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Continental Aktiengesellschaft (Continental AG), whose registered office is Vahrenwalder Strasse 9, Hanover, Germany, is the parent company of the Continental Corporation and a listed stock corporation. It is regis- tered in the commercial register (HRB No. 3527) of the Hanover Local Court (Amtsgericht). Continental AG is a supplier to the automotive industry, with worldwide operations. The areas of business and main activities in which Continental AG is engaged are described in more detail in Note 1 on Segment Reporting. Upon resolution of the Executive Board of February 8, 2011, the consolidated financial statements of Continental AG for 2010 were approved and will be submitted to the electronic German Federal Gazette (elektronischer Bundesanzeiger) and published there.

The consolidated financial statements of Continental AG as of December 31, 2010 have been prepared

under International Financial Reporting Standards (IFRS) as adopted by the European Union, in accor- dance with EU Regulation (EC) No. 1606/2002 in conjunction with Section 315a (1) of the German Commercial Code (Handelsgesetzbuch – HGB). The term IFRS also includes the International Accounting Standards (IAS) and the interpretations issued by the International Financial Reporting Interpretations Com- mittee (IFRIC) and by the former Standing Interpreta- tions Committee (SIC). All International Financial Re- porting Standards mandatory for fiscal year 2010 have been applied, subject to recognition by the European Union.

The consolidated financial statements have been pre- pared on the basis of amortized historical cost, except for certain assets held for sale and derivative financial instruments recognized at their fair value.

The annual financial statements of companies included in the corporation have been prepared using account- ing principles consistently applied throughout the corporation, in accordance with IAS 27. In general, the balance sheet dates of the subsidiary financial state- ments are the same as the balance sheet date of the consolidated financial statements.

The consolidated financial statements have been pre- pared in euros. Unless otherwise stated, all amounts are presented in millions of euros. We point out that differences may arise as a result of the use of rounded amounts and percentages.

Consolidation principles

All major subsidiaries in which Continental AG directly or indirectly holds a majority of voting rights and has the possibility of control have been included in the consolidated financial statements and fully consolidat- ed. In accordance with the provisions of SIC 12 (Con- solidation – Special Purpose Entities), the consolidated financial statements must also include companies that can be controlled by Continental AG, despite a lack of majority voting rights, by other means such as agree- ments or guarantees. No companies were required to be included in the consolidated financial statements as a result of these provisions in either 2010 or 2009. The consolidation of subsidiaries is based on the purchase method, by offsetting the purchasing costs against the proportion of net assets attributed to the parent com- pany at fair value at the date of acquisition. Intangible assets not previously recorded in the standalone fi- nancial statements of the acquired company are en- tered at their fair value. Intangible assets identified in the course of a business combination, including for example brand names, patents, technology, customer relationships, and order backlogs, are recognized separately at the date of acquisition only if the re- quirements under IAS 38 for an intangible asset are met. As a rule, measurement at the time of acquisition is carried out on a preliminary basis only. Increases or reductions of assets and liabilities that become neces- sary within twelve months after the acquisition are adjusted accordingly. These adjustments are pre- sented in the notes to the financial statements. The ratios from the previous year are not subsequently changed.

Any positive remaining amount is capitalized as good- will. In order to ensure the recoverability of goodwill

arising from a not yet completed measurement and the corresponding purchase price allocation, the goodwill is allocated preliminarily to the affected management units as of the balance sheet date. This provisional allocation can deviate significantly from the final alloca- tion.

The shares in the net assets of subsidiaries that are not attributable to the corporation are shown under ‘non-controlling interests’ as a separate component of total equity.

For the term during which Continental or any of its subsidiaries have made binding offers to minority shareholders to purchase their shares in subsidiaries, those non-controlling interests are shown as financial liabilities and not as equity. These financial liabilities are recognized at fair value, which corresponds to the price offered. In the event that the offer was made simultaneously at the time of the business combina- tion, then the fair value of the binding purchase offer is considered part of the total cost of acquisition. On the other hand, if that offer was made separately from the business combination, then any difference between the binding purchase offer and the carrying amount of the non-controlling interests at the time that offer is made is recognized directly in equity.

In Germany, offers to purchase non-controlling inter- ests are required by law particularly in connection with management and profit and loss pooling agreements, in accordance with the redemption obligations under Section 305 of the German Stock Corporation Act (Aktiengesetz – AktG).

Once control has been obtained, any differences aris- ing from successive purchases of shares from non- controlling interests between the purchase price and the carrying amount of those non-controlling interests are recognized directly in equity.

Where there are successive purchases of shares re- sulting in control, the difference between the carrying amount and the fair value at the time of first-time con- solidation is recognized in profit and loss under other income and expenses.

Significant investments where Continental AG holds between 20.0% and 50.0% of the voting rights, there- by enabling it to exert significant influence on the as-

155 sociated companies, are in general accounted for

using the equity method. No companies are included in the consolidated financial statements using the proportionate consolidation method.

Companies that are dormant or have only a low level of business activity and therefore no significant impact on the net assets, financial and earnings position of the Continental Corporation are not included in the consolidated financial statements. Such companies are recognized in the consolidated financial statements at cost unless their fair value can be determined in accordance with IAS 39.

Associates are included using the equity method in which the carrying amount is adjusted to reflect the share in the associate’s net equity. If the annual finan- cial statements of the associates are not available, the pro rata earnings or losses are recognized as neces- sary based on estimated amounts. Goodwill arising from first-time consolidation is reported using the equity method. Goodwill is not amortized but the car- rying amount of investments in associates consolidat- ed using the equity method is tested for impairment if there are relevant indications.

Intercompany amounts receivable and payable, as well as income and expenses, are eliminated on consolida- tion. Intercompany profits arising on the supply of goods and services, and dividend payments made within the corporation, are eliminated on consolidation. Deferred taxes on the elimination of intercompany transactions are carried in the amount derived from the average income tax rate for the corporation.

Foreign currency translation

The assets and liabilities of foreign subsidiaries with a functional currency other than the euro are translated into euro at the year-end middle rates. The statement of income is translated at the average exchange rates for the period. Differences resulting from currency translation are recognized in accumulated other com- prehensive income until the disposal of the subsidiary, without recognizing deferred taxes.

In the standalone statements of Continental AG and its subsidiaries, amounts receivable and payable in for- eign currencies are measured on recognition at the transaction rate and adjusted at the balance sheet date to the related spot rates. Gains and losses arising on foreign currency translation are recognized in the income statement, except for certain loans. Foreign currency adjustments relating to the translation of intercompany financing made in the functional curren- cy of one of the parties, and for which repayment is not expected in the foreseeable future, are charged directly to other comprehensive income within total equity.

In accordance with IAS 21, any goodwill is recognized directly as an asset of the subsidiary acquired and therefore also translated into euros for subsidiaries whose functional currencies are not the euro at the balance sheet date using the middle rate. Differences resulting from foreign currency translation are recog- nized in accumulated other comprehensive income.

The following table summarizes the exchange rates used in currency translation that had a material effect on the consolidated financial statements:

Currencies Closing rate Average rate for the year

1 € in Dec. 31, 2010 Dec. 31, 2009 2010 2009 Brazil BRL 2.22 2.51 2.33 2.85 Switzerland CHF 1.25 1.48 1.38 1.51 China CNY 8.82 9.84 8.99 9.52 Czech Republic CZK 25.12 26.41 25.29 26.46 United Kingdom GBP 0.86 0.89 0.86 0.89 Hungary HUF 277.90 270.44 275.30 280.55 Japan JPY 108.82 133.07 116.54 130.22 South Korea KRW 1,501.40 1,680.02 1,533.80 1,773.59 Mexico MXN 16.59 18.85 16.77 18.80 Malaysia MYR 4.13 4.93 4.28 4.91 Philippines PHP 58.00 66.56 59.84 66.32 Romania RON 4.28 4.24 4.21 4.24 U.S.A. USD 1.34 1.44 1.33 1.39

South Africa ZAR 8.89 10.66 9.72 11.70

Revenue recognition

Only sales of products resulting from the ordinary business activities of the company are shown as reve- nue. Continental recognizes revenue for product sales when there is proof or an agreement to the effect that delivery has been made and the risks have transferred to the customer. In addition, it must be possible to reliably measure the amount of revenue and the reco- verability of the receivable must be assumed.

Ancillary income or proceeds, such as from the sale of equipment or scrap, or rental and licensing income, are netted against the related expenses.

Revenues from made-to-order production are recog- nized using the percentage of completion method. The ratio of costs already incurred to the estimated total costs associated with the contract serves as the basis of calculation. Expected losses from these contracts are recognized in the reporting period in which the current estimated total costs exceed the sales ex- pected from the respective contract.

Product-related expenses

Costs for advertising, sales promotion, and other sales-related items are expensed as incurred. Provi-

sold products on the basis of past experience, as well as legal and contractual terms. Additional provisions may be recognized for specific known cases.

Research and development expenses

Research and development expenses comprise ex- penditure on research and development and expenses for customer-specific applications, prototypes, and testing. Advances and reimbursements from custom- ers are netted against expenses at the time they are invoiced. In addition, the expenses are reduced by the amount relating to the application of research results from the development of new or substantially improved products, if the related activity fulfills the recognition criteria for internally generated intangible assets set out in IAS 38. This portion of the expenses is capital- ized as an asset and amortized over a period of three years from the date that the developed products be- come marketable. However, expenses for customer- specific applications, preproduction prototypes, or tests for products already being marketed (application engineering), generally do not qualify as development expenditure which may be recognized as an intangible asset. Furthermore, expenses incurred directly in connection with starting up new operations or launch- ing new products or processes are charged imme-

157 Only very few development projects fulfill the recogni-

tion criteria as intangible assets since our major me- dium- and longer-term projects are for supplying auto- mobile manufacturers (original equipment business). New developments for the original equipment business are not marketable until Continental AG has been nominated as the supplier for the particular vehicle platform or model and, furthermore, has successfully fulfilled preproduction release stages. Moreover, these release stages serve as the prerequisite to demon- strate the technical feasibility of the product, especially given the high demands imposed on comfort and safety technology. Accordingly, development costs are recognized as an asset only as of the date of nomi- nation as supplier and fulfillment of a specific pre- production release stage. The development is consi- dered to be completed once the final approval for the unlimited series production is granted.

Although suppliers are nominated by original equip- ment manufacturers with the general obligation to supply products over the entire life of the particular model or platform, these supply agreements constitute neither long-term contracts nor firm commitments, in particular because the original equipment manufactur- ers make no commitments in regard of the purchase quantities. For this reason, all pre-series production expenses – with the exception of the capitalized de- velopment costs described above – are recognized immediately in profit or loss.

Interest and investment income and expenses Interest income and expenses are recognized for the period to which they relate; dividends receivable are recognized upon the legal entitlement to payment. Earnings per share

Earnings per share are calculated on the basis of the weighted average number of shares outstanding.

Treasury stock is deducted for the period it is held in treasury. Diluted earnings per share also include shares from the potential exercise of option or conver- sion rights. The corresponding expenses that would no longer be incurred after the conversion or exchange are eliminated.

Balance sheet classification

Assets and liabilities are shown as non-current assets and liabilities in the balance sheet if they have a re- maining term of over one year and, conversely, as current assets and liabilities if the remaining term is shorter. Liabilities are treated as current if there is no unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date. Provisions for pensions and other post-employment obligations as well as deferred tax assets and liabilities are generally shown as non-current. If assets and liabilities have both current and non-current portions, the amounts are classified separately and shown as current and non-current assets or liabilities.

Goodwill

Goodwill corresponds to the difference between the purchase cost and the fair value of the acquired assets and liabilities of a business combination. Goodwill is not subject to amortization; it is tested for impairment at least annually and, if necessary, impaired.

Intangible assets

Purchased intangible assets are carried at acquisition costs and internally generated intangible assets at their production costs, provided that the conditions for recognition of an internally generated intangible asset are met in accordance with IAS 38. If intangible assets have finite useful lives, they are amortized straight-line over a useful life of three to eight years. Intangible assets with indefinite useful lives are tested at least annually for impairment and, if necessary, impaired.

Property, plant and equipment

Property, plant and equipment is carried at cost less straight-line depreciation. If necessary, additional impairments are recognized on the affected items. Investment grants are generally deducted from cost. Construction cost consists of the direct costs and attributable material and manufacturing overheads, including depreciation.

Under certain conditions, portions of the borrowing costs were capitalized as part of the acquisition cost. This also applies to finance leases, investment proper- ty and intangible assets.

As soon as an asset is available for its intended use, subsequent cost is capitalized only to the extent the related modification changes the function of the asset or increases its economic value, and the cost can be clearly identified. All other subsequent expenditure is recorded as current period maintenance expense. Property, plant and equipment is broken down into the lowest level of the components that have significantly different useful lives and, to the extent integrated in other assets, when they are likely to be replaced or overhauled during the overall life of the related main asset. Maintenance and repair costs are recognized as an expense as incurred. The corporation has no prop- erty, plant or equipment that by the nature of its op- eration and deployment can be repaired and serviced only in intervals over several years. The useful lives are up to 33 years for buildings and land improvements; up to twelve years for technical equipment and machi- nery; and two to ten years for factory and office equipment.

Investment property

Land and buildings held for the purpose of generating rental income instead of production or administrative purposes are carried at depreciated cost. Depreciation is charged on a straight-line basis over the useful lives, which correspond to those for real estate in use by the company.

Leasing

Continental leases property, plant and equipment, especially buildings. If the substantial risks and re- wards from the use of the leased asset are controlled by Continental, the agreement is treated as a finance

lease, and an asset and related financial liability are recognized. In the case of an operating lease, where the economic ownership remains with the lessor, only the lease payments are recognized as incurred and charged to income. Other arrangements, particularly service contracts, are also treated as leases to the extent they require the use of a particular asset to fulfill the arrangement and the arrangement conveys a right to control the use of the asset.

Impairment

The corporation immediately reviews intangible assets, property, plant and equipment, investment property and goodwill as soon as there is an indication (trigger- ing event) of impairment by comparing the carrying amount with the recoverable amount. The recoverable amount corresponds to the higher of the fair value less costs to sell and the present value of the expected future cash flow from the continued use of the asset (value in use). If the carrying amount is higher than the recoverable amount, the difference is recognized as an impairment loss. If the circumstances for the prior recognition of an impairment no longer prevail, the impairment losses are reversed for intangible assets, property, plant and equipment, and investment prop- erty.

Capitalized goodwill is tested for impairment once per year in the fourth quarter at the level of cash- generating units. Cash-generating units are the stra- tegic business units that come below the segments (sub-segments) and are the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The impairment test is performed by comparing the carrying amount of the business unit including its goodwill and the recoverable amount of the business unit. The recoverable amount in this case is the value in use calculated on the basis of dis- counted cash flows before taxes. An impairment loss is recognized to the extent the carrying amount ex- ceeds the recoverable amount for the business unit. If