Business Development

Global economic growth and the positive trend in the global automotive markets both continued in 2006. Thanks to its attractive new models, the Volkswagen Group benefited disproportionately from this positive development.

GLOBAL ECONOMIC UPTURN CONTINUES
2006 saw a continuation in the pace of growth of the global economy. At 3.6%, global economic growth increased by 0.4 percentage points year-on-year. However, further increases in commodity and energy prices and increasingly restrictive monetary policies in many countries slowed down the pace of expansion in the course of the year.

NORTH AMERICA
US economic growth slowed following the strong upturn at the beginning of 2006. Nevertheless, growth for the year as a whole (3.4%) was marginally higher than the previous year (3.2%). The US dollar weakened considerably against the euro in the course of the year, but succeeded in recovering against the yen in the second half of the year. The Canadian economy grew by 2.7% (2.9%). As a result of the stable economic development in the USA and high oil prices, Mexican gross domestic product (GDP) increased by 4.9% (3.0%).

SOUTH AMERICA/SOUTH AFRICA
Following a significant decline in economic growth in the previous year, GDP in Brazil increased by 2.7% (2.3%) in 2006. In spite of double-digit inflation, the Argentinian economy continued its very dynamic growth with a rate of 8.8% (9.2%). GDP growth in South Africa was 4.9%, marginally lower than the previous year (5.1%). The sharp rise in trade deficits led to a substantial fall in the value of the rand.

ASIA-PACIFIC
Economic growth declined in most of the Asian emerging markets in the past year. However, with a growth rate of 10.7% (10.4%), China recorded its highest increase for eleven years. Economic growth in Japan, which is driven by both domestic and foreign demand, was 2.1% – on a level with 2005. India continued its strong economic expansion with an 8.5% (8.4%) increase in GDP.

EXCHANGE RATE MOVEMENTS FROM DECEMBER 2005 TO DECEMBER 2006
INDEX IS BASED ON MONTH-END RATES, DEC. 31, 2005= 100

EUROPE
The upturn in Western Europe accelerated in 2006, with both exports and domestic demand, particularly for capital goods, providing impetus for growth. GDP growth increased to 2.6% (1.4%) in the euro zone. The average rate of unemployment decreased by 0.7 percentage points year-on-year to 7.9%. The euro strengthened against the US dollar and the yen. The very strong economic growth in Central and Eastern Europe continued, at 6.0% (5.7%).

GERMANY
In 2006, the German economy recorded a growth rate of 2.7% (0.9%), the highest for six years. In addition to exports as the key pillar of the economy, the upturn was also driven by rising domestic demand for capital goods. By contrast, there was only a hesitant increase in consumer spending in spite of the pull-forward effects owing to the increase in value added tax scheduled for January 1, 2007. Average unemployment fell to 10.8% (11.7%).

GLOBAL PASSENGER CAR SALES INCREASE AGAIN
Worldwide demand for passenger cars increased by 2.6% to 54.4 million vehicles in 2006. Above-average growth was recorded above all in the South American and Eastern Europe markets and in China and India. The number of new passenger car registrations fell in the USA, the world’s largest market. Demand for passenger cars in Western Europe was slightly higher than the previous year. Global automotive production increased by 3.4% to 67.2 million units, of which 56.8 million were passenger cars (+ 3.4%).

NORTH AMERICA
In North America, the market volume in 2006 as a whole was 2.5% below that of the previous year. As in previous years, the US market was characterized by sales promotion activities; nevertheless, demand declined on the whole in 2006. While demand for light commercial vehicles was lower, primarily due to high petrol prices, new passenger car registrations increased by 1.5% year-on-year to 7.8 million vehicles. In Canada, too, passenger car sales increased to 863 thousand units, 2.1% more than the previous year. In Mexico, by contrast, the number of new passenger car registrations fell by 4.8% to 680 thousand units.

SOUTH AMERICA/SOUTH AFRICA
New passenger car registrations in South America grew dynamically in 2006. In Brazil, 1.8 million passenger cars and light commercial vehicles were registered for the first time during the reporting period (+ 13.1%). This increase was partially offset by a fall of 5.1% in truck sales. A total of 845 thousand vehicles were exported, substantially less than the record levels of fiscal year 2005 (– 5.8%). 312 thousand passenger cars were sold in Argentina, a 16.1% increase year-on-year. With sales of 482 thousand vehicles (+ 14.0%), the South African passenger car market as a whole attained record levels for the third year in a row.

ECONOMIC GROWTH
PERCENTAGE CHANGE IN GDP

ASIA-PACIFIC
The disproportionately high growth in demand in the Asia-Pacific region continued in 2006, largely due to the positive overall development in the Chinese and Indian markets. With an increase of 861 thousand to 4.2 million vehicles, the passenger car market in China once again recorded the world’s highest absolute increase in demand. This means that China has advanced to become the world’s third largest passenger car market, behind the US and Japan. The Japanese automotive market experienced a slight decrease in demand, primarily due to higher fuel prices. With sales of 4.6 million units, the passenger car market volume was 2.2% less than the previous year. In India – the second largest growth market in Asia – there was a 19.9% increase in vehicle sales year-on-year, owing above all to a cut in excise duty on small cars.

EUROPE/REMAINING MARKETS
In 2006, demand for passenger cars in Western Europe was 14.7 million, only marginally (+ 0.7%) higher than the previous year’s level. The share of new passenger car registrations attributable to diesel vehicles exceeded the 50% mark for the first time. While the number of new registrations increased year-on-year in the large Italian and German markets, it decreased in the UK, France and Spain, where demand was curbed by higher interest rates and even higher fuel prices than in 2005. In 2006, significantly more passenger cars were registered for the first time in Central and Eastern Europe than in the previous year. However, the high overall market growth is almost exclusively attributable to strong increases in the Ukraine (+ 39.7%), Russia (+ 26.6%) and Romania (+ 16.2%). Passenger car sales in Turkey fell significantly (– 14.9%).

GERMANY
Demand for automobiles in Germany increased by 4.4% to 3.8 million vehicles in 2006. Thanks partly to an increase in new passenger car registrations and a marked turnaround in the commercial vehicle market, 2006 saw the best total market performance of the last seven years. In addition to the variety of new models launched in 2006, the 3.8% rise in demand for passenger cars to 3.5 million vehicles is also attributable to advance purchases ahead of the increase in value added tax on January 1, 2007. New registrations of trucks with a gross vehicle weight of up to six tonnes increased by 12.3% to 204 thousand units. Last year, German manufacturers produced 5.8 million automobiles (+ 1.1%), of which 4.2 million were exported (+ 2.4%); both of these figures were record levels.

VOLKSWAGEN GROUP DELIVERIES BY MONTH
VEHICLES IN THOUSANDS

NEW MODELS IN 2006
The Volkswagen Group’s worldwide offering consists of over 100 passenger car and commercial vehicle models. Passenger cars range from the Fox to the Bugatti Veyron, and commercial vehicles from the Caddy to the Constellation heavy truck series. Volkswagen Financial Services AG supplements this offering with a wide range of products and services relating to automobility.

The most important new models launched by the Volkswagen brand group in 2006 include: the Eos – the world’s first four-seater convertible with a five-section CSC roof –, the Golf GT, the CrossPolo and the Škoda Roomster, as well as the Bentley Continental GTC and Bentley Azure convertibles. The Audi brand group launched the premium Q7 SUV and the successor to the Audi TT Coupé, a sports car with a clear, uncompromising form and advanced engineering. Other new models included the SEAT Altea XL and the Lamborghini Gallardo Spyder. The Commercial Vehicles business line presented the Crafter, the successor to the LT. In 2006, Volkswagen Financial Services AG also launched its innovative “Volkswagen Carefree Package”: for a competitive monthly flat rate, customers are not only provided with financing and insurance, but also receive a comprehensive range of further services.

VEHICLE DELIVERIES WORLDWIDE
In fiscal year 2006, the Volkswagen Group increased deliveries to customers by 9.4% to a record sales level of 5,733,600 vehicles. The chart above shows that the delivery figures in all months of 2006, with the exception of December, outperformed the same month in the previous year. Apart from SEAT, all Group brands achieved record delivery figures, thereby increasing the Group’s share of the global passenger car market to 9.7% (9.1%).

The table below gives an overview of the delivery figures in our key markets and our share of the local passenger car market. The following sections describe the particular factors affecting the individual markets.

DELIVERIES IN EUROPE/REMAINING MARKETS
In 2006, we again delivered the largest proportion of our vehicles – 54.2% (56.0%) – to customers in Western European markets, including Germany. All Volkswagen Group brands exceeded their sales figures from the previous year relating to these markets. In particular, the Fox, Jetta, Passat Variant and SEAT Leon models recorded above-average growth rates. In addition, there was greater demand for the Audi A3, Audi A4 Cabriolet, Audi A6, Škoda Octavia and Caddy models.

The new Eos, Škoda Roomster, Audi Q7, Audi TT Coupé and Crafter models also met with a very positive response from the market. By increasing its share of the passenger car market to 19.9% (18.9%), the Volkswagen Group further extended its market leadership in Western Europe.

In Central and Eastern Europe, demand for Group models in individual markets varied significantly. While sales declined in Hungary owing to overall market developments, there were marked increases in deliveries to customers in Russia and Romania. All in all, sales figures in these markets increased by 16.7%. In particular, more Polo, Jetta, Passat saloon, Passat Variant, Touareg, Škoda Octavia and Audi A6 models were delivered to customers.

Demand for Group models on the Remaining markets increased by 5.7% year-on-year.

DELIVERIES IN GERMANY
The Volkswagen Group was able to profit disproportionately from the slight increase in demand in Germany, recording a 7.3% rise in sales compared with the previous year. Accordingly, our market share increased to 32.6% (30.8%). This growth was largely attributable to the success of the new Fox, Jetta, Passat Variant, Audi A4 Cabriolet and SEAT Leon models. In addition, the Golf Plus, Touran, Škoda Fabia, Škoda Octavia and Audi A3 models recorded above-average growth rates. In 2006, Group models led the German registration statistics in seven out of eleven segments – namely the Fox, Polo, Golf, Passat, Audi A6, Touran and Multivan/Transporter models. The Golf again headed the list of all newly registered passenger cars in Germany.

DELIVERIES TO CUSTOMERS BY MARKET¹

WORLDWIDE DELIVERIES OF THE GROUP´S MOST SUCCESSFUL MODELS IN 2006
VEHICLES IN THOUSANDS

DELIVERIES IN NORTH AMERICA
In the US passenger car market, which is characterized by sales promotion activities, we succeeded in increasing our customer deliveries by 5.9% year-on-year. However, there was a downturn towards the end of the reporting period, as the market launch and success of the new Passat in 2005 had led to a high sales volume, and therefore to a turning point in our sales situation. Demand was particularly strong for the Golf and Audi A3 models. Bentley and Lamborghini models also enjoyed a marked increase in demand. Moderate growth was recorded for the Passat, New Beetle and Audi A4. On the Canadian passenger car market, we delivered 11.3% more units than in 2005. This is attributable above all to our Jetta, Golf and Audi A3 models. Our sales in the declining passenger car market in Mexico fell by 8.2%. While our Fox, New Beetle, Jetta and Passat models experienced growth here, sales of the Gol and Polo models decreased.

DELIVERIES IN SOUTH AMERICA/SOUTH AFRICA
In fiscal year 2006, the key passenger car markets of South America/South Africa continued the positive development of previous years. Volkswagen Group deliveries increased by 14.9%.

The most popular Group model in Brazil remained the entry level Fox, with a share of 27.0% of the total delivery volume. In total, sales figures for Group models increased by 15.1% in this market. Sales of the Saveiro and T2 light commercial vehicles, included in the total deliveries number, increased by 38.7%. Demand for heavy commercial vehicles manufactured in Brazil (trucks in the 5 to 45 tonnes weight classes) fell by 4.0%. Sales of buses increased to 4,906 (3,499) units.

Group deliveries to the Argentinian passenger car market were 16.1% above the previous year’s level. The Fox, Jetta, Passat saloon and Audi A3 models recorded above-average growth rates. With a market share of 26.8%, the Group maintained its leading position in the Argentinian market, where it also delivered 2,917 (3,251) heavy trucks and buses in 2006.

In South Africa, the Volkswagen Group delivered 17.1% more units to customers than in the previous year. This enabled us to increase our market share to 22.0% and to preserve our market leadership. The highest growth was recorded by the Polo, Jetta, Passat and Audi A3 models.

DELIVERIES IN THE ASIA-PACIFIC REGION
In the passenger car markets in the Asia-Pacific region, deliveries by the Volkswagen Group rose by 22.5% year-on-year in 2006. This positive development was due above all to the more buoyant demand for Group models on the Chinese passenger car market. The Polo, Jetta Sagitar, Passat Lingyu, Audi A4 and Audi A6 models recorded the highest growth rates here. Despite sustained competitive pressure owing to greater sales incentives offered by other manufacturers, the Volkswagen Group retained its leadership of the Chinese passenger car market with a share of 17.1%. Our sales in the Japanese passenger car market increased by 1.1% year-on-year. The Polo, Jetta, Passat, Audi A3 and Bentley Continental GT models accounted for most of this sales growth. In the other Asia-Pacific markets, such as Australia and Taiwan, the Polo and Golf models in particular recorded high growth rates.

ORDERS RECEIVED BY THE VOLKSWAGEN GROUP IN WESTERN EUROPE
Demand in Western Europe (including Germany) continued to be very positive for the Group in 2006. This was also reflected in the level of orders received, which increased by 6.3% compared with the previous year. The level of orders from Germany (+ 7.4%), the UK (+ 12.5%), Sweden (+ 12.0%) and Ireland (+ 15.5%) deserve particular mention.All Group brands received more orders than in the previous year, with the Commercial Vehicles business line (+ 11.5%) and the Škoda brand (+ 11.4%) recording the highest growth rates.

At December 31, 2006, the Volkswagen Group held orders for 128,240 vehicles within Germany and for 258,245 units from the rest of Western Europe excluding Germany. This corresponds to a 10.6% increase in orders compared with the previous year.

It should be noted that the level of orders at December 31, 2006, was reduced by advance purchases ahead of the increase in value added tax on January 1, 2007.

SALES TO THE DEALER ORGANIZATION
In fiscal year 2006, the Volkswagen Group increased its sales to the dealer organization worldwide by 10.2% year-on-year, recording a total of 5,720,096 vehicles.

The majority of our models – 80.9% (80.4%) – were sold in countries other than Germany. The volume of vehicles sold abroad increased by 10.9% to 4,627,322 vehicles, owing in particular to sales growth in China, Brazil and Central and Eastern Europe. In Germany, the positive trend from the previous year also continued, with a 7.2% increase in sales to 1,092,774 vehicles.

At 718,467 units sold worldwide, the Golf was once again our biggest seller, corresponding to 12.6% of Group sales. The highest growth rates were recorded by the Audi allroad with 86.5%, the Audi TT Coupé (+ 77.1%), the Passat Variant (+ 53.8%) and the Audi A3 Sportback (+ 31.0%). Substantial increases were also recorded by our Jetta, Golf Plus, Škoda Octavia Combi, SEAT Leon, Lamborghini Murciélago, Crafter and Saveiro models. Owing to the recent or planned model changes and updates, there was a decline in sales of the Phaeton, Touareg, Sharan, Golf Variant, Audi A4 saloon, Audi A3 saloon and Audi TT Roadster models.

PRODUCTION
In 2006, the Volkswagen Group produced a total of 5,659,578 vehicles. This corresponds to an 8.4% increase compared with the previous year. The efficiency of capacity utilization in the plants concerned was improved above all by the rising demand for our new models. This was particularly the case for production at Volkswagen Slovakia a.s., Volkswagen de Mexico S.A., Škoda a.s. and Audi Hungaria Motor Kft. Owing to the positive sales growth in China, the production volume of the Chinese joint venture companies increased substantially year-on-year by 44.8% to 697,458 vehicles. The total production figure includes 1,194 Ford Galaxy models, which are reflected in the number of sales but not in the deliveries to customers. Production figures do not include Crafter models produced in the DaimlerChrysler plants in Düsseldorf and Ludwigsfelde. The portion of total production originating in Germany decreased to 34.2% (36.6%). The plants worldwide produced an average of 24,521 units per working day; this corresponds to an increase of 9.0% compared with the previous year.

INVENTORIES
Inventories held by Group companies and the dealership organization worldwide in 2006 were lower than in the previous year. At the end of 2006, they were also below the previous year’s level. Inventories remained at the level required to supply our customers.

NUMBER OF EMPLOYEES
In 2006, the Volkswagen Group, including the vehicle-producing joint venture companies in China, employed an average of 328,599 people (– 4.8%). A total of 173,790 employees worked in our companies in Germany, corresponding to 52.9% (52.0%) of the total. At the reporting date, the Volkswagen Group employed 324,875 people (– 5.8%). The reduced headcount was primarily due to the sale of the gedas group and the Europcar group and the reduction in staff levels, in particular at Volkswagen AG, initiated as part of our performance enhancement measures. At December 31, 2006, 168,940 people were employed at our companies in Germany (– 5.5%). The number of people employed in our companies outside Germany was 155,935 (– 6.2%). Across the Group, the number of apprentices increased by 2.2% to 9,199.

OUTLINE OF THE LEGAL STRUCTURE OF THE GROUP
Volkswagen AG is the parent company of the Volkswagen Group. It develops vehicles and engines for the Group, but also produces and sells vehicles, in particular Volkswagen brand passenger cars and commercial vehicles. In its function as parent company, Volkswagen AG holds interests in AUDI AG, SEAT S.A., ŠKODA AUTO a.s., Volkswagen Financial Services AG and numerous other companies in Germany and abroad. An overview of the significant Group companies can be found in the Notes to the Consolidated Financial Statements.

The Volkswagen AG Board of Management is the ultimate body responsible for managing the Group. The Supervisory Board appoints, monitors and advises the Board of Management and is consulted directly on decisions that are of fundamental significance for the Company and the Group.

Information on the remuneration structure for the Board of Management and the Supervisory Board can be found in the Notes to the Volkswagen Consolidated Financial Statements and in the notes to the annual financial statements of Volkswagen AG. These can be accessed online at www.volkswagen-ir.com or can be requested free of charge from Volkswagen AG from the address listed in the contact information for this annual report.

SUPPLEMENTAL DISCLOSURES IN ACCORDANCE WITH SECTION 289(4) AND SECTION 315(4) OF THE GERMAN COMMERCIAL CODE (HGB)
With the introduction of the German Takeover Directive Implementation Act (Übernahmerichtlinie-Umsetzungsgesetz) on July 14, 2006, Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 concerning takeover bids (“EU Takeover Directive”) was transposed into German law. Among other things, this Act amends the German Commercial Code (HGB) and requires additional disclosures in the management report, which are presented in the following.

CAPITAL STRUCTURE
On December 31, 2006, the share capital of Volkswagen AG amounted to €1,004,078,968.32 (previous year: €1,093,550,284.80) and was composed of 286,980,067 ordinary shares and 105,238,280 preferred shares. Each share conveys a notional interest of €2.56 in the share capital.

SHAREHOLDER RIGHTS AND OBLIGATIONS
Shareholders have pecuniary and administrative rights. The pecuniary rights include in particular the right to participate in profits (section 58(4) of the German Stock Corporation Act), to participate in liquidation proceeds (section 271 of the German Stock Corporation Act) and preemptive rights on shares in the event of capital increases (section 186 of the German Stock Corporation Act).

Administrative rights include the right to attend the Annual General Meeting and the right to speak there, to ask questions, to propose motions and to exercise voting rights. Shareholders can exercise these rights in particular through actions seeking disclosure and actions for avoidance.

Each ordinary share grants the holder one vote at the Annual General Meeting. The Annual General Meeting elects shareholder representatives to the Supervisory Board and elects the auditors; in particular, it resolves the appropriation of net profit, formally approves the actions of the Board of Management and the Supervisory Board, resolves amendments to the Articles of Association, capitalization measures, authorization to purchase treasury shares and, if required, the conduct of a special audit; it also resolves premature removal of Supervisory Board members and the winding-up of the Company.

Preferred shareholders generally have no voting rights. However, in the exceptional case that preferred shareholders are granted voting rights by law (for example, when preferred share dividends were not paid in one year and not compensated for in full in the following year), each preferred share grants the holder one vote at the Annual General Meeting. Furthermore, preferred shares entitle the holder to a €0.06 higher dividend than ordinary shares (further details on this right to preferred dividends are specified in Article 28(2) of the Articles of Association).

With regard to exercising voting rights by proxy, section 3 of the Volkswagen Act and Article 25 of the Volkswagen AG Articles of Association provide for the following:
No-one may exercise voting rights in his own name in respect of shares not belonging to him. Anyone exercising voting rights in respect of shares which do not belong to him shall, insofar as he is not the legal representative of the shareholder, require a proxy in writing from the shareholder. The proxy shall be effective only in respect of the next General Meeting.

Anyone acting as a commercial representative of shareholders may exercise the voting rights under a proxy only if the shareholder has at the same time as granting the proxy given him directions in writing on the individual items on the agenda. The proxy and the directions may be received at the earliest together with the notices prescribed by section 128 of the German Stock Corporation Act.

The General Meeting generally adopts its resolutions by simple majority of the votes cast. Resolutions of the General Meeting in respect of which the German Stock Corporation Act stipulates a majority comprising at least three quarters of the share capital represented at the time the resolution is voted on shall require a majority of more than four fifths of the share capital of the company represented at such time.

VOTING RIGHT LIMITATIONS
If a shareholder holds more than one fifth of the shares in the company, his voting rights shall be restricted to the number of votes conveyed by one fifth of the shares (section 2(1) Volkswagen Act in conjunction with Article 24 of the Articles of Association). Shares held by a shareholder shall also include such shares as are held by a third party for the account of the shareholder. If a shareholder is a company, the shares belonging to that company shall also include such shares as are held by a company controlling it, by any of its subsidiary companies or by any affiliated Group company or such as are held by a third party for the account of such companies. Shares in the company may not be transferred in order to avoid the voting right restriction.

SHAREHOLDINGS EXCEEDING 10% OF VOTING RIGHTS
Shareholdings in Volkswagen AG that exceed 10% of voting rights are shown in the notes to the annual financial statements of Volkswagen AG and the Notes to the Volkswagen Consolidated Financial Statements.

COMPOSITION OF THE SUPERVISORY BOARD
The Supervisory Board consists of 20 members, half of whom are shareholder representatives. In accordance with section 4 of the Volkswagen Act in conjunction with Article 12 of the Articles of Association, the Federal Republic of Germany and the State of Lower Saxony are entitled to appoint two of the shareholder representatives, as long as they own shares in Volkswagen AG. At present, this only applies to the State of Lower Saxony. The remaining shareholder representatives are elected by the Annual General Meeting. The other half of the Supervisory Board consists of employee representatives elected by the employees in accordance with the Mitbestimmungsgesetz (German Codetermination Act). Seven of these employee representatives are Company employees; the other three employee representatives on the Supervisory Board represent the trade unions. The Chairman of the Supervisory Board, generally a shareholder representative on the Supervisory Board who is elected by his Supervisory Board colleagues, has a casting vote in the Supervisory Board, in accordance with the Mitbestimmungsgesetz (German Codetermination Act).

STATUTORY REQUIREMENTS AND REQUIREMENTS OF THE ARTICLES OF ASSOCIATION WITH REGARD TO THE APPOINTMENT AND REMOVAL OF BOARD OF MANAGEMENT MEMBERS AND TO AMENDMENTS TO THE ARTICLES OF ASSOCIATION
The appointment and removal of Board of Management members are governed by sections 84 and 85 of the German Stock Corporation Act (AktG), whereby Board of Management members are appointed by the Supervisory Board for a maximum of five years. Board of Management members may be reappointed or have their term of office extended – for a maximum of five years in each case. In addition, Article 6 of the Articles of Association states that the number of Board of Management members is stipulated by the Supervisory Board and that the Board of Management must consist of at least three persons.

In accordance with section 4(3) of the Volkswagen Act and Article 26(2) of the Articles of Association, a majority of over 80% of votes cast at the Annual General Meeting is required to amend the Articles of Association.

POWERS OF THE BOARD OF MANAGEMENT, IN PARTICULAR CONCERNING THE ISSUE OF NEW SHARES AND THE REPURCHASE OF TREASURY SHARES
According to German stock corporation law, the Annual General Meeting can, for a maximum of five years, authorize the Board of Management to issue new shares. It can also authorize the Board of Management, for a maximum of five years, to issue convertible bonds on the basis of which new shares are to be issued. The Annual General Meeting also decides the extent to which shareholders have preemptive rights for the new shares. The highest amount of authorized share capital or contingent capital available for these purposes is determined by Article 4 of the Articles of Association of Volkswagen AG, as amended.

The acquisition of treasury shares is governed by section 71 of the German Stock Corporation Act (AktG). At the most recent Annual General Meeting in Hamburg on May 3, 2006, the Board of Management was authorized, in accordance with section 71(1) no. 8 of the AktG and with the consent of the Supervisory Board, to acquire ordinary shares and/or non-voting preferred shares of Volkswagen AG on one or more occasions, up to a maximum of 10% of the share capital – i.e. up to a maximum of 38,554,872 shares – via the stock market or by way of a public purchase offer to all shareholders. This authorization came into effect on October 22, 2006, and will apply until November 3, 2007, insofar as no other resolution is adopted by the Annual General Meeting prior to this date. Details on the issue of new shares and the retirement of treasury shares are shown in the notes [21].

THE MATERIAL AGREEMENTS OF THE PARENT COMPANY THAT ARE VALID ONLY IN THE EVENT OF A CHANGE OF CONTROL FOLLOWING A TAKEOVER BID
On June 14, 2005, a banking syndicate granted Volkswagen AG a syndicated credit line of €12.5 billion. It runs until June 2011 and can be extended by one year. In the event of a change in control of Volkswagen AG (as defined in the EU Takeover Directive), the lenders may terminate the credit line with immediate effect and demand repayment of amounts lent. Such a termination entitlement is standard for the industry (see recommendation of the Loan Market Association).

LEGAL FACTORS INFLUENCING BUSINESS
As with other international companies, the business of Volkswagen companies is affected by numerous laws in Germany and abroad. In particular, these are legal requirements relating to development, production and distribution, but that also include for example tax, capital market and company law as well as labor, banking and insurance regulations.

In particular, the VAT increase in Germany resolved for 2007 had a positive effect on domestic vehicle sales in fiscal year 2006.

Reports on the investigations of the public prosecutor’s office in Braunschweig in connection with the incidents (front companies, embezzlement) in relation to which Volkswagen had filed criminal charges at the end of June 2005, and on the investigations of the public prosecutor’s office in Frankfurt regarding the alleged bribery of suppliers have not had any significant impact on business to date.

The European Commission plans to end design protection for visible vehicle parts. If this project is actually implemented, it could adversely affect the Volkswagen Group’s genuine parts business.

ORGANIZATIONAL STRUCTURE OF THE GROUP
Volkswagen AG and the Volkswagen Group are managed by the Volkswagen AG Board of Management in accordance with the Volkswagen AG Articles of Association and the rules of procedure for the Volkswagen AG Board of Management issued by the Supervisory Board. The Articles of Association and rules of procedure stipulate that certain transactions require the approval of the Supervisory Board. In addition, the Board of Management exercises certain of its Group management functions in the Group Board of Management. This body consists of Board members and top managers to whom the Board of Management has transferred certain management functions.

Information on the future structure of the Board of Management and Executive Committees can be found in the Report on Expected Developments.

In 2006, the Group Board of Management was expanded by the following functions: Chairman of the Board of Management of Volkswagen Financial Services AG (Burkhard Breiing), Group Components (Dr. Werner Neubauer), Group Management China (Dr. Winfried Vahland), Group Management North America (Frank Witter), and Group Management South America (Dr. Viktor Klima). Within the framework laid down by law, the Group Board of Management ensures that Group interests are taken into account in decisions relating to the brands and companies of the Volkswagen Group, and coordinates important questions affecting Group brands in general.

Each brand in the Volkswagen Group is managed by a senior brand manager. The Group targets and requirements laid down by the Board of Management of Volkswagen AG or the Group Board of Management must be complied with in accordance with the applicable legal framework. The rights and obligations of the statutory supervisory bodies of the relevant brand companies remain unaffected. Matters that are of importance to the Group as a whole are submitted to the Group Board of Management.

The companies of the Volkswagen Group are managed separately by their respective management. In addition to the interests of their own companies, each individual company management takes into account the interests of the Group and of individual brands in accordance with the framework laid down by law.

MAJOR CHANGES IN EQUITY INVESTMENTS
As part of its strategy of focusing on core business, Volkswagen AG sold its wholly-owned subsidiary gedas Aktiengesellschaft to T-Systems AG, a subsidiary of Deutsche Telekom AG, on March 31, 2006. Furthermore, Volkswagen AG sold its 50% stake in Volkswagen Bordnetze GmbH to the Japanese Sumitomo group on March 31, 2006.

On May 31, 2006, Volkswagen AG sold Europcar International S.A.S.U. to the Eurazeo Group. In May 2006, Volkswagen AG established OOO Volkswagen RUS, headquartered in Kaluga, 160 kilometers southwest of Moscow. The initial purpose of the company is to set up a plant in Kaluga, the foundation stone for which was laid on October 28, 2006. The production of Volkswagen and Škoda brand vehicles in the Russian Federation is scheduled to begin in 2007.

In November 2006, Global Automotive C.V. was established in Amsterdam, the Netherlands. The function of this company is to hold stakes in various foreign Group companies.

Since January 1, 2007, Autogerma S.p.A. has been operating as Volkswagen Group Italia S.p.A.

SUMMARY OF BUSINESS DEVELOPMENT
Our target for fiscal year 2006 was to increase deliveries to customers in the face of a moderate growth in global automotive demand. Our expectations were surpassed in this respect. The Volkswagen Group was able to profit disproportionately from the growth in demand on the global automotive markets. All Group brands recorded increases in sales compared with the previous year. We also succeeded in improving on the previous year’s delivery figures in all key regions, thereby setting a new record. In particular, we were able to extend our leading position in the Western European and German passenger car markets. This is primarily attributable to the success of the new models that we launched as part of our product rollout.