Financial overview

Consolidated (in million euros)	FY2008	FY2007	Rate of change (%)	Factors
Sales	5,013.7	5,060.4	(0.9)
Net Income	21.8	223.0	(90.2)
Sales by business unit
Piston Systems	1,210.4	1,296	(6.6)	See note 1) below
Cylinder Components	765.8	752	1.8	See note 2) below
Valve Train Systems	618.3	655	(5.6)	See note 3) below
Air Management Systems	799.0	819	(2.4)	See note 4) below
Liquid Management Systems	504.5	535	(5.7)	See note 5) below

Factors
1) Piston Systems
-The development recorded by the vehicle manufacturers in Europe and North America put a heavy strain on the positive development of business seen in the first half of the year. In contrast, sales in Japan and China rose in comparison with the previous year. While sales in the commercial vehicle sector developed positively, sales in the passenger car and light commercial vehicle segment decreased. In the fourth quarter, declining sales development was recorded in all regions and segments.
-While the operating profit developed satisfactorily in the first half of the year, significant revenue losses were suffered in the second half, in line with the lower demand. It was therefore not possible to achieve the successful profit level of the previous year. In all regions, price concessions to the Company's customers and increases in personnel and energy costs put a strain on profits. Nevertheless, the profit achieved in South America exceeded the previous year's value.

2) Cylinder Components
-The sales growth was largely driven by acquisitions, which more than compensated for the fact that, allowing for exchange rate effects, there was an organic sales decrease of four percent. The bearings and piston rings product groups recorded the highest growth in sales. -The integration of the engine parts business of the Dana Corporation, acquired in March 2007, involved extensive restructuring measures, which were carried out as planned but adversely affected profits. These measures included the closure of complete plants or parts of plants. The material costs for steel and alloy components also rose over the year as a whole; these increases were only partially passed on to the customers. All product groups in the product line were affected by these cost increases. The considerable decline in unit sales, which set in during the fourth quarter, also resulted in insufficient profit contributions, which were offset in the short term by capacity adjustments such as cutting back overtime and the use of flextime accounts. In addition, almost all plants extended the shutdown period at the end of the year in response to the large number of plant closures by customers. Furthermore, most of the contracts with temporary employment agencies were not renewed. Despite these measures and ongoing productivity improvements, the adverse affects of increases in material prices and the decline in sales led to the overall profit level falling below the previous year's value.

3) Valve Train Systems
-Declines in sales were recorded in almost all product segments; in the fourth quarter in particular, sales fell considerably short of the values recorded in the same period of the previous year. While unit sales fell primarily in the sintered products, camshafts, and cylinder heads product segments, the valves product segment increased its sales in comparison with the previous year.
-Declines in volumes and increased personnel costs affected the operating profit at all locations; this effect was not offset by the productivity increases achieved. The costs of steel and alloy components also increased over the year as a whole. These costs were only partially passed on to the end customers. The decline in unit sales, which set in as early as the third quarter in some areas, required short-term capacity adjustments; these involved cutting back overtime and unused holidays as well as the use of flextime accounts. In reducing personnel costs, priority was given to cutting back on the number of agency workers. Despite the various measures, the operating profit fell short of the previous year's value because of the strained situation.

4) Air Management Systems
-The development of sales in the Air Management Systems product line was primarily characterized by the significant deterioration in the market environment in North America and Europe compared with the previous year. The heavy decline in vehicle demand led to significantly lower sales in both regions. This was only partially offset by the first full-year consolidation of the air management division of Siemens VDO, acquired in the previous year. Similarly, the strong regional sales growth in Asia did not compensate for the decline.
-The profit generated by the Air Management Systems product line remained below the previous year's level because of unit sales declines in North America and Europe. With the constantly rising price pressure and the increases in material prices for resin and related plastic components, particularly in the second half of the year, this led to a strained situation that was not counterbalanced by the higher contributions to profit resulting from growth in the Asia/Pacific region. The activities to reduce costs and optimize processes were therefore accelerated and extended considerably once again. A series of milestones were also brought forward in connection with the measures initiated with a view to adapting the production network in North America and Europe. For example, in North America, the Canadian location in Windsor was closed at the beginning of October and, to counterbalance this, the production capacity in Mexico was expanded to take on additional programs from the other North American locations. In Europe, the focus was on continuing the process of consolidating the English locations and the measures to improve productivity in the other European locations in a targeted way.

5) Liquid Management Systems
-As a result of the global economic weakening, particularly in the last few months of the 2008 business year, unexpected decreases in sales were recorded in all regions.
-The profit generated by the Liquid Management Systems product line did not reach the previous year's level in Europe and North America because of the decline in unit sales, heavy price reductions in some cases, and significant increases in material prices for activated carbon and resin. In South America, unfavorable currency exchange rate effects in export activities put a strain on profit. Optimization programs and structural adjustments led to an improvement in profit in Japan, despite a slight decrease in sales, while currency effects put a strain on profit in Korea. Global process optimization programs and cost reduction measures were expanded heavily in the second half of the year in view of the deteriorating situation on the automotive markets. Consequently, some production activities were also relocated from the locations in the USA to Mexico.


Joint venture
-The Company entered an agreement with Robert Bosch GmbH to establish a fifty-fifty joint venture to develop, manufacture, and market exhaust gas turbochargers. Bosch Mahle Turbo Systems, headquartered in Stuttgart, plans to develop and manufacture turbochargers for gasoline and diesel engines, and to market them worldwide. Series production is supposed to start in 2010. (From a press release on Feb. 1, 2008)

-The Company's Brazilian subsidiary MAHLE Metal Leve S.A., and Hirschvogel Umformtechnik GmbH founded the joint venture MAHLE HIRSCHVOGEL FORJAS S.A. in Brazil. This joint venture, holding approximately 600 workers with EUR 75 million sales, will be consolidated within the Company. This company is the third largest forge in Brazil and manufactures connecting rods, components for injection systems, and other components for the automotive industry. (From a press release on May 21, 2008)

-The Company announced that a joint venture, Bosch Mahle Turbo Systems, is starting construction work on a new production plant in Austria. From 2011, up to 1.5 million turbochargers per year will be manufactured and assembled in St. Michael ob Bleiburg in Carinthia. In 2011, more than 150 employees are scheduled to work for Bosch Mahle Turbo Systems in St. Michael. (From a press release on Sep. 18, 2008)


Acquisitions
-The Company acquired the total shares of Clemex Mexico S.A. de C.V. and its subsidiaries in Lerma, Mexico. The company, which will continue to operate under the name Clemex Mexico S.A. De CV until early 2009 when it is merged into the MAHLE Group, produces engine bearings and bushings for the automotive aftermarket and global automotive OE manufacturers. The company employs approximately 400 people and achieved sales of EUR 10.3 million in 2007. (From a press release on Jun. 9, 2008)

-The Company acquired all the shares of ENTEC GmbH in Thuringia, Germany, a developer and manufacturer of controlled oil pumps for combustion engines. This acquisition brought in sales of about EUR 7 million in the 2007 business year, generated with a total of about 60 employees. While development is currently concentrated in the Crock/Thuringia location, production principally takes place at the Brattendorf/Thuringia location. (From a press release on Jul. 1, 2008)

R&D Structure
The Company holds 8 R&D centers worldwide:
-Stuttgart, Germany
-Northampton, UK
-Farmington Hills/Detroit, USA
-Novi/Detroit, USA
-Jundiai/Sao Paulo, Brazil
-Kawagoe/Saitama, Japan
-Okegawa/Saitama, Japan
-Shanghai, China

-A new Tech Center in Jundai(near Sao Paulo) in Brazil was opened. The newly built complex for research and development houses laboratories and test cells on a constructed area of 16.800 m2. This new Tech Center provides for the Company the complete research and development as well as engineering and sales departments for South America. Customers are local and international vehicle and engine manufacturers. Approximately 260 employees work in the Tech Center. (From a press release on Jun. 26, 2008)


R&D Expense

(in million Euros)	FY 2008	FY 2007
Total	285.9	277.7

Product Development
Systems development at Powertrain
-The development of thermodynamics (direct injection, turbocharging, variable valve timing) and engine mechanics continues with the 1.2 liter downsizing engine presented by MAHLE at the IAA 2007. The initial results of optimization in the partial load range show enormous potential: Fuel consumption and CO2 emissions can be reduced by more than 30 percent, compared with a 2.4 liter naturally aspirated engine of equal performance. The use of alternative fuels is another way to permanently reduce CO2 emissions. Tests in this area are being performed on a 4-cylinder test engine and a special 1-cylinder research engine. As a special feature, the latter engine offers optical access to the combustion chamber so that changes in the mixture and combustion processes can be observed and analyzed very precisely for alternative fuels.

Pistons
-In gasoline passenger car engines, the combination of exhaust gas turbocharging and direct injection allows specific engine performance that, until a few years ago, was achievable only in high-performance systems and racing engines. The highly heat-resistant aluminum-silicon piston alloys developed by the Company, combined with the EvoTec(R) lightweight concept, can meet the new requirements with significantly increased specific engine performance. This generation of pistons has become the international standard for lightweight and highly stress-resistant pistons. The newly developed ADC (Advanced Diesel Casting) process allows targeted adjustment of the microstructure in specific zones of the aluminum piston during casting. This can significantly increase resistance to temperature fluctuation loads and thus increase the component service life. Further increases in power and reductions in fuel consumption and emissions are being tested for highly stressed commercial vehicle engines with the MonoXcomp(R) next-generation piston. This concept of a multi-part steel piston combines excellent cooling with extremely high stress resistance at an attractive price. For large engines, the MONOBOLT(R) piston provides a future-oriented design for series production. Similarly to the MonoXcomp(R) piston, the crown and skirt are connected by a short anti-fatigue bolt formed on the piston crown. Using this concept, the steel crown can be combined with either an aluminum or a nodular cast iron or steel skirt.

Cylinder liners
-An optimized, high-strength, low-cost gray cast iron has been developed for series production of highly stressed cylinder liners. The anti-polishing ring, made of sheet metal, provides a technically advantageous and low-cost solution for preventing cylinder polishing and seizing. This anti-polishing ring patented by the Company, unlike previous cast rings, does not have a negative effect on the strength of the cylinder liner. The processes for manufacturing aluminum rough cast liners are under continuous further development. They serve to reduce weight in passenger car engines with aluminum crankcases. Until now, their cylinder liners have been almost exclusively made of cast iron. The ALBOND(R) cylinder liner- a compound of several aluminum rough cast liners-allows closer cylinder spacing, and therefore significantly reduced total engine weight.

CamInCam(R) camshaft
-Independent camshaft phase adjustment is now a prerequisite in order to meet the demands on modern engines with regard to fuel consumption and emissions. The MAHLE CamInCam(R) principle combines the advantages of two camshafts in the space of one, with two concentrically arranged camshafts. With this system, positive effects due to independent phase adjustment of the valve lift curves can be obtained for all types of engines with increased dynamic response, reduced fuel consumption, and lower emissions. Typically, a fuel consumption reduction of three to five percent is possible, while power and torque can be increased by more than ten percent. In addition, NOX emission can be significantly reduced.

Air management systems
-Under cold-starting conditions, the use of switchable charge air channels, using charge air bypass valves and newly developed actuators, leads to emissions reductions of carbon monoxide and hydrocarbons, by bypassing the charge air cooler for turbocharged engines. By substituting plastic for aluminum in cylinder head covers and charge air manifolds for turbocharged engines, weight savings of up to 50 percent are achievable for these components. The Company developed new, specialized manufacturing processes for additional weight reductions. Foaming the plastic in the center of the wall can achieve additional weight savings of about ten percent in air filter housings or cylinder head covers. Oil separation systems integrated in the blow-by line have been developed to reduce oil consumption. Pressure-regulated oil mist separators, newly developed by the Company, further reduce oil consumption. The resulting increase in engine running stability also contributes to reductions in fuel consumption and CO2.

Controlled coolant pumps
-The use of a controlled pump in the coolant circuit can also reduce fuel consumption and CO2. With the volume flow controlled according to demand, rapid heating and cooling of the engine can be influenced. The Company is currently developing new pump concepts for this application.

BlueDrain(R) system
-For modern diesel engine injection systems, the automatic disposal of separated water is increasingly important. For diesel fuel with a high water content, the Company developed the BlueDrain(R) system, which can be used either on the pressure or the suction side. It is an automatic water disposal system, with integrated water purification unit, that can be used regardless of driving conditions. The BlueDrain(R) system is available as a standalone component, and in complete MAHLE fuel filter modules.

Capital Expenditure (EUR in millions)

Business Units of Product Line	FY2008	FY2007	FY2006
Piston Systems	122	78	75
Cylinder Components	104	69	47
Valve Train Systems	45	44	27
Air Management Systems	47	37	35
Liquid Management Systems	36	33	42

Investments by Segments
<Piston Systems>
-Capital expenditure on fixed assets amounted to EUR 122 million in 2008, which exceeded the previous year's level significantly. As in the previous year, the increase was essentially due to the high number of new customer projects. Capital expenditure in Europe focused on the expansion of the Polish piston plant and the expansion of piston production capacities at the Italian location. In Turkey, the majority of the joint ventures MAHLE Mopisan Izmir A.S. and MAHLE Mopisan Konya AS were acquired in January. North and South America invested primarily in the optimization of existing production plants. In contrast, in the Asia / Pacific region, particularly in China and Japan, measures to expand piston production capacities for commercial vehicles were pushed through.

<Cylinder Components>
-The restructuring of the newly acquired business units necessitated considerable investments, primarily to relocate parts of production in the bearings and piston rings product group to more cost-effective locations in North and South America, and to overhaul installations. In China, work continued on the construction of a facility for finishing connecting rods for the local market and for exports to the USA. Increasing order levels for cylinder liners in North America called for the modernization of the installations at a Mexican production plant. In addition, significant investments were made once again to rationalize the manufacturing equipment.

<Valve Train Systems>
-Capital expenditure in 2008 centered on the expansion of capacities as well as on technological adjustments required in connection with customer projects. In the sintered products activities, these measures focused on expanding the machining capacity for pump rotors, expanding capacities in the production of turbocharger parts, and expanding the press capacities for valves. In the camshafts division, investments were used to expand the foundry and machining capacity in India. The capacity for composite camshafts was also expanded; this became necessary due to new startups and the transition from precision sintered cam lobes to forged cam lobes. Because of increased demand in the first half of the year, activities in the valves product segment focused on expanding the production capacity at almost all locations. Significant individual investments included a new production line for valves, the expansion of raw part manufacturing, and the construction of a new machine shop.

<Air Management Systems>
-In 2008, the Air Management Systems product line increased its capital expenditure in comparison with the previous year with a ratio of 5.5 percent of sales. Asia remained an area of focus, with investments in the Chinese production plants and the production facilities needed for new products. In North America, capital expenditure focused on Mexico, where, besides investments in the new customer programs, the location in Monterrey was expanded further to optimize the North American production network. In contrast, a disproportionately low level of investment was recorded in Europe, in view of the stagnating markets in Western Europe.

<Liquid Management Systems>
-Investments in the year of 2008 rose in comparison with the previous year, resulting in an investment ratio of 5.8 percent of sales. In Europe, a large proportion of the investments went toward the new startups of oil filter modules and oil pans as well as the production of fuel filters for diesel engines with strict component cleanliness requirements. In addition, initial investments were made for a large project to further optimize logistics processes. Investments in North America focused on new startups of activated carbon canisters, while in Asia the focus was on expanding the production of oil filter modules and elements as well as localization projects.