry bring with them the potential for both economic benefits and growing interdependence. The exclusive use of innovative technologies by suppliers with global operations is lending momentum to this trend. The Audi Group counters the resulting risks, for example, by defining appropriate contractual terms and retaining title over tools used by third-party companies. The complex product development process for new vehicles and components entails diverse potential risks, such as delays, essential changes to the product at short notice and the loss of expertise as a result of the involvement of third-party service providers. As a manufacturer of premium-segment vehicles, the Audi Group has installed extensive, efficient quality management procedures. Nevertheless, it is impossible to entirely rule out potential product liability risks. These could result in significant financial losses to the Company, in addition to harming its image. Infringement of statutory regulations may occur in the course of operating activities. These risks are limited by Group-wide procedures and ongoing monitoring of changes in the law. The growing electronic networking of processes within the Audi Group presents potential information and IT risks. In addition to the risk of failure of key systems controlling business processes, financial performance could be adversely affected by unauthorized access, destruction and misuse, as well as by a heterogeneous system landscape. These risks are appropriately cushioned by the implementation of Company-wide procedures, high security standards and targeted communication with employees. Financial risks The financial risks resulting from the Audi Group s business activities comprise market price risks (exchange rate, interest rate and commodity price risks), creditworthiness risks and liquidity risks. Foreign exchange risks, relating in particular to the U.S. dollar, the pound sterling and the Japanese yen, are also of particular relevance to the Audi Group in view of its worldwide sales markets. Detailed information on the hedging policy and on risk management in the area of financial risks, in particular relating to the use of derivative financial instruments in hedging transactions, is presented in the Notes in Other particulars under Note 35 Management of financial risks.

34 166 Overall assessment of the risk position There have been no substantial changes in the Audi Group s risk position by comparison with the year before. The risks described harbor the potential to significantly undermine the Audi Group s financial position and financial performance. On the basis of all known facts and circumstances, however, no risks currently exist that could endanger the Company s survival in the foreseeable future. Report on expected developments Anticipated development of the economic environment General economic situation The Audi Group believes that the global economy will slow down in 2008, following multiple periods of strong growth. The principal determining factor here is the prospect of a rapid slowdown in the U.S. economy, outweighing robust economic growth in numerous developing and emerging countries. The sustained high level of crude oil and raw materials prices will also have a dampening effect. In the United States, the continuing crisis in the real estate market will put a damper on consumer spending. This will go hand in hand with increasingly restrictive lending practices on the part of the banks, resulting in reduced private-sector investment activity. Economic growth for the year as a whole is therefore expected to weaken even further. In the euro zone, the economy will cool down somewhat in 2008, but the stable upward trend will be sustained. The Audi Group expects to see a further decline in economic growth in Germany. The dynamism of exports and capital expenditures will probably ease off. On the other hand, however, consumer spending is likely to be stronger and make a larger contribution to economic growth than in 2007, not least due to the continued upward trend of employment, coupled with higher collective-bargaining settlements and lower inflation than the year before. The rate of economic expansion will remain high in many countries throughout Latin America as well as Central and Eastern Europe. Most notably in Russia, the rapid upward trend will continue thanks to the strong exports of the country s energy producers. The Chinese economy will be dampened somewhat in 2008 as a result of the weakening of the U.S. economy and the corresponding downturn in exports to the U.S. Its economic dynamism will, however, remain at a high level, with GDP growth likely to remain in the double-digit range. Continued vigorous economic expansion is expected in India. The Japanese economy will again expand at only a very modest rate in The car industry The Audi Group anticipates a renewed increase in global demand for automobiles of over 2 percent in 2008 to around 60 million passenger cars. Principal growth hotspots will be the emerging markets of China, India and Russia. The general market environment will remain difficult in Germany. The forecast rise in consumer spending will induce only a slight improvement in sales figures. The Audi Group expects to see an increase in the volume of new registrations in the German market of just under 2 percent to around 3.2 million passenger cars. The Audi Group expects registrations of new cars in Western Europe (excluding Germany) to decline to 11.4 million vehicles. Dwindling sales figures in Italy will be the main factor at work here. In the countries of Central and Eastern Europe, on the other hand, the market will remain dynamic, although the growth rate will be down slightly from the previous year. The Audi Group is forecasting growth of over 9 percent for the Russian automobile market to nearly 2.6 million passenger cars.

35 167 A further deterioration in the U.S. car market is expected in The overall market volume of 16 million units sold will probably slip below the previous year s total due to the weakening of consumer spending. The Asia-Pacific region will again enjoy strong growth in demand in The Chinese car market, in particular, will continue to expand and should reach nearly 6 million units a growth rate of 17 percent. The rate of growth forecast for India is even higher at around 19 percent, bringing the total to 1.4 million passenger cars. In contrast, new registrations in Japan will rise only marginally to just under 4.5 million passenger cars. Anticipated development of the Audi Group Increasingly intensive competition within the automotive industry and the ailing health of the economy will again pose major challenges for the Audi Group in An even greater effort will therefore be required to repeat the economic successes of the past. Management is nevertheless convinced that the Audi Group will be able to build on the outstanding results for 2007 and post positive overall results for its business activities in fiscal Anticipated development of vehicle sales The Audi Group will sustain growth in vehicle sales in 2008 and plans to improve significantly on the previous year s record figure by selling more than 1 million Audi vehicles. A large number of new models and derivatives, as well as those products with an established market presence, should aid the core Audi brand in accessing new customer segments and give the brand s appeal a long-term boost. In its home market of Germany, the highest-volume market for Audi vehicles, the brand with the four rings is striving to improve its market performance. Audi believes that it is well equipped for further success in Western Europe, despite intensive competition there, and expects to achieve growth in the face of a generally downward market trend. Audi expects that the new markets in Central and Eastern Europe, and especially Russia, will continue to provide strong impetus for growth. Audi is aiming to strengthen its image and market position in the U.S. by further extending its exclusive dealer network and launching new, attractive models. The market launch of the new Audi A4 will provide vital impulses here. In its largest export market, China, Audi intends to continue to benefit from market growth and to strengthen its position of leadership in the premium segment. The locally built long-wheelbase version of the Audi A6 will play an important role in these plans. Audi expects to see positive overall development of unit sales in Japan and the other markets of the Asia-Pacific region. The Indian automotive market, where Audi began local CKD assembly of the Audi A6 in 2007, will be playing an increasingly important role. Anticipated financial performance The Audi Group will see a further rise in revenue in fiscal 2008 as a result of the higher sales figures it is targeting. Based on the renewal and expansion of the product portfolio, the development of the exclusive dealer and service network and further improvements in productivity and processes, the Board of Management expects to see profits for 2008 rise in line with unit sales and revenue.

36 168 Anticipated financial position The Audi Group again expects to be able to finance its ambitious growth entirely from internally generated cash flow in 2008, without recourse to external sources of financing. All Group companies are assured the necessary liquidity through the Group s own cash pool. Cash flow from operating activities is expected to reach a level similar to that in Cash used in investing activities will probably rise year on year as the long-term model initiative continues. The Audi Group s net liquidity will continue to develop on a positive note up until the end of 2008, despite higher capital expenditures. Capital investments Capital investments scheduled for the medium term are intended predominantly for customer-driven additions to the model and engine lines, the resulting need for expanding development and production structures, for improving the productivity and quality of process chains, and for strengthening customer loyalty. All investment measures share the common objective of sustainably strengthening the Audi Group s market position through a forward-looking model and brand strategy. The investment volume for property, plant and equipment envisaged for the period from 2008 through 2012 amounts to around EUR 10.6 billion for the Audi Group, with the 2008 fiscal year accounting for around one-fifth of this total. Cash flow from operating activities will cover investment spending in full for the entire planning period. Capital investments will principally relate to manufacturing operations. Anticipated development of the workforce The size of the workforce will increase moderately in 2008 by comparison with the past fiscal year. The main factor at work here is that AUDI BRUSSELS S.A./N.V., with around 2,100 employees, is being comprehensively consolidated for the first time starting in early 2008 following the transfer of management responsibility from Volkswagen AG to AUDI AG. Opportunities for future development The Audi Group s future development will essentially be driven by forward-looking strategies and measures designed to assure the Company s steady, profitable growth. Systematic renewal and expansion of the product portfolio will play a key role. Following the successful launch of numerous new models during the past fiscal year, the long-term model initiative will continue seamlessly in 2008 with important market launches such as the Audi A3 Cabriolet, the Audi TTS models, the new Audi A4 Avant, the Audi RS 6 Avant and the Audi Q5. Sustaining growth in established markets will once again be an important target for The main focus areas will include restructuring the sales organization in North America and continued expansion of the worldwide exclusive Audi dealer and service network. The Audi Group will also be stepping up its involvement in growth markets and actively tapping into new markets. All in all, the Audi Group expects the above measures to provide lasting growth prospects that will drive the development of the Company s unit sales as well as its financial performance over the coming years.

37 169 In addition to these strategic determinants, changes in external factors might also create further opportunities for the Audi Group. Declines in the prices of raw materials and advantageous exchange rate movements could, for instance, have a positive impact on financial performance. Overall assessment of anticipated future developments The Audi Group has set itself the target of sustained growth in terms of both quality and quantity for 2008 and subsequent fiscal years. This will be reflected in the business figures for 2008 and Disclaimer The Management Report contains forward-looking statements. These statements are based on current assessments and are by their very nature subject to risks and uncertainties. Actual outcomes may differ from those predicted in these statements.

38 170 Auditor s Report This report was originally prepared in the German language. In case of ambiguities the German version shall prevail: Auditor s Report We have audited the consolidated financial statements prepared by the AUDI AG, Ingolstadt, comprising the balance sheet, the income statement, statement of recognised income and expense, cash flow statement and the notes to the consolidated financial statements, together with the group management report for the business year from January 1 to December 31, The preparation of the consolidated financial statements and the group management report in accordance with the IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to (Article) 315a Abs. (paragraph) 1 HGB ( Handelsgesetzbuch : German Commercial Code) are the responsibility of the parent Company s Board of Managing Directors. Our responsibility is to express an opinion on the consolidated financial statements and on the group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (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 consolidated financial statements in accordance with the applicable financial reporting framework and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of 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 consolidated financial statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation, the determination of the entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by the Company s Board of Managing Directors, as well as evaluating the overall presentation of the consolidated financial statements and the group management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion based on the findings of our audit the consolidated financial statements comply with the IFRS as adopted by the EU, and the additional requirements of German commercial law pursuant to 315a Abs. 1 HGB and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group s position and suitably presents the opportunities and risks of future development. Munich, February 7, 2008 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Franz Wagner Wirtschaftsprüfer Petra Justenhoven Wirtschaftsprüferin

39 171 Declaration of the AUDI AG Board of Management on the 2007 Consolidated Financial Statements The Board of Management of AUDI AG is responsible for the preparation of the Consolidated Financial Statements and Group Management Report. Reporting is performed on the basis of the International Financial Reporting Standards (IFRS) as applicable within the European Union, and the interpretations of the International Financial Reporting Interpretations Committee (IFRIC). The Group Management Report is prepared in accordance with the requirements of the German Commercial Code. Under Section 315a of the German Commercial Code, AUDI AG is obliged to prepare its Consolidated Financial Statements in accordance with the requirements of the International Accounting Standards Board (IASB). The regularity of the Consolidated Financial Statements and Group Management Report is assured by means of internal controlling systems, the implementation of uniform guidelines throughout the Group, and employee training and advancement measures. Compliance with the legal requirements and with internal Group guidelines, as well as the reliability and functioning of the systems of controlling, are checked on an ongoing basis throughout the Group. The early warning function required by law is achieved by means of a Group-wide risk management system that enables the Board of Management to identify potential risks at an early stage and initiate corrective action as necessary. PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Munich, has examined the Consolidated Financial Statements and Group Management Report in its capacity as independent auditor, in accordance with the resolution of the Annual General Meeting, and issued its unqualified certification as shown on the page opposite. The Consolidated Financial Statements, the Group Management Report, the Audit Report and the measures to be taken by the Board of Management for the prompt identification of risks which could pose a threat to the Company s survival were discussed at length by the Supervisory Board in the presence of the auditors. The findings of this examination are indicated in the Report of the Supervisory Board.

40 172 Consolidated Financial Statements of the Audi Group at December 31, 2007 Income Statement of the Audi Group for the 2007 fiscal year EUR million Notes Revenue 1 33,617 31,142 Cost of sales 2 28,478 27,309 Gross profit 5,139 3,833 Distribution costs 3 2,737 2,164 Administrative expenses Other operating income 5 1,266 1,051 Other operating expenses Profit from operating activities 2,705 2,015 Result from investments accounted for using the equity method Finance cost 8 Interest expense Interest on provisions Other financial results Financial result Profit before tax 2,915 1,946 Income tax expense 10 1, Profit after tax 1,692 1,343 of which profit share of minority interests 38 of which profit share of AUDI AG stockholders 1,654 1,343 Appropriation of profit share due to AUDI AG stockholders Profit transfer to Volkswagen AG 11 1, Transfer to retained earnings EUR Earnings per share Diluted earnings per share

41 173 Balance Sheet of the Audi Group for the fiscal year ended December 31, 2007 ASSETS EUR million Notes Dec. 31, 2007 Dec. 31, 2006 NON-CURRENT ASSETS 8,325 8,285 Fixed assets 7,379 7,536 Intangible assets 14 2,022 2,335 Property, plant and equipment 15 5,178 5,023 Investment property Investments accounted for using the equity method Other long-term investments Deferred tax assets Other receivables and other financial assets CURRENT ASSETS 14,253 10,625 Inventories 20 2,661 2,109 Trade receivables 21 2,149 1,840 Effective income tax assets Other receivables and other financial assets 19 1, Securities 23 1,333 1,014 Cash and cash equivalents 24 6,740 4,884 BALANCE SHEET TOTAL 22,578 18,910 EQUITY AND LIABILITIES EUR million Notes Dec. 31, 2007 Dec. 31, 2006 EQUITY 8,355 7,265 Issued capital Capital reserve Retained earnings 25 7,291 6,672 AUDI AG stockholders interests 25 8,312 7,265 Minority interests LIABILITIES 14,223 11,645 Non-current liabilities 5,269 4,610 Financial liabilities Deferred tax liabilities Other liabilities Provisions for pensions 29 1,957 1,974 Effective income tax obligations Other provisions 31 2,427 1,905 Current liabilities 8,954 7,035 Financial liabilities Trade payables 32 2,794 2,255 Effective income tax obligations Other liabilities 28 3,013 2,109 Other provisions 31 2,245 1,925 BALANCE SHEET TOTAL 22,578 18,910

42 174 Cash Flow Statement of the Audi Group from January 1 to December 31, 2007 EUR million Profit before profit transfer and taxation 2,915 1,946 Income tax payments 1, Amortization of development expenditure recognized as an intangible asset Depreciation/amortization of and write-ups/write-downs on property, plant and equipment and other intangible assets 1,433 1,538 Write-downs on long-term investments and goodwill amortization Result from asset disposals 1 3 Result from investments accounted for using the equity method 2 12 Change in provisions Change in inventories Change in receivables Change in liabilities Other non-cash income and expenses Cash flow from operating activities 4,876 4,428 Additions for development expenditure recognized as an intangible asset Investments in property, plant and equipment and other intangible assets 1,578 1,292 Acquisition of affiliated companies and participating interests 44 8 Change in securities Sale of shares 3 13 Loans advanced 27 0 Proceeds arising from asset disposals Cash flow from investing activities 2,419 2,442 Capital contributions Transfer of profit Change in financial liabilities and in credit extended Lease payments 2 1 Cash flow from financing activities Change in cash and cash equivalents from changes in the consolidated companies 8 2 Change in cash and cash equivalents from exchange-rate changes 27 3 Change in cash and cash equivalents 1,856 1,779 Cash and cash equivalents at start of period 4,884 3,105 Cash and cash equivalents at end of period 6,740 4,884 EUR million Cash and cash equivalents 6,740 4,884 Securities and credit extended 1,651 1,050 Gross liquidity 8,391 5,934 Credit outstanding Net liquidity 7,860 5,720

43 175 Statement of Changes in Equity of the Audi Group for the 2007 fiscal year EUR million Financial assets available for sale Fair value changes recognized directly in equity without affecting income 33 4 Included in the Income Statement 50 0 Cash flow hedges Fair value changes recognized directly in equity without affecting income Included in the Income Statement Currency translation differences 4 15 Deferred tax items directly recognized in equity Actuarial gains and losses from provisions for pensions Income and expenditure after tax from investments included directly in equity accounted for using the equity method 14 Income and expense included directly in equity Profit after tax 1,692 1,343 Total income and expense recognized in the fiscal year 2,076 1,786 Attributable to AUDI AG stockholders 2,038 1,786 Attributable to minority interests 38

44 176 Notes to the Consolidated Financial Statements of the Audi Group for the 2007 fiscal year Development of fixed assets in the 2007 fiscal year EUR million Gross carrying amounts Costs Jan. 1, 2007 Changes in consolidated group Currency changes Additions Additions from accounting using the equity method Transfers Disposals Disposals from accounting using the equity method Intangible assets 4, ,000 Concessions, industrial property rights and similar rights and values, as well as licenses thereto Goodwill Development expenditure recognized as an intangible asset, products currently under development Development expenditure recognized as an intangible asset, products currently in use 2, Payments on account for intangible assets 2 2 Property, plant and equipment 16, , Land, land rights and buildings, including buildings on land owned by others and leased buildings 3, Plant and machinery 3, Furniture, fixtures and office equipment, as well as leased furniture, fixtures and office equipment 8, Payments on account and assets under construction Investment property 13 Investments accounted for using the equity method Other long-term investments Investments in affiliated companies Participating interests 11 Total fixed assets 20, , ,511 50

45 177 Value adjustments in gross carrying amounts Carrying amounts Costs Cumulative depreciation and amortization Changes in consolidated group Currency changes Additions, scheduled Additions, unscheduled Transfers Disposals Writeups Cumulative depreciation and amortization Dec. 31, 2007 Jan. 1, 2007 Dec. 31, 2007 Dec. 31, 2007 Dec. 31, ,896 1, ,000 1,874 2,022 2, ,922 1, ,471 1,451 1, ,279 11, , ,101 5,178 5,023 3,457 1, ,709 1,748 1,692 4,181 2, ,945 1,236 1,054 9,190 6, ,447 1,743 1, ,498 13, , ,485 14,119 7,379 7,536

46 178 Development of fixed assets in the 2006 fiscal year EUR million Gross carrying amounts Costs Jan. 1, 2006 Changes in consolidated group Currency changes Additions Additions from accounting using the equity method Transfers Disposals Disposals from accounting using the equity method Intangible assets 4, Concessions, industrial property rights and similar rights and values, as well as licenses thereto Goodwill 172 Development expenditure recognized as an intangible asset, products currently under development Development expenditure recognized as an intangible asset, products currently in use 2, Payments on account for intangible assets Property, plant and equipment 15, , Land, land rights and buildings, including buildings on land owned by others and leased buildings 3, Plant and machinery 3, Furniture, fixtures and office equipment, as well as leased furniture, fixtures and office equipment 7, Payments on account and assets under construction Investment property 14 1 Investments accounted for using the equity method Other long-term investments Investments in affiliated companies Participating interests 11 Total fixed assets 19, ,

47 179 Value adjustments in gross carrying amounts Carrying amounts Costs Cumulative depreciation and amortization Changes in consolidated group Currency changes Additions, scheduled Additions, unscheduled Transfers Disposals Writeups Cumulative depreciation and amortization Dec. 31, 2006 Jan. 1, 2006 Dec. 31, 2006 Dec. 31, 2006 Dec. 31, ,334 1, ,999 2,335 2, ,956 1, ,726 1,230 1, ,200 10,246 1, ,177 5,023 5,221 3,331 1, ,639 1,692 1,702 3,853 2, ,799 1,054 1,152 8,438 5, ,739 1,699 2, ,837 11,752 1, ,301 7,536 8,143

48 180 General information AUDI AG has the legal form of a German stock corporation (Aktiengesellschaft). Its registered office is on Ettinger Strasse, Ingolstadt, and is on file in the Commercial Register in Ingolstadt under HR B 1. Around 99 percent of the issued capital of AUDI AG is held by Volkswagen AG, of Wolfsburg, with which a control and profit transfer agreement is in force. The Consolidated Financial Statements of AUDI AG are included in the consolidated financial statements of Volkswagen AG, which are on file at the Local Court of Wolfsburg. The purpose of the Company is the development, production and sale of motor vehicles, other vehicles and engines of all kinds, together with their accessories, as well as machinery, tools and other technical articles. Accounting principles AUDI AG prepares its Consolidated Financial Statements on the basis of the International Financial Reporting Standards (IFRS) and the interpretations of the International Financial Reporting Interpretations Committee (IFRIC). All pronouncements of the International Accounting Standards Board (IASB) whose application is mandatory have been observed. The prior-year figures have been calculated according to the same principles. The Income Statement is prepared according to the internationally practiced cost of sales method. AUDI AG prepares its Consolidated Financial Statements in euros (EUR). The Consolidated Financial Statements provide a true and fair view of the financial performance and financial position of the Audi Group. The requirements pursuant to Section 315a of the German Commercial Code (HGB) regarding the preparation of consolidated financial statements in accordance with IFRS, as endorsed by the EU, are met. All requirements that must be applied under German commercial law are additionally observed in preparing the Consolidated Financial Statements. The German Corporate Governance Code is additionally complied with and is permanently available on the Internet at Effects of new or revised standards The Audi Group applied IFRS 7 (Financial Instruments: Disclosures) for the first time in fiscal 2007 and therefore applied the associated amendment to IAS 1 (Presentation of Financial Statements). IFRS 7 creates extensive disclosure standards for financial instruments. IAS 1 furthermore requires additional disclosures on capital management. The new requirements to be applied do not have any impact on the classification or measurement of financial assets or liabilities. Observance of the following interpretations moreover became mandatory for the first time during the current fiscal year: IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment IFRIC 11 Group and Treasury Share Transactions in accordance with IFRS 2 The initial application of the interpretations had no effect or no material effect on the disclosures made in the Consolidated Financial Statements.

49 181 In accordance with the specifications of IAS 8 and in conjunction with the transitional provisions of IFRS 2, the application of IFRIC 11 (IFRS 2 Group and Treasury Share Transactions) was implemented in advance of the requirement. New or revised standards not applied The following new or amended accounting standards already approved by the IASB were not applied in the Consolidated Financial Statements for the 2007 fiscal year because their application was not yet mandatory: Standard/ Interpretation Mandatory effective Endorsed by EU* Anticipated effects IFRS 8 Operating Segments Jan. 1, 2009 Yes Segment reporting IAS 1 Presentation of Financial Statements Jan. 1, 2009 No Reclassification of financial statement components IAS 23 Borrowing Costs Jan. 1, 2009 No Increase in carrying amount of qualifying assets IFRIC 12 Service Concession Arrangements Jan. 1, 2008 No None IFRIC 13 Customer Loyalty Programs July 1, 2008 No None IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Jan. 1, 2008 No No significant * as of December 31, 2007 The Group In addition to AUDI AG, the Consolidated Financial Statements include all principal companies in which AUDI AG can directly or indirectly determine the financial and business policy in order to benefit from the activities of the companies (subsidiaries) in question. Consolidation begins at that point in time at which it acquires the opportunity for control; it ends when that opportunity ceases to be available. Associated companies are accounted for using the equity method. Subsidiaries excluded from consolidation and participating interests are always reported at their cost of acquisition, because no active market exists for the shares of these companies and no fair value can reliably be determined with a justifiable amount of effort. These subsidiaries are substantially dormant companies or companies with only limited business operations. The following companies have been consolidated since December 31, 2006: VOLKSWAGEN GROUP FIRENZE S.P.A., which was established in September 2006; Audi Retail GmbH, which was established at the end of 2006; Audi Zentrum Hannover GmbH, which was acquired as of January 1, 2007; as well as Audi of America, LLC and Audi Canada Inc., which were established as of January 1, 2007, and had to be consolidated in order to satisfy the requirements of IAS 27.13, Sentence 2.

50 182 The following table shows the composition of the Audi Group: Total AUDI AG and fully consolidated subsidiaries Germany 5 3 Other countries Investments accounted for using the equity method Other countries 1 2 Subsidiaries reported at cost of purchase and other associated companies Germany Other countries 12 7 Total The principal companies within the Audi Group are listed following the Notes. A list of all companies in which shares are held is published on the Audi website under and is also available at This list can additionally be requested directly from AUDI AG, Finance Analysis and Publications I/FF-12, Ingolstadt, Germany. Due to their inclusion in Audi s Consolidated Financial Statements, quattro GmbH, Neckarsulm, Audi Retail GmbH, of Ingolstadt, and Audi Vertriebsbetreuungsgesellschaft mbh, of Ingolstadt, satisfy the conditions of Section 264, Para. 3, of the German Commercial Code and make use of the exemption rule. Participating interests in associated companies As of the balance sheet date of December 31, 2007, FAW-Volkswagen Automotive Company, Ltd., of Changchun, China, in which an interest of 10 percent is held, was the only company accounted for using the equity method following the removal of YANASE Audi Sales Company Ltd. from consolidation during the year under review now that all of its shares have been acquired by Audi Japan K.K. The company, which was renamed Audi Japan Sales K.K. following the takeover, has since been reported at amortized cost. On the basis of the interests in the associated companies, the following values are attributable to the Audi Group: EUR million Non-current assets Current assets Non-current liabilities Current liabilities Income Net profit 48 17

51 183 Principal influences of changes to the group on the opening balance sheet for 2007 EUR million Audi of America, LLC Audi Canada Inc. Non-current assets Current assets of which inventories Equity 4 1 Non-current liabilities Current liabilities Balance sheet total The effect on the opening balance sheet of the other companies included in the consolidation for the first time (Audi Zentrum Hannover GmbH, Audi Retail GmbH and VOLKSWAGEN GROUP FIRENZE S.P.A.) amounts to EUR 23 million. The carrying amounts correspond to the fair values. The first-time consolidation of VOLKSWAGEN GROUP FIRENZE S.P.A. increased revenue marginally in the 2007 fiscal year by EUR 29 million. Similarly the inclusion of the company had only minor impact on consolidated net profit. In connection with the initial consolidation as of January 1, 2007 of Audi Zentrum Hannover GmbH, following its acquisition from Volkswagen Retail GmbH, and the inclusion of Audi of America, LLC and Audi Canada Inc. in the Consolidated Financial Statements pursuant to IAS 27.13, Sentence 2, the predecessor method was applied for the first time within the Audi Group. Revenue in the prior-year period of 2006 would have been EUR 21 million higher if Audi Zentrum Hannover GmbH had been included. Consolidation principles The assets and liabilities of the domestic and foreign companies included in the Consolidated Financial Statements are accounted for in accordance with the standard accounting policies of the Audi Group. In the case of subsidiaries that are being consolidated for the first time, the assets and liabilities are to be measured at their fair value at the time of acquisition. Thus, differences between pre-acquisition carrying amounts and fair values of assets acquired and liabilities assumed are carried, depreciated or dissolved in accordance with the corresponding assets and liabilities. If the purchase prices of the shares exceed the Group s interest in the equity calculated in this manner for the individual company, goodwill arises. Goodwill acquired in a business combination is tested for impairment regularly, at the balance sheet date, and an impairment loss recognized if necessary. The predecessor method was applied within the Audi Group in fiscal 2007 for common control transactions. Under this method, the assets and liabilities of the acquiree are measured at the gross carrying amounts of the previous parent company. The predecessor method thus means that no adjustment to the fair value of the acquired assets and liabilities is performed at the time of acquisition; any goodwill arising during initial consolidation is adjusted against equity, with no effect on income. The Consolidated Financial Statements furthermore include securities funds whose assets are attributable in substance to the Group. Receivables and liabilities between consolidated companies are netted, and expenses and income eliminated. Intra-group profits and losses are eliminated from Group inventories and fixed assets.

52 184 Consolidation processes affecting income are subject to deferrals of income taxes, with deferred tax assets and liabilities being offset where the term and tax creditor coincide. The same accounting policies for determining the pro rata equity are applied to Audi Group investments accounted for using the equity method. The last set of audited accounts of the company in question serves as the basis for this purpose. Currency translation The currency of the Audi Group is the euro (EUR). Foreign currency transactions in the separate financial statements of AUDI AG and its subsidiaries are translated at the prevailing exchange rate on the date of the transaction. Monetary items in foreign currency are reported as of the balance sheet date on the basis of the exchange rate prevailing on that date. Exchange differences are recognized in the current-period income statements of the respective Group companies. The foreign companies belonging to the Audi Group are foreign entities which prepare their financial statements in their local currency. The only exceptions are AUDI HUNGARIA MOTOR Kft. and Audi Volkswagen Middle East FZE, which prepare their annual financial statements in euros and U.S. dollars, respectively, rather than in local currency. The concept of the functional currency is applied when translating financial statements prepared in foreign currency. Assets and liabilities, with the exception of equity, are translated at the closing rate. The effects of foreign currency translation on equity are reported in the currency exchange reserve with no effect on income. The items in the Income Statement are translated using weighted average monthly rates. Currency translation variances arising from the differing exchange rates used in the Balance Sheet and Income Statement are recorded in equity, with no effect on income. The development of the exchange rates serving as the basis for currency translation is shown below: 1 EUR in units of foreign currency Dec. 31, 2007 Dec. 31, Closing rate Average rate Australia AUD Brazil BRL Canada CAD People s Republic of China CNY Japan JPY South Korea KRW 1, , , , United States USD As all consolidated subsidiaries have their registered offices in countries in which there is currently no hyperinflation, IAS 29 does not apply. Recognition and measurement principles Recognition of income and expenses Revenue, interest income and other operating income are always recorded as the services are rendered or the goods or products are delivered, in other words upon passage of risk to the customer. Proceeds from the sale of vehicles for which buy-back agreements exist are not realized immediately, but on a linear basis over the rental period, on the basis of the difference between the selling price and the anticipated buy-back price. These vehicles are reported under inventories.

53 185 Operating expenses are recognized when the service is rendered or at the time they are incurred economically. Intangible assets Intangible assets acquired for consideration are recognized at cost of purchase, taking into account ancillary costs and cost reductions, and are amortized on a scheduled straight-line basis over their useful life. Concessions, rights and licenses relate to purchased computer software and subsidies paid. Research costs are treated as current expenses in accordance with IAS 38. The development expenditure for products going into production is recognized as an intangible asset, provided that production of these products is likely to bring economic benefit to the Audi Group. If the conditions stated in IAS 38 for recognition as an intangible asset are not met, the expenditure is expensed in the Income Statement in the year in which it occurs. Development expenditure recognized as an intangible asset comprises all direct costs and overheads directly attributable to the development process. Borrowing costs are not capitalized. Amortization is performed on a straight-line basis from the start of production, over the anticipated model life of the developed products. The amortization plan is based principally on the following useful lives: Useful life Concessions, industrial property rights and similar rights and values of which software Development expenditure recognized as an intangible asset 3 15 years 3 years 5 10 years The amortization is allocated to the corresponding functional areas. Goodwill created or acquired in a business combination is recognized and tested for impairment regularly, as of the balance sheet date, pursuant to IAS 36. If necessary, an impairment loss resulting from this test is recognized. Property, plant and equipment Property, plant and equipment are measured at cost, with straight-line depreciation being applied according to the pro rata temporis method. The costs of purchase include the purchase price, ancillary costs and cost reductions. In the case of self-constructed fixed assets, the cost of construction includes both the directly attributable cost of materials and cost of labor as well as indirect materials and indirect labor, which must be capitalized, together with pro rata depreciation. Interest on borrowings is not included.

54 186 The depreciation plan is based on the following useful lives, which are reassessed yearly: Useful life Buildings Plant fixtures Plant and machinery Furniture and fixtures, including special tools years years 6 12 years 3 15 years In accordance with IAS 17, property, plant and equipment used on the basis of lease agreements is recognized in the Balance Sheet if the conditions of a finance lease are met; in other words if the significant risks and opportunities which result from its use have passed to the lessee. Recognition is performed at the time of the agreement, at the lower of cost or the present value of the minimum lease payments. The straight-line depreciation method is based on the shorter of economic life or the term of the lease contract. The payment obligations resulting from the future lease installments are recognized as a liability at the present value of the leasing installments. Where Group companies have entered into operating leases as the lessee, in other words if not all risks and opportunities associated with title have passed to them, leasing installments and rents are expensed directly in the Income Statement. Investment property Investment property is measured at amortized cost. Buildings are depreciated on a straightline basis over a useful life of 33 years. Investments accounted for using the equity method Companies in which AUDI AG is directly or indirectly able to exercise significant influence on financial and operating policy decisions (associated companies) are accounted for using the equity method. The pro rata equity of these companies is regularly recorded under longterm investments and the share of earnings recorded as income under the financial result. Impairment tests Fixed assets are tested regularly for impairment as of the balance sheet date. To test for impairment, anticipated future cash flows are discounted at risk-appropriate, countryspecific rates of at least 9 percent. Impairment loss pursuant to IAS 36 is recognized where the recoverable amount from the use or disposal of the asset in question has declined below its carrying amount. Within the Audi Group, the value in use of the cash-generating unit in question, determined according to the entity method, is used in assessing impairment of goodwill. The planning data are compiled on the basis of available knowledge and are influenced by the prevailing macroeconomic developments, as well as by past developments. The planning horizon extends over a period of five years. Plausible assumptions on future developments are made for subsequent years. The impairment test for development work recognized as an intangible asset and for property, plant and equipment is based on current market factors, currency-specific aspects and the prevailing cost situation, with anticipated future cash flows being discounted at a risk-appropriate rate of 9 percent before tax.

55 187 If the reasons for impairment performed in previous years cease to apply, impairment losses are reversed. Goodwill impairment, however, remains unchanged pursuant to IAS 36. Financial instruments The scope of IAS 39 comprises financial assets and financial liabilities (financial instruments). Financial assets are categorized as follows: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets. Financial liabilities are classified into the following categories: financial liabilities at fair value through profit or loss, financial liabilities measured at amortized cost. Where financial instruments are purchased or sold in the customary manner, they are recognized using settlement date accounting, in other words at the value on the day on which the asset is delivered. Initial measurement of financial assets and liabilities is fundamentally at market value. The subsequent measurement of financial instruments depends on their category, in accordance with the requirements of IAS 39. The classification depends on the respective purpose for which a financial instrument has been acquired, and is reassessed as of each balance sheet date. No financial assets in the category of held-to-maturity investments are in use within the Audi Group. Financial assets include both originated instruments and derivative instruments. Derivative financial instruments are used as a hedge for items on the Balance Sheet and for future cash flows. Where hedging instruments used for currency or price hedging purposes according to business administration criteria do not fully satisfy the special eligibility requirements of IAS 39, they are classified as financial instruments at fair value through profit or loss. Only originated financial instruments are contained in the available-for-sale financial assets. Financial instruments are reported at amortized cost (using the effective interest method) or at fair value. They are abandoned if the rights to payments from the investment have expired or been transferred and the Audi Group has in essence transferred all risks and opportunities associated with their title. The amortized cost of a financial asset or financial liability, using the effective interest method, is the amount at which the financial asset or liability was measured at initial recognition minus principal repayments and any impairment losses. Receivables and liabilities denominated in foreign currencies are measured at the average rate on the balance sheet date. In the case of liabilities, amortized costs always correspond to the nominal or settlement value. Fair value generally corresponds to the market value or trading price. If no active market exists, fair value is determined using investment mathematics methods, for example by discounting future cash flows at the market rate or applying established option pricing models.

56 188 At each balance sheet date an assessment is made as to whether there is any objective basis for impairment of a financial asset or group of financial assets. Originated financial instruments Investments in subsidiaries excluded from consolidation and in participating interests are generally shown at their respective cost of purchase, because no active market exists for these companies and no fair value can reliably be determined with a justifiable amount of effort. Where there is evidence that the fair value is lower, this fair value is reported. Loans and receivables originated by the enterprise, as well as liabilities, are measured at amortized cost. These include, in particular loans advanced, trade receivables and payables, other current assets and liabilities, financial liabilities. In the case of current items, the fair values to be additionally indicated in the Notes correspond to the amortized cost. For non-current assets and liabilities with more than one year to maturity, fair values are determined by discounting future cash flows at market rates. Liabilities from financial lease agreements are carried at the present value of the leasing installments. Available-for-sale financial assets include, in particular, cash pool deposits at affiliated companies and securities. These are fundamentally measured at the fair value that corresponds to the market value on the balance sheet date in the case of listed financial instruments. The fluctuations in value of available-for-sale securities are accounted for within a separate equity reserve with no effect on income, after taking into account deferred tax. Unless there is evidence of lasting impairment, the financial result includes only capital gains or losses. If there is evidence of a lasting decline in value, the cumulative loss is recorded in the equity reserve and recognized in the Income Statement. Once impairment losses have been included in the Income Statement they are, however, no longer reversed by recognition in the Income Statement. In the 2007 fiscal year as in previous years there was no evidence of lasting impairment of the securities portfolio. Derivative financial instruments and hedge accounting Derivative financial instruments are used as a hedge against foreign exchange and raw materials price risks for items on the Balance Sheet and for future cash flows. Futures, as well as options in the case of foreign exchange risks, are used for this purpose. A requirement of hedge accounting is that a clear hedging relationship between the underlying transaction and the hedge must be documented and its effectiveness must be demonstrated. How the fair value changes in hedges are accounted depends on the nature of the hedging relationship. In the case of hedges against the risk of changes in value of balance sheet items (fair value hedges), both the hedging transaction and the hedged risk portion of the underlying transaction are recognized at fair value. Changes in the value of hedging and underlying transactions are included in the financial result. When hedging future cash flows, the fluctuations in the market value of the effective portion of a derivative financial instrument are initially reported in a special reserve within equity, with no effect on income, and are only recognized as income or expense once the hedged item is due. The ineffective portion of a hedge is recognized immediately in income.

57 189 Derivative financial instruments that serve currency or price hedging purposes according to business administration criteria but do not satisfy the strict criteria of IAS 39 are measured at fair value through profit or loss. Other receivables and financial assets Other receivables and financial assets (except for derivatives) are recognized at amortized cost. Provision is made for discernible non-recurring risks and general credit risks in the form of corresponding value adjustments. Deferred tax Pursuant to IAS 12, deferred tax is determined according to the balance sheet-focused liability method. This method specifies that tax deferrals are to be created for all temporary differences between the tax base of assets and liabilities and their carrying amounts in the Consolidated Financial Statements (temporary concept). Deferred tax assets relating to carryforward of unused tax losses must additionally be recognized. Deferrals amounting to the anticipated tax burden or tax relief in subsequent fiscal years are created on the basis of the anticipated tax rate at the time of realization. In accordance with IAS 12, the tax consequences of distributions of profit are not recognized until the resolution on the appropriation of profits is adopted. Deferred tax assets include future tax relief resulting from temporary differences between the carrying amounts in the Consolidated Balance Sheet and the valuations in the Balance Sheet for tax purposes. Deferred tax assets for carrying forward unused tax losses that can be realized in the future and from tax relief must also be recognized. Deferred tax assets and deferred tax liabilities are netted if the tax creditors and maturities are identical. Pursuant to IAS 1.70, deferred tax is reported as non-current. The carrying amount is reduced for deferred tax assets which are unlikely to be realized. Inventories Raw materials and supplies are measured at the lower of average cost of acquisition or net realizable value (net selling price). Other costs of purchase and purchase cost reductions are taken into account as appropriate. Work in progress and finished goods are valued at the lower of cost of conversion or net realizable value. Cost of conversion includes direct materials and direct labor, as well as a directly attributable portion of the necessary indirect materials and indirect labor, production-related depreciation and expenses attributable to the products from the amortization of production development expenditure recognized as an intangible asset. Distribution costs, administrative expenses and interest on borrowings are not capitalized. Merchandise is valued at the lower of cost of purchase or net realizable value. Provision has been made for all discernible storage and inventory risks in the form of appropriate write-downs. Individual downward valuation adjustments are made on all inventories as soon as the probable proceeds from their sale or use are lower than the carrying amounts of the inventories. The estimated selling price less the estimated costs incurred up until their sale is regarded as the net realizable value of inventories. Securities, cash and cash equivalents Securities held as current assets are measured at market value, i.e. at the trading price on the balance sheet date. Cash and cash equivalents are stated at their market value, which corresponds to the nominal value.

58 190 Provisions for pensions Actuarial measurement of provisions for pensions is based on the Projected Unit Credit Method for defined retirement benefit plans as specified in IAS 19 (Employee Benefits). This method takes into account pensions and entitlements to future pensions known at the balance sheet date as well as anticipated future pay and pension increases. Actuarial gains and losses are reported in a separate line item within equity, with no effect on income, after taking deferred tax into account. Other provisions In accordance with IAS 37, provisions are recognized if an obligation existing toward third parties is likely to lead to cash outflows and where the amount of the obligation can reliably be estimated. Pursuant to IAS 37, the other provisions for all discernible risks and uncertain liabilities are reported at their probable cost and are not offset against recourse entitlements. Provisions with over one year to maturity are measured at their discounted settlement value as of the balance sheet date. Market rates are used as the discount rates. Since the settlement value pursuant to IAS 37 also includes the cost increases to be taken into account on the balance sheet date, a nominal interest rate of 5.2 percent was applied in Germany. Management s estimates and assessments To some degree, the preparation of the Consolidated Financial Statements involves making assumptions and estimates with regard to the level and disclosure of the recognized assets and liabilities, income and expenditure, and contingent liabilities for the reporting period. The assumptions and estimates relate principally to the reporting and measurement of intangible assets, the Group-wide determination of the useful life of property, plant and equipment and investment property, the collectability of receivables and the recognition and measurement of provisions. The assumptions and estimates are based on premises that reflect the facts as known at any given time. In particular, the circumstances at the time of preparation of the Consolidated Financial Statements and the development of the global and industry environment deemed to be realistic were utilized as the basis with regard to anticipated future business developments. Developments in this underlying situation that deviate from the assumptions and are beyond management s sphere of influence may mean that the actual amounts will differ from the estimates originally anticipated. If the actual development varies from the anticipated development, the premises and, if necessary, carrying amounts for the assets and liabilities in question are adjusted accordingly. At the time of the preparation of the Consolidated Financial Statements, the underlying assumptions and estimates were not subject to any significant risks. As matters stand, therefore, no significant adjustment to the carrying amounts for the assets and liabilities stated in the Consolidated Financial Statements is expected in the following fiscal year. The assumptions utilized as the basis for management s estimates and assessments are explained in the Report on expected developments in the Management Report.

59 191 Notes to the Consolidated Income Statement 1 Revenue The composition of the revenue of the Group, by brand, is as follows: EUR million Audi brand 25,249 23,404 Lamborghini brand Volkswagen brand 2,802 2,772 SEAT brand Škoda brand Bentley brand 15 3 Total revenue from vehicles 29,060 27,068 Other sales 4,557 4,074 Total revenue 33,617 31,142 Revenue is categorized by region for the purpose of segment reporting, analogously to the system used for internal Group steering and reporting. Other sales constitute goods and services supplied to affiliated companies and sales to third parties. 2 Cost of sales Amounting to EUR 28,478 (27,309) million, cost of sales comprises the costs incurred in generating revenue and purchase prices in trading transactions. This item also includes expenses resulting from the formation of provisions for warranty costs, for development expenditure which cannot be capitalized, for amortization of development expenditure recognized as an intangible asset, and for property, plant and equipment for manufacturing purposes. Cost of sales rose at a disproportionately lower rate than revenue in Cost of sales included EUR 427 (547) million in impairment losses on intangible assets and property, plant and equipment. The impairment losses were calculated on the basis of updated impairment tests with particular account being given to the exchange rate of the euro as well as to market risks. 3 Distribution costs Distribution costs of EUR 2,737 (2,164) million substantially comprise labor and materials costs for marketing and sales promotion, advertising, public relations activities and outward freight, as well as depreciation attributable to the sales organization. The rise in distribution costs essentially relates to the initial consolidation of further sales subsidiaries within the Audi Group. 4 Administrative expenses Administrative expenses of EUR 266 (237) million include labor and materials costs, as well as depreciation attributable to administrative operations.

60 192 5 Other operating income EUR million Income from rebilling Income from derivative hedging transactions Income from the reversal of provisions and accruals Income from ancillary business Income from the processing of payments in foreign currency Income arising from asset disposals 8 8 Income from the reversal of reductions for impairment on receivables and other assets 7 13 Miscellaneous operating income Total other operating income 1,266 1,051 Income from ancillary business includes rental income from investment property in the amount of EUR 2 (2) million. Income from the processing of payments in foreign currency substantially comprises gains resulting from exchange-rate movements between the dates of output and payment, as well as exchange-rate gains resulting from measurement at the average rate on the closing date. Similarly, exchange rate losses are reported under other operating expenses. The overall line item for hedging instruments is shown under Other particulars (Note 35). 6 Other operating expenses EUR million Expense from derivative hedging transactions Expense from the processing of payments in foreign currency Expense from the allocation of costs and rebilling Impairment losses on receivables Losses arising from asset disposals Miscellaneous operating expenses Total other operating expenses Losses arising from disposals of assets include expenses from disposals of development expenditure recognized as an intangible asset as well as of property, plant and equipment. Miscellaneous operating expenses include amortization of goodwill for two Europeanbased subsidiaries in the amount of EUR 177 million (Note 14). The overall line item for hedging instruments is shown under Other particulars (Note 35).

61 193 7 Result from investments accounted for using the equity method EUR million Income from investments accounted for using the equity method Expense from investments accounted for using the equity method 1 1 Result from investments accounted for using the equity method Finance cost EUR million Interest and similar expenses of which to affiliated companies Interest expense Interest effect from the measurement of provisions for pensions Interest effect from the measurement of other provisions 3 35 Interest on provisions Interest income and expense are attributed on an accrual basis. The positive interest effect in fiscal 2007 from the measurement of other provisions was attributable to a rise in the discount rate following a rise in the domestic interest rate, and to changed maturities. 9 Other financial results EUR million Investment result 5 35 Income from investments in affiliated companies Income from profit transfer agreements 5 5 Expense from the transfer of losses 7 Expense from investments in affiliated companies Income from the sale of securities 33 7 Expense from the sale of securities 20 5 Income from the measurement of commodity futures Expense from the measurement of commodity futures 9 Interest and similar income of which from affiliated companies Total other financial results Income from investments in affiliated companies primarily relates to a share in the profits of Volkswagen Logistics GmbH & Co. OHG, of Wolfsburg. The overall line item of hedging instruments is shown under Other particulars (Note 35). Interest income is attributed on an accrual basis.

62 Income tax expense Income tax expense includes taxes passed on by Volkswagen AG on the basis of the singleentity relationship between the two companies for tax purposes, along with taxes owed by AUDI AG and its consolidated subsidiaries, as well as deferred taxes. Tax expense consists of the following: EUR million Current income tax expense 1,355 1,207 of which for Germany 1,194 1,119 of which for other countries of which income from the reversal of tax provisions 1 0 Deferred tax income of which for Germany of which for other countries Total income tax expense 1, of which non-periodic tax income of which deferred tax expense from the measurement of tax relief and loss carryforwards 86 EUR 1,193 (1,118) million of the current tax expense was passed on by Volkswagen AG. The current taxes in Germany are calculated at a tax rate of 38.3 (38.3) percent. This represents the sum of the corporate income tax rate of 25.0 percent, the solidarity surcharge of 5.5 percent and the average trade earnings tax rate for the Group. Deferred taxes are calculated at the rate of 29.5 (38.3) percent. The reduction in the tax rate was the result of the German Corporation Tax Reform Act of The national income tax rates applicable for foreign companies range from 0 percent to 41 percent. The effects arising as a result of the tax benefits on research and development expenditure in Hungary are reported under tax-exempt income in the reconciliation accounts. There are loss carryforwards totaling EUR 61 million, of which the amount of EUR 58 million can be used indefinitely. The realization of tax losses resulted in a reduction of EUR 19 (20) million in current income tax expense in the 2007 fiscal year. Deferred tax assets totaling EUR 164 million were not carried for reasons of impairment. Unused tax loss carryforwards accounted for EUR 2 million of this amount, tax rebates for EUR 162 million. Deferred tax totaling EUR 161 (282) million was recognized directly in equity without affecting the Income Statement. Treatment of actuarial gains or losses without affecting income pursuant to IAS 19 led to a reduction in equity in the current fiscal year from the formation of deferred tax amounting to EUR 40 (109) million. The change in deferred tax on effects reported within equity for derivative financial instruments resulted in a EUR 121 (173) million reduction in equity. Deferred tax effects of EUR 142 ( 8) million resulted from tax-rate changes, particularly in Germany.

63 195 The following deferred tax assets and liabilities carried in the Balance Sheet are attributable to the individual Balance Sheet items: EUR million Dec. 31, 2007 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2006 Deferred tax assets Deferred tax liabilities Intangible assets Property, plant and equipment Long-term investments Inventories Receivables and other assets Other current assets Provisions for pensions Other provisions Liabilities Loss carryforwards Gross value 1,654 1,762 1,023 1,151 of which non-current 1,096 1, Offsetting measures 971 1, ,136 Consolidation measures Carrying amount Deferred taxes are explained in detail in the recognition and measurement principles. Reconciliation from anticipated to reported income tax expense Anticipated tax expense is lower than the reported income tax expense. The main reason for this was the reduction in the tax rate in Germany from 38.3 to 29.5 percent beginning in This necessitated a reduction of EUR 128 million for impairment of deferred taxes. All effects are presented in the following reconciliation: EUR million Profit before tax 2,915 1,946 Anticipated income tax expense 38.3 % (38.3 %) 1, Reconciliation: Divergent foreign tax burden Tax portion for: tax-exempt income expenses not deductible for tax purposes temporary differences and losses for which no deferred tax has been recorded Non-periodic tax income Effects of tax-rate changes Other tax effects Income tax expense reported 1, Effective tax rate in %

64 Profit transfer to Volkswagen AG The amount of EUR 1,412 (856) million will be transferred to Volkswagen AG under the profit transfer agreement. 12 Earnings per share Basic earnings per share are calculated by dividing the share of profit due to AUDI AG stockholders by the weighted average number of shares in circulation during the fiscal year. In Audi s case, the diluted earnings per share are the same as the basic earnings per share, since there were no potential shares of AUDI AG in existence at either December 31, 2007, or December 31, Profit share of AUDI AG stockholders (EUR million) 1,654 1,343 Weighted average number of shares (basic and diluted totals are identical) 43,000,000 43,000,000 Earnings per share in EUR Outside stockholders of AUDI AG will receive a compensatory payment for each no-par share in lieu of a dividend for the 2007 fiscal year. The level of this payment corresponds to the dividend that is paid on one Volkswagen AG ordinary share. The dividend payment will be resolved by the Annual General Meeting of Volkswagen AG on April 24, Additional disclosures on financial instruments in the Income Statement Categories Financial instruments are divided into the following three categories within the Audi Group: measured at fair value, measured at amortized cost, not under the scope of IFRS 7. The category of financial instruments that are not covered under the scope of IFRS 7 comprises the investments accounted for using the equity method. Net results for financial instruments The net results for financial instruments as categorized under IAS 39 are as follows: EUR million Financial instruments at fair value through profit or loss Loans and receivables Available-for-sale financial assets Financial liabilities measured at amortized cost 4

65 197 The net results for financial instruments include the net income or expense from interest, fair value measurements, foreign currency translation, reductions for impairment and disposal gains. The financial instruments at fair value through profit or loss category presents the results from the settlement and measurement of commodity futures. The loans and receivables category essentially consists of factoring expenses. The net result for available-forsale financial assets predominantly comprises income from the cash pool and investments in securities. Interest income and expense for financial instruments not measured at fair value EUR million Interest income Interest expense Interest income and expense Impairment losses for financial assets by category EUR million Measured at fair value 2 Measured at amortized cost Impairment losses The impairment losses relate to value adjustments of financial assets. No impairment was applied to financial instruments falling outside the scope of IFRS 7. Gains and losses from hedging relationships The amount of EUR 190 ( 78) million was generated through the realization of foreign currency hedges in connection with cash flow hedges in the 2007 fiscal year.

66 198 Notes to the Balance Sheet 14 Intangible assets EUR million Dec. 31, 2007 Dec. 31, 2006 Concessions, industrial property rights and similar rights and values, as well as licenses thereto Goodwill 172 Development expenditure recognized as an intangible asset Products currently under development Products currently in use 1,451 1,230 Payments on account for intangible assets 2 Total 2,022 2,335 A reduction for impairment in the amount of EUR 177 million was applied to the goodwill of two fully consolidated European sales subsidiaries in view of increasingly intense competition and signs of stagnation in their respective market environments. Research and development expenditure EUR million Research expenditure and development expenditure not recognized as an intangible asset 1,570 1,077 Amortization and disposals of development expenditure recognized as an intangible asset Total 2,226 1,982 Spending on research and development activities in the 2007 fiscal year totaled EUR 2,067 (1,702) million, EUR 497 (625) million of which satisfy the criteria for recognition as an asset under IAS Property, plant and equipment EUR million Dec. 31, 2007 Dec. 31, 2006 Land, land rights and buildings, including buildings on land owned by others 1,748 1,692 Plant and machinery 1,236 1,054 Furniture, fixtures and office equipment 1,743 1,699 of which finance leases 3 1 Payments on account and assets under construction Total 5,178 5,023 The carrying amounts for finance leases correspond to their fair values. Payments totaling EUR 67 (57) million for assets rented on the basis of operating lease agreements were recognized as an expense.

67 199 There are no significant restrictions on ownership and disposal for the reported property, plant and equipment. 16 Investment property Land and buildings held for the purpose of generating rental income (investment property) are reported under investment property pursuant to IAS 40. The fair value of investment property, based on appraisals, was EUR 12 (9) million. 17 Other long-term investments EUR million Dec. 31, 2007 Dec. 31, 2006 Investments in affiliated companies Participating interests 9 9 Total Deferred tax assets The temporary differences between tax bases and carrying amounts in the Consolidated Balance Sheet are explained under Deferred tax in the recognition and measurement principles and under Note 10 Income tax expense. Pursuant to IAS 1, deferred tax liabilities are reported as non-current liabilities, irrespective of their maturities. 19 Other receivables and other financial assets The reported receivables and other assets are not subject to any significant restrictions on ownership or disposal. Derivative financial instruments are measured at market value. The overall line item for hedging instruments is shown under Other particulars (Note 35). Non-current other receivables and other financial assets EUR million Dec. 31, 2007 Dec. 31, 2006 Loans advanced to affiliated companies 28 1 Loans advanced to associated companies 13 Other loans advanced 1 1 Other receivables from affiliated companies of which from derivative currency hedging instruments (cash flow hedges) of which from commodity futures Other tax assets 6 7 Other assets Total The loans advanced have a fair value of EUR 28 (15) million. The miscellaneous non-current assets have a fair value of EUR 260 (98) million.

68 200 Current other receivables and other financial assets EUR million Dec. 31, 2007 Dec. 31, 2006 Other receivables from affiliated companies of which from derivative currency hedging instruments (cash flow hedges) of which from commodity futures 7 6 Other receivables from associated companies 5 Other tax assets Other assets Total 1, All current other receivables and financial assets are due within one year of the balance sheet date. The carrying amounts correspond to their fair values. The other assets include EUR 33 (22) million in refund entitlements from the German Federal Employment Agency for the implementation of partial early retirement plans. 20 Inventories EUR million Dec. 31, 2007 Dec. 31, 2006 Raw materials and supplies Work in progress Finished goods and merchandise 2,002 1,420 Total 2,661 2,109 Inventories amounting to EUR 28,450 (27,442) million were recorded as cost of sales at the same time that revenue from them was realized. The write-down resulting from the measurement of inventories on the basis of sales markets amounted to EUR 30 (44) million. No reversal of write-downs was performed in the fiscal year. Of the finished goods inventory, a portion of the company car fleet valued at EUR 98 (77) million has been pledged as collateral for commitments toward employees under the partial early retirement block model. The other reported inventories are not subject to any significant restrictions on ownership or disposal.

69 Trade receivables EUR million Dec. 31, 2007 Dec. 31, 2006 Trade receivables from third parties 1, affiliated companies associated companies and participating interests Total 2,149 1,840 The fair values of the trade receivables correspond to their carrying amounts. Those trade receivables which will not be realized until more than 12 months subsequent to the balance sheet date amount to EUR 3 (4) million. 22 Effective income tax assets Entitlements to income tax rebates, predominantly for foreign Group companies, are reported under this item. 23 Securities Securities held as current assets comprise fixed-interest or variable-interest securities and equities, with yields of up to 5.20 percent being achieved. 24 Cash and cash equivalents Cash and cash equivalents essentially comprise credit balances with banks and affiliated companies amounting to EUR 6,740 (4,884) million. The yields on overnight money and time deposits ranged between 3.48 percent and 4.84 percent. The credit balances were with various banks and in a variety of currencies. Liquid funds were invested with affiliated companies via the cash pooling arrangements.

70 202 EQUITY 25 Changes in equity EUR million Issued capital Capital reserve Position as of Jan. 1, Currency adjustments Transfer to retained earnings Changes in measurement not affecting income Result from securities Result from settled cash flow hedges Deferred tax items netted directly against equity Capital contributions 231 Other changes Position as of Dec. 31, Reclassification of investments accounted for using the equity method Position after adjustment on Dec. 31, Currency adjustments Transfer to retained earnings Changes in measurement not affecting income Result from securities Result from settled cash flow hedges Deferred tax items netted directly against equity Minority interests Capital contributions 428 Other changes Difference from change in consolidated companies Position as of Dec. 31,

71 203 Retained earnings Equity Legal reserve and other retained earnings Currency exchange reserve Reserve for cash flow hedges Reserve for marketprice measurement of securities Provisions for pensions and similar obligations Equity method accounting after tax AUDI AG stockholders interests Minority interests Total 6, ,104 6, , ,265 7, , ,265 7, , , ,355

72 204 The share capital of AUDI AG totals EUR 110,080, Each share represents a mathematical share of EUR 2.56 of the issued capital. It is classified into 43,000,000 no-par bearer shares. The capital reserves contain premiums paid in connection with the issuance of shares of the Company. In the year under review, capital reserves rose to EUR 911 million as a result of a contribution in the amount of EUR 428 million by Volkswagen AG to the capital reserve of AUDI AG. The opportunities and risks under foreign exchange contracts and currency option transactions serving as hedges for future cash flows are deferred in the reserve for cash flow hedges with no effect on the Income Statement. When the cash flow hedges become due, the results from the settlement of the exchange-rate hedging contracts are reported in the other operating income or expenses. Gains and losses from the measurement at fair value of financial assets available for sale are recognized in the reserve for the market-price measurement of securities. Upon disposal of the securities, share price gains and losses realized are reported under the financial result. Adjustments to actuarial assumptions on retirement benefit obligations are recognized in the provisions for pensions and similar obligations. Pursuant to IAS 28.39, foreign currency translation differences that do not affect income from the accounting of FAW-Volkswagen Automotive Company, Ltd. using the equity method were included in the reserve for equity method accounting after tax. The foreign currency translation differences were reclassified from the currency exchange reserve to a separate reserve item. The minority interests in the Company s equity relate to Volkswagen Group of America, Inc., of Auburn Hills, U.S.A., and Volkswagen Canada Inc., of Ajax, Canada, which respectively hold 100 percent of the shares of Audi of America, LLC and Audi Canada Inc. and to which the earnings of the latter companies are attributable. The balance of EUR 242 (487) million remaining after the transfer of profit to Volkswagen AG is allocated to the other retained earnings. Stock option plan Under Volkswagen AG s stock option plans, the members of the Board of Management and selected senior managers of the Audi Group were granted the right to acquire stock options for shares of Volkswagen AG by subscribing convertible bonds. In the 1999 to 2006 fiscal years, a total of eight tranches of the stock option plan were issued. The stock option plan was not extended for the period beyond Each convertible bond is entitled to be converted into 10 ordinary shares. Conversion may take place for the first time after a qualifying period of 24 months and then up until a period of five years from the time of issuance of the convertible bond has elapsed. For details relating to the terms of subscription and exercise, please refer to the notes on equity in the Annual Report of Volkswagen AG. The convertible bonds are measured at fair value at the time of issue; in accordance with the transitional provisions of IFRS 2, only convertible bonds granted after publication of the draft standard on November 7, 2002, are affected. The fair value of the convertible bonds is determined using a binomial option pricing model, and reported as personnel costs on a pro rata basis over the 24-month qualifying period and under other changes in equity for AUDI AG. Expenses of EUR 0.5 million were incurred in fiscal The corresponding expense for the previous fiscal year was EUR 0.6 million.

73 205 The following table presents the development of the convertible bonds issued (fifth to eighth tranches) and their exercise prices. Average conversion price per convertible bond* Convertible bonds EUR Quantity Position as of Jan. 1, ,400 In fiscal year granted additions disposals ,200 exercised ,500 Position as of Dec. 31, ,750 * Conversion price per 10 shares The total as of December 31, 2007, includes convertible bonds from the eighth tranche only. In the 2007 fiscal year, 11,500 convertible bonds were converted at a weighted average exercise price of EUR 1, LIABILITIES 26 Financial liabilities Non-current financial liabilities EUR million Dec. 31, 2007 Dec. 31, 2006 Liabilities to banks 3 3 Liabilities from financial lease agreements 1 0 Total 4 3 Non-current financial liabilities having a time to maturity of more than five years amount to EUR 1 (1) million. The carrying amounts correspond to their fair values. Current financial liabilities EUR million Dec. 31, 2007 Dec. 31, 2006 Liabilities to affiliated factoring companies Liabilities to affiliated companies from cash pooling Liabilities to banks Liabilities from financial lease agreements 2 1 Total Measurement of the non-current and current financial lease agreements is based on market interest rates in each case.

74 Deferred tax liabilities The temporary differences between tax bases and carrying amounts in the Consolidated Balance Sheet are explained under Deferred tax in the recognition and measurement principles, and under Note 10 Income tax expense. Pursuant to IAS 1, deferred tax liabilities are reported as non-current liabilities, irrespective of their maturities. 28 Other liabilities The derivative currency hedging instruments reported under other liabilities are measured at market values. The overall line item for currency hedging instruments is shown under Other particulars (Note 35). Non-current other liabilities EUR million Dec. 31, 2007 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2006 Carrying amounts Fair values Liabilities to affiliated companies of which from derivative currency hedging instruments (cash flow hedges) of which from commodity futures Other liabilities of which relating to social insurance Total Liabilities having a time to maturity of more than five years amount to EUR 117 (148) million. Current other liabilities EUR million Dec. 31, 2007 Dec. 31, 2006 Liabilities to affiliated companies 1,754 1,112 of which from derivative currency hedging instruments (cash flow hedges) of which from commodity futures 2 4 Liabilities to associates Advances received for orders from customers Other liabilities of which taxes of which in respect of social insurance Total 3,013 2,109 Other liabilities include obligations for derivative currency hedges in the amount of EUR 3 million.

75 Provisions for pensions Provisions for pensions are created on the basis of plans to provide retirement, disability and survivor benefits. The benefit amounts are generally contingent on the length of service and the remuneration of the employees. Both defined contribution and defined benefit commitments exist within the Group for retirement benefit arrangements. In the case of defined contribution plans, the Company pays contributions to public- or private-sector pension plans on the basis of statutory or contractual requirements, or on a voluntary basis. Payment of the contributions releases the Company from any other benefit obligations. The regular contributions paid are recorded as expense for the year in question; they amounted to EUR 237 (220) million for the Audi Group. Of this total, EUR 220 (206) million was paid into the government pension plan in Germany. The retirement benefit systems are based predominantly on defined benefit plans, with a distinction being made between systems based on provisions and externally financed benefit systems. The benefit entitlements to retirement benefits both in Germany and internationally are measured according to the Projected Unit Credit Method pursuant to IAS 19 (Employee Benefits), where the future obligations are measured on the basis of benefit claims vested pro rata as of the balance sheet date. For purposes of measurement, trend assumptions are used for the relevant quantities affecting the level of benefit. The retirement benefit scheme within the Audi Group was evolved into a pension fund model in Germany on January 1, The retirement benefit commitments for this model are also classified as defined benefits in accordance with the requirements of IAS 19. The remuneration-based annual cost of providing employee benefits is invested in mutual funds on a fiduciary basis by Volkswagen Pension Trust e.v. This model offers employees the opportunity of increasing their pension entitlements, while providing full risk coverage. As the mutual fund units administrated on a fiduciary basis satisfy the requirements of IAS 19 as plan assets, these funds were offset against the retirement benefit obligations. The amounts recorded in the Balance Sheet for defined benefits are presented in the following table: EUR million Dec. 31, 2007 Dec. 31, 2006 Present value of externally funded defined benefit obligations Fair value of plan assets Financing status (balance) 0 0 Present value of defined benefit obligations not externally funded 1,957 1,974 Provisions for pensions recognized in the Balance Sheet 1,957 1,974

76 208 The present value of the defined benefits changed as follows: EUR million Present value on January 1 2,280 2,418 Changes in the consolidated companies and initial application of IAS 19 8 Service cost Interest cost Actuarial gains (-) / losses (+) Pension payments from company assets Effects from transfers 6 Currency differences 1 1 Present value on December 31 2,325 2,280 The reconciliation for the fair value of the plan assets is as follows: EUR million Plan assets on January Expected return on plan assets Actuarial gains (+) / losses (-) Employer contributions Plan assets on December In the past fiscal year, actual losses from the plan assets amounted to EUR 2 million. The long-term overall yield on the plan assets is determined on a uniform basis and depends on the actual long-term earnings of the portfolio, historical overall market yields and a forecast of the anticipated yields of the classes of security in the portfolio. Employer contributions to the fund assets totaling EUR 52 million are expected for the following fiscal year. The composition of fund assets is as follows, by category: % of fund assets Shares Fixed-interest securities Cash Other Actuarial gains and losses result from changes in the entitlement base and from deviations in the actual trends (e.g. increases in pay or retirement benefits) from the figures assumed for calculation purposes. In accordance with the requirements of IAS 19, such gains and losses are recognized under a separate line item within equity, after taking deferred tax into account.

77 209 The following amounts were recognized in the Income Statement: EUR million Current service cost for services provided by the employees in the fiscal year Past service cost 28 Interest cost Expected return on plan assets Total The interest element in pension costs is shown under finance cost. The expected return on plan assets is also shown under this item. The provisions for pensions recognized in the Balance Sheet are determined by offsetting the present value against the fund assets pursuant to IAS 19. The development of the net liability recognized as provisions for pensions was as follows: EUR million Provisions for pensions on January 1 1,974 2,180 Changes in the consolidated companies and initial application of IAS 19 8 Employee benefit expenses Actuarial gains (-) / losses (+) Pension payments from company assets Contributions paid to external pension funds Transfers received from affiliated companies 1 1 Transfers made to affiliated companies 7 1 Currency differences 1 1 Provisions for pensions on December 31 1,957 1,974 of which non-current 1,891 1,913 The experience adjustments, i.e. the effects of differences between actuarial assumptions and what has actually transpired, are presented in the following table: % Difference between anticipated and actual performance as % of the present value of the obligation as % of the fair value of the plan assets

78 210 Calculation of the retirement benefit obligations is based on the following actuarial assumptions (weighted average): % Dec. 31, 2007 Dec. 31, 2006 Remuneration trend Retirement benefit trend Discount factor Staff turnover rate Anticipated yield on plan assets The 2005 G Reference Tables published by HEUBECK-RICHTTAFELN-GmbH served as the biometric basis for calculation of retirement benefits. 30 Effective income tax obligations Effective income tax obligations consist primarily of tax liabilities to Volkswagen AG under allocation plans. 31 Other provisions EUR million Dec. 31, 2007 Dec. 31, 2006 Total Of which due within one year Total Of which due within one year Obligations from sales operations 3,630 1,647 2,835 1,373 Workforce-related provisions Other provisions Total 4,672 2,245 3,830 1,925 Obligations from sales operations comprise risks from the sale of vehicles, components and genuine parts, including the disposal of end-of-life vehicles. These are predominantly warranty claims that are determined on the basis of previous or estimated future loss experience. This item additionally includes rebates, bonuses and similar discounts due to be granted and arising subsequent to balance sheet date but occasioned by revenue prior to the balance sheet date. The workforce-related provisions are created, among other reasons, for service anniversary awards, partial early retirement arrangements, suggestion awards and severance payments. The other provisions relate to a wide range of one-off risks. The composition of other provisions by anticipated outflow date will be 48 percent in 2008, 45 percent in the years 2009 through 2012 and 7 percent thereafter.

79 211 The development of the provisions was as follows: EUR million Jan 1, 2007 Change in consolidated group Used Reversed Allocated Interest effect from measurement Dec. 31, 2007 Obligations from sales operations 2, , , ,630 Workforcerelated provisions Other provisions Total 3, , , , Trade payables EUR million Dec. 31, 2007 Dec. 31, 2006 Trade payables to third parties 2,236 1,741 affiliated companies associated companies 8 13 Total 2,794 2,255 The fair value of trade payables to third parties amounts to EUR 2,233 (1,737) million. In the case of liabilities to affiliated and associated companies, the fair value corresponds to the carrying amount. The customary retention of title applies to liabilities from deliveries of goods. Other particulars 33 Capital management The primary goal of capital management within the Audi Group is to assure financial flexibility in order to achieve the business and growth targets, and to enable continuous, steady growth in the value of the Company. The capital structure is steered specifically with this in mind, with the economic environment kept under constant observation. The objectives, methods and procedures for optimizing capital management remained unchanged at December 31, 2007.

80 212 The equity and financial liabilities from the transfer of profit are summarized in the following table: EUR million Dec. 31, 2007 Dec. 31, 2006 Equity 8,355 7,265 as % of total capital Financial liabilities from the transfer of profit 1,943 1,069 Current financial liabilities Non-current financial liabilities 4 3 Liabilities from the transfer of profit 1, as % of total capital Total capital 10,298 8,334 Around 99 percent of the issued capital is held by Volkswagen AG, with which a control and profit transfer agreement exists. In the 2007 fiscal year, equity rose by 15 percent over the year before. This was substantially attributable to a cash injection to the capital reserve by Volkswagen AG and to the allocation to other retained earnings of the balance remaining after the transfer of profit. 34 Additional disclosures on financial instruments in the Balance Sheet Carrying amounts of financial instruments The carrying amounts as classified under IAS 39 are presented in the following overview: EUR million Dec. 31, 2007 Dec. 31, 2006 Financial assets measured at fair value through profit or loss Loans and receivables 2,642 2,150 Available-for-sale financial assets 8,122 5,939 Financial liabilities measured at fair value through profit or loss 2 10 Financial liabilities measured at amortized cost 5,029 3,615

81 213 The following table presents a reconciliation of the carrying amounts of the Balance Sheet items with the individual categories: EUR million Balance Sheet item Dec. 31, 2007 Carrying amounts of financial instruments Carrying amounts, miscellaneous Non-current assets Measured at fair value Measured at amortized cost Not under scope of IFRS 7 Other investments Other receivables and financial assets Current assets Trade receivables 2,149 2,149 Other receivables and financial assets 1, Securities 1,333 1,333 Cash and cash equivalents 6,740 6,740 Non-current liabilities Financial liabilities 4 4 Other liabilities Current liabilities Financial liabilities Trade payables 2,794 2,794 Other liabilities 3, ,695 1,290 The fair values of financial assets and liabilities within the measured at amortized cost category are indicated in the corresponding sections, under the Notes to the Balance Sheet.

82 214 EUR million Balance Sheet item Dec. 31, 2006 Carrying amounts of financial instruments Carrying amounts, miscellaneous Non-current assets Measured at fair value Measured at amortized cost Not under scope of IFRS 7 Other investments Other receivables and financial assets Current assets Trade receivables 1,840 1,840 Other receivables and financial assets Securities 1,014 1,014 Cash and cash equivalents 4,884 4,884 Non-current liabilities Financial liabilities 3 3 Other liabilities Current liabilities Financial liabilities Trade payables 2,255 2,255 Other liabilities 2, , Reductions for impairment The development of reductions for impairment to receivables and other financial assets existing on the balance sheet date was as follows: EUR million 2007 Individual write-down 2006 Individual write-down Position as of January Allocated Used Reversed Position as of December Portfolio-based write-downs are not used within the Audi Group.

83 Management of financial risks Credit risk The credit risk from financial assets comprises the risk of default by a contractual party and therefore does not exceed the positive fair values of these assets. The risk from originated financial instruments is covered by value adjustments. The contractual partners for cash and capital investments, as well as currency and raw materials hedging instruments, have impeccable creditworthiness. Over and above this, the risks are restricted by a limit system that is based on the credit ratings of international rating agencies. The quality of financial assets by category is presented in the following table: EUR million Gross carrying amount 2007 Neither overdue nor impaired Overdue, not impaired Impaired Gross carrying amount 2006 Neither overdue nor impaired Overdue, not impaired Impaired Trade receivables 2,163 1, ,854 1, Other receivables 1,525 1, Borrowings Other 1,213 1, Total 3,688 2, ,566 1, The Audi Group s trading partners, borrowers and debtors are regularly monitored under the risk management system. All receivables that are neither overdue nor impaired, amounting to EUR 2,801 (1,884) million, are allocable to risk category 1. Risk category 1 is the highest rating category within the Volkswagen Group; it includes customers of high creditworthiness exclusively. Analysis of gross carrying amounts of overdue, unimpaired financial assets by maturity date: EUR million Overdue, not impaired Overdue Dec. 31, 2007 Up to 30 days 30 to 90 days More than 90 days Trade receivables Other receivables Borrowings 0 0 Other Total

84 216 EUR million Overdue, not impaired Overdue Dec. 31, 2006 Up to 30 days 30 to 90 days More than 90 days Trade receivables Other receivables Borrowings 0 0 Other Total The vast majority of the overdue and unimpaired financial assets are overdue by only a very short period predominantly due to the customer s purchase invoice and payment processes. It was therefore not necessary to implement any contractual changes to prevent financial instruments from becoming overdue. The Audi Group did not accept any collateral with the intention of selling it in fiscal Liquidity risk A liquidity forecast based on a fixed planning horizon and available yet unused lines of credit assure adequate liquidity at all times. Analysis of undiscounted cash used for financial liabilities by maturity date The financial assets reported as of the balance sheet date are categorized separately by maturity date in the following table: EUR million Total To contractual maturity date Up to 1 year 1 to 5 years More than 5 years Financial liabilities Trade payables 2,794 2, Other financial liabilities 1,751 1, Derivatives used as hedges 9,224 4,466 4,758 0 Total 14,300 9,439 4, The cash used for derivatives where gross settlement has been agreed is offset by cash received. These cash receipts are not presented in the analysis by maturity date. Had the cash receipts been also taken into account, the cash used would have been significantly lower in the analysis by maturity date. Mutual fund price risk The special mutual funds created using surplus liquidity are exposed, in particular, to an equity and bond price risk that may arise from fluctuating stock market prices and indices, and market interest rates. The changes in bond prices resulting from a variation in market interest rates are quantified separately in the corresponding notes on the Price and currency risk and on the Interest rate risk, reflecting the evaluation of foreign exchange and other interest risks from the special mutual funds.

85 217 The risk from special mutual funds is generally countered by maintaining a broad mix of products, issuers and regional markets when investing funds, as stipulated in the investment guidelines. Where necessitated by the market situation, currency hedges in the form of futures contracts are additionally used. Such measures are coordinated centrally by Group Treasury and implemented at the operational level by the special mutual funds risk management. With regard to representation of market risks, IFRS 7 additionally requires disclosures on how hypothetical changes in risk variables would affect the prices of financial instruments. Market prices and indices can serve as risk variables. If equity trading prices had risen (fallen) by 10 percent by comparison with the position as of December 31, 2007, the equity reserve and the fair value of the equities held would have been EUR 6 million higher (lower) (December 31, 2006: EUR 12 million higher (lower)). Price and currency risk The Audi Group is exposed to price and exchange rate fluctuations in view of its international business activities. These risks are limited by concluding appropriate hedges for matching amounts and maturities. The currency risk hedging measures to hedge against currency risks are coordinated regularly between AUDI AG and the group treasury of Volkswagen AG in accordance with Volkswagen s organizational guideline. Marketable derivative financial instruments (foreign exchange contracts, currency option transactions, currency swaps and commodity futures) are used for this purpose. The hedging transactions are performed centrally on behalf of AUDI AG by Volkswagen AG on the basis of an agency agreement. Contracts are concluded exclusively with top-caliber national and international banks whose creditworthiness is regularly examined by leading rating agencies. The results from hedging contracts are credited or debited to the Audi Group each month on the basis of the proportionate share of the Volkswagen Group s overall hedging volume. In accordance with the Volkswagen organizational guideline, AUDI AG additionally concludes hedging transactions of its own to a limited extent, where this helps to simplify current operations. Measures involved in the management of currency risks primarily related to the U.S. dollar, the pound sterling, the Canadian dollar and the Japanese yen. To reflect price and currency risks, IFRS 7 requires sensitivity analyses that reveal the effects of hypothetical changes in relevant risk variables on profit and equity. The periodic effects are determined by applying the hypothetical changes in the risk variables to the inventory of financial instruments on the reporting date. It is assumed for this purpose that the inventory on the reporting date is representative of the entire year. Currency risks pursuant to IFRS 7 arise as a result of financial instruments that are denominated in a currency other than the functional currency and are of a monetary nature. Exchange rate variances from the translation of financial statements into the Group currency are disregarded. All non-functional currencies in which the Audi Group enters into financial instruments are fundamentally treated as relevant risk variables. Within the Audi Group, the principal originated monetary financial instruments (liquid assets, receivables, securities held and equity instruments held, interest-bearing liabilities, liabilities under finance lease arrangements, interest-free liabilities) are either denominated directly in the functional currency or substantially transferred to the functional currency through the use of derivatives. The short maturity of the instruments also means that potential exchange rate movements have only a very minor impact on profit or equity.

86 218 Had the value of the euro been 10 percent higher (lower) against all originated financial instruments held in foreign currency on December 31, 2007, the other financial result and the fair value of the financial instruments would have been EUR 26 million lower (higher) (December 31, 2006: EUR 35 million lower (higher)). Had the value of the euro been 10 percent higher (lower) against all securities investments held in foreign currency on December 31, 2007, there would have been no significant effect on equity or profit. Movements in the exchange rate against the underlying currencies for these transactions affect the hedging reserve in equity and the fair value of these hedging transactions. Had the value of the euro been 10 percent higher (lower) against the hedged foreign currencies on December 31, 2007, the hedging reserve in equity and the fair value of the hedging transactions overall would have been EUR 550 million higher or EUR 504 million lower (December 31, 2006: EUR 549 million higher or EUR 350 million lower). Raw materials risk Raw materials risks are avoided or limited by entering into commodity futures or long-term supply agreements. Hedging measures relate principally to the supply of the following raw materials: Aluminum, lead, copper, palladium, platinum and rhodium. Had the raw material prices been 10 percent higher (lower) on December 31, 2007, profit would have been EUR 40 million higher (lower) (December 31, 2006: EUR 46 million higher (lower)). Interest rate risk The interest rate risk stems from changes in market rates, above all for medium- and longterm variable-rate receivables and liabilities. The Audi Group is exposed to interest rate risks primarily in the euro zone, the United Kingdom, the United States and Asia. Interest rate risks are presented by means of sensitivity analyses pursuant to IFRS 7. These analyses reveal the effects of changes in the market rates on interest payments, interest income and expense, other earnings components, as well as equity, if applicable. The interest rate sensitivity analyses are based on the following assumptions: Had the market interest rate been 100 basis points higher (lower) on December 31, 2007, equity would have been EUR 20 million lower or EUR 22 million higher (December 31, 2006: EUR 18 million lower or EUR 20 million higher). Had the market interest rate been 100 basis points higher (lower) on December 31, 2007, profit would have been EUR 4 million higher (lower) (December 31, 2006: EUR 3 million higher (lower)). Credit risk The credit risk from financial assets comprises the risk of default by a contractual party and therefore does not exceed the positive fair values of these assets. The assumption is made that the actual risk from originated financial instruments is covered by adequate reductions for impairment or uncollectability. The credit risk from derivative financial instruments does not exceed the balance of positive market values in the event of default by a contractual party of Volkswagen AG or Audi Group companies. The actual credit risk is negligible, as contracts are concluded only with business partners of impeccable creditworthiness and trading limits are defined for each business partner as a risk management measure.

87 219 Methods of monitoring the effectiveness of hedging relationships Within the Audi Group, the effectiveness of hedging relationships is evaluated prospectively using the critical terms match method. Retrospective evaluation of the effectiveness of hedges involves an effectiveness test in the form of the dollar offset method. In the case of the dollar offset method, the changes in value of the underlying transaction, expressed in monetary units, are compared with the changes in value of the hedge expressed in monetary units. All hedge relationships were effective within the range specified in IAS 39 (80 to 125 percent). Nominal volume of derivative financial instruments The nominal volumes of the hedges presented represent the total of all buying and selling prices on which the transactions are based. EUR million Nominal volumes Market values Time to maturity up to 1 year Dec. 31, 2006 Time to maturity up to 1 year Dec. 31, 2007 Dec. 31, 2006 Dec. 31, 2007 Cash flow hedges Foreign exchange contracts 6,807 4,463 6,667 4, Currency option transactions 2,414 3,186 3, Currency swaps Commodity futures Total portfolio 9,673 4,641 10,489 7, The derivative financial instruments used exhibit a maximum hedging term of five years. 36 Cash Flow Statement The Cash Flow Statement details the payment streams for both the 2007 fiscal year and the previous year, categorized according to cash used and received for operating, investing and financing activities. The effects of changes in the consolidated companies and to foreign exchange rates on cash flows are presented separately. Cash flow from operating activities includes all payment streams in connection with ordinary activities. Under the indirect calculation method, all expenditures not affecting cash (comprising substantially depreciation and amortization) are eliminated, starting with the profit before profit transfer and taxation. In 2007, cash flow from operating activities included payments for interest received amounting to EUR 278 (175) million and for interest paid amounting to EUR 91 (71) million. The Audi Group received dividends and profit transfers totaling EUR 84 (37) million in The income tax payments item substantially comprises payments made to Volkswagen AG on the basis of the single-entity relationship for tax purposes in Germany, as well as payments to foreign tax authorities. Cash flow from investing activities includes additions to development expenditure recognized as an intangible asset as well as additions to other intangible assets, property, plant and equipment, and long-term investments and non-current loans advanced. The change in investment property, the proceeds arising from asset disposals and the change in securities effective as payment are similarly reported in cash flow from investing activities.

88 220 Cash flow from financing activities includes cash used for the transfer of profit, as well as changes in financial liabilities and credit extended. The changes in the balance sheet items that are presented in the Cash Flow Statement cannot be derived directly from the Balance Sheet because the effects of currency translation and of changes in the consolidated companies do not affect cash and are segregated. The change in cash and cash equivalents as a result of changes in the consolidated companies relates to companies that have been consolidated for the first time. 37 Contingencies Contingencies are unrecognized contingent liabilities whose amount corresponds to the maximum possible claim as of the balance sheet date. EUR million Dec. 31, 2007 Dec. 31, 2006 Liabilities from guarantees 9 8 Furnishing of collateral for outside liabilities 53 Total Litigation Neither AUDI AG nor any of its Group companies are involved in ongoing or prospective legal or arbitration proceedings which could have a significant influence on their economic position. Appropriate provisions have been created within each Group company, or adequate insurance benefits are anticipated, for potential financial charges resulting from other legal or arbitrational proceedings. 39 Assets and liabilities held for sale There were no assets or liabilities held for sale on either December 31, 2007, or December 31, Change of control agreements Change of control clauses are contractual agreements between a company and third parties to provide for legal succession should there be a direct or indirect change in the ownership structure of any party to the contract. The contractual agreements between the Audi Group and third parties do not contain any change of control clauses in the event of a change in the ownership structure of AUDI AG or its subsidiaries.

89 Other financial obligations EUR million Dec. 31, 2007 Dec. 31, 2006 Ordering commitments for Due within 1 year 1 to 5 years over 5 years Total after 1 year Total property, plant and equipment , ,195 intangible assets Commitments from long-term rental and lease agreements Total 1, , ,520 Due 42 Discontinued operations There are no plans to discontinue or cease operations as defined by IFRS Cost of materials EUR million Raw materials and consumables used, as well as purchased goods 21,242 19,925 Purchased services 1,850 1,702 Total 23,092 21, Personnel costs EUR million Wages and salaries 2,836 2,804 Social insurance as well as expenses for employee benefits and support payments of which relating to retirement benefit plans of which defined contribution pension plans Total 3,406 3, Total average number of employees for the year Domestic Group companies 45,372 45,179 Foreign Group companies 7,975 7,118 Total 53,347 52,297 of which apprentices 2,002 2,031

90 Related party disclosures Related parties as defined in IAS 24 are: the parent company, Volkswagen AG, and its subsidiaries outside the Audi Group Porsche Automobil Holding SE, of Stuttgart, and its affiliated companies. Its voting interest in Volkswagen AG was 30.6 percent on July 31, It appoints two members of the Supervisory Board of Volkswagen AG. other parties (individuals and companies) which could be affected by the reporting entity or which could influence the reporting entity, such as the members of the Board of Management and Supervisory Board of AUDI AG, the members of the Board of Management and Supervisory Board of Volkswagen AG, associated companies, unconsolidated subsidiaries. The volume of transactions with the parent company, Volkswagen AG, and with other subsidiaries which do not belong to the Audi Group is presented in the following overview: EUR million Sales and services supplied to Volkswagen AG 4,443 3,937 Volkswagen AG subsidiaries not belonging to the Audi Group 8,870 10,319 Purchases and services received from Volkswagen AG 4,955 4,930 Volkswagen AG subsidiaries not belonging to the Audi Group 3,821 3,446 Receivables from Volkswagen AG 5,885 5,582 Volkswagen AG subsidiaries not belonging to the Audi Group 2, Liabilities to Volkswagen AG 2,722 2,307 Volkswagen AG subsidiaries not belonging to the Audi Group 1, Contingent liabilities to Volkswagen AG Volkswagen AG subsidiaries not belonging to the Audi Group As of December 31, 2007, sales of receivables to Volkswagen AG subsidiaries which are not members of the Audi Group amounted to EUR 1,590 million (1,168) million. Any claims against Volkswagen AG subsidiaries which are not members of the Audi Group arising from the contingencies is considered to be unlikely.

91 223 The extent of business relations between fully consolidated companies of the Audi Group and non-consolidated companies, associated companies and other related parties is presented in the following tables: EUR million Dec. 31, 2007 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2006 Goods and services supplied Goods and services received Associated companies 1,453 1, Non-consolidated subsidiaries Porsche companies* * related parties since the 2007 fiscal year EUR million Dec. 31, 2007 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2006 Receivables from Liabilities to Associated companies Non-consolidated subsidiaries Porsche companies* 11 1 * related parties since the 2007 fiscal year All business transactions with related parties have been conducted on the basis of international comparable uncontrolled price methods pursuant to IAS 24, according to the terms that customarily apply to outside third parties. The goods and services procured from related parties primarily include supplies for production, as well as development, transportation, financial and distribution services and, to a lesser extent, design, training and other services and supplies of genuine parts. Business transacted for related parties mainly comprises sales of new and used cars, engines and components. Members of the Boards of Management or Supervisory Boards of Volkswagen AG and AUDI AG also belong to the supervisory or management boards of other companies with which the Audi Group maintains business relations. All transactions with such companies are similarly conducted according to the terms that customarily apply to outside third parties. A full list of the non-executive directorships of members of the Board of Management and Supervisory Board of AUDI AG is presented in the Annual Financial Statements of AUDI AG. In the same manner, the service relationships with the members of the Boards of Management and Supervisory Boards of Volkswagen AG and AUDI AG were conducted at arm s length. As in the previous year, the volume of transactions was low. Services having a total value of EUR 36 thousand were purchased from this group of persons during the year under review, and services with a total value of EUR 139 thousand were provided by the Audi Group. For details of the remuneration paid to the members of the Board of Management and Supervisory Board of AUDI AG, please refer to Details of the Supervisory Board and Board of Management (Note 50). Cash management transactions with affiliated companies were also conducted at arm s length.

92 Auditor s fees EUR thousand Auditing of the financial statements Other certification or appraisal services 90 Tax consultancy services 8 12 Other services Total Based on the requirements of commercial law, the auditor s fees include auditing of the Consolidated Financial Statements and auditing of the annual financial statements of the domestic subsidiaries. 48 Segment reporting The Audi Group primarily comprises only the Cars segment. The secondary segment reporting structure is based on the Group s internal steering and reporting arrangements. The Audi Group is structured into the segments of Germany, Rest of Europe and Rest of World on the basis of the regional locations of its assets. Inter-segment transactions are fundamentally conducted at arm s length, as is also customary for transactions with outside third parties. EUR million External revenue Internal revenue Total revenue Germany 20,847 21,950 5,867 3,238 26,714 25,188 Rest of Europe 8,179 7,824 3,492 2,728 11,671 10,552 Rest of World 4,591 1, ,595 1,370 Consolidation measures 9,363 5,968 9,363 5,968 Audi Group 33,617 31,142 33,617 31,142 EUR million Dec. 31, 2007 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2006 Profit before tax Segment assets Segment liabilities Germany 2,371 1,542 17,580 16,110 12,272 12,029 Rest of Europe ,568 5,166 1,387 1,386 Rest of World , , Consolidation measures 8 2 2,745 3,675 1,140 2,427 Audi Group 2,915 1,946 21,918 18,275 14,183 11,627

93 225 EUR million Investments in intangible assets and property, plant and equipment Long-term investments Germany 1,831 1, Rest of Europe Rest of World Consolidation measures Audi Group 2,079 1, EUR million Depreciation and amortization Other non-cash expenses Germany 1,689 2, ,522 Rest of Europe Rest of World Consolidation measures Audi Group 2,287 2,515 2,186 1,916 Revenue by region 2007 share 2006 share EUR million % EUR million % Germany 8, , Rest of Europe 17, , North America 3, , Asia/Oceania 3, , Africa South America Total 33, , German Corporate Governance Code The Board of Management and Supervisory Board of AUDI AG submitted the declaration pursuant to Section 161 of the German Stock Corporation Act relating to the German Corporate Governance Code on December 5, 2007, and made it permanently accessible on the Internet at 50 Details of the Supervisory Board and Board of Management The remuneration paid to members of the Board of Management complies with the legal requirements of the German Stock Corporation Act, as well as the recommendations and most of the suggestions in the German Corporate Governance Code. The total short-term remuneration comprises fixed and variable income components. The fixed components assure a base remuneration that enables the Board member to execute his duties in the best interests of the Company and with the care of a reasonable and prudent operator, without becoming dependent upon the attainment of short-term targets. Conversely, variable components that are contingent on the economic results of the Com-

94 226 pany assure that the interests of the members of the Board of Management are consistent with those of the other stakeholders. The remuneration paid to members of the Board of Management for the 2007 fiscal year amounted to EUR 4,614 (4,531) thousand, of which variable components accounted for EUR 2,309 (2,479) thousand. The variable component in the year before also included remuneration under stock options granted; the fair value at the time of granting amounted to EUR 106 thousand. The fixed remuneration components for the members of the Board of Management totaled EUR 2,305 (2,052) thousand in the 2007 fiscal year. Disclosure of the remuneration paid to each individual member of the Board of Management, by name, pursuant to Section 314, Paragraph 1, No. 6a), Sentences 5 to 9, of the German Commercial Code has not been effected, as the 2006 Annual General Meeting adopted a corresponding resolution that is valid for a period of five years. In addition to fixed payments in cash, there are varying levels of contributions in kind, including, in particular, the use of company cars. Each member of the Board of Management is paid a variable annual bonus. The variable bonus comprises annually recurring components that are linked to the Company s economic success. It is largely based on the earnings achieved by the Company and its economic position. There are no non-recurring variable components linked to business success in the remuneration paid to members of the Board of Management. Stock options serve as variable remuneration components providing a long-term incentive. These options are based on the performance of Volkswagen ordinary shares. Since Volkswagen AG s stock option plan was not extended beyond 2006, no further convertible bonds were issued in the 2007 fiscal year. The structure of the stock option plan is essentially as follows: The basis for determining the conversion price (base conversion price) of a tranche consists of the average Xetra closing prices of Volkswagen ordinary shares on the five trading days preceding each decision to issue convertible bonds. Conversion may be effected for the first time following a qualifying period of 24 months and thereafter up until a period of five years has elapsed from the time the convertible bonds were issued. The conversion price is initially 110 percent of the base conversion price, rising by five percentage points in each subsequent year. Members of the Board of Management may exercise their conversion rights only three times a year, during four-week exercise periods, each of which commences on a public reporting date of Volkswagen AG. In the spirit of the German Corporate Governance Code, the stock option plan is thus based on demanding, relevant comparison parameters. Further details are presented in the Agenda to the Annual General Meeting of Volkswagen AG on April 16, 2002, which authorized the introduction of the stock option plan. The structure of the stock option plan is designed to grant the members of the Board of Management a remuneration component that is based on appreciation of the Company s trading price. It is thus intended to contribute toward increasing value creation and toward enhancing the value of Volkswagen AG. Moreover, stock option plans are a widely used instrument for recruiting and retaining board members. Retrospective adjustment of the stock option plan s performance targets or comparison parameters is not permissible. Inordinate proceeds from the stock options are not expected due to the linkage with the trading price performance of Volkswagen ordinary shares and the restricted number of options per tranche. In order to implement the recommendation of the German Corporate Governance Code, the Supervisory Board is prepared to reach an agreement with the members of the Board of Management on a cap in the event of exceptional, unforeseen developments. In the 2007 fiscal year, 1,500 stock options were exercised by members of the Board of Management of AUDI AG. On December 31, 2007, the members of the Board of Management were entitled to purchase a total of 14,500 ordinary shares of Volkswagen AG upon the con-

95 227 ditions of conversion being met. The value of the stock options totaled EUR 1,266 thousand on December 31, This calculation is based on a binominal model and takes all parameters of the stock option plan into account. Under certain circumstances, members of the Board of Management are entitled to retirement benefits and a disability pension. The amount of EUR 2,064 (577) thousand was allocated to the provisions for pensions for current members of the Board of Management during the 2007 fiscal year; the provisions for pensions on December 31, 2007, totaled EUR 7,116 (7,454) thousand. Former members of the Board of Management and their survivors received payments totaling EUR 1,957 (1,359) thousand. The provisions for pensions for this group of individuals amount to EUR 21,083 (22,175) thousand. The members of the Board of Management, together with their seats on other supervisory boards and regulatory bodies pursuant to Section 285, Sentence 1, No. 10, of the German Commercial Code and Section 125, Para. 1, Sentence 3, of the German Stock Corporation Act are indicated in the Notes to the Financial Statements of AUDI AG. The basic features of the remuneration paid to members of the Supervisory Board are stipulated in Section 16 of the Articles of Incorporation and Bylaws. The total short-term remuneration comprises fixed and variable components. The level of the variable remuneration components is based on the compensatory payment made for the 2007 fiscal year in accordance with the applicable provision in the Articles of Incorporation and Bylaws. The remuneration paid to members of the Supervisory Board of AUDI AG totaled EUR 558 (459) thousand, including EUR 175 (172) thousand in fixed remuneration components and EUR 383 (287) in variable remuneration components.

96 228 Supervisory Board 1) As of Dec. 31, 2007 Prof. Dr. rer. nat. Martin Winterkorn Chairman 2) Stockholder representative 2) 6) Berthold Huber Deputy Chairman Employee representative Dr. rer. pol. h.c. Bruno Adelt Stockholder representative 2) Senator h.c. Helmut Aurenz Stockholder representative Heinz Eyer Employee representative 6) Dr. rer. pol. Thomas R. Fischer Stockholder representative Wolfgang Förster Employee representative 6) Francisco Javier Garcia Sanz Stockholder representative 5) Dr. jur. Claus Helbig Stockholder representative Johann Horn Employee representative 6) 2) 4) 6) Peter Mosch Employee representative Wolfgang Müller Employee representative 6) Dr. rer. pol. Horst Neumann Dr.-Ing. Franz-Josef Paefgen Stockholder representative Stockholder representative Hans Dieter Pötsch Stockholder representative 3) 5) 6) Norbert Rank Employee representative Dr. rer. pol. Axel Freiherr von Ruedorffer Stockholder representative Jörg Schlagbauer Employee representative 6) Max Wäcker Employee representative 6) Hubert Waltl Dr. rer. pol. Carl H. Hahn Employee representative Honorary Chairman 1) The profession and company of the members of the Supervisory Board, together with other non-executive directorships, are presented in the Notes to the Financial Statements of AUDI AG. 2) Member of the Presiding Committee and the Negotiating Committee 3) Chairman of the Audit Committee 4) Deputy Chairman of the Audit Committee 5) Member of the Audit Committee 6) The employees elected representatives have stated that their remuneration as Supervisory Board members be paid to the Hans Böckler Foundation, in accordance with the guidelines of the German Confederation of Trade Unions.

97 229 Events occurring subsequent to the balance sheet date Volkswagen AG transferred management responsibility for AUDI BRUSSELS S.A./N.V. to AUDI AG effective January 1, The control requirements of IAS 27.13, Sentence 2, are accordingly satisfied as of the start of the 2008 fiscal year, and this company will therefore be included in Audi s Consolidated Financial Statements in the future. This company s initial consolidation will have no significant impact on the financial position and financial performance of the Audi Group.

98 230 Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles, the Consolidated Financial Statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the Group Management Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group. Ingolstadt, February 7, 2008 The Board of Management Rupert Stadler Ulf Berkenhagen Michael Dick Frank Dreves Axel Strotbek Ralph Weyler Dr. Werner Widuckel