April 27, 2006 – DaimlerChrysler 1st Quarter 2006 Interim Report

Management Report

Positive development of world economy and automotive industry

Global economic developments were very positive in the first quarter of this year, despite the continuation of high rawmaterial prices and rising interest rates. This applies in particular to the United States and China, but also to Japan, most of the emerging economies and some of the countries of Western Europe. A slight upturn in demand was apparent in Western Europe.

Worldwide demand for automobiles was also very positive in most markets. This was primarily due to the stable economic situation as well as a large number of new vehicles launched. Whereas demand for automobiles remained stable in the United States, Western Europe and Japan, demand in the Asian emerging markets expanded significantly. Worldwide demand for commercial vehicles generally remained at the high level of the prior year, especially for medium and heavy-duty trucks.

Announcement of new management model

On January 24, 2006, DaimlerChrysler announced a new management model with the goal of improving the company’s competitiveness to allow further profitable growth. The model is designed to continue DaimlerChrysler’s integration, to focus its operations even more effectively on their core processes, and to promote collaboration within the Group. Furthermore, the duplication of activities is to be reduced.

The structural changes include the consolidation and integration of all management functions such as finance and controlling, human resources, strategy and IT. These functions will be unified and will report to the member of the Board of Management responsible for the respective function throughout the Group. Overlaps between the Group level and the operating levels will be reduced. The integration of the management functions will lead to shorter, faster and more streamlined reporting chains and decision processes, while reducing complexity at the Group.

In this context, we decided that the Commercial Vehicles division will focus on the core truck business under the name Truck Group. Buses and vans will be directly managed as independent businesses. The results of the bus and van business will be reported in the new segment “Van, Bus, Other” as of the first quarter of this year. The prior-year figures of the segments affected have been adjusted to the new structure for the sake of comparability.

As a result of eliminating duplicate activities, consolidating management functions and optimizing processes, the size of the workforce will be reduced by some 6,000 employees over the next three years. This figure represents around 20% of all positions in administrative departments worldwide. The reduction is to take place via early retirement and exit agreements with severance payments.

The total expense, mainly comprising severance payments and investments in the harmonization and standardization of processes and systems, will probably amount to approximately €2 billion in the years of 2006 through 2008; the operating profit in 2006 is likely to be impacted by €0.5 billion.

Decisions made on smart and EADS

At the end of March, we made decisions on additional measures to achieve profitability at smart as of the year 2007 and to secure the brand’s long-term future. The measures planned include the consistent focus on the smart fortwo model, the discontinuation of the smart forfour, anchoring the smart fortwo as a long-term fixed and important component of Daimler- Chrysler’s product portfolio, and the complete integration of smart in the organization of Mercedes-Benz. The expenses required to finance these measures are likely to reach a magnitude of approximately €1 billion; nearly all of this amount is taken into account in the earnings of the first quarter.

At the beginning of April, we decided to reduce our 30% equity interest in the European Aeronautic Defence and Space Company (EADS) to 22.5%. The market value of the 7.5% reduction amounts to approximately €2.0 billion. The transaction is to be concluded in the period between January and April 2007 and will have a positive effect on net income for the year 2007 of around €1 billion. This sale represents a further stage in the concentration on our core automotive business. DaimlerChrysler will continue to be an important shareholder in EADS in the future, with an equity interest of at least 15%.

In March 2006, after receiving the approval of the anti-trust authorities, we concluded the sale of our off-highway activities to the Swedish financial investor, EQT, as agreed in December 2005.

Significant increase in unit sales and revenues in the first quarter

DaimlerChrysler sold 1.15 million vehicles worldwide in the first quarter of 2006, surpassing the figure for Q1 2005 by 6%.

The Mercedes Car Group increased its unit sales by 14% to 281,500 vehicles. The Chrysler Group also shipped more vehicles than in the prior-year quarter: a total of 695,400 passenger cars and light trucks (+4%). Unit sales by the Truck Group of 119,300 trucks were slightly below the high level of the prior-year period. In addition, 59,700 vans and 7,800 buses were sold in the first quarter (Q1 2005: 51,600 vans and 7,500 buses). The Financial Services division increased its contract volume by 9% to €116.3 billion.

As a result of the positive development of unit sales, the Group’s total revenues increased by 17% to €37.2 billion. Adjusted for exchange-rate effects, revenues rose by 12%.

Group operating profit impacted by focus on the smart fortwo

DaimlerChrysler recorded an operating profit of €891 million in the first quarter of 2006 (Q1 2005: €628 million). Earnings in both years were negatively affected by substantial expenses relating to smart. In the first quarter of this year, charges of €982 million were recognized as a result of the decision to discontinue the smart forfour model, while earnings in the first quarter of the prior year were reduced by €800 million due to the realignment of the smart business model. In addition, the continuation of the staff-reduction program in the context of CORE at the Mercedes Car Group caused expenses of €203 million. There was a positive effect of €234 million in the first quarter of 2006 from DaimlerChrysler’s off-highway business, which was sold to EQT, a Swedish financial investor. This income is included in the operating profit of the Van, Bus, Other segment. In addition, the adjustment of a provision for obligations relating to early retirement programs due to the application of a new accounting standard led to income of €166 million. The Truck Group’s earnings for the prior year period included exceptional income of €276 million.

The development of the Group’s operating profit in the first quarter of 2006 primarily reflects the higher unit sales and further efficiency improvements, as well as lower risk costs at Financial Services. The charges recognized at the Chrysler Group were mainly related to the negative net pricing development caused by intense competition in the North American market.

Exchange-rate effects had only a slight negative effect on operating profit during the reporting period. Positive effects on earnings from the translation of subsidiaries’ financial statements into euros, especially due to the appreciation of the US dollar against the euro, were offset by less favorable currency hedging rates compared to the prior year period.

The Mercedes Car Group reported an operating loss of €678 million (Q1 2005: operating loss of €954 million). The planned discontinuation of the smart forfour resulted in expenses totaling €982 million, primarily related to provisions for compensation payments to contractual partners and the valuation of vehicle inventories. In the prior-year quarter, charges of €800 million were recognized for the realignment of the smart business model. Earnings in the first quarter of 2006 were also reduced by €203 million due to the ongoing staff reductions at Mercedes-Benz Passenger Cars in the context of the CORE program. By the end of the first quarter, approximately 7,800 employees had signed voluntary severance agreements or had taken advantage of early retirement. A positive effect on earnings in the amount of €91 million resulted from the application of a new accounting standard, which led to an adjustment of the provision for early retirement obligations.

Adjusted to exclude these above-mentioned items in both years, the Mercedes Car Group increased its operating profit significantly. This was due to higher unit sales and an improved model mix, resulting in particular from the launch of the new S-Class, M-Class and R-Class. Furthermore, the efficiency improving measures initiated in the context of the CORE program also had a positive effect. However, there was a negative impact on earnings from less favorable currency hedging conditions than in the prior-year period.

Although market conditions remained difficult in North America, the Chrysler Group posted an operating profit of €119 million in the first quarter of 2006, compared with an operating profit of €252 million in Q1 2005.

The decrease in operating profit was primarily the result of negative net pricing and shifts in product and market mix, partially offset by an increase in worldwide factory unit sales.

The Truck Group posted a first-quarter operating profit of €426 million (Q1 2005: €698 million). The prior-year figure included income of €276 million from the settlement agreement reached with Mitsubishi Motors Corporation related to the expenses incurred for quality actions and recall campaigns at Mitsubishi Fuso Truck and Bus Corporation.

Positive effects on earnings from the ongoing high level of unit sales combined with an improved model mix and the efficiency improvements resulting from the Global Excellence program almost offset higher expenses for new vehicle projects and to fulfill future emission regulations. The adjustment of the provision for early retirement obligations due to the application of a new accounting standard led to income of €55 million.

The Financial Services division increased its first-quarter operating profit from €328 million to €448 million.

This increase in earnings was aided by lower risk costs, the increased volume of business, the positive earnings trend at Toll Collect and the stronger US dollar compared with the prior-year period. These factors more than offset the negative impact from a higher level of interest rates.

The operating profit reported by the Van, Bus, Other segment increased to €423 million, compared with €234 million in the first quarter of last year.

The result includes income of €234 million from the disposal of DaimlerChrysler’s off-highway business. The sale to EQT, a Swedish financial investor, was agreed upon in December 2005 and was completed in the first quarter after receiving the approval of the antitrust authorities.

Vans and Buses made a positive contribution to the segment’s operating profit. The operating profit of the Vans business was affected by a very pleasing development of unit sales and by expenses for the startup of the new Sprinter generation. The bus business improved its result due to higher unit sales and further efficiency improvements.

The contribution to earnings from EADS was positive, but below the very high level of the prior-year quarter. The decrease was, amongst others, a result of less advantageous currency hedging rates than in the prior year period, particularly for the US dollar, partially offset by measures taken to improve efficiency and by increased unit sales.

Financial expense amounted to €60 million in the first quarter (Q1 2005: financial income of €80 million). The result includes an increase of €88 million in income from investments to €115 million, primarily due to the improved contribution to earnings from our investment in Toll Collect, which is accounted for using the equity method. Net interest expense increased from €42 million to €114 million, mainly as a result of unrealized losses from the mark-to-market valuation of derivative financial instruments that did not qualify for hedge accounting treatment. Other financial expense amounted to €61 million, compared with other financial income of €95 million in Q1 2005. This development is primarily a reflection of income from the sale of securities in the prior-year period.

DaimlerChrysler posted first-quarter net income of €299 million (Q1 2005: €288 million). The increase in operating profit of €263 million was largely offset by the higher net interest expense and the other financial expense. The charges related to the discontinuation of the smart forfour model and the realignment of the smart business model in the prioryear quarter had a negative effect on net income of €604 million and €512 million, respectively.

Earnings per share amounted to €0.29, compared with €0.28 in the first quarter of 2005.

Cash provided by operating activities of €3.0 billion was lower than in the first quarter of 2005 (€3.4 billion). The decrease was primarily due to a rise in inventory-related receivables from financial services, but was also reduced by the severance payments connected with the headcount reduction at the Mercedes Car Group (€0.6 billion) and higher tax payments. There were opposing effects from the lower increase in inventories than in the prior-year quarter and the higher proportion of operate-lease contracts to sales financing contracts in the financial-services business.

Cash used for investing activities increased by €2.2 billion to €3.6 billion, due not only to the increase in equipment on operating leases, but also to the development of receivables from financial services provided to end customers. This was mainly a result of lower payments received on existing receivables and lower proceeds from the sale of these receivables. Although cash outflows for new financing contracts decreased, this did not compensate for the aforementioned effects. Higher proceeds from the sale of businesses reduced the cash outflow for investing activities. This was mainly due to the sale of the Off Highway business unit, which gave rise to a net cash inflow of around €0.8 billion. Capital expenditure for property, plant and equipment was almost unchanged.

Cash used for financing activities amounted to €0.6 billion. This was primarily the result of the (net) repayment of financial liabilities, and was almost unchanged compared with the prior-year quarter.

Cash and cash equivalents with an original maturity of three months or less at March 31, 2006 decreased by €1.3 billion compared with December 31, 2005, after taking currencytranslation effects into consideration. Total liquidity, which also includes deposits and marketable securities with an original maturity of more than three months, decreased from €12.6 billion to €11.0 billion due to optimized processes in the Group’s liquidity-management.

 

Compared with December 31, 2005, total assets decreased by €2.3 billion to €199.3 billion. After adjusting for currency translation effects of €3.0 billion, there was an increase of €0.7 billion, primarily due to the expansion of the leasing and sales-financing business.

Equipment on operating leases and receivables from financial services totaled €96.3 million (December 31, 2005: €95.3 million), equivalent to 48% of total assets. An increase in the portfolio of operate-lease and sales financing contracts was partially offset by effects of currency translation. The increase in inventories and trade liabilities was related to the development of production volume during the year. The change in other assets was due not only to exchange rate effects, but also to a decrease in retained interests in sold receivables (asset-backed securities).

Accrued liabilities decreased, mainly due to the effects of currency translation. There was a rise, however, related to the planned discontinuation of the smart forfour. The change in financial liabilities was almost exclusively due to currency translation effects.

Stockholders’ equity of €36.5 billion at March 31, 2006, was almost unchanged from the level at December 31, 2005. The main reasons for the slight increase were the positive net income as well as the valuation of available-for-sale securities (with no effect on earnings). Opposing effects resulted from the currency translation of equity.

The Group’s equity ratio as of March 31, 2006, adjusted for the dividend distribution in April 2006, was 17.6% (December 31, 2006: 17.3%). The equity ratio for the industrial business was 25.5% (December 31, 2005: 24.8%). The increase in the equity ratio was primarily due to the decrease in total assets.

At the end of the first quarter of 2006, DaimlerChrysler employed a workforce of 368,853 people worldwide (end of Q1 2005: 386,789). Of this total, 171,176 were employed in Germany and 96,531 in the United States (end of Q1 2005: 184,936 and 98,701 respectively).

 The total number of employees decreased compared with the position a year earlier primarily due to the staff-reduction measures initiated at the Mercedes Car Group (-6%) at the end of September 2005 and the sale of the off-highway business with approximately 7,000 employees. The number of persons employed at the Chrysler Group decreased by 3%. Employment levels at the Truck Group and at Financial Services were similar to the figures at the end of Q1 2005.

DaimlerChrysler assumes that the world economy’s rate of expansion will slow down during the course of the year in comparison with the first quarter, primarily due to high raw-material prices, particularly for oil, further rises in interest rates and global imbalances such as the United States’ growing foreign-trade deficit. Provided that general conditions remain stable, the world economy should grow in the year 2006 at about the same rate as in the prior year.

Parallel to the development of the world economy, the dynamism of global demand for automobiles is likely to decrease slightly. For full-year 2006, we therefore anticipate a growth rate similar to that in 2005. Whereas market volumes at prioryear levels are the best that can be expected for the United States and Western Europe, demand should increase significantly in almost all of the large emerging economies. Slight growth is expected for Japan. Worldwide demand for commercial vehicles is likely to remain at a high level in 2006. We assume that competitive pressure in the automotive industry will intensify as a result of worldwide over-capacity.

DaimlerChrysler anticipates unit sales in 2006 in the magnitude of the prior year (2005: 4.8 million vehicles).

At the Mercedes Car Group, we expect full-year unit sales in the magnitude of 2005, combined with an improved model mix. The product offensive will continue this year with the new GL-Class, the CL coupe based on the new S-Class, the

revised SL roadster and above all with the new generation of the E-Class, which we presented in the middle of April. At smart, we will focus on the smart fortwo. At the same time, the CORE efficiency-improving program will be continued.

The Chrysler Group assumes that unit sales will remain stable in an unchanged difficult market environment in 2006. We will launch a total of ten new models on the market in the course of the year, although a large number of them will not be available for sale until the second half of the year. However, the Chrysler Group will continue its actions to improve productivity, quality and customer satisfaction in the current year.

The Truck Group anticipates stable unit sales for full-year 2006. We will continue modernizing our product range with the Mitsubishi Fuso Canter light truck with hybrid drive, the Stratosphere heavy-duty truck from Western Star and the Sterling 360 light-duty delivery truck. We will also continue with the consistent implementation of the Global Excellence program.

The Financial Services division looks forward to moderate growth in contract volume during the course of the year, taking into consideration the rising level of interest rates. Financial Services will further intensify its cooperation with the vehicle units. In the coming years, we intend to further enhance customer and dealer satisfaction and process quality while achieving efficiency improvements.

The Vans unit expects lower unit sales than in 2005 due to the Sprinter model change. For the bus activities we assume that unit sales will remain at the high level of the prior year. EADS plans for a stable market for civil aircraft in the year 2006, Airbus deliveries should increase again compared with the prior year.

The DaimlerChrysler Group anticipates a slight increase in revenues in the year 2006 (2005: €149.8 billion).

The Group’s workforce is expected to decrease further by the end of the year due to the implementation of the staff-reduction programs.

For full-year 2006, DaimlerChrysler anticipates an improvement in profitability and operating profit to exceed €6 billion. This figure includes charges for the implementation of the new management model (€0.5 billion), for the focus on the smart fortwo (€1 billion) and for the staff reductions at the Mercedes Car Group (€0.4 billion), as well as a gain on the disposal of the off-highway business (€0.2 billion).

 

Forward-looking statements in this Interim Report:

This interim report contains forward-looking statements that reflect management’s current views with respect to future events. The words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project” and “should” and similar expressions identify forward-looking statements. Such statements are subject to risks and uncertainties, including, but not limited to: an economic downturn in Europe or North America; changes in currency exchange rates, interest rates and in raw material prices; introduction of competing products; increased sales incentives; the effective implementation of our New Management Model, and the CORE program, including the new business model for smart, at the Mercedes Car Group; renewed pressure to reduce costs in light of restructuring plans announced by our major competitors in NAFTA; disruption of production or vehicle deliveries, resulting from shortages, labor strikes or supplier insolvencies; the resolution of pending governmental investigations; and decline in resale prices of used vehicles. If any of these or other risks and uncertainties occur (some of which are described under the heading “Risk Report” in Daimler- Chrysler’s most recent Annual Report and under the heading “Risk Factors” in DaimlerChrysler's most recent Annual Report on Form 20-F filed with the Securities, and Exchange Commission), or if the assumptions underlying any of these statements prove incorrect, then actual results may be materially different from those expressed or implied by such statements. We do not intend or assume any obligation to update any forward-looking statement, which speaks only as of the date on which it is made.