Annual Report 2005

Masterflex AG | Annual Report 2005

Masterflex AG

Fon

Fax

Willy-Brandt-Allee 300

+49 209-97077-0

+49 209-97077-20

45891 Gelsenkirchen

[email protected]

www.masterflex.de/com

* Proposal to the Annual General Meeting on June 14, 2006

6.0

5.9

in EUR million

75.8

66.9

70 80 90

50 87.8

3.7

123

1.37

1,4

in EUR

12.6

in EUR million

1.33

1,2

0.84

10.6

0,8 1,0

0,2

2005

December

31, 2005

87,773

Masterflex at a glance | Facts and figures

14,584

12,263

9,719

5,965

31,040

97,832

31.7%

14.0%

6.8%

1.37

0.80*

2.9%**

656 31, 2004

75,752

13,544

10,553

9,423

5,942

28,848

87,259

33.1%

13.9%

7.8%

1.33

0.80

2.9 %

473

December

Change

15.9 %

16.2 %

7.7 %

3.1 %

0.4 %

7.6 %

12.1 %

38.7 %

3.0 %

0.0 %

Consolidated EBIT

2004

2003

2004

2003

0,4

Consolidated earnings per share

7.6

789

0,6

** Share price on December 31, 2005: 27.00 EUR

Net dividend yield (December 31, 2005)**

Consolidated revenue

Masterflex at a glance

Annual Report 2005 |

Revenue (EUR thousand)

EBITDA (EUR thousand)

Net profit (EUR thousand)

Total assets (EUR thousand)

Staff (December 31, 2005)

Earnings per share (EUR)

Net dividend per share (EUR)

EBIT (EUR thousand)

EBT (EUR thousand)

Equity (EUR thousand)

Equity ratio %

EBIT-Margin

Return on sales

2005

2004

2003

2005

Consolidated net profit

10 20 30 40

2004

2003

rf M le la te at as x a g nc e	D be ec em r 3 20 05 1,	D be ec em r 3 20 04 1,	C ha ng e
R ( EU R th d ) ev en ue o us an	87 ,7 73	75 ,7 52	15 .9 %
EB IT D A ( EU R th d ) o us an	14 ,5 84	13 ,5 44	7. 7 %
( ) EB IT EU R th d o us an	12 ,2 63	10 53 ,5	16 .2 %
EB T ( EU R th d ) o us an	9, 7 19	9, 42 3	3. 1 %
N fit ( EU R th d ) et p ro o us an	5, 96 5	5, 94 2	0. 4 %
E (E U R th d ) it qu y o us an	3 1, 04 0	28 ,8 48	7. 6 %
(E ) To l a U R th d ta et ss s o us an	97 ,8 32	87 ,2 59	12 .1 %
E % it ti qu y ra o	3 1. 7 %	33 .1 %
St af f (D be 3 1, 20 05 ) ec em r	65 6	47 3	38 .7 %
EB IT -M gi ar n	14 .0 %	13 .9 %
R le et ur n o n sa s	6. 8 %	7. 8 %
Ea ha ( EU R ) in rn gs p er s re	1. 37	1. 33	3. 0 %
N d id d sh (E U R ) iv et en pe r ar e	* 0. 80	0. 80	0. 0 %
(D 3 20 05 ) N d id d el d be 1, iv yi et en ec em r	2. 9 % **	2. 9 %

* Proposal to the Annual General Meeting on June 14, 2006

** Share price on December 31, 2005: 27.00 EUR

Masterflex AG

Fon

Fax

Willy-Brandt-Allee 300

Masterflex AG | Annual Report 2005

Annual Report 2005

+49 209-97077-0

+49 209-97077-20

45891 Gelsenkirchen

[email protected]

www.masterflex.de/com

Consolidated balance sheet

A ss	et s	D be ec em r 3 1, 20 05	D be ec em r 3 1, 20 04
A	N nt et o nc ur re a ss s	EU R t ho u.	EU R t ho u.
I.	In ib le ta et ng a ss s	32 16 ,7	23 ,2 58
II.	Pr pl d ui rt t t o pe y, an an eq pm en	23 ,2 2 1	17 ,2 2 1
III	Lo i -t tm ts ng er m nv es en	1, 3 15	2, 39 1
IV	ef D d ta ts er re as se x	70 9	39 4
		57 ,9 6 1	4 3, 26 4
B.	C nt et ur re a ss s
I.	In ri nt ve o es	20 73 ,5	13 69 ,5
II.	Pr d ai ep ex pe ns es	74 3	63 9
III	Tr ad nd bl ei ts ot e ac co un a n es r ec va e	13 ,6 60	12 ,1 89
IV	Se ri ti cu es	0	9, 50 0
V.	C h d ba nk b al as an an ce s	4, 89 5	8, 09 8
		39 ,8 7 1	4 3, 99 5
		97 ,8 32	87 ,2 59

I.

II.

I.

II.

III.

IV.

I.

II.

III.

IV.

Shareholders' equity

Noncurrent liabilities

Financial liabilities

Current liabilities

Financial liabilities

Operating expenses

Consolidated Income Statement

Financial result

Income taxes

Provisions

Equity and liabilities

Consolidated equity 30,606

Minority interest 434

Deferred income 2,616

Other noncurrent liabilities 3,016

Deferred tax liabilities 2,444

Deferred income 233

Other current liabities 12,580

Operating income 94,206

Profit from ordinary activities 9,719

Other taxes -246

Income attributable to minority interests -193

Net profit for the period 5,965

28,039

31, 2004

EUR thou.

28,848

26,967

2,606

3,280

1,588

4,419

4,198

14.818

23,678

87,259

79,838

December

31, 2004

EUR thou.

-69,285

1,130

9,423

-2,814

-198

-351

5,942

243

34,733

31,040

December

31, 2005

EUR thou.

35,148

31,644

97,832

December

31, 2005

EUR thou.

-81,943

-2,544

-3,655

4,504

14,327

1,289

25,783

809

December

292

D	D
be	be
ec	ec
em	em
r	r
3	3
1,	1,
20	20
05	04
EU	EU
R t	R t
ho	ho
u.	u.
2,	5,
67	33
0	2
-1	-3
9,	,0
83	6
7	1
12	2,
,9	77
56	8
-4	5,
,2	04
11	9
8,	3,
09	59
8	4
1, 00 8	-5 45
4,	8,
89	09
5	8

Eq ui nd li ab ili ti ty a es		D be ec em r 3 1, 20 05	D be ec em r 3 1, 20 04
s' A Sh eh ld ui ar o er eq	ty	EU R t ho u.	EU R t ho u.
I. C lid ed at on so e qu	it y	30 ,6 06	28 ,0 39
II. M in rit in te st o y re		43 4	80 9
		3 1,0 40	28 ,8 48
B. N lia bi lit t on cu rr en	ie s
I. Pr is io ov ns		1,2 89	29 2
II. Fi l l bi lit ia ia ie na nc s		25 ,7 83	26 ,9 67
III D ef d in er re co m e		2, 6 16	2, 60 6
IV O th er n on cu rr en	lia bi lit ie t s	3, 0 16	3, 28 0
ef V. D d lia bi ta er re x	lit ie s	2, 44 4	1,5 88
		35 ,1 48	34 ,7 33
C C li ab ili ti nt ur re es
I. Pr is io ov ns		4, 50 4	4, 4 19
II. Fi l l bi lit ia ia ie na nc s		14 ,3 27	4, 19 8
III D ef d in er re co m e		23 3	24 3
IV O th li ab nt er c ur re	iti es	12 ,5 80	14 .8 18
		3 1,6 44	23 ,6 78
		97 ,8 32	87 ,2 59

Assets

Noncurrent assets

Consolidated balance sheet

Facts and figures

I. Intangible assets

Current assets

Inventories

Securities

Trade accounts and notes receivable

Deferred tax assets 709

Prepaid expenses 743

Property, plant and equipment

Long-term investments

Cash and bank balances

Consolidated Cash Flow Statement

Net cash from/used operating activities

Net cash from/used in investing activities

Net cash from/used in financing activities

Net change in cash and cash equivalents

Changes in cash and cash equivalents

due to exchange rates and other factors

Cash and cash equivalents at end of period

Cash and cash equivalents at beginning of period

Annual Report 2005 |

II.

III.

IV.

I.

II.

III.

IV.

V. 32,716

23,221

20,573

13,660

4,895

39,871

97,832

December

31, 2005

EUR thou.

2,670

-19,837

12,956

-4,211

8,098

1,008

4,895

1,315

57,961

December

31, 2005

EUR thou.

31, 2004

EUR thou.

23,258

17,221

43,264

13,569

12,189

9,500

8,098

43,995

87,259

31, 2004

EUR thou.

December

5,332

-3,061

2,778

5,049

3,594

-545

8,098

2,391

394

639

December

C lid ed In St at at t on so co m e em en	D be ec em r 3 20 05 1, EU R t ho u.	D be ec em r 3 20 04 1, EU R t ho u.
O ti in pe ra ng co m e	94 ,2 06	79 ,8 38
O ti pe ra ng e xp en se s	-8 1,9 43	-6 9, 28 5
Fi l r ul ia t na nc es	-2 44 ,5	13 0 1,
Pr of fr rd it in tiv iti om o ar y ac es	9, 7 19	9, 42 3
In ta co m e xe s	-3 ,6 55	-2 ,8 14
O th t er ax es	-2 46	98 -1
In ib ab le in rit in at tr ut t te st co m e o m o y re s	-1 93	-3 5 1
fit fo N th od ri et p ro r e pe	5, 96 5	5, 94 2

Highlights of 2005 2
Foreword by the Board 3
Masterflex shares 6
Financial Calendar 2006 12
Corporate Governance Report 13

Group Management Report 19
I. Business and business conditions 19
Group structure and business activities 19
Market and competition 22
Corporate governance, objectives and strategies 33
The 2005 Fiscal Year 39
General economic situation 39
Plastics processing industry 41
Masterflex AG 42
57 II. Earnings position, Financial Situation and Net Assets
Earnings position 57
Financial Situation 59
Net assets 61
III. Supplementary report 65
IV. Risk report 66
V. Forecast report 71

Consolidated Balance Sheet 80
Consolidated Income Statement 82
Consolidated Statement of Changes in Equity 83
Consolidated Cash Flow Statement 84

Notes to the Annual Financial Statements 85

Consolidated Statement of
Changes in Noncurrent Assets 116
Auditor's Report 118

Report of the Supervisory Board 119

Glossary 122
Financial Calendar 2006 Imprint 124

Highlights of 2005

March

Investors conference in Frankfurt

April

Masterflex AG presents on Hanover fair the modular designed transportation vehicle "Cargobike" with an innovative hydrogen based fuel cell propulsion unit. Apart from the driving power, additional power can be supplied for vehicle lighting or for cooling transported goods.The range of application is 250 km .

May/June

International road show, for the first time also to the USA Annual Shareholder Meeting with more than 300 participents

August

Masterflex AG buys SURPRO group, one of the leading companies of precious metal coating

September

Investors conference in London

November

Masterflex AG supplys the world's first fleet of bicycles with fuel cell propulsion systems to the german city of Herten

Masterflex presents on the Deutsches Eigenkapitalforum in Frankfurt

International road show

Dear Shareholders,

Once again, we can look back on a successful year; for the eighteenth year in a row we were able to increase revenue and improve our profit situation in fiscal 2005. Research and development have a prominent position in our company and, as before, we were able to introduce a series of innovations in this past business year.

Overall, revenue and earnings before taxes were completely within the forecast range published in November 2005. We retroactively adjusted the valuation at the time of initial consolidation of our subsidiaries DICOTA GmbH and Fleima Plastic GmbH in accordance with international accounting standard IFRS 3 and thereby also restated our financials for the 2004 business year. As a result of these changes, Masterflex AG's year-overyear growth was even better.

Based on the figures published last year for fiscal 2004, consolidated revenue rose 15.9 percent to EUR 87.8

million (preceding year: EUR 75.8 million) and consolidated earnings before interest and taxes (EBIT) were increased by 8.0 percent.After adjusting the figures from the preceding year consolidated EBIT in the fiscal year 2005 even rose by 16.2 percent to EUR 12.3 million (preceding year EUR 10.6 million). Earnings before taxes (EBT) suffered from the poorer financial result, growing 3.1 percent to EUR 9.7 million (preceding year: EUR 9.4 million).

Weaker earnings from financing activities and a steep year-over-year 34.1 percent increase in the Group's tax rate caused the Group's net profit to remain steady at the prior year's level of about EUR 6.0 million (2004: EUR 5.9 million).The main reasons for the tax increase were a mandatory one-time adjustment of transfer prices and the profits generated by the DICOTA group in countries with higher tax burdens.

The revaluation related to initial consolidation reduced the earnings per share for the 2004 financial year by EUR 0.20 to EUR 1.33. Earnings per share for fiscal 2005 were EUR 1.37, or three percent higher than the adjusted prior year's result.

Despite the overall positive performance, we did not reach all our targets because we were originally expecting a rise in EBIT of between 15 and 25 percent which we corrected to +5 to +12 percent in November 2005.The slower growth in profit was a result of special items outside the areas of our core business.This applies in particular to our subsidiary DICOTA GmbH which, despite a pleasing growth in revenue, remained clearly behind our profit expectations.The decrease in profit at DICOTA amounting to EUR 0.6 million was essentially due to the marked rise in selling costs because of the forced internationalisation of business. It is encouraging to see that in the meantime DICOTA has found its way back to its old earnings potential.

However, Masterflex AG's overall positive Group development clearly shows that we are active in business areas that are fit for the future. The EBIT margin remains at an excellent 14 percent. Our core business of High-tech Hose Systems was successful again in 2005, thereby serving as a solid foundation for Masterflex AG. As announced, we realigned our business to focus on products of higher value.We were aware that we might see decreases in revenue in some areas and budgeted this in. Overall we attained the revenue level of the preceding year and thus achieved our goal of further improving growth in earnings. Earnings before taxes and the EBIT margin for High-tech Hose Systems were further increased in 2005, despite the fact that our subsidiary TECHNO GmbH, which specialises in products used in tunnel construction, did not perform satisfactorily. In the course of the next two years we are expecting a clear improvement in the performance of our subsidiary.

Fuel cell technology also had a successful year. Activities are currently allocated to the Hightech Hose Systems core business area because fuel cell technology does not yet represent a significant economic size on its own. During 2005 we made considerable technological advances in fuel cells. We received the order for the first fuel-cell-powered bicycle fleet, and with the Cargobike we have developed another light vehicle that will be used throughout Europe in the HYCHAIN Minitrans hydrogen and fuel cell project.

The positive performance of the High-tech Hose Systems business area makes Masterflex AG's high technological competence clear. We are excellently positioned with future-oriented products. All in all, we are expecting the successful performance in the area of High-tech Hose Systems to continue. At the beginning of the year we hit a new record in the number of orders, which makes us optimistic for the fiscal year 2006.

Medical Technology also fulfilled our expectations for the fiscal year 2005. After the extensive investments made over the past few years this area is now providing continuous, albeit still small, contributions to earnings. Altogether, we see considerable future potential for Medical Technology because we have innovative products made of materials that do not pose any health threat. In addition, we offer surgery kits at a fixed price, giving hospitals a reliable basis for their cost calculations.

The Mobile Office Systems business area has been reorganised. It contains the business generated by DICOTA GmbH with system cases and bags for transporting notebooks and office systems. After the difficulties experienced in the third quarter of 2005, business had clearly recovered by the fourth quarter and the beginning of this year has also been quite positive.Thus we are anticipating a noticeable recovery of business activity in the year 2006.

The SURPRO Group, whose revenue and earnings were proportionally consolidated for the first time in 2005, is part of the new Advanced Material Design area. SURPRO is well-known for its high competence in the area of refined surfaces and has developed excellently compared to the preceding year.We are assuming that the SURPRO Group will provide noticeable stimuli for our future business performance.

The Board of Masterflex AG is expecting the successful trend to continue in the 2006 fiscal year, particularly because the year got off to such a pleasing start: the order books are very nicely filled and the economy is in a generally positive mood. Because of the successful performance of the Group, we will recommend paying a dividend of EUR 0.80 at the annual general meeting on June 14, 2006, the same amount as last year. For 2006 we expect an increase in consolidated revenue of 20 to 30 percent and a growth in consolidated EBIT of 10 to 20 percent.

Together with the Supervisory Board, we would like to thank all our employees for their successful work, all our business partners for their positive co-operation and our shareholders for their trust in our company.

Detlef Herzog Ulrich Wantia Chairman of the Board Chief Financial Officer

Masterflex shares

Share information

ISIN	DE 000 549 293 8
WKN	549 293
Type of share	Ordinary bearer shares
Exchange symbol	MZX
Bloomberg symbol	MZX.GR
Reuters symbol	MZXG.F
Market segment	Prime Standard
Included in the following indices	SDAX
	CDAX
	Prime All Share Index
	Classic All Share Index
	Prime Industrial Index
Designated Sponsor	HSBC Trinkaus & Burkhardt KGaA
	Sal. Oppenheim Jr. & Cie. KGaA (until 31/12/2005)
Number of shares	4.5 Mio.
Notional value	EUR 1.00

Stock market - 2005 German stock markets closed in 2005 with a strong across-the-board share price increase of 4 percent.There were 20 genuine IPOs and an additional 30 companies had themselves listed. Looking back, 2005 proved to be an extremely successful year for the stock market.The DAX climbed 27 percent, outperforming both the Dow Jones and NASDAQ indices, which rose only marginally, and the European EuroStoxx 50 index, which finished 23 percent higher.The excellent corporate business situation in Germany raises expectations that companies will raise their dividend payments substantially.The projected increase for DAX companies alone is approximately 17 percent. Smaller companies again led the charge; the SDAX outperformed the DAX and soared by approximately 32.5 percent.

Year-on-year, Masterflex lost ground relative to the SDAX trend.The year-end share price was EUR 27.00, the same as at the beginning of the year. Over the course of fiscal 2005, the share price went as high as EUR 37.75 (Xetra), a gain of almost 40 percent.The significant drop and unsatisfactory development of the stock price was caused by the revision of our profit forecast from 15 - 25 percent to 5 - 12 percent in November 2005.

Placement An upbeat outlook for the year, several studies with positive recommendations, an increase in investor relations activities with a number of road shows, also in the United States for the first time, and a securities placement influenced the Masterflex share price positively, particularly after July 2005. Because of the high level of demand for Masterflex shares, at the beginning of July, 560,000 Masterflex AG shares with institutional investors in the United States and Europe were placed via WestLB AG, Düsselldorf, increasing the free float to more than 83 percent.The placement price was established at the upper end of the price range at EUR 27.00, which corresponded to a discount of approximately 1.8 percent on the previous day's XETRA closing price.The order book was oversubscribed several times.The shares originated from the family holdings of Chairman of the Board Detlef Herzog, as well as from the holdings of Chairman of the Supervisory Board Friedhelm Bischoping. Market reaction to this placement was extremely positive.

Contacts with European investors were further cultivated at road shows, in one-on-one meetings, and at an investor conference in London.The close contact to the financial market, an additional analyst study with a positive recommendation, as well as positive reporting in the media, led to a constantly rising share price. A new 52-week high (Xetra) was reached at the beginning of October at EUR 37.75.

Following the November 9, 2005 profit warning, the price sank from over EUR 30.00 to an annual Xetra low of EUR 24.20 (floor trading: EUR 24.36). At year-end, the price then rose again and closed on December 30, 2005 at EUR 27.00, exactly the same level as at the beginning of the year.

We are not satisfied with the company's 2005 stock market performance. Masterflex AG is a growth company with outstanding future prospects. Our goal is to ensure that this positive corporate outlook is also sustainably reflected in our share price. Since the beginning of 2006, the share price has already recovered. We will therefore continue to stay in close contact with the financial markets in order to present our potential for success.

Price performance of Masterflex shares versus DAX and SDAX

Share price statistics

Xetra		2006 Jan. 2 to Mar. 29	2005	2004
Highest variable rate	EUR	31.70	37.75	31.00
Lowest variable rate	EUR	26.00	24.20	16.80
Opening price	EUR	27.50	27.00	16.80
Closing price Dec. 30 / Mar. 29	EUR	31.70	27.00	27.30
Performance		15.3 %	0.0 %	62.5 %
Floor trading
Highest variable rate	EUR	31.99	31.10	31.10
Lowest variable rate	EUR	26.00	24.36	16.90
Opening price	EUR	27.45	27.10	16.90
Closing price Dec. 30 / Mar. 29	EUR	31.99	26.75	27.20
Performance		16.5 %	-1.29 %	60.9 %
All-time high	EUR	39.00
All-time low	EUR	9.95

In 2005, the average monthly order book trading volume per share was 264,790 on Xetra. This is 1.4 times more than in 2004, when the figure was 108,326 shares, and represents a volume increase of more than EUR 4.5 million. On average, floor trading was 64,574 shares, or close to EUR 1.8 million.This reflects a slight decline of 2.7 percent in number of shares, but a volume increase of EUR 1.2 million, or a plus of almost 6 percent.

The total number of Masterflex shares traded on all German markets was 4.2 million, an increase of 1.9 million shares (+82.8 percent).This represents a trading volume of EUR 117.9 million in 2005, virtually double that of the previous year. Increased liquidity was mainly attributable to the renewed expansion of the free float, which increased from 56 percent to 83 percent in July 2005.

Analysts continue to issue positive recommendations In 2005 WestLB, Bankhaus Lampe, First Berlin, as well as Dresdner Kleinwort Wasserstein issued positive recommendations in their coverage of Masterflex AG.

Even after the profit warning in November 2005, most analysts stood by their positive assessments due to the unchanged excellent growth potential. Some analysts lowered their recommendations to "neutral" or "hold". Analyst recommendations are also documented in the Investor Relations/Analyst and Press Recommendations section of our home page, www.masterflex.de/com.

Dividend payment for the fifth year running

For the fifth consecutive year, the company's positive results will enable us to pay our shareholders a dividend.The Board and Supervisory Board will propose a dividend on the prior year level of EUR 0.80 per share at the general meeting on June 14, 2006, thereby continuing to highlight our positioning in the stock market: Masterflex is a growth and value stock.

Earnings development in 2005

Key performance indicators per share		2005	2004
Share capital	EUR millions	4.50	4.50
Number of shares	millions	4.50	4.50
Share price as of December 31 (floor trading)	EUR	27.20	27.20
Market capitalization as of December 31	EUR millions	122.40	122.40
Free-float market capitalization as of December 31 EUR millions		106.52	67.24
Free float as of December 31		83.3 %	56.0 %
IAS earnings per share	EUR	1.37	1.33
Net dividend per share	EUR	0.80*	0.80
Net dividend yield (as of December 31)		2.9 %	2.9 %

*Proposal to the Annual General Meeting on June 14, 2006

Investor relations strategy 2005 – raising awareness In 2005, Masterflex AG expanded its investor relations activities. Road shows for institutional investors were held in Germany and abroad to discuss the 2004 annual financial statements, the half-year report and the nine-month results. A visit to investors in the United States in June 2005 was a first. Masterflex AG gave a company presentation at an investor conference in London in September 2005, as well as at the November 2005 Equity Capital Forum hosted by the German Stock Market, which was attended by an audience of more than 3,000 delegates from the world of finance. In addition, a series of one-on-one discussions were conducted at company headquarters in Gelsenkirchen.These measures enabled us to further raise the level of awareness of the company in the financial world.

Close contact with private investors Our open, transparent and concurrent publication policy applies to all capital market participants. Detailed information is made available to our private investors on our home page, www.masterflex.de/com, and regularly via an e-mail newsletter service. In addition, there is a mailing list for the interim and annual reports. Investors can also talk to the company's principals directly at the Annual General Meeting and at shareholder meetings.

At the General Meeting held on June 8, 2005, private investors had the opportunity to meet directly with the Board and Supervisory Board of Masterflex AG. At the same time, we introduced the product line and the new Cargobike, a fuel-cell-powered cargo taxi with a range of 250 km. Shareholders were satisfied with the progress of Masterflex AG and consequently approved all agenda items with large majorities.

Media contact – raising awareness In 2005, we also raised media awareness of Masterflex AG. Numerous interviews and articles appeared in important market media, in trade journals, as well as on the Internet. Masterflex AG is also represented in a film about the City of Gelsenkirchen that was produced for foreign journalists and visitors who will attend the Soccer World Cup 2006.

Investor Relations 2006 Investor relations work in 2006 will focus on furthering our dialog with investors, analysts, and the financial press, as well as raising our profile as a high-margin small-cap stock with significant potential. In early January and late March 2006 we gave a company presentation at two bank conferences focussed on renewable energies. We will continue to expand our participation at such events and will also emphasize international road shows and meetings with investors. At the end of March, Stephanie Kniep, Head of Investor Relations at Masterflex AG, was elected to the Board of Deutsche Investor Relations Verband e.V., where she will represent the interests of small and medium-sized companies in particular.

Financial Calendar 2006

Annual earnings press conference	March 31th
DVFA analysts' meeting	April 3rd
International road show	April/May
Interim report for Q1	Mid May
Annual General Meeting	June 14th
Dividend payment	June 16th
Interim report for H1	Mid August
Interim report for Q3	Mid November
International road show	November/December

Corporate governance report

The following report by the Board on corporate governance at Masterflex AG - also on behalf of the Supervisory Board - is in accordance with section 3.10 of the German Corporate Governance Code:

The term "corporate governance" refers to responsible corporate management and supervision aimed at adding long-term enterprise value. Fundamental aspects of good corporate governance are:

efficient cooperation between the Board and Supervisory Board
respect for shareholders' interests and
open and transparent corporate communication.

Corporate governance has always been a high priority at Masterflex AG. A large majority of the principles and recommendations contained in the German Corporate Governance Code already form an essential part of our corporate culture. Masterflex AG's compliance officer, who was appointed in fiscal year 2002 to deal with corporate governance issues, provides the Board and the Supervisory Board with information about the current status of the implementation of the Code and about new developments in Germany on a regular basis.The compliance officer also reports on adherence to the Code within the Group.

Masterflex AG has committed to observe the German Corporate Governance Code, which sets out guidelines for responsible corporate governance. The Code was presented by the Government Commission on the German Corporate Governance Code on February 26, 2002 and published by the Federal Ministry of Justice on November 26, 2002 in the official section of the electronic Federal Gazette. In subsequent years additional recommendations and supplements were announced with particular reference to more transparency in board and supervisory board remuneration.

The Code presents key statutory regulations for the management and supervision of German listed companies and contains internationally and nationally recognized standards of good and responsible governance (in the form of recommendations and suggestions).The Code is designed to make the German corporate governance system transparent and comprehensible.The Company is obliged, without exception, to observe and comply with the statutory regulations presented in the Code, although it can deviate from the recommendations contained in it. Such deviations are provided for explicitly in the foreword to the Code and are intended to contribute to "more flexibility and more self-regulation in the German corporate constitution".

Declaration of conformity In December 2005, the Board and Supervisory Board of Masterflex AG declared it has been in conformance with the German Corporate Governance Code dated June 2, 2005, published by the Federal Ministry of Justice on July 20, 2005 in the official part of the electronic Federal Gazette with revised recommendations from the Government Commission dated July 21, 2005 since the last Declaration of Conformity issued in December 2004, with the exceptions cited in that document.The Board and Supervisory Board further declared continuing conformity in the future with the following exceptions:The Declaration is made permanently available to the shareholders of Masterflex AG on the Internet at http://www.masterflex.de/de/index.php ?&node_id=21. All Declarations of Conformity previously published are also available there.

Exceptions

4.2.3. Publication of the salient points of the remuneration system The salient points of the remuneration system and the concrete form of a stock option scheme or comparable instruments for components with long-term incentive effect and risk are explained in more detail in the Company's annual report, which can be downloaded from the website.

5.3.1., 5.3.2. Supervisory Board The Supervisory Board of Masterflex AG has deliberately been kept small, at three members.This lean structure - like that of the Group as a whole enables it to pass resolutions efficiently, quickly and flexibly.The appointment of recognized specialists to the Supervisory Board is a key way in which Masterflex AG can institute a process of ongoing dialog and hence lay the foundations for its successful corporate development.

5.4.7. Individualized disclosure of Supervisory Board remuneration Supervisory Board remuneration consists of fixed components only. Disclosure in the notes of the 2004 annual financial statements was presented as an aggregate amount. Pursuant to the Code, in future annual reports, disclosure of Supervisory Board remuneration will be published in the Corporate Governance Report.

7.1.2. Publication deadline The Code recommends a publication deadline of 45 days for quarterly reports and 90 days for annual reports. Here we comply with the Stock Exchange Rules and Regulations of the Frankfurt stock exchange, which require publication within two and four months respectively.

7.1.4. Disclosure of the results of subsidiaries The Code provides that the individual results of the subsidiaries from the previous year should be reported in the annual financial statements. We do not comply with this and do not report these results. Our subsidiaries are medium-sized companies whose competitive position, in our opinion, could be compromised by the publication of the results.

The declaration of conformity and the German Corporate Governance Code are permanently accessible to all interested parties on the "Investor Relations" section of our home page, www.masterflex.de.

The auditors inform the Supervisory Board and/or note in the audit report if, during the performance of their audit of the financial statements, facts are discovered which indicate that the declaration of conformity submitted by the Board and Supervisory Board in accordance with section 161 of the Aktiengesetz (AktG – German Public Companies Act) is inaccurate.

Key elements of corporate governance at Masterflex AG

Investor Protection Improvement Act requires greater attention to corporate governance On October 30, 2004, the Anlegerschutzverbesserungsgesetz (AnSVG – Investor Protection Improvement Act) came into force. With the implementation of the EU Directive, the laws on insider trading, ad hoc disclosures and market abuse are being modernized and harmonized at European level. Background information and the text of the Act are available on the website of the German Federal Finance Ministry.

The new act, which modifies the Wertpapierhandelsgesetz (WpHG – Securities Trading Act) among others, aims to enhance investor confidence in the capital markets. Masterflex AG has taken all measures necessary to comply with the new regulations applicable to the Company. Masterflex AG's employees have been informed about the new insider rules and the associated regulations governing events subject to disclosure requirements. Masterflex AG fulfils its duty to maintain an insider list.This contains the names of all those with access to insider information on a regular or project-related basis.

Efficient cooperation between the Board and Supervisory Board We are convinced that intensive, continuous dialog between the Board and Supervisory Board forms the basis for successful corporate development.The Board of Masterflex AG informs the Supervisory Board regularly, without delay and comprehensively of all relevant issues regarding company planning and strategic corporate development, the course of business, the position of the Group including its risk position, and risk management.Variances between actual business developments and previously formulated plans and targets are discussed individually and the Company's strategic approach is agreed jointly. Regulations to prevent conflicts of interests are laid down in the by-laws.The Company has taken out directors' and officers' (D&O) liability insurance with a deductible for Masterflex AG's Board and Supervisory Board members. Due to the increased liability risk brought about by the AnSVG, risk management and measures aimed at providing full documentation have been stepped up.

Compliance as the focus of risk management Responsible risk management is one aspect of good corporate governance. As part of its commitment to value-oriented corporate management, Masterflex AG has established a comprehensive risk management program that recognizes risk at an early stage.The risk management system is continually checked and updated to suit changing general conditions. Details about the risk management program are given in the management report.

Shareholders' rights Masterflex AG's shareholders exercise their rights, including their right to vote, at the Annual General Meeting. Shareholders can exercise their right to vote at the Annual General Meeting themselves, or they can have an authorized representative of their choice or a proxy appointed by the Company who is bound to act in accordance with their instructions cast their votes for them.

Open, transparent corporate communication Providing all groups of shareholders with timely, regular and equal access to information is a high priority for us, which is why we put such focus on publishing information on our website at www.masterflex.de.This enables retail shareholders and other capital market participants to obtain information about our Company on a regular basis.The information provided includes a financial calendar listing key events and publications (e.g. the Annual Report, quarterly reports and the Annual General Meeting).

We offer all shareholders and interested parties the opportunity to subscribe to an electronic newsletter, which provides ongoing information about current developments in the Group, key events, recent publications, ad hoc disclosures and press releases.The business and trade press are also kept informed on a regular basis via press releases, press conferences and interviews. Press releases can also be downloaded from our home page.

Reportable securities transactions on Masterflex AG's home page Under the Viertes Finanzmarktförderungsgesetz (4. FinFöG – 4th Financial Market Promotion Act), which came into force on July 1, 2002, Board and Supervisory Board members and their spouses are required to report purchases/disposals of own shares and securities transactions relating to Masterflex shares (e.g. the purchase or disposal of warrants) in accordance with section 15a of the WpHG.When the AnSVG came into force in fall 2004, the group of persons required to report securities transactions was extended. Persons with regular access to insider information and who are authorized to take key managerial decisions, as well as legal entities and natural persons, who are related parties of Board and Supervisory Board members, are now also required to report securities transactions.These transactions are published on the Internet under "Directors' Dealings".

Remuneration report Masterflex AG has two Board members and three members of the Supervisory Board.

Board member remuneration consists of annual remuneration with a fixed component and a variable component.The criteria that determine appropriateness of the compensation are each Board member's sphere of responsibility, personal performance, as well as company success and future prospects.

The fixed component is paid monthly. Performance-related remuneration will be paid out in fiscal year 2006. However, a provision was made for this in the 2005 fiscal year.The variable component in the form of a bonus depends on the development of Group EBIT.

Total Board remuneration in calendar year 2005 was EUR 501 thousand (previous year EUR 1,175 thousand)

	Fixed remuneration 2005 EUR thou.	Performance-related remuneration 2005 EUR thou.	Total 2005 EUR thou.
Chairman of the Board,
Mr. Detlef Herzog	264	0	264
Board member,
Mr. Ulrich Wantia	168	0	168
Board member,
Mrs. Hiltrud Mütherich	0	69	69
Total	432	69	501

Remuneration of members of the Supervisory Board is stipulated in the Articles of Association and is determined by the General Meeting. It is based on the tasks and responsibility of the members of the Supervisory Board.

Currently Supervisory Board remuneration is only comprised of fixed components.The General Meeting can provide a variable remuneration, but it has not availed itself of this option in the past.The fixed remuneration is paid after the conclusion of each fiscal year.

The Chairman of the Supervisory Board receives twice the remuneration amount, and the Deputy Chairman receives one and half times the remuneration amount. Remuneration for Supervisory Board members who only serve on the Supervisory Board for part of the fiscal year is prorated to the duration of their Board activity. Remuneration paid to members of the Supervisory Board for services personally rendered is published in accordance with statutory regulations.

The General Meeting of Masterflex AG held on June 8th 2005 resolved to increase fixed Supervisory Board remuneration from EUR 4,000 to EUR 7,000 annually for each member of the Supervisory Board.

	2005 EUR thou.	2004 EUR thou.
Chairman of the Supervisory Board
Friedrich-Wilhelm Bischoping	14	8
Deputy Chairman of the Supervisory Board
Prof. Dr. Detlef Stolten	11	6
Supervisory Board member Prof. Dr.
Paulus Cornelis Maria van den Berg	7	4
Total	32	18

In 2005, members of the Supervisory Board received total remuneration in the amount of EUR 32 thousand.

Group Management Report

The 2005 fiscal year was another successful year for Masterflex AG. Consolidated revenue increased for the eighteenth year in a row. Compared with the previous year, revenue rose by 15.9 percent to EUR 87.8 million.We also generated higher pre-tax profits (EBIT) again. Earnings before interest and taxes grew by 16.2 percent to EUR 12.3 million and net profit was at EUR 6.0 million, representing EUR 1.37 earnings per share.

I. Business and business conditions

Group structure and business activities

Masterflex AG, with its headquarters in Gelsenkirchen, specializes in the development and processing of high-tech plastics, and especially polyurethane (abbreviated: PUR). Since its foundation under the name Masterflex Kunststofftechnik GmbH in 1987, the company's core business has been the manufacture of High-tech Hose Systems for complex industrial applications. With a number of patents and many innovations, Masterflex is the world's technology leader in this area.

In addition to its operative activity the corporation has a majority holding in other companies in the fields of medical technology, fuel cell technology, surface refinement and the sale of mobile office systems. The

Masterflex Group has therefore been divided into the areas High-tech Hose Systems (HTS), Medical Technology (MT), Mobile Office Systems (MOS) and Advanced Material Design (AMD).

In HTS, to which Masterflex AG also belongs, High-tech Hose Systems are produced based mainly on in-house developments. Starting in 2005 the HTS area will be expanded to include the business from the development and marketing of fuel cell technology.

The Medical Technology business unit sells Medical Technology components ("medical devices") made from special plastics (infusion hoses, catheters, multi-lumen tubing etc.) and in part produced on our own extrusion equipment, as well as surgery kits.

Mobile Office Systems, previously known as the fuel cell technology business unit, will be accounted for separately as of the 2005 fiscal year.This business unit includes the activities of DICOTA GmbH.The company primarily sells and distributes system cases and bags designed to transport notebooks and office systems.

The Advanced Material Design unit is new and includes all activities to do with metal surface refining.The area epitomizes the expertise required to process materials in a way that leads to the design and creation of highly functional, first class, sophisticated products that are market leaders in their respective categories.

The Group's main production site is in Gelsenkirchen, and Masterflex AG also has a direct presence in eleven other locations in Germany, France, the United Kingdom, Bulgaria, the Czech Republic and the USA, as well as an indirect presence in Asia. Masterflex AG has been listed on the Frankfurt Stock Exchange since June 16, 2000.

Company name Headquarters			MASTERFLEX holding in percent
NOVOPLAST Schlauchtechnik GmbH	D	Halberstadt	100
MASTERFLEX SARL	F	Béligneux	80
MASTERFLEX Technical Hoses Ltd.	GB	Oldham	100
FLEXMASTER USA, Inc.	USA	Houston	100
TECHNO Handelsgesellschaft mbH	D	Bochum	100
MASTERFLEX Bulgaria Eood	BG	Sofia	100
ANGIOKARD Medizintechnik
GmbH & Co. KG (Subgroup)	D	Friedeburg	100
ANGIOKARD Medizintechnik Beteiligungs GmbH	D	Friedeburg	100
SURPRO-Verwaltungs GmbH (Subgroup)	D	Wilster	100
DICOTA GmbH (Subgroup)	D	Bietigheim-Bissingen	100
Matzen & Timm GmbH	D	Hamburg	100
Masterflex Brennstoffzellentechnik GmbH	D	Gelsenkirchen	100

Corporate bodies

Masterflex AG is run by a board consisting of two members: Detlef Herzog, one of the three founders of the company, has been Chairman of the Board since the year 2000. Ulrich Wantia has been Chief Financial Officer since the end of 2004.The Supervisory Board of Masterflex AG is comprised of three members. Friedrich-Wilhelm Bischoping is also one of the founders of the company and has been Chairman of the Supervisory Board since the year 2000. Since June 9, 2004, his deputy chairman has been Dr. Detlef Stolten, Director of the Institute for Materials and Processes in Energy Systems at the Forschungszentrum Jülich GmbH (Jülich Research Center).The third member, who has also been serving since June 9, 2004, is Dr. Paulus Cornelis Maria van den Berg, an expert in the area of anesthesia and intensive care.The Supervisory Board has been kept small deliberately, so there are no separate committees. Important issues are also handled outside of the meetings between the Board and Supervisory Board, in telephone conferences or strategy meetings that are convened at short notice. Moreover, the Chairman of the Supervisory Board keeps himself informed at all times of business operations and Masterflex AG's current projects.

Board remuneration

Board members receive annual remuneration consisting of a fixed and a variable component. Total Board remuneration in the calendar year 2005 was EUR 501 thousand (previous year EUR 1,175 thousand)

	Fixed remuneration 2005 EUR thou.	Performance-related remuneration 2005 EUR thou.	Total 2005 EUR thou.
Chairman of the Board,
Mr. Detlef Herzog	264	0	264
Board member,
Mr. Ulrich Wantia	168	0	168
Board member,
Mrs. Hiltrud Mütherich	0	69	69
Total	432	69	501

Performance-related remuneration was paid out in fiscal 2005.

Supervisory Board remuneration

Supervisory Board remuneration is fixed only.The General Meeting can provide a variable remuneration component; however, it has not availed itself of this option in the past. Fixed remuneration is paid after the conclusion of each fiscal year.

The General Meeting of Masterflex AG held on June 8, 2005 resolved to increase fixed Supervisory Board remuneration from EUR 4,000 to EUR 7,000 annually for each member of the Supervisory Board.

In 2005, members of the Supervisory Board received total remuneration in the amount of EUR 32,000.

	2005 EUR thou.	2004 EUR thou.
Chairman of the Supervisory Board
Friedrich-Wilhelm Bischoping	14	8
Deputy Chairman of the Supervisory Board
Prof. Dr. Detlef Stolten	11	6
Supervisory Board member Prof. Dr.
Paulus Cornelis Maria van den Berg	7	4
Total	32	18

The breakdown is also listed in the notes to the Annual Financial Statements under item 35b.

Employee compensation system

Masterflex AG has a contemporary compensation system that includes variable components and fixed components.The variable component is based on the individual employee's performance, as well as general corporate success. Payment is made in the form of a bonus. After 2005, it will no longer be possible to be paid in the form of share options, as the program has expired and has not been extended.

Masterflex AG also offers each employee the opportunity to participate in the company's retirement program. Employees can choose between the "Riester pension", a pension fund, or a direct insurance policy. Combinations are also possible.

Market and competition

High-tech Hose Systems

Over the years, Masterflex AG has acquired a high degree of expertise in processing polyurethane and other special plastics, and is thereby participating in a growth market.

In 2004, worldwide production and processing of plastics amounted to around 176 million metric tons.This represented a new record level for global consumption of plastics materials. Experts expect the average growth rate of 5 percent experienced in the last three years to continue over the next few years. In Germany, approximately 10.7 million tons of plastic were processed. Highperformance plastics such as polyurethane (PUR) are proving to be the key to enabling plastics to be used in more demanding applications.Thanks to its versatility, polyurethane is being used in more and more areas. Processing PUR is much more technically demanding than working with standard plastics such as PVC. As a result, this material is frequently found in highly specialized applications like High-tech Hose Systems.

In 2004, a total of 10.8 million tons of PUR were consumed worldwide. This PUR consumption is less than one-tenth that of standard plastics (120 million tons). In Europe, more than 30 million tons of standard plastics were consumed, but only 2.7 million tons of PUR. In Germany, 0.8 million tons of PUR and approximately 7 million tons of standard plastics were processed in 2005.

Germany is still the largest market for PUR processing, ahead of Eastern Europe, which processed 0.5 million tons. According to the Foam Plastics Industry Association, FSK, industry revenue in Germany was approximately EUR 6 billion in 2005. This amount was distributed among more than 700 companies, including Masterflex AG.The German PUR industry employs approximately 37,000 people.The largest buyers of PUR are the furniture and mattress industry, representing revenue of EUR 1.7 billion, as well as the construction and insulation industry, representing revenue of nearly EUR 1.2 billion. Hoses are not listed separately and fall under the category "Other".

Polyurethane's high abrasion resistance is an important criterion for the increasing use of PUR hoses. Since 1987 Masterflex AG has established a substitution market for hoses made of polyurethane and other high-tech plastics based on a number of patents and innovations.We are the sole source for numerous products.

The High-tech Hose Systems product line consists of suction and trans-

Source: GKV, Masterflex calculations

Source: FSK 2005

port hoses, including extruded, highly abrasion resistant PUR hoses, plus associated connecting systems, as well as suction and blower hoses made of special fabrics.The majority of these hose solutions are made to order; frequently they are developed in close collaboration with the customers. Whereas the price-driven mass markets for PVC, rubber and corrugated plastic hoses are served by a variety of national and international suppliers, only a few, usually small and medium-sized, hose manufacturers not listed on the stock market cater to the relevant market for Masterflex AG.

While many processors of mass plastics are struggling with the high prices of raw materials, particularly for crude oil, Masterflex AG has been less affected by these negative factors on the purchasing side thanks to its long-term supply arrangements, and a strong bargaining position as one of the qualified buyers of polyurethane.

Masterflex AG targets a highly specialized niche market for which no official data is available. The German Federal Statistical Office groups hoses, extrusions, and tubes in the same category. The hose group, as defined by the National Association of Plastics Processors GKV, also includes extrusions, panels, and foils. It is therefore impossible to make precise statements regarding market volume and market potential for hoses. Nor is there any way to make estimates based on purchaser data, as we ship our hoses to more than 5,000 customers in a variety of industries.

Masterflex AG Applications

We consider the growth potential in this niche market to be outstanding, as experts are extremely positive in their assessment of the future for plastics and polyurethane. BASF forecasts that the overall global demand for plastic materials will increase to 250 million tons annually by the year 2010.

Moreover, the major manufacturers of raw materials expect stable growth of about 5 to 6 percent annually for the total PUR market over the next few years.The overall prognosis is that PUR consumption will continue to increase, reaching approximately 14 million tons by 2009 (source: Foam Plastics Industry Association FSK).

The growing demand for PUR is based on the continuing enhancement and invention of products, applications, and processes, as well as on expanding markets, particularly in the Asia/Pacific and Eastern European regions.

Export prospects Masterflex AG sees its growth potential in continuous product improvement, as well as expanding into foreign markets. We see interesting market opportunities in the United States, which is almost unaware of the PUR hose market - classic PVC and rubber

Source: FSK 2005

products still dominate the American market. There are also good prospects in the Eastern European market, as existing German customers who establish production facilities in this region take their standards, and thus Masterflex products, along with them. Furthermore, European environmental and safety standards are being implemented systematically.

The prerequisites that generate demand for our highly specialized hose systems in a market are the achievement of a higher level of industrial standards, as well as the need to comply with environmental regulations.This is why the Asian industrial regions are becoming increasingly interesting target markets for Masterflex AG.

On the whole, plastics continue to offer enormous potential for innovation (this is also the essence of a study published by the IKB Deutsche Industriebank AG in October 2004). It applies equally to the Medical Technology sector, where BASF AG projects an average country-dependent increase in demand for special plastics of at least 5 percent annually.

Fuel Cell Technology

Fuel cell technology is considered by many, including the experts, to be one of the most promising technologies for solving the energy problems of the future. Due to the higher price of oil, renewable energies in general continued to attract attention in 2005.The support for fuel cell technology on the part of politicians has therefore also continued to increase.The evolution from pure research and development to close-to-the market products continued last year.

Source: Fuel cell today 2005 worldwide survey

The number of fuel cell systems (units that independently generate power) produced worldwide increased from more than 11,000 to approximately 14,500 units. On the technical side, the fuel cell market is dominated by hydrogen-based PEM (Proton Exchange Membrane) fuel cells, which are also used by Masterflex AG. The transport segment, particularly the automobile sector, now relies almost 100 percent on this type of fuel cell.

Growth market for electric bicycles The increasing density of traffic and the environmental harm caused by noise and exhaust emissions demand new and sustainable mobility concepts. In the European Union, and particularly in Germany, the increase in oil prices and the EU directive on fine dust that came into force January 1, 2005 have again brought the importance and the need to discuss innovative, environmentally-friendly traffic concepts to the forefront.The stricter limits for fine dust set by the new regulation have already been exceeded by several major German cities on numerous occasions, which has added to the urgency.

The threat of driving bans is not only highlighting new concepts for individual and public local transport, but has also moved the issue of transporting loads within city limits higher up the priority agenda. Masterflex AG is concentrating its activities on mobile energy supplies in the range of 25 to 1,000 watts. As early as 2004 we addressed this problem by introducing an electric bicycle with a reliable fuel cell propulsion. In 2005, we presented our Cargobike, the second fuel-cell-powered light vehicle prototype. According to a study by Fuel Cell Today, Masterflex AG is thus the only company that made significant progress in the bicycle segment in 2005.

Last November, we announced that we would deliver the world's first fuel-cell-powered bicycle fleet to the city of Herten in the German State of North Rhine-Westphalia in 2006.

The market for electric bicycles is a growth market. In 2004, approximately 10 million light vehicles were sold; this number includes approximately 1 million battery-powered electric bicycles. These so-called "pedelecs" (from pedal electric) automatically link the motor's output with the cyclist's muscle power using a force or movement sensor.The motor is only activated when there is pressure on the pedals, and it supports the rider by providing additional power. Batterypowered pedelecs can achieve a range of between 20 to 50 kilometers, which is inadequate, particularly for professional and commercial applications.The Masterflex fuel cell powered bicycle achieves a range of approximately 120 kilometers with just 45 grams of hydrogen; with the Cargobike we can approximately double this range.

In January 2006 we announced that Masterflex AG is participating in the EU HYCHAIN Minitrans project.This cross-border project aims to demonstrate innovative and sustainable alternatives to the extremely oil-dependent transport economy.The aim is to identify markets early and create uses for selected transport applications.The HYCHAIN Minitrans project includes the operation of 150 fuel-cell-powered small and light vehicles, as well as production, storage and distribution logistics of hydrogen.Test regions are the Ruhr area (Germany), the Grenoble area (France), Modena (Italy) and Castilla y Leon (Spain). Masterflex AG plans to use at least forty of its Cargobikes in the four regions.

All in all, more than twenty companies and research organizations are participating.The world's largest industrial gas supplier, the French company Air Liquide, is responsible for the project. HYCHAIN Minitrans will operate minibuses, motor scooters, small commercial vehicles and wheelchairs that are driven by fuel cells.

The European Union and the North Rhine-Westphalia state government support our fuel cell projects.The EU is co-financing the HYCHAIN project with EUR 17 million. In addition, since March 2005 there has been increased government support for the generation, storage, and distribution of hydrogen.

It will be some time before fuel cell technology is broadly commercialized; the timeframe is very difficult to assess. But experts are certain that mobile fuel cells will be a significant energy source of the future.

Medical Technology

Medical Technology is a growth market that offers significant potential for the Masterflex Group. Projections are that the market for health services in Germany will increase from EUR 260 billion in 2003 to EUR 453 billion by 2020, a rise of 74 percent. Growth drivers are changed awa-

Source: Roland Berger 2005

20 40 60 80 100 120 140 160 180 200 Global market for Medical technology 2003 EUR billions D 20.0 USA 79.0 Global 184.0 EU 55.0

Source: Spectaris

reness of personal health and the associated increase in private spending on health services, medical equipment progress, demographic change, as well as expanded other services (source: "Innovation und Wachstum im Gesundheitswesen" a survey published in 2005 by Roland Berger Strategy Consultants).

In 2004, expenditures for healthcare in Germany rose to EUR 279 billion.This represents approximately 11 percent of Germany's GDP of EUR 2,178 billion. The trend continued in 2005, but the growth primarily came from abroad.

Medical Technology is a subset of this market. In 2003 the global market for Medical Technology was estimated at approximately EUR 184 billion. This represents an 8 percent share of total healthcare spending. At approximately EUR 20 billion, Germany is the third largest single market, after the United States and Japan.The industry association Spectaris estimates growth for Germany in 2005 was 6 percent or EUR 14.4 billion.The growth was primarily attributable to export sales, which rose 12.5 percent, while domestic revenue declined by 3 percent to EUR 5.5 billion.There is still great potential on the international market, particularly from Central and Eastern European countries, which still have considerable catching up to do in the area of medical equipment.

Annual growth rates of six to seven percent worldwide, and approximately four to five percent in Germany, are expected over the next few years (source: the Spectaris industry association). However, the prerequisite for the growth in Germany is improvement in the general political conditions. Experts estimate that the difficult situation in Germany has by now resulted in an investment backlog of EUR 10-15 billion. Products that enable costefficient treatment are therefore positioned for success. According to statements made by the German Federal Association of the Medical Device Industry the DRG

(Diagnosis Related Group reimbursement) amount regulations compel doctors and hospitals to assess spending more from an economic perspective (e.g., reduction of time spent in hospitals, etc.).The industry is faced with the challenge of offering products that help optimize processes, save time, are safe, cut recovery times and reduce aftercare.

The difficult situation in Germany, where revenues are declining, shows that Masterflex AG, with a revenue increase of twenty percent, offers the right products and is properly positioned in the market. One trend offers us aditional future prospects: currently 45 percent of all Medical Technology products manufactured worldwide are made of plastic.

Products that meet the trend towards lower costs Our subsidiaries, Angiokard Medizintechnik GmbH & Co. KG and Novoplast Schlauchtechnik GmbH, offer an innovative product line of medical kits and components (medical devices) that cost less and use safe materials.

Angiokard is a pioneer in the sale of medical kits that drastically reduce preparation time for operations and examinations and optimize warehouse logistics. The kits also accommodate lump sum compensation legislation with concrete calculations because they are sold as disposable products at a fixed price.

Angiokard Medizintechnik GmbH & Co. KG focuses primarily on the German market and neighboring countries, where it is a market leader. For the most part, competitors are subsidiaries of large groups that offer the group's products in their kits. Angiokard is more flexible because it is manufacturer-independent and can package components according to the treating doctors' specifications.The firm primarily offers angiographic kits. At the end of 2004, the Medic Health Care subsidiary was established to develop new segments for surgery kits. In parallel, Angiokard is aggressively expanding into foreign markets; for instance, the Arabian market. Fleima Plastic GmbH has been a subsidiary of Angiokard since 2004. Fleima is a specialist producer of sophisticated plastic injection molded parts for the pharmaceutical and Medical Technology industries.The company has its own tool-making facility equipped with the latest machining centers. Fleima's connecting systems round out the Medical Technology product range.

The growth potential of Medical Technology is also based on technical progress. Industry analysts at IKB Deutsche Industriebank AG expect strong growth in this area, in part from new materials. Our polyurethane material is considered to be one of these innovative materials due to its versatility and compatibility characteristics. For example, PUR can be made with anti-bacterial, antithrombogenic, or biodegradable characteristics. It also has a quality that is becoming ever more important in the field of medicine. Materials such as PVC, which are still widely used today, contain softeners whose potential risk to patient health cannot be unequivocally ruled out. Our subsidiary, Novoplast Schlauchtechnik GmbH, uses state-of-the-art extrusion equipment to produce softener-free infusion tubes, catheters, and multi-lumen tubes.

Another new development is LaryVent, our internationally patented respiratory mask, which prevents injury to the vocal cords because it eliminates the need to insert a tube into the trachea – an industry first.

Conditions are ideal for the successful expansion of our Medical Technology segment.T he medical components and surgery kits we offer add genuine value and have good growth prospects in the market.

Mobile Office Systems

We participate in the mobile office market (mobile computing equipment) via DICOTA GmbH in Bietigheim-Bissingen, a company acquired in 2001.

DICOTA is one of the world's top full-line suppliers. It primarily sells and distributes system cases and bags designed to transport notebooks and office systems.The product line also includes an extensive range of accessories (a mobile mouse series, numeric keypads, etc.).

The company has ten subsidiaries and approximately 80 employees worldwide. It established a subsidiary in Shanghai (China) last year.

The expanding mobile office segment enjoys double-digit annual growth rates. In 2004 growth for computers and notebooks was 11.8 percent higher than the previous year, according to information provided by the Gartner IT research organization.The Europe, Middle East and Africa region (EMEA) grew by approximately 14 percent.The growth was primarily attributed to the demand for mobile PCs.

Growth projections for PCs and servers for 2005 were slightly below those for the previous year at 13 percent, and approximately 21 percent for the notebook market (EMEA). However actual growth in the notebook market of approximately 15.8 percent exceeded these projections, mostly due to the dynamics in Asia.The trend was positive in Europe as well; the German market, however, remained considerably below expectations.

Experts at the IDC market research group expect growth of approximately 10.5 percent in the worldwide notebook market in 2006. DICOTA is also confident about fiscal 2006, as they continue to build up their international presence (Southern Europe, Asia, the Arabian market) and they have a number of product innovations that should ensure that the positive trend continues. DICOTA could also profit from a potentially better buying mood in Germany as people purchase to beat the 2007 increase in VAT.

Advanced Material Design

Since acquiring the SURPRO group in August 2005, we have been active in an additional "materials processing" segment; namely, the complex development and processing of high-tech materials.

The name SURPRO is a contraction of "surface protection".The company has particular expertise in coating precious metals and is one of the world's leading suppliers in this field.

SURPRO is a highly specialized niche vendor for production and refinement of high-precision surfaces. Surpro supplies products to the medical industry, aerospace industry, and the luxury writing utensil industry.

This expertise puts SURPRO in a growing market segment; according to an IKB Deutsche Industriebank study (May 2005), surface engineering is one of the fastest growing industries in Germany because there is an ever-expanding range of applications for its modern processes. Surface engineering significantly influences the quality and usability of products.Traditionally, small and medium-sized companies have dominated the industry; there are approximately 800 firms with more than 20 employees.These companies generated revenues of approximately EUR 4.5 billion in 2004. Revenues of almost EUR 14 billion were produced under the category of surface engineering, which is much broader. Germany is thereby the leading country for surface engineering in the EU, next to Italy.

There are potential customers in virtually all areas of the processing industry.The IKB assesses the future earnings position for surface engineering as stable.

Important buyer groups are the automotive industry, Medical Technology industry, and aerospace industry. Metallic coatings represent the major share of the materials that are processed. Galvanization dominates the coating technology field. Overall galvanization has a share of approximately 26 percent (source: German Federal Statistical Office) of the total process. It is used for decoration, corrosion protection, or for changes in frictional behavior. Many small companies are involved in galvanizing and they produce total revenues of approximately EUR 5.6 billion.The typical metal used in coating is zinc at approximately 40 percent, followed by other (precious) metals. Plastics are being metallically coated more and more frequently, a trend that Masterflex AG will pursue in the future together with SURPRO. According to IKB, the production value of plastic coating has grown by 350 percent over the past decade.

The IKB expects nominal revenue growth of 6 to 7 percent annually over the next three years.The overall economic benefit offered by surface engineering is estimated to be very high. For example, in the Medical Technology segment, it increases life expectancy and quality of life for patients. In other industries it increases safety and reduces the use of raw materials.

Given these positive industry conditions and the proven competence of the SURPRO group in its original field of expertise, we expect further growth. We also see significant stimuli and synergy effects for product development within our own Medical Technology and fuel cell technology business segments, as well as new application areas involving metallic coating of plastics.

Corporate governance, objectives and strategies

Objectives and strategies

Market leadership

Our objective is to be among the market leaders in our target markets. In this regard we strive for technology leadership, not price leadership. Masterflex AG has successfully implemented this corporate guiding principle in the High-tech Hose Systems segment.This goal shall also be achieved in the Medical Technology segment in the medium term after extensive investments. In the fuel cell technology segment, Masterflex AG achieved technology leadership in the 25 to 1,000 watt segment within five years with a fully functional and stably operating fuel cell.This leading position will be further extended in coming years, particularly in the market for light vehicles.

Research & development focus

Masterflex AG assigns a high priority to research and development.We achieved our technology leadership position in the high-tech hose segment through constant innovation. A primary goal of strategic corporate planning is to secure this innovation strength. To further increase the Group's influence, a new Business Development Management organization was created that will consistently bundle the synergies within the medical technologies segment.We also expect spinoff effects on our core high-tech hoses business segment.

Implementation of innovative materials and technologies

Masterflex AG specializes in the development and processing of innovative materials using new technologies. We recognized the potential of polyurethane early on. Since 1987, we have consistently enhanced the material and introduced numerous innovations. In 2005, follow-up projects in particular were relaunched or brought a crucial step forward.

Two of Masterflex AG's important innovations are hoses and connecting systems for the food industry that satisfy the most rigorous hygienic requirements and conform in every aspect to food grade specifications. Compliance with these requirements has been documented in a certificate since the end of 2005.To date, Masterflex AG is the only company in the world that has this certificate for PUR connector systems.The raw materials used (polyurethane or polyolefin) satisfy the relevant EC guidelines, the BgVV (German Institute for Consumer Protection and Veterinary Medicine) recommendations, and they have been approved by the American Food and Drug Administration.
Masterflex AG uses innovative technologies, such as nanotechnologies, to improve product characteristics and to develop new products. In 2005, a patented process was developed for coating hoses from inside with metal or ceramic in nanoparticle structuring.
In the future, projects involving the combination of materials expertise and surface coating will arise due to the acquisition of the SURPRO group, particularly in the Medical Technology (catheters with precious metal coatings) and in the fuel cell technology segments.
In 2005 Masterflex AG further developed a fuel-cell-powered electric bicycle for trial operation and introduced the prototype of a fuel-cell-powered Cargobike.

Presence in profitable niche markets

We strive for market leadership in sustainable and profitable niche markets. We develop the market in a manner that is more oriented toward value than it is to revenue.The key performance indicators are EBIT and EBIT margin, which should be in the double digits. Masterflex AG positions itself in these markets as a specialist for demanding system solutions.

However, it may be necessary to deviate from this strategy to achieve faster market penetration. One example of this is the United States, where the size of the market has made it necessary to invest in personnel and extensive local inventories, which has led to higher up-front costs. Nevertheless, we achieved breakeven in two years. EBIT will grow at a slower pace, since market penetration investments will be necessary.

Expansion in new markets

Masterflex AG has achieved an outstanding market position in Western Europe in the High-tech Hose Systems segment. Market leadership will be secured through the development of new product segments (e.g., hoses for the food processing industry, hoses with interior coatings) and expansion into new markets. Primary target regions are Eastern Europe and the United States. The first steps towards Asia will be initiated in parallel with these programs.

In the Medical Technology segment, our market leadership in angiographic surgery kits will be extended to other operation areas. We will build on and expand our position as market leader both domestically and abroad.

Since polyurethane and minimally invasive operation methods are being implemented at an increasing rate, Masterflex AG is also aiming for market leadership with medical components made of compatible materials.

In the fuel cell technology segment, the first step of our strategy is to develop niche markets where fuel cell systems plus supporting logistics offer substantial economic benefits, in spite of higher first costs. On the way towards the commercial viability of electric bikes, we initially expect to market these stand-alone solutions to professional users. We have already identified electric bikes and Cargobikes as niche markets, in which fuel cell systems offer economic benefits despite higher costs. Extremely rapid growth in the future seems to be a real possibility and bicycle propulsion is only one of the many possible applications for our fuel cells.

In the Mobile Office Systems segment, DICOTA GmbH will continue to press ahead with positioning itself as an international provider of premium products, particularly high-end system solutions.

Research and development

The Endowment Association for German Research has determined that German companies reduced their research and development spending by 0.5 percent in 2004. In the 90's, growth rates were still in the double-digits.

Given the vital role that research and development plays in our company's growth, this is one trend that we will not be following. Masterflex AG is well known for its innovation strength. Our development focuses on inventing new products and enhancing our existing products made of high-performance plastics, as well as developing innovative production processes.We have demonstrated our ingenuity and technological leadership in this area in the past with numerous new products, based on both our own patents and patents licensed from third parties.

We attach great importance to continuous research and development in all our business segments as we aim to develop new markets. Expenditure on research and development for the Masterflex Group amounted to EUR 1,224 thousand in 2005.This represents 1.4 percent of revenue. Of this, EUR 812 thousand were development costs. A substantial proportion of the remaining total spending of EUR 412 thousand is attributable to staff costs. An exact allocation of personnel involved in research and development is not practical because of overlaps in engineering, production, and design activities.

For purposes of research and development, we make use of all available information sources to ensure the long-term success of the company.We employ internal and external expertise to strengthen and expand our product range and to access new markets. Our employees develop innovative technologies for new products and production processes. Individual projects focus on the needs of operational product development and the production process.The results flow to the company's business units and create new opportunities for portfolio expansion.We tailor quality standards to meet the precise requirements of different markets as early as the research and development stage – right down to satisfying the specific requests and expectations of individual industrial customers.

We introduced numerous innovations in 2005. For example, we extended our range of hoses and connecting systems that conform to food processing standards. One promising project is the patented process of applying interior hose coatings of metal or ceramic. Our subsidiaries have also developed a number of new products, as reported elsewhere.We took a major step forward in the fuel cell technology segment when we developed our fuel-cell-powered electric bicycle to test maturity.This intensive and ongoing research and development effort also differentiates the Masterflex Group from the general research & development trend in Germany.

Nanotechnology

Our research and development activities also extend to nanotechnology. For example, we are collaborating with centers of expertise for nanotechnology and other specialized institutions. Nanotechnology allows us to optimize the structure and thus the properties of our materials, as well as to create new properties. For instance, polyurethane's abrasion resistance properties – which are already excellent – or its performance at high temperatures can be further improved. Current projects include surfaces with greater abrasion resistance, anti-microbic and scratchresistant hoses, lotus-effect surfaces and electromagnetic compatibility (EMC). In 2005, a patented process was developed for nanoparticle-structured coating of hoses from inside with metal or ceramic.

Environmental protection

Protecting the environment is an important topic at Masterflex AG.We use polyurethane, which does not contain any toxic components. Furthermore, energy costs to produce plastic are lower than for other materials.

Virtually no waste is produced in manufacturing our profile-extruded PUR hoses. Scrap that accumulates when ramping up and ending production is recycled. Wires and polyurethane are separated and resold.

Environmental considerations are very important to us.We have commissioned external security officers to keep us abreast of changes in environmental legislation and their implications for operation, and also to monitor our compliance on a regular basis.

We view development of our fuel-cell-powered light vehicles as an active contribution toward solving traffic problems and the associated environmental pollution caused by CO2 emissions. In 2005, we made substantial progress on the road toward marketable products. A first fuel-cell-powered bicycle fleet will be placed in service in 2006.

Internal corporate governance system

We measure the degree of goal achievement using an internal control system. We have established a group-wide, two-level monthly reporting system that indicates the corporate business situation via a target/actual achievement analysis. We receive a weekly status report about the number of orders received and liquidity. Sales, orders received, receivables, liabilities, and cash on hand of the subsidiaries are reported by the 5th day of the month. A balance sheet and a qualitative report about the sales, personnel, and accounting departments, as well as a market analysis and competitive analysis are due by mid-month. In addition, quarterly consolidated financial statements are produced in accordance with the international IFRS accounting rules.

Value-oriented corporate management via key performance indicators

Corporate governance is value oriented; consequently, profits are more important than revenues. Important key performance indicators are EBIT and EBIT margin (EBIT/revenue). We have defined target values for the overall Group and for the segments in this regard. Another profit indicator is net profit, which is the basis of the earnings per share, dividend and yield (dividend per share/market price) numbers that are important to our shareholders.

The value-oriented key performance indicator system will in future be expanded to include ROCE (Return on Capital Employed), which shows pre-tax profit in relation to capital employed. We will also use the key performance indicator ROI (Return on Investment), which we can use to identify Masterflex AG's value drivers.

Our main key performance indicator is cash flow from operating activities, which represents our internal financial strength. It shows how much we earn from our own business in order to finance our corporate growth organically.The company's equity ratio is also important for evaluating our self-financing strength. Our equity ratio should sustainably exceed 30 percent. External financing should also be primarily long-term so that Masterflex AG has a reliable basis for calculating financial transactions.

Another frequently used key performance indicator is cash flow relative to capital expenditures (CAPEX).This key indicator is less important to Masterflex AG for corporate governance because, due to the importance of research and development and the high percentage of in-house developments, our investments are mainly in the expertise of our employees.

Key performance indicator	HTS	MT	MOS	AMD	Group
Market leadership	x	x	x	x	x
Revenue increase p.a.	5-10%	>20%	>20%	>20%	double-digit
EBIT increase p.a.	>10%	>20%	>20%	>20%	double-digit
EBIT margin	>20%	5-10%	>10%	>10%	15-18%
Operative cash flow					positive
Equity ratio					>30%
Planned:
ROCE					x
ROI					x

The 2005 Fiscal Year

General economic situation

The global economy continued its healthy growth in the year 2005 despite the marked rise in crude oil prices.World production has increased more than 4.3 percent. Once again, China was an important engine for the global economy in the year 2005.The Japanese economy also recovered.The American economy grew by about 3.6 percent in 2005. However, based on all the industrial countries, the real gross domestic product grew only about 2.5 percent.The US dollar fell sharply, which should be viewed in the context of the high US current account deficit. If this cannot be reduced quickly, economic experts fear the global economy will cool off in 2006. Because prices for raw materials and energy will most likely remain high in 2006, experts are expecting world economic growth to be the same as last year, at about four percent.

In spite of the fact that Germany was once more the world export champion, its economy only grew by about 1 percent in 2005, which was less than the global economy. Nevertheless, in the second half of 2005, the mood clearly lifted and investment rose. According to the Federal Office of Statistics, however, the gross domestic product (GDP), i.e., the total goods and services produced in Germany, remained unchanged in the fourth quarter of 2005 as compared to the previous quarter (+0.0 percent). Economic growth in the first three quarters (+0.6%, +0.3%, +0.6%) did not continue through until the end of 2005. Positive growth impulses in comparison to the previous quarter came solely from investments, in particular from construction; however, this was offset above all by the drop in both public and private consumer expenditures.

In total, the gross domestic product (GDP) increased by 0.9 percent in 2005, of this 0.7 percent was due to export alone.The boom in the global economy is thus slowly spreading to Germany.

Altogether, German exports increased in 2005 by 7.5 percent. Domestic demand and the employment market continued to be weak. Since the end of 2005, the consumers' mood has brightened. For this reason, experts expect consumption to increase in the year 2006. One reason might be that many purchases will be made earlier because of the increase in the value added tax scheduled for 2007.

According to Creditreform, in 2005 the number of company bankruptcies fell by 3.5 percent, the first drop in five years. However, consumer insolvencies continued to rise dramatically, increasing by 35.2 percent.

The outlook for 2006 is judged to be better: the six leading institutes for economic research are forecasting an increase in economic growth of 1.5 to 1.7 percent. Nevertheless, the generally positive revenue and earnings prospects are not yet expected to lead to a recovery in the job market in 2006.

However, domestic demand could recover in 2006 - most industries have announced that they will be investing more than last year because of higher revenue and profits forecasts.They also expect an impact from the soccer world championship. Experts are anticipating additional stimuli from a growth package planned by the government that will include tax concessions for companies and private households amounting to billions.

The economic recovery has also affected the stock markets. European stock market share price performance was very good in 2005, while Wall Street's growth was mediocre. The German share index (DAX) is among the biggest winners in Europe, with a jump of 28 percent. The market for initial public offerings was also revitalized in Germany in 2005.Twenty companies were listed for the first time on the exchange; there were only five new names in 2004.

It is looking like Europe stock market growth in 2006 will again exceed that in the United States. According to experts, this is due to the relatively low valuations in Europe and the attractive economy in Germany. It is anticipated that the number of initial public offerings will continue to rise.

Plastics processing industry

In 2005, development of the plastics processing industry in Germany was again significantly different from that of the economy as a whole. Revenue increased nominally by 2.9 percent to EUR 44.8 billion (preceding year: EUR 43.5 billion). Adjusted by the 2.7 percent rise in the price index however, the 0.2 percent increase is rather small. Except for the construction industry with its

drop of just under 2 percent, all other sectors recorded a growth in sales: panels, extrusions and foils grew by a solid 4 percent, the technical parts segment, supplier products and consumer goods by a good 2 percent.

Once again, exports were the growth engine. Domestic sales were up by 1.1 percent while export sales increased by 6.4 percent. Altogether, the upwards trend leveled off after the 8.0 percent increase of the year 2004.

According to the projections of the trade journal "Plastverarbeiter", net production will be slightly below the level of the preceding year. So far, the sector's revenue and production growths have been quite similar. It is generally assumed that these trends are due to reduced inventories and/or the transfer of production out of the country.

According to statements by the National Association of Plastics Processors (GKV), plastics processors are optimistic about 2006.They expect the German plastics processing industry to be able to expand its position as an innovative key industry.The GKV forecasts growth of 2.5 to 3 percent, although competition is becoming more intense and pressure on prices has increased on the consumer end. Experts from the trade journal "Plastverarbeiter" expect 2006 to be more promising because the number of orders received in January 2006 was up considerably. New business has already improved by an average of 3 percent both domestically and internationally since the third quarter of 2005. In total, we can expect a 4 percent growth in production.

Masterflex AG

In 2005, Masterflex AG again outperformed the plastics industry as a whole. Consolidated revenue grew by 15.9 percent, to EUR 87.8 million (2004: EUR 75.8 million).This puts us within our forecast corridor of 15 to 17 percent.

Germany is our most important market. In spite of the continuing difficult economic climate, last fiscal year we were able to increase revenues by EUR 8.2 million to EUR 48.1 million from EUR 39.9 million in 2004.This corresponds to 54.8 percent of the Group's total revenue (2004: 52.7 percent). Germany is followed by the EU countries with an increase of EUR 5.1 million to EUR 23.1 million (2004: EUR 18.0 million).This corresponds to 26.3 percent (2004: 23.8 percent). Sales from other

countries decreased by EUR 1.2 million to EUR 16.6 million (2004: EUR 17.8 million).This corresponds to 18.9 percent (2004: 23.5 percent). In the next few years, we are expecting a gradual shift to other countries because of the increasing share of revenues coming from the United States, where we have successfully done business since 2001.

Our most important business unit manufactures High-tech Hose Systems. In 2005 we generated just under EUR 36.0 million in revenue. Compared to total Group revenue this represents a share of 41.0 percent (2004: 47.1 percent). Medical Technology expanded by twenty percent, contributing EUR 16.8 million or a share of 19.1 percent to the successful growth of the Group. In 2004, the segment's revenues were EUR 14.0 million and the share was 18.4 percent.The new Mobile Office Systems business unit generated EUR 28.8 million, this was a 32.8 percent share of the total.The proportional revenue of the SURPRO Group, which was consolidated for the first time in 2005, was EUR 6.2 million.This corresponds to 7.1 percent of the Group's total revenue.

Consolidated Group profit continues to grow, but more slowly Overall, earnings before taxes were completely within the forecast range published in November 2005 of between +8 and +12 percent. In accordance with the international accounting standard IFRS 3, the amounts recognized in the initial consolidation of the subsidiaries DICOTA GmbH and Fleima Plastic GmbH were adjusted retrospectively, as were the financial statements for the 2004 fiscal year, so that the year-on-year comparison for Masterflex AG reveals an even more favorable trend.

Based on the figures published last year for fiscal 2004, Group earnings before interest and taxes (EBIT) was up by 8.0 percent. After adjusting the figures from the preceding year, consolidated EBIT in the fiscal year 2005 even rose by 16.2 percent to EUR 12.3 million (2004: EUR 10.6 million).

Group profit development EUR millions 2003 2004 2005 3.7 7.6 5.9 10.6 6.0 12.3 2 4 6 8 10 12 14 Net profit EBIT

Group net profit remained, as a result of the noticeably higher tax rate of 34.1 percent, almost at the level of the preceding year,

amounting to approx. EUR 6.0 million (2004: EUR 5.9 million).The reasons for the increased tax rate were mainly a one-time adjustment that had to be made to the standard costs used in accounting, and profits that were achieved within the DICOTA-Group in countries that have a higher tax level.

The restatement of the values recognized in the initial consolidation lowered earning per share for the 2004 fiscal year by EUR 0.20 to EUR 1.33.The earnings per share for the 2005 financial year of EUR 1.37 are thus 3.0 percent above the adjusted figure for the prior year.

Despite the overall positive performance, we are not satisfied with the development of earnings because we were expecting for fiscal 2005 a rise in EBIT of between 15 and 25 percent which we adjusted to +5 to +12 percent in November 2005.The limited growth in profit was a result of special items outside fields of our core business.This applies in particular to our subsidiary DICOTA GmbH that, despite a pleasing growth in revenue, remained clearly behind our profit expectations.There were several reasons for this:

DICOTA has greatly expanded internationally. Start-up costs associated with establishing new branches and building up the sales network had an impact.The surprisingly slow growth of the European and, in particular, German retail stores was another factor. Here, sales in the notebook segment fell during the summer months. It should also be mentioned that 2004 was an exceptional year for DICOTA GmbH.The project orders with large margins received last year from major customers were an anomaly, and these types of orders were scarce in 2005. It is encouraging to see that in the meantime DICOTA has found its way back to its old earnings potential.

Another reason was the weak performance of Techno GmbH.Techno is a commercial enterprise that specializes in hoses and valves used in tunnel construction. At the beginning of the year Techno recorded lower revenue and earnings due to a change of management.T he new management, active since May 2005 has already repositioned the company.

This impact could not be offset by the excellent profit growth in the hose business, the earnings contribution from Medical Technology plus the first-time inclusion of the SURPRO Group in the consolidated results. DICOTA GmbH has now nearly completed its international expansion initiative. DICOTA's business already clearly recovered in the fourth quarter and was extremely positive at the beginning of the year, so we are counting on renewed profit growth in the future.Techno GmbH has also expedited its reorganization program, so we are counting on a significant improvement in revenue in 2006 and, after 2007, in profits as well.

Although we had hoped to do better, Masterflex AG still remains a healthy growth company with future-oriented business areas, an above-average EBIT margin of 14.0 percent and a net margin of 6.8 percent. Both indicators represent top level performance when compared to the stock companies listed in Germany. Because of the positive earnings performance, we will again

recommend a dividend of EUR 0.80 at the annual general meeting on June 14, 2006, the same amount as last year. This represents a dividend yield of almost 3.0 percent based on the Xetra closing price of EUR 27.00 as of 30 December 2005.

Because we have built up a portfolio of trend-setting products in all business fields, we are optimistic that we will return to dynamic growth in fiscal 2006.

High-tech Hose Systems

In 2005, we generated just under EUR 36.0 million (2004: EUR 35.7 million) in revenues from our core High-tech Hose Systems business, the same amount of revenue as in the preceding year. As already announced in 2004, this was due in part to the streamlining that we did in favor of highervalue products, in order to further improve our earnings. We were aware that we might see decreases in revenue in some areas and budgeted this in.

We recorded an unscheduled drop in revenue and results combined with a loss of market shares in the small tunnel construction segment. Our subsidiary TECHNO Handelsgesellschaft mbH had to reposition itself during the past year.This subsidiary has been performing very nicely again since the beginning of 2006. However, the revenue level originally planned for 2005 was not achieved.

Germany is still the most important market for Hightech Hose Systems. Domestically, we generated the same level of revenue as last year. However, export sales were sharply higher.This puts us on par with the general trend in the plastics industry. One of Masterflex AG's key target markets is the United States, where our ongoing successful performance continues. In 2005, we successfully pressed ahead with our expansion into Eastern Europe. Initial contacts in Russia have even led to the first sale: Hose systems manufactured by Masterflex are now being used at the Russian spaceport "Baikonur".

We were able to clearly achieve our profit targets in our highly profitable core business of High-tech Hose Systems in 2005. EBIT for the segment rose by 1.8 percent to EUR 8.6 million. This amounts to an excellent EBIT margin of 23.9 percent. High-tech Hose Systems thus continue to provide the company with a stable earnings base.

We want to extend this successful performance into 2006.We will strengthen our position as a system supplier with an aggressive product program and we will continue to accelerate our expansion into the international market.

No revenue was generated by the fuel cell segment. We are expecting this to change during the current fiscal year thanks to the bicycle test fleet and the HYCHAIN project.

Medical Technology

In the wake of investments made over the past few years our second business unit, Medical Technology, is contributing more and more to Masterflex AG's success. In 2005, revenue was clearly increased by twenty percent to EUR 16.8 million (2004: EUR 14.0 million).This proves that we have set the right course for the future of Medical Technology. More and more doctors and hospitals are using medical components that do not contain plasticizers, the so-called medi-

cal devices.This trend can be seen clearly in the growing demand for our infusion tubes, catheters and multi-lumen tubes, which are all made of materials that are medically safe. For example, a well known manufacturer of hearing aids now buys its hoses from our subsidiary Novoplast Schlauchtechnik GmbH.We also have several important original equipment manufacturers of medical components among our customers.

During fiscal 2005 we introduced a series of product enhancements, among them a diagnostics catheter for examining coronary vessels. It can be used, for example, to inject contrast media into coronary vessels in order to detect anomalies and blockages. Another product innovation is a so-called Y-adapter, which is also used in heart surgery.

The distribution of our medical kits has been extended to additional European countries. MHC Medic Health Care GmbH, a subsidiary of Angiokard Medizintechnik GmbH & Co., participated in numerous medical fairs, such as the MEDICA/COMPAMED in Düsseldorf, in order to increase customer awareness of these surgery kits.The positive outlook for the kit business is boosted by the new diagnosis related groups (DRG) required in hospitals because the surgery kits allow a clear allocation of costs.

Our internationally patented LaryVent respiratory mask was launched in 2005 in a pre-marketing campaign. In order to accelerate the market introduction of this innovative system, a Medical Technology expert was added to the project management team.This individual will analyze discussions with doctors and will use the results to develop a strategy for a broad and successful launch.The next steps in the LaryVent marketing program will be explained in an internal study that is to be completed shortly after this annual report goes to print. During the course of 2006, Masterflex AG will provide additional details about the measures implemented.

We are not happy about the further delays we are experiencing with LaryVent. However, the fact that the success of medical surgery kits and medical devices enabled us to achieve our goals in 2005 even without LaryVent is more important for assessing our future prospects in Medical Technology. Our profit situation has improved significantly. Fleima Plastic GmbH was acquired in 2004.The initial accounting for the business combination was determined provisionally, because the fair value of some of the identifiable assets could only be provisionally determined in connection with the purchase price allocation. In accordance with the international accounting standard IFRS 3, the values recognized in connection with Fleima Plastic GmbH were retrospectively adjusted.This, consequently, required a restatement in the Masterflex AG annual financial statements for the 2004 fiscal year. In the 2004 fiscal year, goodwill of EUR 427 thousand should, accordingly, be recognized in place of current income of EUR 607 thousand. Our innovative product portfolio leads us to expect continued dynamic growth and substantial earnings contributions in 2006.

Mobile Office Systems

Our subsidiary DICOTA GmbH is one of the world's top suppliers of mobile computing equipment.

During the 2005 fiscal year, we were again able to generate higher segment revenues.They rose from EUR 26.1 million in 2004 to EUR 28.8 million, an increase of 10.3 percent. Earnings before taxes declined, but remained positive. EBIT fell from EUR 3.7 million in 2004 to EUR 3.1 million, a decline of 14.8 percent.

As explained above, one reason was DICOTA GmbH's major international expansion in 2005.This led to start-up costs from establishing the new branches and building up the sales network. On the other hand, it was because of the surprisingly slow growth of the European and, in particular, German retail stores. During the summer months, revenue from notebook sales fell sharply. Furthermore, 2004 had been an exceptional fiscal year for DICOTA. Project orders with substantial margins were received from major customers, and this type of business was not seen in 2005.We are expecting a substantial recovery in this area during the 2006 fiscal year. DICOTA GmbH continues to expand internationally, business already recovered in the fourth quarter of 2005.

Advanced Material Design

Revenue and earnings from the SURPRO Group, which has belonged to the Masterflex Group since August 2005, were consolidated for the first time. SURPRO is well-known for its high competence in the area of refined surfaces and has developed excellently compared to the preceding year. Revenue in the first proportional fiscal year 2005 amounted to EUR 6.2 million, earnings before interest and taxes rose to EUR 1.4 million.

Nevertheless, the proportional contribution starting in August 2005 was still unable to offset the effects of DI-COTA GmbH and Techno GmbH.The same applied to the growth contributed by Masterflex AG's other business units.We are expecting 2006 to be another successful fiscal year for the Advanced Material Design segment.

Developments at our subsidiaries

In addition to its headquarters and main production site in Gelsenkirchen, Masterflex AG has a direct presence in eleven other locations in Germany, France, the United Kingdom, Bulgaria and the USA, and an indirect presence in Asia.

Note: Dates refer to the year of acquisition by the Group

Company name		Headquarters	MASTERFLEX holding in percent
NOVOPLAST Schlauchtechnik GmbH	D	Halberstadt	100
MASTERFLEX SARL	F	Béligneux	80
MASTERFLEX Technical Hoses Ltd.	GB	Oldham	100
FLEXMASTER USA, Inc.	USA	Houston	100
TECHNO Handelsgesellschaft mbH	D	Bochum	100
MASTERFLEX Bulgaria Eood	BG	Sofia	100
ANGIOKARD Medizintechnik
GmbH & Co. KG (Subgroup)	D	Friedeburg	100
ANGIOKARD Medizintechnik Beteiligungs GmbH	D	Friedeburg	100
SURPRO-Verwaltungs GmbH (Subgroup)	D	Wilster	100
DICOTA GmbH (Subgroup)	D	Bietigheim-Bissingen	100
Matzen & Timm GmbH	D	Hamburg	100
Masterflex Brennstoffzellentechnik GmbH	D	Gelsenkirchen	100

Masterflex S.A.R.L.

Masterflex S.A.R.L., Béligneux, is still the High-tech Hose Systems business unit's most successful subsidiary outside Germany. In 2005, we continued to expand our business by introducing product enhancements and penetrating new market segments.The result was double-digit revenue growth. Masterflex S.A.R.L. has developed two new food hoses that have been successfully sold around the world since 2005.

Masterflex S.A.R.L. enjoys an outstanding reputation as a specialist manufacturer and distributor of high-end products.This reputation has now received renewed official backing following the successful reaudit for certification to ISO 9001/2000 in September 2005. Numerous activities are again being planned for 2006 to increase awareness and strengthen our excellent market position, including participation in the international speciality trade fairs Process Vrac Expo, EXPOBOIS, INFOVRAC and Polllutec.

Masterflex Technical Hoses Ltd.

Masterflex Technical Hoses Ltd., Oldham, has been successful in the English-speaking markets for High-tech Hose Systems since 1996. Revenue and earnings continued to rise during the past fiscal year. Substantial increases were generated by a number of specialty products and new customers were acquired, resulting in higher revenue. Masterflex Technical Hoses will again be present at various trade fairs in 2006, including Interplast and Woodmex, a specialty event for the woodworking industry.

Flexmaster USA, Inc. and Masterduct Inc.

Masterflex AG continued its successful performance in the USA during 2005.The trend towards high-quality hose systems offering genuine added value continued unabated. In a hose market dominated by PVC and rubber, more and more customers are becoming convinced of the superiority of our hose systems made of polyurethane and special fabrics.The ongoing economic upswing also gave our business a positive boost. Houston-based Masterduct Inc., extended its double-digit revenue growth. We are also very satisfied with earnings improvement, especially considering that the size of the market requires ongoing investments in marketing and sales.

In 2005, for example, we intensified our marketing activities in the pharmaceutical industry. We introduced our Masterprotect pipe bend with patented polyurethane lining to the cement industry and our wire-reinforced hose for brakes to the automotive industry. A survey was also done to identify the potential in one the chemical industry's specialty markets. Masterduct Inc. also exhibited at the Interphex trade fair in New York, National Air Duct Cleaner and the Chemicals Supply, New York. And Masterduct made many new contacts at the annual convention of the Association for Hose and Accessories Distribution (NAHAD).

The year 2005 saw the market launch of several new products, among them food hoses and high temperature hoses. Masterduct is also working on a development project for an innovative wireless hose, for which initial production tests are already underway.

The success proves that we correctly assessed the market opportunities in the United States. We therefore expect the rising trend in the area of High-tech Hose Systems to extend into 2006.

We have also maintained our high-quality strategy in Flexmaster Inc.'s traditional air conditioning and ventilation business. Flexmaster has established itself as a specialist for advanced HVAC solutions. For example, acoustic hoses that allow sound waves to pass through them and anti-microbic hoses have been particularly successful products. In 2005, Flexmaster continued to sell aggressively in order to position its premium products in the marketplace.

TECHNO Handelsgesellschaft mbH

TECHNO Handelsgesellschaft mbH, Bochum, a subsidiary of Masterflex AG since 2000, specializes in hoses, valves and accessories for concrete, water and compressed air, which are used mainly in tunnel construction.The company does not make these products; instead, it packages specialty products according to the needs of the respective construction site.TECHNO has been involved in practically all major construction projects in Germany over the past number of years. Reference projects include the Elb Tunnel in Hamburg, the airport tunnel in Cologne-Bonn, various tunnels of the BAB 17 federal motorway near Dresden, and the subway in Munich.

The company's performance during the year under review was not satisfactory; revenues and earnings dropped, which had a slightly negative impact on the entire high-tech hose system segment. Since the company must now reenter the market, we are expecting the business recovery to take about two years. In 2005,TECHNO presented its portfolio of products and services at major trade fairs such as the STUVA (specialist congress for tunnel construction) in Leipzig. It also plans to participate in important specialist fairs in 2006. In January of 2006,TECHNO was able to make a presentation at the shotcrete trade fair in Innsbruck.

We believe that the tunnel construction market continues to offer promising prospects for the future, especially outside Germany. Because single-bore tunnels are potentially extremely dangerous, many countries are investing in conversion to double-bore constructions.

Masterflex Bulgaria Eood

Masterflex Bulgaria Eood was established in 2002 as a pure manufacturing facility for engineered hoses. It supplies its hoses exclusively to other companies within the Group.The operation has made a successful contribution to the expansion of our product range. During the course of 2005, the existing capacities were further expanded.

Matzen & Timm GmbH

Hamburg-based Matzen & Timm GmbH was founded in 1925 and became a member of the Group in 2003; its highly specialized products round off our range in the High-tech Hose Systems business.These specialty hoses and formed parts are sold mainly to customers that require precision and stability under load; for example, for airplanes, helicopters, cars, trains, machine tools and in outer space.The aviation industry is the most important sector - Matzen & Timm GmbH is the supplier for all Airbus models.The company's hoses and formed parts are used in almost the entire air circulation system in the cabin of the German part of the Airbus A 380.The blanket order with Airbus was signed at the beginning of December 2005 and will run until December 31, 2011.

Matzen & Timm also sells specialty hoses for vacuum lifting systems, which are used to lift heavy loads by means of suction.These devices make it possible to lift weights of up to 300 kilograms without straining the back.The company's hose products are used by one of the world's leading manufacturers of such handling systems.

Matzen & Timm exhibited in 2005 at the AIRCRAFT Interiors Expo aviation trade fair in Hamburg and will be there again in 2006.They are also planning to participate in the InnoTrans, the international trade show for traffic engineering. Matzen & Timm is also exhibiting for the first time at the MAKS International Aviation & Space Salon in Moscow and at the International Automobile Show in Moscow.

Sometime in 2006, Matzen & Timm GmbH will be moving to the Hamburg area.The new location will have more efficient manufacturing capacities that should enable a faster throughput of material and thus a higher production density.

NOVOPLAST Schlauchtechnik GmbH

Novoplast Schlauchtechnik GmbH, which was founded in 1991 in Halberstadt, is our oldest subsidiary, successfully producing high-tech industrial and medical hose systems from high-quality plastics. The company presented its industrial hose systems in 2005 at trade fairs such as the Hanover Trade Fair (jointly with Masterflex AG) and the speciality MOTEK fair in Sinsheim.

Novoplast Schlauchtechnik GmbH attended international trade shows in Hungary, Romania and Turkey together with Masterflex AG.These shows were extremely fruitful. New business partners were found, who quickly introduced the products to market and achieved considerable success. A new warehouse has been built to accommodate the huge demand.

One of the new products in the industrial area is a fire detection hose. In the event of a fire, it generates a pulse that can be used, for example, to turn on sprinkler systems and open skylights. Another innovative product is a double-layer hose used as a paint spray hose for paint systems.

We have significantly expanded the Medical Technology area over the past few years, and throughout 2005, earnings started to grow steadily.We now have one of the most modern micro precision extrusion systems in Europe, on which we manufacture all the standard hearing aid tubes for a well-known major company in the field of hearing aid manufacture.

The new products include anti-microbic hoses and innovative urological catheter hoses for long-term implants. These recently developed products were introduced at the COMPAMED (Dusseldorf) and the MedTec (Stuttgart).The managers of Novoplast Schlauchtechnik GmbH also joined a business development trip to Paris in the company of Federal President Horst Köhler and the Prime Minister of Sachsen-Anhalt, Prof.Wolfgang Böhmer.

The Federal Institute for Drugs and Medical Devices advises against the use of plasticizers, in particular DEHP. More and more doctors are therefore looking for alternatives.The increased demand for Novoplast Schlauchtechnik's plasticizer-free medical hoses reflects this trend. As a result, prospects for the 2006 fiscal year appear to be extremely positive.

ANGIOKARD Medizintechnik GmbH & Co. KG (Subgroup)

Angiokard Medizintechnik GmbH & Co. KG, our subsidiary in Friedeburg, is one of the leading providers of angiographic customer procedure trays (CPTs) on the German market.The concept of customer procedure trays is becoming more and more popular, both nationally and internationally.

In Germany, the advantage of the kits is that they enable clear allocation of costs in light of the introduction of the diagnosis-related groups. One kit can contain more than 60 individual components. Guaranteed product availability, shorter preparation time for operations and reduced packaging waste all simplify logistics, saving both time and money.

Angiokard Medizintechnik offers clinics and specialized medical practitioners a comprehensive range of products for cardiology, radiology, anesthesia and intensive care, plus a specialty kit that contains required individual accessories from one of these fields of application. In order to be able to react quickly and flexibly to every customer need, the company has a permanent stock of over 4,000 different individual components.

To ensure continuous availability in light of the strong rise in demand, both domestically and internationally, a new sterile warehouse was set up at the company's headquarters in 2005. In the fall of 2005, warehouse capacity was expanded by adding a hall for the commercial goods. The rise in demand over the past year led to the hiring of fifteen new employees. In order to further increase flexibility, Angiokard Medizintechnik switched to a three-shift system in 2006.

Angiokard Medizintechnik presented its product line at numerous medical congresses and technical trade fairs throughout 2005. Particularly noteworthy is the new IntroFlow diagnostic catheter, which is used to examine coronary vessels. It can be used, for example, to inject contrast media into the coronary vessels to detect anomalies and blockages. Another product innovation is a so-called Y-adapter, which is also used in heart surgery.

The company pressed ahead with foreign expansion in 2005. For example, new dealer partnerships were formed in the Anglo-Saxon area. After the great success in 2005 at the largest trade show in the Arabian world, the Arab Health (Dubai), Angiokard Medizintechnik and MHC again attended in January 2006. Last year Angiokard won a bid in the United Arab Emirates which brought with it a large hospital as a new customer. Further trade show participation is planned for this year, including attendance at the Cardiology Congress in Mannheim and the Radiology Congress in Berlin.

MHC Medic Health Care GmbH – Establishing a brand We are convinced that the market for customer-specific kits will continue to be a very interesting niche market over the next few years. We estimate the size of the potential market for surgery kits to be in the hundreds of millions of euros in Germany alone. Angiokard is already recognized as an independent specialist in the market for angiography kits, capable of configuring a kit according to the physician's requirements, while at the same time minimizing costs.

MHC Medic Health Care GmbH, founded at the end of 2004, is intended to transfer Angiokard's product expertise to other operations.The surgery market is an important subsector. In 2005, we already acquired over a dozen customers, and we now supply all of their heart surgery needs.

Fleima-Plastic GmbH Fleima-Plastic GmbH was established in 1974 in Mörlenbach and specializes in the manufacture of advanced injection-molded plastic parts for the pharmaceutical and Medical Technology industries.The company has its own tool-making facility equipped with the latest machining centers. Product applications include dialysis, enteral feeding (artificial feeding via stomach and intestinal tubes, used in illnesses of the digestive tract), as well as cardiology. Fleima-Plastic GmbH supplies renowned companies in the field of Medical Technology in the European Union as well as in overseas markets.

Fleima-Plastic GmbH's comprehensive knowledge of thermoplastics enables it to custom manufacture, and even design, tools and components to suit individual customer needs.They range from individual components for heart-lung machines to complex systems for autologous blood donations (machine-assisted donation of the patient's own blood).These services have made Fleima-Plastic GmbH a recognized specialist on today's market. In 2006, Fleima will present its portfolio of products and services at the MEDICA Medical Trade Show and in other European countries.

Angiokard Medizintechnik GmbH & Co. KG considers itself to be excellently positioned for the future thanks to its innovative products and services. In 2006, innovative products, expanded brand recognition and further internationalization should contribute to the dynamic growth of the Medical Technology segment within the Masterflex Group.

DICOTA GmbH (Subgroup)

DICOTA GmbH, based in Bietigheim-Bissingen, is one of the world's top full-service suppliers of mobile computing equipment.Ten subsidiaries with about 80 employees sell cases and case solutions around the world as well as accessories for carrying notebooks and office systems.

A series of innovations were introduced in January 2005, among them a case with integrated notebook protection and a mouse with an integrated USB receiver.These new products were presented at countless trade fairs; e.g., at the big GITEX IT trade show in Dubai and at

COMEX, which attracts almost 400,000 visitors and is the largest computer show in Singapore. These shows were so successful that participation is planned for 2006 as well. In Germany, DICOTA attended the World of Mobility in Cologne and, as every year, CeBIT in Hanover.

DICOTA GmbH has evolved successfully since Masterflex AG acquired a majority stake in the company in 2001. Growth in revenue and earnings has been in the double digits. Masterflex AG therefore purchased the remaining shares in January 2005.The decision was strongly influenced by the record 2004 financial year, during which pre-tax profit rose by seventy percent.

Forecasts from leading market research institutes also predicted double-digit growth for the notebook market in 2005, particularly in Asia. In light of this positive environment, DICOTA continued to expand last year.The founding of a Shanghai subsidiary has not yet been completed. All in all, the notebook market grew 15.8 percent in 2005.The development was also positive in Europe - with one exception.The German retail market was very restrained and, particularly in the summer months, hardly any notebooks were sold.

As already explained, although DICOTA's revenues were up toward the end of the year, the company was unable to reach the forecasted pre-tax profit.The reasons for this were the preproduction costs from establishing the new branches and building up the sales network. In addition, there were fewer very profitable project orders from key customers, which had boosted the excellent performance in 2004. Despite a strong fourth quarter in 2005 these losses could not be made up for before the end of the year.

For 2006, experts at the IDC market research agency are forecasting that the global notebook market will grow about 10.5 percent. DICOTA is also confident about the 2006 business year because it has now essentially completed its international expansion and a series of product innovations should ensure that the positive trend continues. DICOTA could also profit from a potentially better buying mood in Germany as people purchase to beat the 2007 increase in VAT.

SURPRO Verwaltungs GmbH (subgroup)

SURPRO Verwaltungs GmbH, Gelsenkirchen, has subsidiaries in Wilster (Schleswig Holstein) and Plana (Czech Republic) and has been part of the Masterflex Group since August 2005. The name SURPRO is a contraction of "surface protection".The company's main area of specialization is in coating surfaces with precious metals, and it is one of the world's leaders in this field.

SURPRO is in the business of electroplating and metal processing for functional and decorative economic goods, and specializes in manufacturing and refining high-quality surfaces.The surface coating is done in a fully automated, state-of the-art electroplating facility using an environmentally sound process. SURPRO is a member of the precious metal board of the German Society for Electroplating and Surface Technology and co-author of diverse publications in the precious metal sector.The profitable company's products are purchased by the medical sector, the aerospace industry and others.

SURPRO also has extensive expertise in CAD, tool making and manufacturing. Masterflex AG, which strongly emphasizes material science and new materials in its research and development, expects this expertise to considerably stimulate product development.There should also be synergies with its Medical Technology and fuel cell technology business units and the plastics metals coating process.

SURPRO caters to a growth market segment. Since surface engineering is one of the fastest growing branches in Germany, we are expecting a continued successful performance of our new subsidiary in 2006.

Masterflex Brennstoffzellentechnik GmbH

Masterflex Brennstoffzellentechnik GmbH was founded in Germany in December 2005 in order to clearly separate the area of fuel cell technology from the other business units organizationally. The company's headquarters is in Gelsenkirchen. As of January 1, 2006 all activities in conjunction with the development of fuel cells was transferred to the company. Production takes place in Herten.The company presently has six employees.

II. Earnings position, Financial Situation and Net Assets Earnings position

	2005 EUR thou.	%	2004 EUR thou.	%	Change EUR thou.	%	2003 EUR thou.	%	2002 EUR thou.	%
Revenue	87,773	93.2	75,752	94.9	12,021	83.7	66,917	95.6	56,823	95.8
Changes in inventories	1,164	1.2	406	0.5	758	5.3	396	0.6	-24	0.0
Work peformed by the enter
prise and capitalized	1,066	1.1	903	1.1	163	1.1	953	1.4	1,040	1.8
Other operating income	4,203	4.5	2,777	3.5	1,426	9.9	1,732	2.4	1,420	2.4
Total output	94,206	100.0	79,838	100.0	14,368	100.0	69,998	100.0	59,259	100.0
Cost of materials	-40,637	-43.1	-34,313	-43.0	-6,324	-44.0	-32,148	-45.9	-27,042	-45.6
Staff costs	-21,309	-22.6	-17,538	-22.0	-3,771	-26.2	-15,211	-21.7	-13,236	-22.3
Depreciation and
amortization expense	2,321	-2.5	-2,991	-3.7	670	4.7	-2,897	-4.1	-2,699	-4.6
Other operating expenses	-17,676	-18.8	-14,443	-18.1	-3,233	-22.5	-12,435	-17.8	-10,968	-18.5
Operating expenses	-81,943	-87.0	-69,285	-86.8	-12,658	-88.0	-62,691	-89.5	-53,945	-91.0
EBIT	12,263	13.0	10,553	13.2	1,710	12.0	7,307	10.5	5,314	9.0
Financial result	-2,544	-2.7	-1,130	-1.4	-1,414	-9.8	-1,187	-1.7	-931	-1.6
Other tax	-246	-0.3	-198	-0.2	-48	-0.3	-220	-0.3	-237	-0.4
Income before taxes
and minority interests	9,473	10.0	9,225	11.6	248	1.9	5,900	8.5	4,146	7.0
Income taxes	-3,315	-3.5	-2,932	-3.7	-383	-2.7	-2,299	-3.3	-1,828	-3.1
Income attributable
to minority interests	-193	-0.2	-351	-0.4	158	1.1	-217	-0.3	-95	-0.2
Net profit for the year	5,965	6.3	5,942	7.5	23	0.3	3,384	4.9	2,223	3.7

Masterflex AG's earnings position continued to improve in 2005. Changes in the profit structure are therefore mainly attributable to the company's successful performance.

Revenue increased for the eighteenth year in a row and was up by 15.9 percent from EUR 75.8 million last year to EUR 87.8 million.

The cost of materials and staff costs rose by 18.4 percent and 21.5 percent respectively.The ratio of cost of materials to revenue improved further. It was 46.3 percent compared to 45.3 percent in 2004.The ratio of staff costs to revenue rose from 23.2 percent in 2004 to 24.3 percent in the reporting period and was thus slightly higher.The change in the absolute numbers, particularly of staff costs, was mainly due to the acquisition of the SURPRO Group.

The financial numbers for 2004 required a so-called restatement, which is attributable to the initial consolidation of Fleima Plastic GmbH and DICOTA Gesellschaft zur Entwicklung von Tragesystemen für elektrische Geräte mbH (DICOTA GmbH).

In 2004, we acquired all shares in Fleima Plastic GmbH.The initial accounting for the business combination was determined on a provisional basis, because the fair value of some of the identifiable assets could only be provisionally determined as part of the purchase price allocation. In accordance with IFRS 3.62, the values recognized on a preliminary basis were corrected within 12 months.The effect on the subsequent consolidation was taken into account in 2004 and 2005.

Amortization and depreciation of non-current assets declined year-on-year by EUR 670 thousand to EUR 2,321 thousand (since – in compliance with IFRS 3: Business Combinations, IAS 36: Impairment of Assets and IAS 38: Intangible Assets – goodwill is no longer amortized as of January 1, 2005.

Other operating expenses rose 22.4 percent in absolute terms to EUR 17,676 thousand from EUR 14,443 thousand a year earlier as a result of the increase in revenue.This is primarily attributable to the significant increase at the DICOTA Group and the initial consolidation of the SUPRO Group.

The higher revenues and the slight rise in expenses again pushed earnings before interest and taxes (EBIT) up from EUR 10.6 million last year to EUR 12.3 million, an increase of 16.2 percent.The result was a the achievement of a first-class EBIT margin of 14 percent up from 13.9 percent in 2004. Compared to the prior year, earnings before taxes did not grow quite as strongly. Some of the profit contribution shortfall is due to the restructuring of TECHNO Handelsgesellschaft mbH. Furthermore, in the summer of 2005 business in Germany at our subsidiary DICOTA GmbH fell sharply, while start-up costs for material and staff were generated by the setting up new branches.The shortfall in revenue could not be offset by the higher earnings in other business units.

The financial result deteriorated in 2005 by 125 percent to EUR – 2,545 thousand.The primary reasons for this are, firstly, the borrower's note loan, which was taken out in September 2004, thus resulting, for the first time, in a full year of interest expense, and, secondly, impairment losses on short-term securities.These impairment losses are offset by tax-advantaged income, so that we can, on balance, note relief in terms of the tax burden in favor of the Masterflex Group.

In the last Annual Report we had reported a tax ratio of 28.5 percent. After completion of the restatement, the tax ratio increased to 31.9 percent.The tax ratio for the 2005 fiscal year is 34.1 percent.This was primarily caused by a required one-time transfer-pricing adjustment, as well as an unfavorable shift of profits generated within the overall Group to countries with a relatively higher tax burden.

Consolidated net profit remained constant at EUR 6.0 million. Net return stands at 6.8 percent. As a result of the company's growth, earnings per share rose by 3.0 percent, from EUR 1.33 to EUR 1.37.

Business at DICOTA GmbH has returned to normal since the fall of 2005.TECHNO Handelsgesellschaft mbH is also moving in the right direction. For fiscal 2006, we are expecting a substantial improvement in earnings at these companies, as well as at the Group level.The sales drive, rising contributions to earnings from medical technology and revenues in the six figure range from fuel cell technology lead us to expect a double-digit increase in revenue of between 20 and 30 percent, an improvement in earnings before income and taxes of between 10 and 20 percent and continuing net profit growth.

Financial Situation

Principles and goals of financial management

Masterflex AG is aiming for technology leadership in its target markets.The strategy must be supported by efficient financial management that provides inexpensive access to liquid assets so that the business can be expanded successfully. It must also ensure that the capital employed generates above-average returns.

In all of its financing activities, Masterflex AG makes sure that it maintains a balance between equity and debt that guarantees the financial independence of the corporate group.

To continue to grow the company successfully, the highest priority focus must therefore be on liquidity.To keep the cost of capital low, Masterflex AG also considers the leveraging effect of external financing, which increases the return on equity.

The company tries to borrow at low interest rates that are fixed for the longest possible period when taking out a loan. Here Masterflex AG relies on the opportunities offered by innovative financing instruments and subsidies. In addition, the company analyzes the financing needs of the various companies so as to identify and take advantage of opportunities to lower interest rates for the entire Group.

Masterflex AG carries on an ongoing and transparent dialog with various financial institutions about the company's current business situation, the financing measures required, and the minimization of bad debt risk.This also secures our financial independence.

Financing analysis

In September 2004, Masterflex AG's excellent credit rating enabled it to secure a borrower's note loan in the amount of EUR 23 million with maturities of five and seven years at attractive terms from IKB Deutsche Industriebank AG.The loan is being used primarily to finance the Masterflex Group's strategic expansion plans. Part of the loan proceeds were already used in 2004 to optimize our liability structure and to purchase Fleima-Plastic GmbH. At the beginning of 2005, we acquired the remaining shares in DICOTA GmbH and Novoplast Schlauchtechnik GmbH.

The acquisition of the SURPRO Group, which was largely financed through debt, occurred in the reporting period. Debt was also raised to acquire land for the construction of the new production plant of Matzen & Timm.

Investment analysis

The importance of research and development and the high share of in-house developments causes Masterflex AG to invest above all in creative employees.The EUR 3,828 thousand invested in property and plant and equipment are therefore within a manageable range of 4.4 percent of revenue and for the year 2005 consisted mainly of investments in expansion.

We invested in additional in-house developed machines at the Gelsenkirchen location, where our high-tech hose systems are manufactured. At our subsidiary Matzen & Timm, investments are being made in construction because they will be transferring their production location to the Hamburg area in the summer of 2006 or thereabout. A new warehouse and logistics building has been under construction at Novoplast Schlauchtechnik since November 2005.

In the medical technology area, expansion investments were made at the headquarters of Angiokard Medizintechnik GmbH & Co. KG in Friedeburg. A sterile warehouse was built. In addition, a hall for commodities was added to increase warehouse capacity.

Investments totaling EUR 2,026 thousand were made in intangible assets.These were mostly territorial protection agreements, patents, registered designs and licenses for the projects handling hoses with interior coatings, the LaryVent respiratory mask and fuel cell technology.

Liquidity analysis

In the 2005 fiscal year, a cash flow of EUR 2,670 thousand was generated from operating activities.The earnings for the period and the amortization, depreciation and impairment of non–current assets are offset especially by an increase in inventories and trade receivables, which are primarily attributable to the DICOTA Group and the SURPRO Group.

The outflow of cash from investing activities for the reporting period of EUR 19,837 thousand was due to the acquisition of the remaining shares in Novoplast and DICOTA, as well as the outright acquisition of the SURPRO Group.This is offset by cash inflows from financing activities. Incoming payments from the sale of securities totaling EUR 9,500 thousand deserve highlighting, as do the proceeds from the borrower's note loan that have not yet been used, together with those from the outside financing of company acquisitions.

Cash and bank balances decreased by 39.6 percent to EUR 4,895 thousand.

Assets	Dec. 31, 2005		Dec. 31, 2004		Change		Dec. 31, 2003		Dec. 31, 2002
	EUR thou.	%	EUR thou.	%	EUR thou.	%	EUR thou.	%	EUR thou.	%
Intangible assets	32,716	33.5	23,258	26.6	9,458	89.5	22,597	34.6	23,419	36.4
Property, plant, and equipment	23,221	23.7	17,221	19.7	6,000	56.7	14,760	22.6	14,789	23.0
Non-current financial assets	1,315	1.3	2,391	2.7	-1,076	-10.2	2,993	4.6	895	1.4
Deferred taxes	709	0.7	394	0.5	315	3.0	593	0.9	376	0.6
Non-current assets	57,961	59.2	43,264	49.5	14,697	139.0	40,943	62.7	39,479	61.4
Inventories	20,573	21.0	13,569	15.6	7,004	66.2	10,492	16.1	10,020	15.6
Prepaid expenses	743	0.8	639	0.7	104	1.0	195	0.3	129	0.2
Trade accounts
and notes receivable	13,660	14.0	12,189	14.0	1,471	13.9	10,037	15.4	11,985	18.6
Current assets	34,976	35.8	26,397	30.3	8,579	81.1	20,724	31.8	22,134	34.4
Cash flow	4,895	5.0	17,598	20.2	-12,703 -120.1		3,594	5.5	2,671	4.2
	97,832 100.0		87,259 100.0		10,573 100.0		65,261 100.0		64,284 100.0

Net assets

Equity and Liabilities	Dec. 31, 2005		Dec. 31, 2004		Change		Dec. 31, 2003		Dec. 31, 2002
	EUR thou.	%	EUR thou.	%	EUR thou.	%	EUR thou.	%	EUR thou.	%
Consolidated equity	30.606	31,3	28.039	32,1	2.567	24,3	28.102	43,1	25.331	39,4
Minority interest	434	0,4	809	0,9	-375	-3,5	449	0,7	179	0,3
Total equity	31.040	31,7	28.848	33,0	2.192	20,8	28.551	43,8	25.510	39,7
Provisions	1.289	1,3	292	0,3	997	9,4	259	0,4	172	0,3
Financial liabilities	25.783	26,4	26.967	30,9	-1.184	-11,2	7.213	11,0	8.394	13,1
Deferred income	2.616	2,7	2.606	3,0	10	0,1	2.263	3,5	1.886	2,9
Other noncurrent liabilities	3.016	3,1	3.280	3,8	-264	-2,5	10.943	16,8	11.340	17,6
Deferred tax liabilities	2.444	2,5	1.588	1,8	856	8,1	413	0,6	438	0,7
Noncurrent liabilities	35.148	36,0	34.733	39,8	415	3,9	21.091	32,3	22.230	34,6
Provisions	4.504	4,6	4.419	5,1	85	0,8	3.199	4,9	2.297	3,6
Financial liabilities	14.327	14,6	4.198	4,8	10.129	95,8	6.160	9,4	6.138	9,5
Deferred income	233	0,2	243	0,3	-10	-0,1	243	0,4	212	0,3
Other current liabilities	12.580	12,9	14.818	17,0	-2.238	-21,2	6.017	9,2	7.897	12,3
Current liabilities	31.644	32,3	23.678	27,2	7.966	75,3	15.619	23,9	16.544	25,7
	97.832 100,0		87.259 100,0		10.573 100,0		65.261 100,0		64.284 100,0

Analysis of the asset structure

The changes in the individual balance sheet items compared to last year reflect the successful expansion of our business activities.The Group's consolidated assets rose 12 percent, from EUR 87,259 thousand to EUR 97,832 thousand.This is due, in particular, to the acquisition of the remaining shares in Novoplast, and the DICOTA Group as well as the purchase of all shares in the SURPRO Group on the asset side of the balance sheet.This is offset on the liability side by the financing of these transactions.

The individual items changed as follows:

Intangible assets classed as noncurrent assets increased to EUR 32,716 thousand, 40.7 percent higher than the previous year.

Property, plant and equipment was up 34.8 percent from the prior year's EUR 17,221 thousand reaching EUR 23,221 thousand.This takes into account ordinary expenditures of EUR 3,828 thousand and additions due to the changes to the consolidated group of EUR 4,229 thousand, less depreciation of EUR 2,105 thousand.

Financial assets declined by 45 percent, since loans to outside third parties were reduced.

Inventories climbed by 51.6 percent to EUR 20,573 thousand; this is due firstly to the initial consolidation of the SURPRO Group and secondly, in the main, to an increase at the DICOTA Group, which can be attributed to the favorable situation with respect to orders. Receivables and miscellaneous assets rose by EUR 1,471 thousand. Cash and cash equivalents decreased by EUR 12,703 thousand to EUR 4,895 thousand since securities are no longer behind recognized under current assets (prior year: EUR 9,500 thousand).

Shareholders' equity as at Dec. 31, 2005 amounted to EUR 31,040 thousand. At the end of the financial period, the company held 134,126 treasury shares, the cost of which has been deducted from equity.The equity and liabilities side of the balance sheet shows that Masterflex AG continued to enjoy an excellent equity ratio of 31.7 percent in 2005.The reduction in the equity ratio compared to the previous year was mainly due to higher total assets resulting from increased liabilities due to banks. With respect to shareholders' equity, it should be noted that a change in the basis of measurement required by IAS 8 reduced shareholders' equity by EUR 378 thousand.

Long-term debt rose by 1.2 percent to EUR 35,148 thousand.

Short-term debt increased by 33.6 percent to EUR 31,644 thousand as a result of the rise in financial liabilities to EUR 14,327 thousand (Prior year: EUR 4,198 thousand).The increase in financial liabilities was due to the partial financing of company acquisitions by financial institutions. Other liabilities decreased due to the acquisition of shares in DICOTA GmbH, Bietigheim-Bissingen.

In 2005, provisions rose by 23.0 percent to EUR 5,793 thousand (Prior year: EUR 4,711 thousand).The increase in provisions for pensions arising from the changes to the scope of consolidation should be highlighted in particular; the largest decline in terms of value occurred in the provisions for staff bonuses and commissions that had been set aside in the last fiscal year primarily for a member of the Board who has since departed.

Company acquisitions

In the 2005 fiscal year, Masterflex AG acquired the remaining 30 percent of the shares in Novoplast Schlauchtechnik GmbH, Halberstadt, as well as the remaining 49.98 percent of the shares in DICOTA GmbH, Bietigheim Bissingen. In the second half of the 2005 fiscal year, it further acquired all shares in the SURPRO Group.The purchase prices for these companies, including other expenses associated with the acquisitions, totals EUR 16.9 million.

Employees

The innovations we have developed over the years and the technological advantage they represent would have been unthinkable without the creativity and commitment of our employees. In all business units, our success is founded on the unflagging attention to the requirements of our customers.We therefore attach great value to research and development, which often takes place in cooperation with our customers.This requires highly trained technical employees who have a sense for a product's marketability and potential, as well as for what is technically feasible. We also need a sales force that engages in constant dialog with customers and is able to pass on their suggestions to the development department. Our customers value this focus and surveys show that they are very satisfied with the high quality of our service and the commitment of our employees.

The Masterflex Group is aware of its social responsibilities.These include a commitment to Germany as a location for industry and commerce, and the provision of vocational traineeships. We have officially provided vocational training for a number of years at our headquarters in Gelsenkirchen. Since August 2004, we have been training two young people as industrial administrators. Novoplast Schlauchtechnik GmbH has also taken on trainees for many years. Currently four young people are being trained as industrial apprentices. Our subsidiaries Matzen & Timm, TECHNO Handelsgesellschaft mbH and Fleima Plastic GmbH also have trainees. In total, the Masterflex Group has eight apprentices.We also regularly offer students from schools and universities on-the-job training opportunities.

Masterflex AG values competence and experience. In contrast to many other companies in Germany, we also employ older workers. At the start of 2005, an employee retired in Gelsenkirchen, the first to do so since the company was founded. In May of 2006 another employee will be retiring at the age of 65.

We also offer employees who have families the opportunity to work part-time So that we do not lose the expertise of these experienced workers.

We greatly value a good working atmosphere that leaves room for innovative ideas and commitment.The turnover rate among our employees is extremely low. Absenteeism due to illness is also well below the German industry average. We are proud to have not only satisfied customers; but also a satisfied workforce. Altogether, the number of employees rose 38.7 percent to 656 workers due to new hires and the acquisition of the SURPRO Group in 2005.

Staff development

III. Supplementary report

Material events after the close of the fiscal year

On 31 January 2006 the Chairperson of the Board, Detlef Herzog, signed a contract in the presence of representatives of the EU Commission in Brussels confirming Masterflex AG's participation in the EU HYCHAIN Minitrans project.This cross-border project aims to demonstrate innovative and sustainable alternatives to the extremely oil-dependent transport economy. Masterflex AG will supply Cargobikes powered by fuel cells.The HYCHAIN Minitrans project includes the operation of 150 fuel-cell-powered small and light vehicles, as well as the production, storage and distribution logistics of hydrogen. The aim is to identify markets early and create uses for selected transport applications.The German Ruhr area was chosen as one of the European test regions. Other areas that will participate are the Grenoble region (France), Modena (Italy) and Castilla y Leon (Spain). HYCHAIN Minitrans will operate minibuses, motor scooters, small commercial vehicles and wheelchairs that are driven by fuel cells.We want to set up at least forty of our "Cargobike" transport taxis in these four regions.

Masterflex AG has thereby successfully launched a second fuel cell project within a two month period. In November of 2005, we received an order from the North Rhine-Westphalian city of Herten to supply the world's first fuel-cell-powered bicycle fleet.

Besides Masterflex AG, more than twenty other companies and research institutions are participating in the project.The EU will provide EUR 17 million in co-financing for the project.

Effects of events on net assets, the financial and earnings position

Revenue and earnings from the HYCHAIN Minitrans project will not affect net assets, the financial or earnings position until some time during the 2006 fiscal year and the effect will only be minor.

IV. Risk report

Risk management system for value-driven company management

Business activities always involve both opportunities and risks. Risk is defined as the possibility of unfavorable future developments that can be expected with a significant degree of probability, even though they are not necessarily inevitable.

What we mean by risk management is the targeted safeguarding of existing and future profit potential. Our risk management system includes risk recognition, valuation and management.This process aims to systematically identify potential risks within the Group at an early stage, to monitor them and through applicable management measures, to limit or avoid them. This controlled exposure to risks secures the Group's net assets, financial and earnings positions.

Efficient organization of risk management

The Board of Masterflex AG has established a decentralized risk management system that is continually expanded and refined. Its essential components are Group planning, periodic internal reporting including actual and forecast reporting, and comprehensive risk reports.

Based on strategic Group planning and medium-term financial planning, the budget to actual system enables potential risks to be discovered early, evaluated and taken into consideration during the decision-making process so that suitable managerial actions for dealing with the risk can be implemented on time.

Monitoring and control of the economic risks associated with the current business are ensured with the help of a standardized internal reporting system set up according to uniform guidelines applying to the entire Group.The Board is thereby informed in detail each month about the current economic situation and to what degree we achieved our targets.These steps are supplemented by analyses of the market and the competition that further increase risk transparency.

The company business segments for high-tech hose systems, Medical Technology, Mobile Office Systems and Advanced Material Design are involved in different types of businesses; therefore, they need different risk profiles geared to the specific risks of each of their fields.

It is the decentralized risk managers' responsibility to identify the risks as part of their regular risk reporting, to evaluate them concerning their possible degree of damage and how

great the chances are that they will occur, and to document and communicate them. Furthermore, it is local management's job to develop and, if necessary, to implement the proper measures to avoid risk, to diminish and to protect against it.

The decentralized management is supported by the central Group risk management unit that, aside from coordinating tasks and processes, also determines the uniform conditions and guidelines for the entire Group.The central risk management unit also identifies the consolidated risk position of the Masterflex Group and informs the Board regularly and in detail.

We have listed below the most important risk areas that could have a major impact on both our business development or our net assets, financial and earnings position.To these we must add the risks that we do not yet know about and those that we currently consider to be less important, but which could have a negative effect on our company if the situation were to change.

Risk factors

Market risks

There are potential market risks for the companies in the Masterflex Group both on the procurement side and on the sales side.

On the procurement side, the availability and the purchase prices of raw materials, as well as primary and intermediate products pose a potential risk for our companies.We try to reduce these price and supply risks on the procurement side with international purchasing programs, longterm supply contracts and by continuously optimizing our supplier profile. In addition, we use contracts with price escalation clauses in order to minimize the negative effects of changes in the purchase price. When choosing suppliers, Masterflex AG chooses those with excellent performance and quality records. For key third-party components, we try to cooperate very closely with our various suppliers and include them as early as possible in new project developments in order to guarantee the economic success of the project.The risk for Masterflex AG associated with this close cooperation is the potential dependency on the supplier.

On the sales side, we counter the possible increase in competitive pressure in our business areas by continually improving our products and services, as well as our business processes and cost structures.

We try to counter general customer risk (e.g. loss to competitors, insolvency of key customers or an increase in price pressure due to market dominance) with a broad spectrum of customers and by avoiding dependencies.

Financial risks

We classify liquidity, market price and bad debt risks as financial risks.These kinds of risks can result from transactions in operative business where hedging activities, financial decisions and changes in value are caused by financial positions in the balance sheet. At the Masterflex Group, we manage and monitor Group financing centrally, including the limitation of financial and economic risks.

There are mandatory regulations about what kind of financing instruments can be used, their exposure limits and the participating banks.We regularly check to ensure that all limits are strictly adhered to.The credit risk is reduced by systematically obtaining business information, setting credit limits and by active debtor management including sending reminders and an aggressive collection department.

The fundamental risk strategies for interest-rate, currency and liquidity management are determined centrally.We make financing and hedging decisions based on our financial and liquidity planning, which takes into account all the material company business units.

Business and financing activities are rarely conducted in other than the respective country's currency, but when it does happen, there are cash flows in foreign currencies.The individual company units are required to monitor the risks resulting from this themselves and, if necessary, to hedge appropriately in consultation with Group management, provided there are no country specific barriers or other reasons that might make this unadvisable. Forward exchange contracts, currency swaps and simple currency options are use for these purposes.

Foreign currency risks are reduced as far as possible by using natural hedging; for example, by ensuring that subcontracts and services are provided in the same currency as the original order.

Any interest-rate risks that arise from the different periods to maturity of borrowings on the capital market are managed centrally. For this, we use interest-rate derivatives such as interest rate and currency swaps or interest options.

Translation risks resulting from the conversions for Group companies that do not use euros in their balance sheets are not hedged with financing instruments.

Production risks

If there were to be a loss of production over a longer period of time due to a catastrophe (e.g., fire damage) at any single location, the subsidiary in question would suffer a potential threat to its ability to deliver its products.

We counter these risks with preventive maintenance measures, by keeping important replacement parts available, taking certain steps regarding fire prevention and protection, by training employees and by building up a network of external suppliers.We are insured against events of damage or loss that might take place despite these preventive measures to an amount that makes good business sense.

In order to manage quality risks related to services rendered, Masterflex emphasizes quality assurance.The Masterflex Group consistently contains quality-relevant risks by applying critical quality measures during development, rigorous inspections throughout the entire process chain, and staying in continuous contact with suppliers.

Technology and quality risks

Masterflex Group tries to strengthen its market position by offering products and services that are internationally competitive.This requires continuous innovation and development in order to meet the demanding specifications of our customers. We also try to work closely with our customers, in order to tap into new applications and markets early.This often leads to innovative new business ideas that ideally become standard applications.

Masterflex, with its leading position in innovations and quality, is separated from its competitors by a wide margin. Quality assurance errors or developing products that are out of touch with the needs of the market reduce the chances of selling the product. High-quality products and services are not only a prerequisite for a steady stream of orders from customers, they also reduce the additional expenses caused by servicing warranty and damage claims.Targeted innovation and quality management are therefore a top priority.

IT risks

Appropriate IT systems are absolutely essential to running a business at our various locations. Inhouse and third-party experts therefore work constantly to optimize the decentralized systems we have set up to ensure information security.To protect against a possible disruption of operations due to external causes such as viruses penetrating the computer system, we categorically use the most up-to-date hard- and software components available on the market. An example of the technical protective measures we take is the application of up-to-date virus scanners and state-ofthe-art firewalls, as well as comprehensive access controls.

Legal risks

At present, we know of no legal disputes or threats that could have a material impact on the Group's financial situation. However, such risks cannot be categorically ruled out for the future.

Personnel risks

The performance of our employees is of utmost importance for the growth and development of our company.We compete with other companies for highly qualified specialists and executive staff. We do not see any issues worth mentioning that might pose a risk to filling specialist and executive positions in line with our growth objectives.

General statement on the Group's risk situation

There are no identifiable single risks that could endanger Masterflex AG's existence at present or in the foreseeable future or substantially impair the company's net assets, financial position and results. Nor is there any apparent threat to Masterflex AG from total sum of all risks.We believe that our core business of High-tech Hose Systems has a particularly solid foundation and that there are no material risks to its continued existence.There are three areas in which we cannot guarantee that there will not be any unforeseen developments. They would deprive Masterflex of significant development opportunities for the future but would not affect the Group's core business.

In the Medical Technology area, our subsidiary Angiokard Medizintechnik GmbH & Co. KG in Friedeburg previously focused solely on angiography kits.Towards the end of 2004, we decided to apply their expertise to a new business area; namely, surgery kits. Here we see a much greater market potential and chances for significantly higher earnings.The surgery kits business is still in the early stages of development.The wide range of possible applications means that this future market is not yet as clearly structured or well penetrated, making its development difficult to assess. If the economic success at Angiokard GmbH & Co. KG should unexpectedly not come about, an adjustment of the investment value might become necessary.
1. The fuel cell technology business unit has so far outperformed expectations.This particularly applies to the technological leadership we have achieved with various individual components and the overall system development. Market research to date has shown that, above all, the lack of infrastructure – i.e. the nationwide provision of hydrogen or filling stations – could make rapid market penetration difficult. Masterflex AG cannot provide such services. We are therefore focusing on "stand-alone solutions", i.e. a large number of applications within a manageable region for which we can supply hydrogen via external service providers.We already made great progress with this in 2005.
1. We expect to see significant opportunities in new business areas such as our LaryVent respiratory mask and hose coatings. If the expected successes failed to materialize, however, it would possibly be necessary to record the capitalized development expenses as a current expense.

V. Forecast report

Report on opportunities

Masterflex AG again continued to grow successfully in fiscal 2005. Revenue was higher for the eighteenth year in succession. Profits were also higher again, although growth was not as strong as in the preceding year. A Group EBIT margin of 14 percent positions us among the top-performing companies on the stock market. We are confident that Masterflex AG will continue to grow because we have identified a series of opportunities:

Polyurethane has a promising future

High-performance plastic products such as polyurethane are proving to be the key to developing-high quality applications. As other materials reach their limits, demand for these products is ever increasing. Polyurethane's versatility makes it one of these substances and experts assume the use of this multi-talented material will continue to grow. Because of their superior characteristics, polyurethane products are already being used more and more as a substitute for conventional materials such as PVC, rubber and steel.The success of our polyurethane High-tech Hose Systems in the United States, traditionally a PVC and rubber market, underlines this general trend. In Medical Technology also, polyurethane is being used more frequently because it fulfills the growing demands of doctors for the use of materials which do not contain plasticizers or have other potentially harmful substances. PUR can also be given antithrombogenic and antibacterial qualities without using additives that pose a risk to health.These characteristics are very important, particularly in the use, for example, of long-term indwelling catheters.

The innovative potential of polyurethane is further improved by the use of nanotechnology, which can increase the advantages of polyurethane compared with other materials and open up new areas of application. For example, polyurethane's non-stick and anti-microbic properties can be further enhanced. Our development department is working constantly on improving materials in this area, partly in cooperation with external institutions.

A head start through innovation

While many companies have reduced their budget for research and development over the past few years during the economic downturn in Germany, ongoing product innovations have been one of the most important pillars of Masterflex AG's success.These inventions and product enhancements have made the company a technology leader. In the field of high-tech hose systems, Masterflex has been acknowledged for years as a specialist for solving highly complex technical problems. Many of these innovations have now become standard industry solutions.

The high value Masterflex assigns to research and development can be seen from the numerous product innovations and the ongoing development and enhancement of materials, products, production and process technology that we have introduced to the market. Here it is worth mentioning the example of the first flame-retardant PUR hose for the lumber industry, the pipe bend with patented PUR inner coating for improved conveyance of bulk material, multi-lumen tubes for Medical Technology and the first electric bicycles powered by fuel cells.

Our expertise, demonstrated by numerous patents, extends across the entire supply chain; from the material itself and its further processing using internally developed equipment and production processes, through to our own field sales force.This combination of chemistry and engineering is the foundation of our success and is what makes our product range so exceptional. Our problem-solving expertise is reflected in the example of a hose that can cost up to EUR 3,500 per meter because of its sophistication.This type of highly specialized product has enabled us to become the recognized market leader in High-tech Hose Systems.

We have consistently transferred this principle of success to all our fields of business. We keep abreast of new scientific and technological developments on an ongoing basis and ally closely with reputable partners such as research institutions and universities, in order to guarantee the high standard of quality of our products in Medical Technology and fuel cell technology. Our first patents have shown that here too we are on the right track.

Focus on profitable, future-oriented niche markets

The core of our business strategy is to focus on highly profitable, future-oriented niche markets, where the quality of the products and their ability to solve problems is more important than price and volume. Some of our products are tailored to meet individual customers' needs. Our polyurethane material's versatility makes it suitable for a steady stream of new applications and hence additional market potential.

For years, this strategy has been bringing us stable revenue and earnings in our core business of High-tech Hose Systems. Our target markets are showing few signs of saturation, as the potential all over the world for replacing traditional materials such as PVC, rubber and steel is extremely large. Since we are not dependent on any particular customers or branches, our business is less susceptible to cyclical fluctuations.We are therefore able to compete even in difficult market conditions.

In Germany, Medical Technology is one of the few growth markets, despite the fact that the trend in the health sector is towards cost reduction and the introduction of diagnosis-related groups for hospitals, particularly in Germany. In our target markets, we can take advantage of this trend and offer products with genuine added value and a reliable basis for calculating costs. For example, our surgery kits optimize warehouse logistics and lead to significant reductions in the effort required to prepare for operations, because all the necessary items are supplied in a single sterilized kit. Our medical devices reduce the risks of thrombosis and infections so that the extra healing time due to post-procedure complications in the hospital is shortened, thereby lowering the costs.

We also specialize in solutions tailored to individual customers in the Mobile Office Systems sector.The continuing demand for notebooks and increasing industrialization, particularly in Asia, still offers considerable potential for growth. Added to this is DICOTA GmbH's consistent positioning as a premium supplier.

In fuel cell technology, experts agree that the first marketable solutions will become possible where an wide-area hydrogen infrastructure is not necessary. We can already see excellent opportunities for mobile energy supplies in the range of 25 to 1,000 watts, where a conventional portable power supply is either not possible or only at substantial expense, and where a hydrogen supply is already possible today as a stand-alone solution. Here, our fuel cell technology offers a real alternative that provides both sides with an economic solution.

With the awareness that fossil fuels are limited, experts think that fuel cell technology has the greatest future potential of solving the growing environmental and transport problems. Although the automotive industry has decided on vehicles powered by hydrogen fuel cells a broad market introduction will still take years because there are considerable technical problems to solve and a hydrogen supply infrastructure still has to be created. Masterflex AG is already one step ahead in this area. We are convinced that our fuel-cell-powered electric bike will be marketable much sooner.Together with external partners, we have succeeded in building up a hydrogen infrastructure as a stand-alone solution.The market for electric light vehicles is already a growth market and we give it even better chances for the future with the introduction of solutions using fuel cell power that clearly increase the range.This makes using electric bikes interesting from an economic point of view as well.

If these projects are successful, Masterflex AG may have a great opportunity, not only to move fuel cell technology a step forward, but also to establish another sustainable pillar for the company's future.

Acquisitions policy with a potential for synergy

Our acquisitions policy is strategically aimed at strengthening and expanding existing business areas. In addition, we always consider acquiring a company if its purchase would make a material contribution to the growth of the company.

Examples of this philosophy are the acquisition of Matzen & Timm GmbH in 2003. Because we were previously underrepresented in the aerospace industry, we resolved to round out our line of High-tech Hose Systems. Among other things, the traditional Hamburg company supplies the international aerospace industry with highly specialized products such as hoses and formed parts.

In fiscal 2005, we also acquired the SURPRO Group, a world leader in coated processes. Masterflex AG further strengthened its development group with this acquisition. We expect to see synergy effects in product development in the business units for Medical Technology, fuel cell technology and metallic coating of plastics.

When we take over a company, we also make sure that it has already reached a certain size, so that the cost of integration remains within a manageable range in accordance with our high accounting standards.The companies must also be market leaders in attractive niche areas and generate a profit.We do not entertain acquisitions without any measurable value added because we strive for quality growth. We are not interested in simply purchasing higher sales volumes without commensurate profits.

The successful growth of our company development impressively substantiates that we have understood how to recognize profit potential for years, even with our acquisitions.The development of DICOTA GmbH, which has been part of the corporate group since 2001, has been excellent, even though we are not satisfied with the course of the 2005 fiscal year.

Outlook

Our goal is to continue to successfully develop our company. Our future potential is great and our risks are manageable. Business conditions offer us an ideal basis for further growth, because our target markets are also growing.The PUR industry and Medical Technology are growing much faster than other industries and are distinguished by a series of innovations. Fuel cell technology is an upcoming industry that is receiving broad support from German and European politicians because of the energy problems of the future.

Business segments

High-tech Hose Systems

Over the next two years, we will strengthen our position as a system supplier even further; i.e., we will continue to develop hoses in combination with associated connecting elements for our High-tech Hose Systems. One area of focus will be on products for the food industry.

In 2006, we are aiming for further market penetration with our advanced product range, particularly in the United States and the Eastern European countries. We already made promising progress here in 2005. We will be present at numerous trade fairs (e.g. Hanover Trade Fair, AnugaFoodTech,WIN – World of Industry) in Germany and abroad and we will strengthen our contacts to local partners. Furthermore, we will continue to prepare to enter the Asian market over the next two years. As a first step, we are assuming that we will enter into cooperatives with domestic traders that have excellent market relationships. It is not our intention to establish production facilities in Asia right now.

Another promising project is the development of hoses with interior coatings of metal or ceramic as an alternative to conventional hoses or stainless steel pipes. In the course of 2005, we identified pioneer markets that offer us the best chances of successful development.These include the HVAC industry, Medical Technology, the pharmaceutical and clean-room industry and the varnish industry.The hoses will be presented in April at the Hanover Trade Fair and other specialized fairs. In addition, our target customers have received initial samples for testing.The first minor sales will already be generated in 2006. A broader market launch is planned for the 2007 fiscal year. At that point, the business should be able to carry itself and a break-even should be possible.

We are focusing on the market for light vehicles with our fuel cell projects. In 2005, we showed the prototype of a three-wheeled cargo taxi at the Hanover Trade Fair. We presented the close-to-production Cargobike at the end of April 2006 at the Hanover Trade Fair. For the next two years the production of Cargobikes for the EU HYCHAIN Minitrans project will be at the forefront of our activities. In parallel, we will move forward with the marketing of our fuel-cellpowered bicycle fleets. We have already had requests from inside and outside the country.The first fleet will be shipped to the city of Herten in the spring of 2006.We expect the first contributions to revenue from fuel cell technology in 2006 and 2007. In conjunction with these budgeted figures, however, we must consider that we are dependent upon our partners to make a hydrogen supply available along with the appropriate storage technology. Delays are therefore possible.

We are convinced that the market for light vehicles is a pioneer market for fuel cells.The nation-wide provision of hydrogen is not an absolute prerequisite for this market to function because a local infrastructure of stand-alone solutions enables already commercial applications.The first order for the bicycle fleet and the HYCHAIN project both support this conviction. We have therefore stopped work on the development of fuel cells for the operation of Mobile Office Systems.The notebook market is a billion euro market; the provision of hydrogen will therefore be much more complex and be subject to much stricter specifications. At present, neither Masterflex AG nor its cooperation partners can provide this infrastructure.

For the business segment of high-tech hose systems in the fiscal year 2006 we are anticipating revenues of EUR 37.8 to 41.4 million and earnings before taxes of EUR 8.9 to 10.8 million. Our EBIT margin thus continues to be at a record level.We are expecting this trend to continue in 2007.

Mobile Office Systems

The change in tactics in fuel cell technology has resulted in a strategic reevaluation of DICOTA GmbH. DICOTA was acquired in 2001 because the Board of Masterflex AG considered the company to be an ideal distribution channel for fuel cell technology. The project got off to a promising start: At the time Masterflex AG presented a mobile office system with an integrated fuel cell that supplied the notebook with power for over 50 hours. Since we are now concentrating our development work on the area of light vehicles, there are no longer any synergy effects between DICOTA GmbH and other corporate areas of Masterflex AG, in particular with our core business area of high-tech hose systems. We are currently evaluating whether DICOTA GmbH should remain within our corporate group.This decision should be made during the course of the 2006 fiscal year.

DICOTA GmbH continues to be a part of the forecasts in our quantitative outlook. In our view, the notebook market collapse that was the major cause of the drop in profits at DICOTA GmbH was only temporary.We are therefore assuming that revenue will rise in 2006 up to EUR 34.6 to 37.4 million and that profits will be up to EUR 3.8 to 4.1 million.

Medical Technology

Medical Technology recorded positive earnings in 2005. We want to continue and improve on this successful development in the next two years. In Medical Technology in 2006 and 2007 we plan to continue to tap the growing market for surgery kits. Medic Health Care GmbH should become established as a brand name for surgery kits. Our business activities will focus on measures to increase market recognition in Germany and abroad and the development of innovative kits.

When the final design changes have been made to LaryVent to improve its competitiveness, we will introduce our internationally patented breathing mask to the market.

In the Medical Technology segment we are anticipating revenue for the fiscal year 2006 of EUR 18.4 to 20.1 million and growth in earnings before taxes at a rate of factor 15 to 25. Over the next two years, we are forecasting a continuous rise in our EBIT margin. Our medium-term goal is to reach an EBIT margin of 5 to 7 percent, which would be excellent for Medical Technology.

Advanced Material Design

We see good opportunities to increase revenue and earnings in the Advanced Material Design segment in 2006.

Our new subsidiary, SURPRO, is a specialist in surface technology and a market leader in metallic coating. We will be relying on SURPRO's competency for our new developments in high-tech hose systems and Medical Technology and launching cooperative development projects such as coating connecting systems. SURPRO is a profitable company and, as a specialist, has an excellent market position. We are estimating that revenue and earnings performance trend will continue in the double-digit range over the next two years.

Overall, we are anticipating in the current fiscal year revenue in the Advanced Material Design segment of between EUR 16.0 to 18.7 million and earnings before taxes of between EUR 1.8 to 2.1 million.This results in an excellent EBIT margin of around 10 to 13 percent.

Overall group

In our estimation, conditions for the group's continued successful development are outstanding. We look to the future with optimism, as we see considerable potential for further growth in all our fields of business.

Operative and value-driven growth will continue to take precedence over pure growth in revenue in our successful corporate development. We will therefore always align measures for penetrating the market faster with this strategic goal.

Our most important strategic goal for the next few years is to expand and strengthen our technological leadership in all business fields. Masterflex AG wants to become the recognized specialist for sophisticated system solutions of the highest technical quality. In areas where we are already the technology leader, we will continue to develop new opportunities with product innovations, as well as furthering our international expansion.

We want to extend our dynamic growth in the 2006 fiscal year by increasing consolidated revenue between 20 and 30 percent and raising consolidated EBIT between 10 and 20 percent. In the next few years, revenue should increase at a double-digit rate and the profit situation should at least remain stable, so that we should be able to keep the EBIT margin at its excellent twodigit level.

40 60 80 100 2006* -114.1 2005 87.8 2004 75.8 Consolidated EBIT forecast EUR millions

EUR millions

105.3

Forecast for consolidated revenue

*estimated

120

Our investment policy has two clear goals: Our creative and committed employees, who develop products of the highest quality, are our most important capital. Investments in employee development and product innovations thus continue to be a top priority.This company strategy is accompanied by a concept that places Masterflex AG on solid financial ground. When planning the financing of new production and warehouse facilities, we continue to pay attention to an appropriate balance between loan capital and shareholder's equity when considering capital expenditures. In other words, we keep our equity ratio above 30 percent over the long term.

Finally, we will continue to share the success of the corporation with our shareholders by paying a dividend, as long as the profits we have made are not needed to expand our business activities.

Consolidated Balance Sheet

Assets	December 31, 2005	December 31, 2004
	EUR thou.	EUR thou.
A. Noncurrent assets
I. Intangible assets	32,716	23,258
II. Property, plant and equipment	23,221	17,221
III. Long-term investments	1,315	2,391
IV. Deferred tax assets	709	394
	57,961	43,264
B. Current assets
I. Inventories	20,573	13,569
II. Prepaid expenses	743	639
III. Trade accounts and notes receivable	13,660	12,189
IV. Securities	0	9,500
V. Cash and bank balances	4,895	8,098
	39,871	43,995
	97,832	87,259

	Equity and liabilities	December 31, 2005 EUR thou.	December 31, 2004 EUR thou.
A.	Shareholders' equity
I.	Consolidated equity	30,606	28,039
II.	Minority interest	434	809
	Total equity	31,040	28,848
B.	Noncurrent liabilities
I.	Provisions	1,289	292
II.	Financial liabilities	25,783	26,967
III.	Deferred income	2,616	2,606
IV.	Other noncurrent liabilities	3,016	3,280
V.	Deferred tax liabilities	2,444	1,588
C.	Current liabilities	35,148	34,733
1.	Provisions	4,504	4,419
II.	Financial liabilities	14,327	4,198
III.	Deferred income	233	243
IV.	Other current liabilities	12,580	14,818
		31,644	23,678
		97,832	87,259

Consolidated Income Statement

		December 31, 2005	December 31, 2004
		EUR thou.	EUR thou.
1.	Revenue	87,773	75,752
2.	Changes in inventories of
	finished goods and work in progress	1,164	406
3.	Work performed by the enterprise and capitalized	1,066	903
4.	Other operating income	4,203	2,777
		94,206	79,838
5.	Cost of materials
	Cost of raw materials and consumables used
	and of goods purchased and held for resale	-38,072	-32,810
	Cost of purchased services	-2,565	-1,503
		-40,637	-34,313
6.	Staff costs
	Wages and salaries	-17,635	-14,839
	Social security contributions, retirement
	and other benefit costs	-3,674	-2,699
		-21,309	-17,538

7.	Depreciation and amortization expense	-2,321	-2,991

8.	Other operating expenses	-17,676	-14,443
9.	Income from investments	14	13
10.	Other interest and similar income	501	326
11.	Write-down of current securities	-662	0
12.	Interest and similar expenses	-2,397	-1,469
13.	Net profit from ordinary activities	9,719	9,423
14.	Income tax expense	-3,655	-2,814
15.	Deferred taxes	340	-118
16.	Other taxes	-246	-198
17.	Income attributable to minority interests	-193	-351
18.	Net profit for the period	5,965	5,942

Consolidated Statement of Changes in Equity

	Issued	Share	Retained	Revaluation	Exchange	Minority	Total
	capital	premium	earnings	reserve	differences	interest
			(retained
			profits brought
			forward)
	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.
Equity at Dec. 31, 2003	4,498	20,663	5,247	-559	-1,035	1,969	30,783
According to IAS 8	0	0	-1,600	0	0	-1,520	-3,120
Net profit/ minority
interest in earnings	0	0	6,830	0	0	351	7,181
Changes in fair values of
financial instruments	0	0	0	-112	0	0	-112
Currency translation gains/losses
from translation of foreign
financial statements	0	0	0	0	-545	0	-545
Sale of treasury shares	65	1,610	0	0	0	0	1,675
Purchase of own shares	-152	-3,754	-245	0	0	0	-4,151
Dividend distributions	0	0	-2,700	0	0	-100	-2,800
Other changes	0	0	-172	0	0	109	-63
Equity at Dec. 31, 2004	4,411	18,519	7,360	-671	-1,580	809	28,848
Net profit/ minority
interest in earnings	0	0	5,965	0	0	193	6,158
Changes in fair values of
financial instruments	0	0	0	167	0	0	167
Currency translation gains/losses
from translation of foreign
financial statements	0	0	0	0	1,008	0	1,008
Sale of treasury shares	50	1,200	204	0	0	0	1,454
Purchase of own shares	-95	-2,198	-308	0	0	0	-2,601
Dividend distributions	0	0	-3,498	0	0	-120	-3,618
Change due to
equity decreases	0	0	0	0	0	-448	-448
Other changes	0	0	72	0	0	0	72
Equity at Dec. 31, 2005	4,366	17,521	9,795	-504	-572	434	31,040

Consolidated Cash Flow Statement

	2005 EUR thou.	2004 EUR thou.
Net profit for the period	5,965	5,942
Depreciation and amortization expense	2,321	2,991
Change in provisions	1,082	1,253
Other non-cash expenses/income and
gain/loss on disposal of noncurrent assets	-1,027	-569
Changes in inventories, trade receivables and other assets	-3,768	-4,061
Changes in trade payables and other equity and liabilities	-1,903	-224
Net cash from operating activities	2,670	5,332
Proceeds from asset disposals	1,842	837
Payments to acquire noncurrent assets	-13,757	-2,704
Payments to acquire consolidated subsidiaries	-7,922	-1.194
Net cash used in investing activities	-19,837	-3,061
Proceeds from additions to equity
(capital increases, sales of treasury shares)	1,454	1,675
Dividends paid to owners and minority interests
(dividends, acquisition of treasury shares)	-6,672	-6,843
Proceeds from securities/term deposits	9,500	0
Payments to acquire securities/term deposits	0	-9,500
Proceeds from finance facilities raised	12,938	23,077
Repayment of borrowings	-4,264	-5,631
Net cash from/used in financing activities	12,956	2,778
Net change in cash and cash equivalents	-4,211	5,049
Changes in cash and cash equivalents
due to exchange rates and other factors	1,008	-545
Cash and cash equivalents at beginning of period	8,098	3,594
Cash and cash equivalents at end of period	4,895	8,098

Notes to the Annual Financial Statements

Basis of presentation The consolidated financial statements of Masterflex AG were prepared in accordance with the standards published by the International Accounting Standards Board (IASB), London. According to section 315a of the Handelsgesetzbuch (HGB – German Commercial Code), the preparation of consolidated financial statements in accordance with the IFRSs (International Financial Reporting Standards) exempts the Company from its duty to prepare consolidated financial statements in accordance with the provisions of German commercial law.

The single-entity financial statements for of the companies included in the consolidation (see Note 4), which were prepared in accordance with national accounting standards, were adjusted to comply with the IFRSs. In the 2005 fiscal year, the necessary changes mainly relate to the measurement of noncurrent assets, including an assessment of whether leased assets must be capitalized, the recognition of internally generated intangible assets, fair value measurement of derivatives, the recognition of deferred tax assets from tax loss carryforwards, the measurement of deferred tax assets and liabilities arising from temporary differences, the accounting for treasury shares, currency translation including the treatment of currency translation differences, the amortization to the income statement of investment grants and subsidies received, the recognition directly in equity of changes in the fair value of available-for-sale noncurrent financial instruments, and the recognition directly in equity of specific current and deferred income tax assets and liabilities.

The single-entity financial statements of the companies included in the consolidated financial statements are prepared as of the reporting date for the consolidated financial statements.

Comparability DICOTA France SARL (France), SUR-PRO Verwaltungsgesellschaft mbH, SURPRO Oberflächenbeschichtungs- und Beratungszentrum GmbH, SURPRO Metalltechnik GmbH, TEKOV-SURPRO s.r.o. (Czech Republic) und Masterflex Brennstoffzellentechnik GmbH were newly included in the consolidated Group in the year under review. SURPRO Oberflächenbeschichtungs- und Beratungszentrum GmbH, SURPRO Metalltechnik GmbH are wholly-owned subsidiaries of SURPRO Verwaltungsgesellschaft mbH (see Note 4).

By contract dated February 18, 2005, Masterflex AG acquired the remaining 30 percent of the nominal capital of Novoplast Schlauchtechnik GmbH for EUR 820 thousand plus EUR 32 thousand of incidental expenses attributable to the acquisition.The shares in the nominal capital correspond to the voting rights.The purchase price was paid in cash. In connection with the purchase price allocation as of the dates of the successive acquisition of shares, adjustments totaling EUR 162 thousand were applied to non-current assets, which exceeded the carrying amount of EUR 4,568 thousand. Accruals of deferred taxes were increased accordingly. A positive difference of EUR 462 thousand remaining after the purchase price allocation was recognized as goodwill.The portion of net profit for the year in 2005 attributable to minority interests in the 2005 financial year totals EUR 18 thousand.

By contract dated February 10, 2005, Masterflex AG acquired the remaining 49.98 percent of the nominal capital of EUR 250 thousand of DICOTA GmbH for EUR 7,400 thousand plus EUR 13 thousand of incidental expenses attributable to the acquisition.The shares in the nominal capital correspond to the voting rights.The purchase price was paid in cash. A purchase price allocation according to IFRS 3 was not applied, since the transaction involved the exercise of a share purchase option, which led to a correction of an error in accordance with IAS 8. In accordance with the provisions of the partnership agreement, the net profit for the 2005 financial year was already fully allocated to Masterflex AG. In addition to the purchase price paid, a possible purchase price adjustment was agreed, contingent upon the future earnings performance of the company in the 2005 and 2006 fiscal years.

By contract dated February 10, 2005, DICOTA GmbH similarly acquired 100 percent of the nominal capital of EUR 50 thousand of DICOTA GmbH for EUR 50 thousand.The shares in the nominal capital correspond to the voting rights.The purchase price was paid in cash. In connection with the purchase price allocation at the time of the acquisition of the shares the assets and liabilities accounted for were recognized at their previous carrying amounts; no adjustments were applied. The full amount of the positive difference of EUR 684 thousand resulting under merger accounting was recognized as goodwill.The portion of net profits for 2005 year attributable to the seller in the 2005 financial year was omitted as immaterial.

By contract dated August 16, 2005, Masterflex AG acquired 100 percent of the nominal capital of EUR 25 thousand of SUPRO Verwaltungs GmbH for EUR 25 thousand plus EUR 5 thousand of incidental expenses attributable to the acquisition.The shares in the nominal capital correspond to the voting rights.The purchase price was paid in cash. By notarial instrument dated August 18, 2005, Masterflex AG – via SURPRO Verwaltungs GmbH – acquired 100 percent of the respective nominal capital in each of SURPRO Oberflächenbeschichtungs- und Beratungszentrum GmbH, SURPRO Metalltechnik GmbH and TEKOV-SURPRO s.r.o. (Czech Republic).The shares in the nominal capital correspond to the voting rights.The purchase price in the amount of EUR 8,637 thousand was paid in cash.The incidental expenses attributable to the acquisition totaled EUR 354 thousand. A possible purchase price adjustment was taken into consideration. In connection with the purchase price allocation on the dates of the initial consolidation, adjustments totaling EUR 2,965 thousand were applied to non-current assets including capitalized leased assets, which exceeded the relevant carrying amount of EUR 1,636 thousand. Further valuation adjustments were applied in the area of (non-current) provisions for pensions, which exceeded the carrying amount of EUR 888 thousand by EUR 513 thousand, and in the area of non-current liabilities, which increased the carrying amount of EUR 385 thousand by EUR 452 thousand. Accruals of deferred taxes were increased accordingly. A positive difference of EUR 6,478 thousand remaining after the purchase price allocation was recognized as goodwill. In 2005, the SUPRO group as a sub-group, generated sales of EUR 11,305 thousand, which were incorporated into the consolidated financial statements of Masterflex AG in an amount of EUR 6,234 thousand.The 2005 net profit of the SUPRO sub-group according to IFRS totaled EUR 728 thousand (estimate due to extrapolation), of an amount of which EUR 928 thousand was incorporated into the consolidated net profit.

Masterflex Brennstoffzellentechnik was formed on December 16, 2005 and commenced operations in early 2006.

3. Consolidation methods

Purchase accounting As part of purchase accounting, acquired entities over which the Company has a controlling influence are consolidated. Entities acquired up until March 31, 2004 are consolidated in accordance with IAS 22/27. Acquisitions from March 31, 2004 onwards are consolidated in accordance with the new IFRS 3 Business Combinations.The Company has decided against a limited retrospective application of IFRS 3 to past business combinations.

Under this method, the cost of the equity interest acquired is offset against the acquirer's interest in the equity of the subsidiary remeasured as of the acquisition date. Any excess of the purchase price over the net assets acquired is recognized as goodwill. Any excess of the interest in the net assets acquired over the purchase price (negative goodwill) is recognized immediately as income and reported under other operating income.

In each case, the amount recognized for the equity investment and the remeasured equity of the subsidiaries as of the actual acquisition date were used as the basis for determining the amount of goodwill.

Due to the adoption of IFRS 3, Business Combinations, in conjunction with IAS 36, Impairment of Assets, and IAS 38, Intangible Assets, the company has ceased to amortize goodwill effective January 1, 2005.

Minority interests in the equity of the subsidiaries are recognized as of the closing dates and presented as a Minority interest caption under equity.This also reflects the fact that, in accordance with the IFRSs, losses can only be attributed to shareholders to the extent that this does not result in a negative equity interest on the part of the other shareholders in the subsidiaries concerned. In accordance with IFRS, minority interests in consolidated net profit were reported separately in the income statement, before consolidated net profit for the year.

Consolidation of intercompany balances During the consolidation of intercompany liabilities, receivables and payables between companies included in consolidation were eliminated.

Interim profits Interim profits were eliminated in the fiscal year.

Consolidation of income and expense During the consolidation of income and expense, intragroup revenue and other intragroup income were eliminated or offset against the relevant expenses.

All companies included in the consolidated income statements were included for a period of 12 months with the exception of the equity investment in DICOTA France SARL, which has been included in the consolidated group as of February 10, 2005, the equity investment in SUR-PRO Verwaltungsgesellschaft mbH GmbH, which has been included in the consolidated Group as of August 16, 2005, the equity investments in SURPRO Oberflächenbeschichtungs- und Beratungszentrum GmbH, SURPRO Metalltechnik GmbH and TEKOV-SURPRO s.r.o. (Czech Republic), which have been included in the Consolidated Group as of August 18, 2005, as well as Masterflex Brennstoffzellentechnik GmbH, which has been included in the consolidated Group as of December 16, 2005.

Translation of financial statements prepared in foreign currencies The balance sheet items in the consolidated financial statements are translated at the closing rate, while the income statement items of foreign consolidated subsidiaries are translated at the average exchange rate for the fiscal year.The equity of the subsidiaries was translated at historical rates (modified closing rate method). Currency translation differences were recognized directly in equity.

Consolidated Group In addition to Masterflex AG, the parent company, the consolidated Group comprises the domestic and foreign companies listed below.

Compared with the previous year, the consolidated Group has expanded to include DICOTA France SARL, SURPRO Verwaltungsgesellschaft mbH, SURPRO Oberflächenbeschichtungs- und Beratungszentrum GmbH, SURPRO Metalltechnik GmbH, TEKOV-SURPRO s.r.o. (Czech Republic) and Masterflex Brennstoffzellentechnik GmbH.

The dates of acquiring control over, and thus the dates of incorporation into the consolidated financial statements of, the above-referenced subsidiaries correspond to the respective contract signing dates.

Novoplast Schlauchtechnik GmbH produces and markets high-tech hose and connecting systems made of a variety of advanced plastics for industrial and medical applications.

Masterflex SARL and Masterflex Technical Hoses Ltd. produce and distribute high-tech hose and connecting systems for industrial applications in France/Southern Europe and Great Britain respectively.

Flexmaster USA, Inc. operates in the North American market as a manufacturer of air conditioning and ventilation hoses.

Masterduct Inc. is a wholly-owned subsidiary of Flexmaster USA, Inc. and is based in Houston (USA).The company produces and distributes special high-tech hose systems for industrial applications.

Masterflex Bulgaria Eood exclusively manufactures certain types of high-tech hose, which are then distributed via Group companies.

Techno Handelsgesellschaft mbH distributes special hightech hose systems for tunnel building and bridge construction.

Matzen & Timm GmbH produces and distributes special high-temperature hoses for the aerospace, automotive and engineering industries.

Angiokard Medizintechnik GmbH & Co. KG produces and distributes medical products, and in particular treatment sets for use in the areas of cardiology, radiology and anesthesia.

Angiokard BV is a wholly-owned subsidiary of Angiokard Medizintechnik GmbH & Co. KG. and distributes medical products.

Fleima-Plastic GmbH is a wholly-owned subsidiary of Angiokard Medizintechnik GmbH & Co. KG.This company produces and distributes advanced injection molded parts made of plastic for use in medical technology applications.

Medic Health Care GmbH is a wholly-owned subsidiary of Angiokard Medizintechnik GmbH & Co. KG and distributes medical products, in particular surgery kits. DICOTA GmbH is one of the leading suppliers of mobile office systems in Europe and Asia. It is the parent of a subgroup encompassing five second-tier subsidiaries in the above regions.

DICOTA Asia Ltd. is a wholly-owned subsidiary of DI-COTA GmbH and distributes mobile office systems in Asia.

DICOTA Far East Ltd. is a wholly-owned subsidiary of DICOTA GmbH and distributes mobile office systems in China.

DICOTA Eastern Europe s.r.o. is a 75% subsidiary of DI-COTA GmbH and distributes mobile office systems in eastern Europe.

DICOTA UK Ltd. is a wholly-owned subsidiary of DICO-TA GmbH and distributes mobile office systems in Great Britain.

DICOTA France SARL is a wholly owned subsidiary of DICOTA GmbH and distributes mobile office systems in France.

Subra International Ltd. is a wholly-owned subsidiary of DICOTA GmbH and operates as a buyer of mobile office systems for the DICOTA companies.

SURPRO Verwaltungsgesellschaft mbH is the parent of a subgroup, holding and managing the equity investments in the entities SURPRO Oberflächenbeschichtungs- und Beratungszentrum GmbH, SURPRO Metalltechnik GmbH and TEKOV-SURPRO s.r.o. (Czech Republic).

SURPRO Oberflächenbeschichtungs- und Beratungszentrum GmbH is a wholly owned subsidiary of SURPRO Verwaltungsgesellschaft mbH that produces and distributes superior metal-working products and inert metal coatings.

SURPRO Metalltechnik GmbH is a wholly owned subsidiary of SURPRO Verwaltungsgesellschaft mbH that produces and distributes superior metal-working products and inert metal coatings.

TEKOV SURPRO s.r.o. is a wholly owned indirect subsidiary of SURPRO Verwaltungsgesellschaft mbH, producing and distributing superior metal-working products. Masterflex Brennstoffzellentechnik GmbH is a wholly owned subsidiary of Masterflex AG that develops, produces and distributes fuel cell systems and allied technologies.

The subsidiaries named above and listed in the following table were fully consolidated as of December 31, 2005:

The Group structure is as follows:

Name	Domicile		Interest held
			by Masterflex (%)
Novoplast Schlauchtechnik GmbH	D	Halberstadt	100
Masterflex SARL	F	Beligneux	80
Masterflex Technical Hoses Ltd.	GB	Oldham	100
Flexmaster USA, Inc.*		USA Houston	100
· Masterduct Inc.		USA Houston	100*
Masterflex Bulgaria Eood	BG	Sofia	100
TECHNO Handelsgesellschaft mbH	D	Bochum	100
Matzen & Timm GmbH	D	Hamburg	100
Angiokard Medizintechnik Beteiligungs GmbH	D	Friedeburg	100
Angiokard Medizintechnik GmbH & Co. KG*	D	Friedeburg	100
· Angiokard B.V.	NL	Hillegom	100*
· Fleima-Plastic GmbH	D	Mörlenbach	100*
· Medic Health Care GmbH	D	Friedeburg	100*
DICOTA GmbH*	D	Bietigheim-Bissingen	100
· DICOTA Asia Ltd.		SGP Singapur	100*
· DICOTA Far East Ltd.		VRC Hong Kong	100*
· DICOTA Eastern Europe s.r.o.	CZ	Prag	75*
· DICOTA UK Ltd.	GB	London	100*
· Subra International Ltd.		VRC Hong Kong	100*
· DICOTA France SARL	F	Paris	100*
SURPRO Verwaltungsgesellschaft mbH*	D	Gelsenkirchen	100
· SURPRO Oberflächenbearbeitungs- und Beratungszentrum GmbH	D	Wilster	100*
· SURPRO Metalltechnik GmbH	D	Wilster	100*
· TEKOV-SURPRO s.r.o	CZ	Plana	100*
Masterflex Brennstoffzellentechnik GmbH	D	Gelsenkirchen	100

*) = Subgroup

The companies all prepared their financial statements as of December 31.

Accounting policies For the fiscal year starting January 1, 2005, the Consolidated Financial Statements are presented in accordance with IAS 1 (2004). With respect to deferred taxes as well as Group-specific items related to the presentation of equity, the above-referenced provisions were supplemented by the corresponding IFRS requirements. With respect to equity, this relates in particular to unrealized gains and losses on non–current financial assets, which are recognized as a separate item under equity in accordance with IAS 39. Internal development costs are reported separately as part of noncurrent assets.

The income statement in accordance with IFRS was prepared according to the total cost method and classified in accordance with IAS 1. In addition, the deferred taxes and minority interests are reported separately.

a) Currency translation

Currency translation Transactions denominated in foreign currencies were translated into the relevant local currency at the rate prevailing on the transaction date ties denominated in foreign currency are translated in all cases at the closing rate as of December 31.

Translation of financial statements prepared in foreign currencies The balance sheets and income statements of consolidated foreign subsidiaries are translated into euros (EUR) on the basis of the functional currency concept of IAS 21.The subsidiaries are foreign entities as defined by IAS 21.

With the exception of equity, all balance sheet items are translated at the closing rate at the balance sheet date:

Dec. 31, 2005	EUR
1 pound sterling (£)	1.4548
1 US dollar (\$)	0.8451
1 Bulgarian lev (LEV)	0.5113

Equity is translated at historical rates. Income and expense items in the income statement, including the net profit for the period, are translated at the average rate for the year:

EUR
1.4601
0.8015
0.5113

Currency translation differences are recognized directly in equity as currency translation adjustments.

Foreign currency hedges Loans to finance a foreign equity investment were taken out in the local currency. In accordance with IAS 21, the resulting translation differences are recognized directly in equity. In accordance with IAS 12, related taxes were also recognized directly in equity.

In the mobile office systems segment, currency risks were hedged by purchasing USD. Derivatives are carried at fair value.

b) Effect of tax rules In accordance with IFRS, carrying amounts adopted solely for tax purposes are not recognized in the consolidated financial statements.

c) Intangible assets Intangible assets consist of goodwill from two individual companies and from business combinations, purchased software and licenses, as well as internally generated intangible assets to be accounted for in accordance with IAS 38. In accordance with IFRS 3, goodwill was amortized over 20 years until December 31, 2004, if the companies were included in the consolidated Group on March 31, 2004. As of January 1, 2005, goodwill is tested for impairment and only impairment losses are recognized.This treatment applies to companies that were acquired on or after March 31, 2004. Software is recognized at cost and amortized over a useful life of four years using the straight-line method. Licenses are also capitalized at cost and amortized over their individual useful lives using the straight-line method.

The costs recognized for internally generated intangible assets are the costs incurred between the date when technological feasibility and the probable economic benefit of the asset concerned are established and the completion date of the development phase.The assets are amortized from the date of completion over their expected useful life using the straight-line method.

Research and development costs that do not meet the criteria for capitalization under IAS 38 are expensed as incurred.

d) Property, plant and equipment Property, plant and equipment are carried at cost and depreciated over their expected useful lives using the straight-line method.The cost of production of internally produced plant and equipment comprises all specific costs directly attributable to the asset. Borrowing costs are not capitalized. No write-downs were taken. Gains or losses from the disposal of noncurrent assets are reported in other operating income or expenses.

If property, plant and equipment are the subject of a finance lease as defined by IAS 17, they are capitalized at the present value of the minimum lease payments.The corresponding payment obligations from future lease payments are recognized as liabilities.

e) Useful lives Amortization and depreciation of intangible assets and property, plant and equipment are based on the following useful lives:

	Useful life	Depreciation/ amortization method
Software	4 years	straight-line
Licenses and	over contractual
similar rights	period	straight-line
Buildings	10 – 50 years	straight-line
Plant and machinery	2 – 18 years	straight-line
Other equipment,
office and operating
equipment	2 – 10 years	straight-line

As of January 1, 2005, goodwill is no longer amortized and is instead subjected to an impairment test in accordance with IFRS 3, which may result in the recognition of impairment losses if appropriate.

f)Noncurrent financial assets Noncurrent financial instruments are classified as available for sale in accordance with IAS 39.The securities are measured at the quoted market price at the balance sheet date. Unrealized gains and losses net of any income tax effects are recognized directly in equity in a separate Revaluation reserve account.

g) Inventories Inventories comprise raw materials and consumables, finished goods, work in progress and goods purchased and held for resale.These are carried at cost. The production cost includes both direct costs and appropriate indirect material and production costs. Borrowing costs are not recognized as a component of cost. Appropriate write-downs were taken for inventory risks resulting from excessive storage periods or impaired marketability.

h) Trade receivables Trade receivables are recognized at their principal amount and measured after adjustment for all identifiable risks. Specific allowances for doubtful accounts were charged against individual trade receivables.

i) Other current assets Other current assets are generally recognized at their principal amount. Matching claims for recovery against third parties relating to negative fair values of derivative financial instruments are measured at fair value.

j) Other securities The financial assets carried in the prior year under Other securities are classified as available for sale in accordance with IAS 32 and IAS 39.The fair value corresponds to cost.

k) Cash and cash equivalents Cash and cash equivalents chiefly consist of bank balances, cash and checks not yet credited, and are recognized at their principal amount. Cash denominated in foreign currencies is translated at the closing rate.

l) Leases Masterflex AG leases production and warehousing facilities as well as its administrative buildings under a property lease.The contract, dated March 30, 1993 and entered into with the lessor MODICA Grundstücks-Vermietungsgesellschaft mbH & Co. Objekt Masterflex KG, Gelsenkirchen, was drafted in such a way that substantially all the risks and rewards incidental to ownership of the leased assets were passed to Masterflex AG. Masterflex AG is entitled to exercise a notarized right of purchase for the first time on July 31, 2014.The lease is treated as a finance lease as defined by IAS 17.The lessor retains legal title.

The properties that are subject to the lease are capitalized at fair value or at the lower present value of the minimum lease payments and – to the extent that they involve buildings – depreciated over the course of their customary useful lives using the straight-line method.

m) Prepaid expenses Prepaid expenses were recognized for expenditures representing expenses for subsequent periods.The main item is the discount on a borrower' note loan.

n) Provisions for taxes In the case of German companies, provisions for taxes comprise outstanding obligations in relation to trade tax, corporate income tax and the solidarity surcharge. In the case of the foreign companies included in the consolidation, they encompass the comparable foreign taxes. Measurement reflects the expected tax liability.

o) Other provisions In accordance with IAS 37, other provisions are recognized for legal or constructive obligations arising from past events, the settlement of which is expected to result in an outflow from the Group of resources embodying economic benefits, and where a reliable estimate can be made of the amount of the obligation. In accordance with IAS 37, other provisions comprise all identifiable obligations to third parties. Offsetting claims for reimbursement are taken into account by recognizing a corresponding asset.The amount recognized as provisions is the best estimate of the expenditure required to settle the obligation. No discounts were applied for reasons of materiality.

p) Financial liabilities Liabilities vis-à-vis financial institutions are recognized at their settlement or redemption amount and are classified as financial liabilities.

q) Trade payables Trade payables are recognized at their redemption amount and are classified as other current liabilities.

r) Other liabilities Other liabilities are carried at their redemption amount. Liabilities from finance leases are recognized at the present value of the minimum lease payments.

s) Revenue recognition Income for a fiscal year is recognized – irrespective of the payment date – when it has been realized. Income from the sale of goods, merchandise and services is treated as having been realized when the service owed has been provided and the risk has passed to the buyer. Revenue is recognized net of returns, discounts and rebates.

t) Borrowing costs Borrowing costs are expensed in the period in which they are incurred.

u) Financial instruments The financial instruments recorded on the balance sheet of Masterflex AG comprise in particular cash and cash equivalents, available-for-sale securities, trade receivables, trade payables, and bank loans and overdrafts. Financial instruments held for trading, and in particular derivatives, are carried at fair value, with any changes in fair value being recognized in income. Available-for-sale securities are carried at fair value, with unrealized market value gains and losses recognized separately in equity in the Revaluation reserve item.The Board classifies the financial instruments at the time of their acquisition and reviews this classification at every balance sheet date. Securities held by the Group are reported under both noncurrent financial assets and current assets.

There are no material deviations between the carrying amounts and the fair values for any of the other recognized financial instruments.The Group holds cash and cash equivalents at a number of financial institutions and focuses in its risk management strategy on minimizing its dependence on any single financial institution. Financial risk relating to customers is monitored via ongoing credit checks on customers.

There are no material default risks in excess of the carrying amount of the financial assets.

v) Deferred taxes In accordance with IAS 12, deferred tax assets and liabilities are recognized according to the liability method for temporary differences between the carrying amounts in the IFRS financial statements and the tax base under national law of the companies included in consolidation (temporary differences). Deferred taxes are recognized on the probable amount of tax payable or recoverable in future fiscal years. Where German companies are concerned, the measurement covers trade tax, corporation tax and the solidarity surcharge.

Deferred tax assets relating to existing loss carryforwards at individual Group companies are recognized to the extent that it is probable according to projections that the companies concerned will generate sufficient future taxable profits.The measurement is based on the tax rate of the Group company concerned.

Deferred tax assets and liabilities are offset where they relate to the same fiscal authority.

w) Deferred income In accordance with IAS 20 (Accounting for Government Grants and Disclosure of Government Assistance), government investment grants are recognized as deferred income and reversed to income over the life of the asset. IAS 20 does not allow such grants to be recognized immediately as income.

x) Stock options program The company stock options program (see also Note 22, Equity) is not reflected on the balance sheet or in the income statement for the fiscal year, since no options could be exercised in 2005 and all options expired 2005.

y) Estimates and assumptions Preparation of the consolidated financial statements in accordance with IFRS requires management to makeassumptions and estimates in relation to a number of items, affecting the carrying amounts on the consolidated balance sheet and the income statement. Actual amounts may differ from these estimates and assumptions.

Cash flow statement The consolidated cash flow statement has been prepared in accordance with IAS 7 (Cash Flow Statements). It is broken down into cash flows from operating, investing and financing activities. The cash and cash equivalents disclosed in the cash flow statement correspond to the balance sheet item Cash in hand and other bank balances; interest and income tax payments are included in cashflow from operating activities in the following amounts:

	2005	2004
	EUR thou.	EUR thou.
Interest received	501	326
Interest paid	2,397	1,469
Income taxes paid	3,655	2,814

The formation of Masterflex Brennstoffzellentechnik GmbH did not lead to any material cash outflows or inflows. DICOTA France SARL was acquired by DICOTA GmbH by the purchase of shares.The value of the acquired net assets amounted to EUR -372 thousand.The net assets at the date of acquisition comprised noncurrent assets of EUR 2 thousand and current assets of EUR 315 thousand less provisions and liabilities of EUR 689 thousand. Other assets included acquired cash and cashequivalents totaling EUR 47 thousand which were deducted from the cost of acquisition of EUR 50 thousand. The positive difference resulting from the business combination was recognized as goodwill.The net assets were paid for in cash.

The acquisition of SURPRO VerwaltungsgesellschaftmbH was transacted as a purchase of shares.The acquisitions of SURPRO Oberflächenbeschichtungs- und Beratungszentrum GmbH, SURPRO Metalltechnik GmbH, and TE-KOV-SURPRO s.r.o. (Czech Republic) were transacted by purchasing the shares of the companies.The value of the acquired net assets amounted to EUR 3,533 thousand.The net assets at the date of acquisition comprised noncurrent assets of EUR 4,727 thousand and current assets of EUR 5,126 thousand less provisions and liabilities of EUR 6,320 thousand. Other assets included acquired cash and cash-equivalents totaling EUR 1,257 thousand, which were deducted from the cost of acquisition of EUR 8,647 thousand.The positive difference resulting from the business combination was recognized as goodwill.The net assets were paid from the proceeds of a new bank loan

The Group's cash and cash equivalents decreased by EUR 3,203 thousand.

Segment reporting The primary reporting format used for segment reporting in accordance with IAS 14 is business segments, which are based on the Company's product lines.

In response to the acquisition of the SUPRO group and the anticipated changes in the use of fuel cell technology, the Executive Board has realigned the classification of product lines under segments.Thus the "MOS – Mobile Office Systems" product line is shown separately for the first time in the 2005 financial year. The activities in the fuel cell technology segment, which are currently of no more than secondary importance in terms of materiality, are included in the segment "HTS – High Tech Hose Systems." Consequently, the Masterflex Group now reports four segments: High-Tech Hose systems (HT S), Medical Technology (MT), Mobile Office Systems (MOS) and Advanced material Design (AMD).

The Company's longest-established business unit manufactures high-tech hose systems from high-quality specialty materials (e.g. polyurethane).These hose systems are used in a wide range of industrial applications (e.g. the chemical industry, the automotive industry, environmental protection and the food industry, etc.).

In 1996, the Company used polyurethane for the first time in the field of medical technology. At the start of 2000, it strategically expanded its Medical Technology business unit by acquiring an equity interest in Angiokard Medizintechnik GmbH & Co. KG.This business unit manufactures and distributes both individual medical components and entire treatment sets for use in the fields of radiology, cardiology and anesthesia. In fiscal year 2005, the acquisition of Fleima-Plastic GmbH ideally extended and supplemented the value chain in the Medical Technology business unit.

The segment Mobile Office Systems (MOS) comprises mainly DICOTA GmbH, Bietigheim-Bissingen and its subsidiaries. The business activities of the DICOTA group extend primarily to the distribution of computer bags and cases for transporting notebooks and office systems. The segment Advanced Material Design (AMD) comprises the Group's latest fields of operation. It offers expertise especially in surface machining for the technology sector and electroplating for functional coatings.

2005	HTS	MT	MOS	AMD	Segment-	Recon-	Group
	High-Tech- Hose- Systems	Medical Techno- logy	Mobile Office Systems	Advanced Material Design	aggregate	ciliation
									EUR thou	EUR thou	EUR thou	EUR thou	EUR thou	EUR thou	EUR thou
								Revenue	35,982	16,751	28,807	6,233	87,773	0	87,773
Earnings (EBIT)	8,558	5	3,148	1,396	13,107	-843	12,264
Assets	32,947	21,529	18,751	17,082	90,309	7,523	97,832
Liabilities	6,115	2,520	2,392	7,224	18,251	48,541	66,792
Investments in property,
plant and equipment
and intangible assets	4,670	510	102	573	5,855	0	5,855
Depreciation and
amortization	1,492	510	85	234	2,321	0	2,321
2004
Revenue	35,700	13,956	26,096	0	75,752	0	75,752
Earnings (EBIT)	8,409	-448	3,695	0	11,656	-1,103	10,553
Assets	28,369	20,823	17,234	0	66,426	20,834	87,260
Liabilities	6,464	3,519	10,030	0	20,013	38,399	58,412
Investments in property,
plant and equipment
and intangible assets	2,709	389	347	0	3,445	0	3,445
Depreciation and
amortization	1,461	944	586	0	2,991	0	2.991

Segment information by business unit

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The segment results are represented using the indicator EBIT (earnings before interest and taxes), adjusted for the segment expenses and segment income excluded in accordance with IAS 14.There were no material noncash expenditures.

Segment assets primarily comprise all operating assets, such as intangible assets including goodwill, property, plant and equipment, inventories, receivables, other current assets and prepaid expenses. In accordance with IAS 14, noncurrent financial assets, intersegment receivables, recoverable taxes and deferred tax assets are not included in the calculation. No write-downs were taken on either intangible assets or property, plant and equipment.

Segment liabilities mainly represent operating liabilities resulting from the operating activities of the segment concerned. As in the case of segment assets, tax liabilities, financial liabilities and lease obligations were not included.

The Reconciliation column reflects amounts arising from different definitions of the contents of the segment items compared to the corresponding Group items.

The reconciliation of EBIT to the net profit from ordinary activities is as follows:

Earnings (EBIT)	EUR 12,263 thousand
Interest and similar income	EUR 501 thousand
Income from investments	EUR 14 thousand
Write-downs of current securities	EUR -662 thousand
Interest and similar expenses	EUR -2,397 thousand
Net profit from
ordinary activities	EUR 9,719 thousand

Total equity and liabilities break down as follows:

Liabilities	EUR 66,792 thousand
Book equity	EUR 30,606 thousand
Minority interest	EUR 434 thousand
Total equity and liabilities	EUR 97,832 thousand

2005	Germany	EU	Rest of world	Segment- aggregate	Reconcili- ation	Group
	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.
Revenue	48,058	23,072	16,643	87,773	0	87,773
Segment assets	69,714	9,336	11,971	91,021	6,811	97,832
Investments	5,226	413	216	5,855	0	5,855
2004
Revenue	39,947	17,999	17,806	75,752	0	75,752
Segment assets	48,696	6,910	11,189	66,796	20,464	87,260
Investments	3,159	35	251	3,445	0	3,445

Segment information by region

In the case of both primary and secondary segment reporting, the figures are primarily allocated to the individual segments on the basis of legally independent Group companies.

8. Revenue

	2005	2004
	EUR thou.	EUR thou.
Aggregate (external and
intragroup) revenue	90,880	79,551
Elimination of intragroup revenue	3,107	3,799
Total revenue	87,773	75,752

Other operating income Other operating income for the Group totaled:

2005	2004
EUR thou.	EUR thou.
4,203	2,777

Other operating income breaks down as follows:

2005	2004
EUR thou.	EUR thou.
244	14

512	267

342	82
35	27

243	260
1,656	1,570
564	0
72	0
23	47
103	84
409	426
4,203	2,777

Cost of materials The cost of materials breaks down as follows:

	2005	2004
	EUR thou.	EUR thou.
Cost of raw materials and
consumables used	38,072	32,810
Cost of purchased services	2,565	1.503
Total	40,637	34,313

Amortization of intangible assets and depreciation of property, plant and equipment Depreciation and amortization expense breaks down as follows:

	2005	2004
	EUR thou.	EUR thou.
Goodwill from business
combinations	0	1,218
Other intangible assets and
property, plant and equipment	2,321	1,773
Total	2,321	2,991

No write-downs were taken.

12. Goodwill amortization

Goodwill Jan. 1, 2005	EUR thou.	19,642
Additions	EUR thou.	7,624
Disposals	EUR thou.	4
Amortization	EUR thou.	0
Goodwill Dec. 31, 2005	EUR thou.	27,262

Retroactive adjustment of the initial consolidation In 2004, we acquired all shares in Fleima Plastic GmbH.The initial accounting for the business combination was determined on a provisional basis, because the fair value of some of the identifiable assets could only be provisionally determined as part of the purchase price allocation. In accordance with IFRS 3.62, the values recognized on a preliminary basis were corrected within 12 months.The corrected purchase price allocation resulted in lowering hidden reserves less deferred taxes by a total of EUR 1,034 thousand, so that goodwill in the amount of EUR 427 thousand was to be recognized in 2004 instead of EUR 607 thousand of operating income.The financial statements for the prior year were restated accordingly.The effect on the subsequent consolidation was taken into account in 2004 and 2005.

The initial consolidations of DICOTA France SARL, SUR-PRO Oberflächenbeschichtungs- und Beratungszentrum GmbH, SURPRO Metalltechnik GmbH, and TEKOV-SUR-PRO s.r.o. (Czech Republic) and the acquisition of the rest of the shares of Novoplast Schlauchtechnik GmbH resulted in total goodwill of EUR 7,624 thousand, which was recognized under noncurrent intangible assets.

In accordance with the adoption of IFRS 3, goodwill amortization is replaced by a so-called impairment test.

Under this process, goodwill is annually tested for possible impairment. If events or changes in circumstances occur that suggest a possible impairment, impairment testing must also be performed more frequently.

In connection with the impairment testing of goodwill, the remaining carrying amounts of the individual cash generating units in the Masterflex Group are compared to their recoverable amount, i.e. the higher of either their fair value less cost to sell or their value in use.

In the event that the carrying amount of the cash generating unit is higher than the recoverable amount, an impairment loss equal to the difference must be recognized.

The cashflows for calculating the value in use are determined on the basis of Management's medium-term planning.These plans are based on past experience as well as future expectations about market developments, taking into account any strategic and operational measures for setting the direction of the business segment that have already been initiated. Moderate constant growth has been assumed for the period beyond the detail planning horizon.

The cost of capital is calculated as a weighted average return on equity and borrowing costs (WACC = Weighted average cost of capital.) The discount rate used for the cash flow projections is based on a base interest rate of 4.25% plus a risk premium.

There were no impairment losses to be recognized in 2005.

The (amortized) carrying amount of goodwill for acquisitions of – or successive purchases of shares in – subsidiaries transacted in the current and previous fiscal years is as follows:

	EUR thou.
Novoplast GmbH	462
Flexmaster Inc.	1,488
Techno Handelsgesellschaft mbH	768
Angiokard GmbH & Co. KG	8,726
Fleima Plastic GmbH	427
DICOTA GmbH	7,996
DICOTA France SARL	684
Matzen & Timm GmbH	233
SURPRO GmbH	6,478
Total	27,262

Other operating expenses Other operating expenses for the Group totaled:

2005	2004
EUR thou.	EUR thou.
17,676	14,443

Other operating expenses break down as follows:

	2004
EUR thou.	EUR thou.
2,161	1,615
408	351
7,829	6,460
2,698	2,442
1,942	1,307
1,337	1,508
595	307
22	3
684	450
17,676	14,443
	2005

Research and development costs Development costs eligible for capitalization are recognized as Intangible assets. Research costs and non-capitalizable development costs are expensed as incurred. In fiscal year 2005, research and development costs in the amount of EUR 412 thousand (previous year: EUR 500 thousand) were incurred.
Net finance costs The net finance costs comprise the following items:

	2004
EUR thou.	EUR thou.

14	13
501	326

-662	0
-2,397	-1,469
-2,544	-1,130
	2005

Interest income primarily arises in the short-term segment. Interest expenses also includes interest on leases that must be recognized as finance leases in accordance with IAS 17.

Income tax expense The income tax expense recognized consists of the income taxes paid or owed in the individual countries, plus deferred tax liabilities and assets. Income taxes comprise corporation tax, trade income tax, the solidarity surcharge and corresponding foreign income taxes.The income tax expense breaks down as follows:

	2005	2004
	EUR thou.	EUR thou.
Income tax expense	3,655	2,814
Deferred tax liabilities/assets	340	-118
Total income tax expense	3,315	2,932

The expected tax expense at the average income tax rate is reconciled to the actual income tax expense as follows:

	2005	2004
	EUR thou.	EUR thou.
Net profit before taxes	9,280	8,874
Expected income tax
expense 40%	3,712	3,550
Non-tax-deductible
goodwill amortization	138	138
Tax reductions due to
differences in tax rates	-206	-1.136
Other	-329	380
Actual income tax expense	3,315	2,932

The starting point (net profit before taxes) corresponds to the consolidated net profit plus income tax and the deferred tax assets and liabilities recognized in the income statement.The Other item comprises the effects of tax-free income, non-tax-deductible expenses and different foreign tax rates.

Deferred tax assets and liabilities changed as follows:

	Balance at Jan. 1, 2004	Tax income/ -expense	Adjust- ments directly in equity	Balance at Dec. 31, 2004	Tax income/ -expense	Adjust- ments directly in equity	Balance at Dec. 31, 2005
	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.
Deferred tax assets from
loss carryforward	594	-200	0	394	315	0	709
Deferred tax liabilities from
temporary differences	-413	82	-1.257	-1,588	35	-891	-2,444
Total		-118			340
Reported in income statement		-118			340

Deferred tax assets were recognized for loss carryforwards to the extent that the Company's projections indicate that it is probable that sufficient future taxable profits will be generated by the Group companies concerned. EUR 709 thousand of the deferred tax assets relate to Group companies that recorded a loss in the fiscal year or in prior years.

Earnings per share Earnings per share are calculated in accordance with IAS 33 by dividing the consolidated net profit for the year by the weighted average number of shares outstanding during the fiscal year.

		2005	2004
Earnings per share	EUR	1.37	1.33
Consolidated
net profit	EUR thou.	5,965	5,942
Weighted average
number of shares		4,365,030	4,461,847

Due to the fact that options could not be exercised, the stock options program (see Note 22) does not have any material dilutive effect on earnings.The stock options program expired in 2005.

Dividend The Board of Masterflex AG is proposing a dividend of EUR 0.80 per share.The appropriation of the unappropriated surplus of the parent company for fiscal year 2005 will be resolved by the General Meeting on June 14, 2006.
Noncurrent assets Changes in noncurrent assets are disclosed separately in the consolidated statement of changes in noncurrent assets (see Annex). Land charges in the amount of EUR 2,156 thousand (previous year: EUR 2,452 thousand) and liens on production equipment and assignments of receivables in the amount of EUR 1,448 thousand (previous year: EUR 2,733 thousand) serve as collateral for bank loans and overdrafts.

Assets held by foreign companiesThe assets held by foreign companies are translated into euros (EUR) as of December 31 using the closing rates at that date; all changes during the year are translated at annual average rates.The currency translation differences resulting from the different translation methods are disclosed separately in the consolidated statement of changes in noncurrent assets.

a) Intangible assets All intangible assets were purchased, with the exception of specific intellectual property rights and developments generated by Masterflex AG.The intellectual property rights relate to internally generated patents.The developments comprise capitalizable expenses incurred in the development of marketable products.

The carrying amounts break down as follows:

	2005	2004
	EUR thou.	EUR thou.
Internally generated
intangible assets	3,225	2,435
Purchased intangible assets	2,229	1,181
Goodwill	27,262	19,642

Costs, additions and disposals are as follows:

	Balance at Jan. 1, 2004	Additions	Disposals	Balance at Dec. 31, 2004	Additions	Disposals	Balance at Dec. 31, 2005
	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.
Internally generated
intangible assets	1,882	738	0	2,620	812	0	3,432
Purchased intangible assets	902	865	13	1,754	1,238	0	2,992
Goodwill	24,391	427	0	24,818	7,624	0	32,442

Amortization expense and cumulative totals break down as follows:

	Balance at 01. 01. 2004	Annual amortization	Balance at Dec. 31, 2004	Annual amortization	Balance at Dec. 31, 2005
	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.
Internally generated
intangible assets	163	23	186	21	207
Purchased intangible assets	463	109	572	191	763
Goodwill	3,958	1,218	5,176	0	5,180

b) Property, plant and equipment Property, plant and equipment also include the plots of land that are the subject of a finance lease.The following table provides a breakdown of the cost, useful lives and changes in carrying amounts of the property concerned:

	Historical cost EUR thou.	Useful lives	Carrying amount 2005 EUR thou.	Carrying amount 2004 EUR thou.
Buildings	4,505	30 years	3,012	3,166
Land	587	-	587	587
Total	5,092		3,599	3,733

Payment obligations from lease installments during the term of the contract are broken down into an interest portion and a redemption portion.The interest expense is as follows:

c) Noncurrent financial assets Noncurrent financial assets break down as follows:

2005	2004
EUR thou.	EUR thou.
201	222

	2005	2004
	EUR thou.	EUR thou.
Noncurrent financial instruments	1,188	1,028
Other loans	127	1,363
Total noncurrent financial assets	1,315	2,391

The noncurrent financial instruments are available-forsale financial instruments as defined by IAS 39.They are composed of the following:

	EUR thou.
Equity instruments	850
Debt instruments	338
Total	1,188

The cost, unrealized gains and losses and fair value of the available-for-sale securities as of December 31, 2005 are as follows:

Historical	Unrealized	Fair value
cost	gains/losses
EUR thou.	EUR thou.	EUR thou.
1,869	-681	1,188

Income from these assets totaled EUR 14 thousand.

Inventories Inventories break down as follows:

	2005	2004
	EUR thou.	EUR thou.
Raw materials and consumables	6,791	5,117
Work in progress	3,513	263
Finished goods and goods
purchased and held for resale	10,151	7,688
Advance payments	118	501
Total inventories	20,573	13,569

Receivables and other assets Receivables and other as-

sets break down as follows:

	2005	2004
	EUR thou.	EUR thou.
Trade receivables	10,947	10,070
Other receivables and assets	2,571	2,119
Market value of derivatives	142	0
Total receivables
and other assets	13,660	12,189

Other current assets break down as follows:

	2005	2004
	EUR thou.	EUR thou.
Receivables from shareholders	255	266
Claims under reinsurance policies	662	54
Recoverable taxes	995	451
Receivables from employees	40	293
Bonus claims	112	88
Currency options	0	234
Reimbursement claims in c
onnection with derivatives	115	0
Security deposits	212	0
Receivables from investment
grants, subsidies	39	292
Other	140	441
Total other current assets	2,571	2,119

As of the balance sheet date, there were no items with a remaining maturity of more than one year.

Equity For explanations concerning the development of [shareholders'] equity, reference is made here to the statement of changes to equity.

Issued capital The total issued capital of Masterflex AG comprises 4,500,000 ordinary bearer shares in the form of no-par value bearer shares with a notional pro-rata share of issued capital of EUR 1.00 per share.The issued capital is fully paid in.

By resolution of the General Meeting of June 8, 2005, the company was authorized for the period from June 9, 2005 up until December 8, 2005, to purchase treasury shares for a maximum pro-rata amount of share capital of EUR 450,000.00 to be allocated to such shares.This represents 10% of the company's share capital of EUR 4,500,000.00 at the time of the General Meeting.The purchased shares – together with other treasury shares in possession of the company or to be allocated to the company according to §§ 71a ff, AktG – may not, at any time, exceed 10% of the company's share capital.This authorization replaces the authorization to purchase treasury shares granted at the General Meeting of June 9, 2004, which was limited to December 9, 2005 and which is hereby rescinded.

The authorization may not be used for the purpose of trading in treasury shares.

The purchase shall be transacted on the open market or by means of a public tender offer extended to all of the company's shareholders.

If treasury shares are purchased on the open market, the purchase price per share (excluding incidental expenses) may not exceed or fall short of the quoted price of the company's shares by more than 5%.The relevant market price within the meaning of the authorization shall be the average price of the shares of the company established as the final auction price in Xetra trading (or in a functionally comparable successor system to the Xetra system) on the Frankfurt Securities Exchange for the last three trading days prior to the purchase of the shares.

If the treasury shares are purchased by means of a public tender offer to the shareholders of the company, the purchase price offered, or the maximum or minimum values of the offering price range per share (excluding incidental expenses) may not exceed or fall short of the market price of the company's shares by more than 20%.The relevant market price within the meaning of the authorization shall be the average price of the shares of the company established as the final auction price in Xetra trading (or in a functionally comparable successor system to the Xetra system) on the Frankfurt Securities Exchange from the sixth to the third trading day prior to the day of the publication of the offer.The volume of the tender offer may be limited.To the extent that the total volume of the offer is over-subscribed, the shares tendered must in each case be accepted on a pro-rata basis.The tender offer may provide for priority to be given to the acceptance of tenders of company shares in small lots of up to 100 shares per shareholder.

The provisions of the Wertpapiererwerbs und Übernahmegesetz [German Securities Acquisition and Takeover Act] shall be complied with as applicable.

The Board shall further be authorized, with the approval of the Supervisory Board, to dispose of the purchased treasury shares to third parties – subject to the exclusion of shareholders' subscription rights – for non-cash considerations, especially also in connection with company mergers as well as the acquisition of companies, parts of companies and/or equity positions in companies. In this context, the value of the non-cash capital contribution, when considered as a whole, must be appropriate within the meaning of § 255 subsection 2 of the German Stock Corporation Act. In the case referred to under letter f), the shares may only be disposed of to a third party at a price (excluding incidental expenses) that is not materially lower – or at most lower by 5% – than the market price of company shares with the same features at the time of disposal.The relevant market price within the meaning of the authorization shall be the average price of the shares of the company established as the final auction price in Xetra trading (or in a functionally comparable successor system to the Xetra system) on the Frankfurt Securities Exchange for the last five trading days prior to the disposal of the treasury shares.

The Board shall further authorized, with the approval of the Supervisory Board, to dispose of the purchased treasury shares – subject to the exclusion of the shareholders' subscription rights – for a cash consideration by means other than the open market or a tender offer to all shareholders.The authorization to exclude shareholders' subscription rights shall further be effective subject to the proviso that the treasury shares disposed of subject to the exclusion of subscription rights may not – in aggregate and in combination with other shares issued subject to the exclusion of subscription rights according to § 186 subsection 3 sentence 4 AktG in connection with a capital increase or authorized capital – exceed 10% of share capital at the time of disposal.

The Board shall further be authorized to cancel the purchased treasury shares without additional resolutions by the General Meeting. As part of the cancellation, it is further authorized to execute the cancellation of no-par shares as part of a reduction in capital or without a reduction in capital. If the cancellation of no-par shares is executed without a reduction in capital, the pro-rata share of issued capital of the remaining shares shall be increased in accordance with § 8 subsection 3 AktG. In that event, the Board is additionally authorized to adjust the number of shares of the company as specified in the articles of incorporation (§ 237 subsection 3, No. 3 AktG).

The above authorizations may be exercised on one or several occasions, individually or in combination.

When acquiring treasury shares, the Board shall properly comply with the statutory provisions for the recognition of reserves for treasury shares (§ 71 subsection 2 sentence 1 AktG, § 272 subsection 4 HGB).

In the course of fiscal year 2005, a total 50,000 treasury shares were sold and 94,783 treasury shares were newly acquired, which were deducted in accordance with SIC-16. As of the balance sheet date, Masterflex AG held 134,126 treasury shares (prior year: 89,343).

Contingent capital The Extraordinary General Meeting of the Company on May 6, 2000 resolved on a contingent increase of share capital by EUR 360,000.00 by issuing up to 360,000 ordinary bearer shares with a notional value of EUR 1.00 per share. The contingent capital in the amount of EUR 360,000.00 was authorized by the Extraordinary General Meeting in relation to the granting of options under a stock option program for members of the Board and employees of the Company's subsidiaries.

In fiscal year 2000, the Board, with the approval of the Supervisory Board, issued a total of 43,000 options for no-par bearer shares of the Company. 24,000 of these options were granted to members of the management bodies of the Company and affiliated companies, and 19,000 to other employees.

Each option granted the holder the right to purchase one no-par ordinary bearer share of the Company at different subscription prices that are, however, at least equal to the issue price of EUR 25.00.

The options could only be exercised within a period of five years or less and no later than December 31, 2005. 50% of the rights granted to individual beneficiaries could be exercised no earlier than two years after the effective date of the option grant (issue). A further 25% of the rights granted was able to be exercised after three years, and the remaining 25% of the rights granted was able to be exercised to be exercised after four years.

After the expiration of the above-mentioned lockup periods, rights accruing from the stock options were able to be exercised within fifteen trading days from the publication of the interim financial statements for the first and third quarters and from the Ordinary General Meeting of the Company. Rights that were not exercised automatically increased the number of potential options for the following years by the unexercised amount.

Beneficiaries could only exercise their option rights if the previously defined performance targets were met. Board members were entitled to exercise their options if the share price on the exercise date exceeded the exercise price by at least 10% per full year that had passed since the options were issued.The Supervisory Board was responsible for laying down further details. Managing directors of subsidiaries were entitled to exercise their options if they exceeded the figures laid down in the revenue and earnings targets agreed with the Board by at least 2% in each case.The Board was responsible for determining the performance targets to be met by other employees wishing to exercise their options, with one exception.

The stock options program expired in 2005. No options were exercised.

Authorized capital By resolution of the Extraordinary General Meeting on May 6, 2000, the Board was authorized, with the approval of the Supervisory Board, to increase the share capital of the Company once or on several occasions in the period until May 3, 2005 by a total of up to EUR1,800,000.00 by issuing new ordinary and / or preferred bearer shares against cash and / or non-cash contributions.The Board will lay down the terms and conditions for issuing the shares with the approval of the Supervisory Board.

The Board was also authorized, with the approval of the Supervisory Board, to exclude shareholders' subscription rights in the following cases:

a) to settle fractions;

b) to issue no-par value shares as employee shares to employees of the Company;

c) in exchange for non-cash contributions, especially in the form of companies or parts of companies;

d) if the capital increase against cash contributions does not exceed 10% of the share capital and the gains from the issue of the no-par value shares are not materially less than the stock market price;

e) in the event that non-voting preference shares are issued, subject to the proviso that the ordinary shareholders are only entitled to subscribe for new ordinary nopar value shares and the preferred shareholders are only entitled to subscribe for new nonvoting preferred shares ("gekreuzter Bezugsrechtsausschluss" – i.e. the exclusion of pre-emptive rights to other classes of shares).

The Board did not make use of this authorization.

By resolution of the ordinary General Meeting of June 8, 2005, the Board was authorized, with the approval of the Supervisory Board, to increase the share capital of the company by up to EUR 2,225,000.00 by issuing – on one or several occasions up until June 7, 2010 – ordinary bearer shares up to EUR 2,225,000.00 against cash and/or non-cash contributions (authorized capital).The Board is authorized, with the approval of the Supervisory Board, to establish any additional rights vested in the shares and the terms and conditions for the issuance of shares.The new shares are to be offered to the shareholders for subscription. However, the Board is authorized, with the approval of the Supervisory Board, to exclude shareholders' subscription rights in the following cases:

• for fractional amounts;

• for capital increases against non-cash contributions intended to grant shares for the purpose of acquiring companies, parts of companies or equity positions in companies;

• for cash contributions up to an amount not exceeding 10% of the of the share capital existing at the time that this authorization is being exercised and at an issue price of the shares that is not materially lower than the market price of the company's shares already quoted on the stock exchange at the time that the issue price is finalized.The above-referenced 10% limit shall be calculated to include treasury shares that are issued or disposed of within the fiscal year of the issuance of the shares from authorized capital and subject to the exclusion of subscription rights in accordance with § 186 subsection 3 sentence 4 AktG.

After the full or partial execution of the share capital increase in accordance with the respective use of authorized capital – and in the event that the authorized capital is not fully used by June 7, 2010 – the Supervisory Board is authorized to adjust § 4 of the Articles of Incorporation as last amended after the period of authorization has expired.

Share premium The share premium at the balance sheet date amounted to EUR 17.521 thousand (previous year: EUR 18,519 thousand).This mainly consists of the issue proceeds of the IPO in 2000, after the deduction of IPO costs. Moreover, in accordance with SIC 16, the purchase and disposal of treasury shares are netted after adjustment for related income tax effects.
Revaluation reserve In accordance with IAS 39, securities held as non-current assets were classified as available-for-sale.These securities were measured at fair value as of the balance sheet date. Resulting unrealized losses net of income tax effects were recognized directly in equity under "Revaluation reserve for financial instruments."

	Exchange differences from the translation of foreign financial statements	Exchange differences in accordance with IAS 21.17	Exchange differences in accordance with IAS 21.19	Total
	EUR thou.	EUR thou.	EUR thou.	EUR thou.
Balance at Dec. 31, 2003	- 863	- 267	95	- 1,035
Change in 2004	- 545	0	0	- 545
Balance at Dec. 31, 2004	- 1,408	- 267	95	- 1,580
Change in 2005	1,013	-5	0	1,008
Balance at Dec. 31, 2005	-395	-272	95	-572

Exchange differences The exchange differences recorded in equity can be broken down as follows:

In accordance with IAS 12.61, taxes relating to items recognized directly in equity are also debited or credited directly to equity and included in the changes to exchange differences reported above. Please refer also to Note 22.

In accordance with IAS 21.17/21.19 in conjunction with IAS 21.37, the changes to fair value of EUR -177 thousand recognized in equity are fixed upon retirement of the foreign currency obligation.The exchange differences recognized in equity are not reversed to the income statement until the disposal of the economically independent foreign entity.

Minority interests Since the parent company does not hold a 100% stake in all subsidiaries, the minority interest in the capital of the companies included in consolidation was presented as a separate Minority interest item under from Group equity.

The amount reported for this item is:

2005	2004
EUR thou.	EUR thou.
434	809

27. Provisions Provisions break down as follows:
--------------------------------------------------	--	--	--	--	--

	Balance at Jan. 1, 2005	Changes to the consoli- dated Group	Utilization	Reversals	Additions	Balance at Dec. 31, 2005
	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.	EUR thou.
Noncurrent provisions
Pensions	221	1,401	323	167	86	1,218
Onerous contracts	71	0	0	0	0	71
Total	292	1,401	323	167	86	1,289
Current provisions
Provisions for taxes	1,365	381	1,466	14	1,129	1,395
Year-end closing costs	238	33	252	2	266	283
Compensated absences	235	84	274	3	325	367
Bonuses to customers	518	0	434	112	376	348
Premiums, severance
payments, commissions	1,585	40	1,505	141	882	861
Warranties	97	64	96	49	105	121
Employers' Liability
Insurance Association	247	40	269	4	337	351
Outstanding invoices	46	120	143	23	442	442
Miscellaneous	88	118	153	11	294	336
Total	4,419	880	4,592	359	4,156	4,504

a) Noncurrent provisions Pension accruals are recognized for liabilities arising from vested benefits and from current benefits paid to vested active and former employees of the member companies of the Masterflex Group as well as their surviving dependents.There are various forms of retirement benefit schemes, which are generally based on the employees' term of employment and level of compensation.

With respect to company pension plans, a principle distinction is made between Defined Contribution and Defined Benefit retirement schemes.

Under defined contribution plans, the company assumes no commitments beyond the payment of contributions to the fund. Expenditures are recognized as current personnel expenses and no provisions are set aside.The expenditures for such plans total EUR 83 thousand (prior year: EUR 72 thousand); employer contributions to statutory retirement benefit insurance schemes are not included in these payments.

Under defined benefit plans, the company incurs an obligation to provide the benefits promised by the plan to current and former employees. The measurement of provisions for defined benefit plans is based on the projected unit credit method in accordance with IAS 19.The amount of the defined benefit obligations was calculated by using actuarial methods based on estimates of the relevant factors. In addition to assumptions with respect to life expectancy, the following assumptions were made concerning the parameters to be used for the actuarial calculations in the expert reports:

	Dec. 31, 2005
Discount rate	4.00 %
Rate of salary increases	0.00 %
Cost of living increases	2.00 %
Rate of statutory retirement
benefit increases	2.00 %

Wage trends encompass future increases in wages and salaries that are estimated annually by reference to inflation and tenure at the company. Since the pension commitments entered into with respect to subsidiaries are not contingent on future wage and salary increases, no salary increases were taken into consideration when calculating the relevant provisions for pensions.

Provisions for pensions as of December 31, 2005, are calculated as follows:

	Dec. 31, 2005
	EUR thou.
Amount recognized on
the balance sheet as of Jan. 1, 2005	221
Changes to the scope of consolidation	1,401
Payments to pension fund	-323
Reversals	-167
Additions	72
Interest expense	14
Amount recognized on
the balance sheet as of Dec. 31, 2005	1,218

b) Current provisions The provisions for taxes comprise the provisions for taxes on income for the companies included in the consolidated Group.The entire amount is expected to come due within one year.The provisions for year-end closing expenses comprise the external costs for the preparation and audit of the annual financial statements.

Provisions for accrued vacations are determined on the basis of the days vacation outstanding and the individual salaries of the employees concerned

The provisions for bonuses are based on the contractual agreements and the annual revenue in each case.

Warranty provisions relate to guarantee costs and ex gratia payments calculated as a proportion of the revenue generated in the reporting period.

Provisions for contributions to the Employers' Liability Insurance Association are calculated on the basis of the corresponding payroll records, using the premium rates for the previous year.

Financial liabilities In September 2004, the Company received a EUR23 million borrower's note loan with maturities of five and seven years from IKB Deutsche Industriebank AG.

Bank loans and overdrafts break down by original maturity as follows:

	2005	2004
	EUR thou.	EUR thou.
Long-term loans	25,783	26,967
Short-term loans	14,327	4,198
Total bank loans
and overdrafts	40,110	31,165

Loans with an original maturity of more than one year are classified as long-term liabilities.

These liabilities have the following remaining maturities:

	2005 EUR thou.	2004 EUR thou.
Loans with a remaining maturity
of up to 1 year	14,327	4,198
Loans with a remaining maturity
maturity of between 1 and 5 years	14,497	15,588
Loans with a remaining maturity
of more than 5 years	11,286	11,379
Total bank loans and overdrafts	40,110	31,165

The following table provides an overview of the terms and conditions of the main items due to banks.

Interest rate	Fixed-interest until *)	Carrying amount as of Dec. 31, 2005
%		EUR thou.
3.00 %	2012	-355
3.20 %	2006	-300
3.20 %	2007	-700
3.27 %	2006	-6,819
4.25 %	2009	-248
4.26 %	2007	-300
4.50 %	2009	-2,038
4.50 %	2009	-10,188
4.50 %	2007	-17
4.50 %	2007	-40
4.75 %	2008	-359
4.90 %	2007	-575
5.00 %	2011	-4,083
5.00 %	2011	-7,146
5.25 %	2010	-901
5.75 %	2007	-270
5.75 %	2006	-988
6.00 %	2005	-162
6.10 %	2005	-621
6.71 %	2008	-70
7.25 %	2006	-252
7.30 %	2006	-450

*) = In some cases, the terms of the contracts substantially exceed the fixed-interest periods shown above..

Other liabilities The details of other liabilities are shown in the following table:

	2005	2004
	EUR thou.	EUR thou.
Down payments on
orders received	18	21
Trade payables	4,895	3.843
Other liabilities	10,363	14.234
Market value of derivatives	320	0
Total other liabilities	34,660	26.958

All trade payables are due within one year.

Other liabilities include the following items:

	2005	2004
	EUR thou.	EUR thou.
Tax liabilities	907	751
Lease liabilities	3,700	3,537
Social security payments	582	363
Liabilities to minority
interests in subsidiaries	1,322	0
Liabilities from acquisition
activities	2,704	7,720
Forfaiting of receivables	0	695
Pension fund liabilities	716	728
Miscellaneous	432	440
Total	10,363	14,234

The reported leasing obligations are related to a property in Gelsenkirchen leased under a finance lease.

	Up to 1 year	2 – 5 years	More than 5 years
	EUR thou.	EUR thou.	EUR thou.
Future financial obligations
(including interest)	345	1,382	1,988
Present value of
future financial
obligations
(redemption portion)	263	1,133	1,883

The remaining maturities are as follows:

	2005 EUR thou.	2004 EUR thou.
Liabilities with a remaining
maturity of up to 1 year	7,347	10,954
Liabilities with a remaining maturity
of between 1 and 5 years	1,133	1,100
Liabilities with a remaining maturity
of more than 5 years	1,883	2,180
Total other liabilities	10,363	14,234

Deferred income Deferred income consists almost entirely of government grants and subsidies designed to promote investment.

The following amounts were recognized as liabilities as of December 31.

	2005	2004
	EUR thou.	EUR thou.
Subsidies	2,060	1,998
Grants	788	849
Other	1	2
Total	2,849	2,849

The following amounts were reversed to income in the individual years

	2005	2004
	EUR thou.	EUR thou.
Reversal of subsidies	115	122
Reversal of grants	128	138
Total	243	260

The subsidies received relate mainly to subsidies for the expansion of operating facilities and for technical equipment and machinery in the years 1995 to 2005.The grants were awarded for the purchase of machinery and office and operating equipment.The necessary evidence that the funds were employed as intended has been provided in full.

Prior-period restatements In 2004, we acquired all shares in Fleima Plastic GmbH.The initial accounting for the business combination was determined on a provisional basis, because the fair value of some of the identifiable assets could only be provisionally determined as part of the purchase price allocation. In accordance with IFRS 3.62, the values recognized on a preliminary basis were corrected within 12 months.The corrected purchase price allocation resulted in lowering hidden reserves less deferred taxes by a total of EUR 1,034 thousand, so that goodwill in the amount of EUR 427 thousand was to be recognized in 2004 instead of EUR 607 thousand of operating income.The financial statements for the prior year were restated accordingly.The effect on the subsequent consolidation was taken into account in 2004 and 2005.

The acquisition of the remaining shares in DICOTA Gesellschaft zur Entwicklung von Tragesystemen für elektrische Geräte mbH (DICOTA GmbH) was transacted by exercise of contractual agreements dated August 8, 2001.The contingent purchase price was not estimated as part of the initial consolidation of DICOTA GmbH in 2001 and thus had not been recognized. Pursuant to IFRS 3.33 in conjunction with IAS 8, a retroactive adjustment was applied to the initial consolidation.This restatement results in an increase in goodwill to a total of EUR 5,892 thousand, to which straight-line amortization was applied through 2004. Net income for the 2004 fiscal year was accordingly reduced by EUR 295 thousand in additional amortization; cumulative amortization for fiscal years 2001 – 2004 totaled EUR 1,007 thousand. Goodwill amortization was last applied in 2004 so that the effect on earnings per share is limited to this period only; earnings per share in 2004 were lower by EUR 0.07. For the sake of simplification, no discount was applied to the retroactive purchase price payment.

Related party disclosures Masterflex AG and the companies included in the consolidated financial statements primarily entered into transactions with the following related parties as defined by IAS 24:

MODICA Grundstücks-Vermietungsges. mbH & Co., Objekt Masterflex KG, Gelsenkirchen Masterflex AG, Gelsenkirchen has been using the production, warehousing and administrative buildings of the above-mentioned company since January 1, 1994. Please refer to the disclosures under Leases and Other liabilities for further details.

The lease expires on July 31, 2014.The monthly lease payments amounted to approximately EUR 29 thousand in fiscal year 2005.

The shareholders of MODICA Grundstücks-Vermietungsges. mbH also hold shares in Masterflex AG, Gelsenkirchen.

33. Remuneration of executive bodies

a) Board The members of the Board receive annual remuneration consisting of a fixed and variable component. In calendar year 2005, total remuneration of the Board amounted to EUR 501 thousand (previous year: EUR 1,175 thousand), which breaks down as follows:

Fixed	Performance	Total
remuneration	related
	remuneration
2005	2005	2005
EUR thou.	EUR thou.	EUR thou.

264	0	264

168	0	168

0	69	69
432	69	501

Performance-related remuneration was paid out in fiscal year 2005.

b) Supervisory Board The Supervisory Board received remuneration totaling EUR 32 thousand, which breaks down as follows:

	2005 EUR thou.	2004 EUR thou.
Chairman of the Supervisory
Board Friedrich-Wilhelm Bischoping	14	8
Deputy Chairman of the Supervisory
Board Prof. Dr. Detlef Stolten	11	6
Supervisory Board member Prof. Dr.
Paulus Cornelis Maria van den Berg	7	4
Total	32	18

Other financial obligations and contingent liabilities a) a) Lease liabilities For further details of the financial obligations resulting from a finance lease, please see the disclosures in Note 32.

Other financial liabilities for future years arising from operating leases are as follows:

	2006	2007-2010	2011
	EUR thou.	EUR thou.	EUR thou.
Notional amount of future minimum
lease payments	165	164	0

Existing operating leases are related to the financing of the car and truck fleet as well as office and operating equipment.

b) Other obligations The offices and operating facilities of Angiokard Medizintechnik GmbH & Co. KG have been rented from the former shareholder until December 31, 2009. No extraordinary rights of termination and no purchase option exist. When the rental contract expires, Angiokard has an option to renew the tenancy.The total obligation for rent payments is EUR 970 thousand. Of this amount, EUR 245 thousand is due within one year and EUR 725 thousand is due in a period of one to five years.

In addition, contingent liabilities existed in connection with the acquisition of shares in SURPRO Oberflächenbeschichtungs- und Beratungszentrum GmbH, SURPRO Metalltechnik GmbH, TEKOV-SURPRO s.r.o. (Czech Republic). A possible purchase price adjustment was agreed, contingent upon future earnings of the company in the 2005 and 2006 fiscal years. An estimated amount for the expected purchase price adjustment was already recognized in the 2005 financial statements.

Contingent liabilities also existed in connection with the acquisition of shares in DICOTA GmbH. A possible purchase price adjustment was agreed, contingent upon future earnings trends of the company in the 2005 and 2006 fiscal years. However, no purchase price adjustment is expected according to the present state of knowledge.

The Company has entered into an agreement with Ideamed N.V. (the licensor) concerning the use of international patents for the manufacture of a respiratory mask.The agreement is expected to expire in November 2017.The license agreement provides for non-performance-related payments as from the start of marketing of the respiratory mask; these payments are linked to margin-based remuneration.The obligations in relation to these non-performance-related payments over the term of the contract total EUR 601 thousand.

The Company has entered into a license agreement with Material Design GmbH (the licensor) concerning the use over an unlimited time period of a coating technique for internally-coated hollow parts. The license

agreement applies to Europe only and provides for performance-related license fees.

All other contingent liabilities at single-entity levels have been recognized as liabilities on the consolidated balance sheet.

Derivatives In 2005, Masterflex AG entered into a derivatives (interest rate swap) contract with a financial institution. The contract runs from February 17, 2005 through February 17, 2010.The notional principal is EUR 15 million. Over the life of the contract, Masterflex AG receives interest at a fixed rate of 3% and in return pays interest at a variable amount, which is calculated contingent upon the development of the interest rate differential between the 10-year EURIBOR swap rate and the 2-year EURIBOR swap rate. In the absence of a hedging relationship, the financial instrument must be classified in accordance with IAS 39.9 as a financial investment held for trading and measured at fair value. On the basis of the forecast data provided by the financial institution, the fair value calculated as of the balance sheet date is EUR 142 thousand. Given the right to terminate the contract at any time on the part of Masterflex AG and as of each interest payment date on the part of the financial institution, the instrument is reported under current assets.

In 2005, Masterflex AG entered into a derivatives (interest rate swap) contract with a financial institution.The contract runs from September 1, 2005 through September 1, 2010.The notional principal is EUR 15 million. Over the life of the contract, Masterflex receives interest at a fixed rate of 3% and in return pays interest at a fixed rate of 2.4%. In addition, the agreement provides for payment of an interest equalization payment at the end of the contract period, which is to be calculated contingent upon the development of the interest rate differential between the 30-year EUR swap rate and the 2-year EURO swap

rate. In the absence of a hedging relationship, the financial instrument must be classified in accordance with IAS 39.9 as a financial investment held for trading and measured at fair value. On the basis of the forecast data provided by the financial institution, the fair value calculated as of the balance sheet date is EUR 320 thousand. Given that Masterflex AG may exercise a right of termination at any time, the instrument is reported under current liabilities.

Risk management policy and hedging transactions The operating activities as well as the financial transactions of the Masterflex Group are subject to financial risk.These are risks arising especially in connection with exchange rate fluctuations. In addition to the identification, analysis and assessment of these risks, the groupwide risk management system of Masterflex AG also uses derivatives for risk mitigation.The use of such derivatives for speculative purposes is prohibited. Derivatives transactions are entered into exclusively with foreign and domestic banks with sound creditworthiness.

Due to the international orientation of the Masterflex Group, its operating activities create currency risks, which arise from fluctuations in the exchange rates between the Euro and other currencies. As a matter of policy, open underlying positions that are subject to currency risk are hedged using derivatives. Currency options are used for this purpose.These functions are performed by the operating subsidiaries.

The hedging transactions listed on the following table were in effect as of December 31, 2005. Notional volumes are given without netting and thus reflect to sum of the principal amounts of all transactions. The market values of the derivatives represent the price – as of the balance sheet date – at which a third party would assume the rights and/or obligations under the contracts in an arms length transaction.

	Notional Volumes		Market Value		Remaining term
					to maturity
EUR thou.	Dec. 31, 2004	Dec. 31, 2005	Dec. 31, 2004	Dec. 31, 2005	(in months)
FX options contracts	8,500	1,690	234	0	1

The foreign exchange options contracts reported as exchange rate hedges are, in each case, related to a single underlying transaction, and have primarily been entered into as a hedge of future transactions not yet recognized on the balance sheet such as, for example, orders received from clients or orders place with suppliers.The hedging policy of the Masterflex Group is to hedge currency risks with appropriate derivatives immediately after they arise, i.e. after contract signing.

37. Other disclosures

	2005	2004
Group employees	656	473

Audit fees The expenses the financial auditor, MBT Wirtschaftstreuhand GmbH, Wirtschaftsprüfungsgesellschaft, [recorded] in the 2005 fiscal year were EUR 126 thousand, which included the fees for the audit of the consolidated financial statements as well as the audit of the statutory financial statements of Masterflex AG and its domestic subsidiaries. An additional EUR 28 thousand were recorded as expenses for tax advisory and other services.
Events after the balance sheet date By the day of submission to the Supervisory Board there had been no material events after the balance sheet date.
Publication of the consolidated financial statements The financial statements have been published on March 31, 2006 at the Company's annual earnings press conference in Düsseldorf.
Information on the German Corporate Governance Code In December 2005, the Board and the Supervisory Board of Masterflex AG again issued a declaration of conformity in accordance with section 161 of the AktG and made it permanently accessible to shareholders on the Company's website.The declaration of conformity is also reproduced in the Corporate Governance section of the annual report.

Masterflex AG Willy-Brandt-Allee 300 45891 Gelsenkirchen

Gelsenkirchen, March 23, 2006

Detlef Herzog Ulrich Wantia (Chairman of the Board) (Member of the Board)

Consolidated Statement of Changes in Noncurrent Assets

	Historical cost Jan. 1, 2005	Changes to the consoli- dated Group	Additions	Disposals	Reclassi- fications	Currency translation differences	Historical cost Dec. 31, 2005
	¤ thou.	¤ thou.	¤ thou.	¤ thou.	¤ thou.	¤ thou.	¤ thou.
Intangible assets
Concessions, industrial
and similar rights
and assets, licenses	1,768	23	1,184	0	13	0	2,988
Development costs	2,386	0	812	0	0	0	3,198
Goodwill	24,818	7,624	0	0	0	0	32,442
Advance payments	220	0	30	0	-12	0	238
	29,192	7,647	2,026	0	1	0	38,866
Property, plant, and equipment
Land, land rights
and buildings including buildings
on third-party land	9,609	89	1,357	128	23	140	11,090
Plant and machinery	12,248	3,206	996	52	26	126	16,550
Plant and machinery
operating and office equipment	6,559	882	837	253	32	123	8,180
Advance payments
and assets under development	208	52	638	0	-81	0	817
	28,624	4,229	3,828	433	0	389	36,637
Noncurrent financial assets
Noncurrent financial instruments	1,876	0	0	7	0	0	1,869
Other loans	1,363	0	0	1,255	0	19	127
	3,239	0	0	1,262	0	19	1,996
	61,055	11,876	5,854	1,695	1	408	77,499

	Cumulative depreciation and amortization Jan. 1, 2005	Depreciation and amor- tization for fiscal year	Disposals	Fair value changes recognized directly in equity	Currency translation differences	Cumulative depreciation and amor- tization Dec. 31, 2005	Balance at Dec. 31, 2005	Balance at Dec. 31, 2004
	¤ thou.	¤ thou.	¤ thou.	¤ thou.	¤ thou.	¤ thou.	¤ thou.	¤ thou.
Intangible assets
Concessions, industrial
and similar rights
and assets, licenses	752	213	0	0	-4	961	2,027	1,016
Development costs	6	3	0	0	0	9	3,189	2,380
Goodwill	5,176	0	0	0	4	5,180	27,262	19,642
Advance payments	0	0	0	0	0	0	238	220
	5,934	216	0	0	0	6,150	32,716	23,258
Property, plant, and equipment
Land, land rights
and buildings including buildings
on third-party land	2,801	293	128	0	56	3,022	8,068	6,808
Plant and machinery	5,636	1,106	46	0	92	6,788	9,762	6,612
Plant and machinery
operating and office equipment	2,966	706	95	0	29	3,606	4,574	3,593
Advance payments
and assets under development	0	0	0	0	0	0	817	208
	11,403	2,105	269	0	177	13,416	23,221	17,221
Noncurrent financial assets
Noncurrent financial instruments	848	0	21	-146	0	681	1,188	1,028
Other loans	0	0	0	0	0	0	127	1,363
	848	0	21	-146	0	681	1,315	2,391

	18,185	2,321	290	-146	177	20,247	57,252	42,870

Auditor's Report

"We have audited the consolidated financial statements comprising the balance sheet, the income statement and the statements of changes in equity and cash flows as well as the notes to the financial statements prepared by Masterflex AG for the fiscal year from January 1 to December 31, 2005.The preparation and content of the consolidated financial statements are the responsibility of the Company's Board. Our responsibility is to express an opinion as to whether the consolidated financial statements comply with the International Financial Reporting Standards (IFRSs), based on our audit.

We conducted our audit of the consolidated financial statements in accordance with German auditing requirements and generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW).Those standards require that we plan and perform the audit such that it can be assessed with reasonable assurance whether the consolidated financial statements are free of material misstatements. Knowledge of the business activities and the economic and legal environment of the Company and evaluations of possible misstatements are taken into account in the determination of audit procedures.The evidence supporting the amounts and disclosures in the consolidated financial statements is examined on a test basis within the framework of the audit. The audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements give a true and fair view of the net assets, financial position, results of operations and cash flows of the Group for the fiscal year in accordance with IFRSs.

Our audit, which also extends to the group management report prepared by the Company's Board for the fiscal year from January 1 to December 31, 2005, has not led to any reservations. In our opinion, on the whole the group management report provides a suitable understanding of the Group's position and suitably presents the risks of future development. In addition, we confirm that the consolidated financial statements and the group management report for the fiscal year from January 1 to December 31, 2005 satisfy the conditions required for the Company's exemption from its obligation to prepare consolidated financial statements and the group management report in accordance with German law."

MBT WIRTSCHAFTSTREUHAND GMBH Wirtschaftsprüfungsgesellschaft Lohne, March 30, 2006

Taphorn Meyer

CPA CPA

Report of the Supervisory Board

Dear Shareholders, in fiscal year 2005, the Supervisory Board of Masterflex AG met four times and discussed the economic situation and further strategic development of Masterflex AG in detail. The Board provided the Supervisory Board with regular and comprehensive information on the Company's business and financial situation, the staffing situation, business and capital expenditure developments, and the current status of corporate planning at all of these meetings. Written and verbal reports, which the Board provided in a regular and timely fashion, served as the basis for these deliberations of the Supervisory Board. In addition, the Chairman of the Supervisory Board was in constant contact with the Board and was informed about all material developments and upcoming decisions. Decisions of fundamental importance were submitted to the Supervisory Board for approval, which the latter granted after completing its review and assessment of the matter. On the basis of reports from the Board, the Supervisory Board monitored the conduct of business by the Board and provided advice in accordance with the roles and responsibilities assigned to it by law and the articles of incorporation. In monitoring the contact of the business, the Supervisory Board review focused especially on its being lawful, proper and appropriate as well as economically sound. In so doing, the Supervisory Board examined the activities already undertaken by the Board on the one hand. On the other hand, the Supervisory Board engaged in an intensive dialogue with the Board about future-oriented business decisions and plan calculations, basing the discussions on the reports provided by the latter, as well as the review and consideration of specific business documents or submissions in each case.

Major topics included especially the acquisition of the SURPRO Group, progress in fuel cell technology and the scaling back of profit expectations in November 2005. The Board kept the Supervisory Board continuously informed about the state of the take-over negotiations with respect to the SURPRO Group as well as the synergy effects to be expected in research and development. After the lowering of profit expectations was announced, the Board and the Supervisory Board discussed adjustments to the risk management environment, aimed at optimizing the early warning system of Masterflex AG in the event of variances from plan. In addition to the successes in fuel cell technology, the Board of Masterflex AG also presented a highly promising project to the Supervisory Board in the field of gastight hoses, which are coated on the inside with metal or ceramic, and discussed possible areas of application as a substitute for stainless steel pipes.

At its meetings, the Supervisory Board thoroughly discussed the reports from the Board and engaged in a dialogue with the Board about the development prospects of the company and of the individual business segments. To the extent that a Supervisory Board decision was required by law or the articles of incorporation for individual transactions or measures by the Board, we adopted such resolutions at Supervisory Board meetings.

The implementation of the German Corporate Governance Code is an integral part of the Supervisory Board meetings at Masterflex AG. In line with section 5.6. of the Code, the Supervisory Board continuously reviewed the efficiency of its own work. In December 2005, the Board and the Supervisory Board issued an updated declaration of conformity in accordance with section 161 of the Aktiengesetz (German Public Companies Act) based in each case on the revised version of the German Corporate Governance Code dated June 2, 2005, and made it permanently accessible to the Company's shareholders on its website. Otherwise, the Board reports on corporate governance on behalf of the Supervisory Board as well in accordance with section 3.10 of the German Corporate Governance Code.

Given that, under the articles of incorporation, the Supervisory Board is composed of three individuals as members, it did not appear sensible to establish separate committees, since the same three persons would necessarily be appointed to all.

The auditing firm MBT Wirtschaftstreuhand GmbH Wirtschaftsprüfungsgesellschaft, Lohne, which was appointed as the Company's auditor by the Annual General Meeting on June 8, 2005, audited the annual financial statements and management report of Masterflex AG submitted by the Board, as well as the consolidated financial statements and Group management report for 2005, including the accounting, and gave each an unqualified audit opinion.The documents to be audited and the auditors' reports were distributed to each member of the Supervisory Board at the meeting convened to approve the annual financial statements on March 16, 2006.The auditors participated in the discussion of the annual financial statements and the consolidated financial statements.They reported about the major audit findings, focusing explanations especially on the net assets, financial situation and earnings position of the company and of the Group, and were available to the Supervisory Board for additional information.

The Supervisory Board concurred with the auditor's reports.The results of its own examination correspond in full with the results of the audit of the financial statements.The Supervisory Board had no reason to raise any objections to the annual financial statements and consolidated financial statements prepared by the Board.The Supervisory Board has therefore approved the annual financial statements and the consolidated financial statements for the year ending December 31, 2005, as submitted by the Board, on March 24, 2006.The annual financial statements have thus been adopted. The Supervisory Board also concurs with the Board's proposal for the appropriation of the unappropriated surplus.

No Supervisory Board members were involved in any conflicts of interests in the period under review; they did not hold any other positions on executive bodies.

The Supervisory Board would like to thank the members of the Board and all Masterflex employees for their commitment and hard work in fiscal year 2005.

Gelsenkirchen, March 2006 The Supervisory Board Friedrich-Wilhelm Bischoping Chairman

The current members of the Supervisory Board are:

Mr. Friedrich-Wilhelm Bischoping (Chairman) After graduating from university, Mr. Bischoping founded an industrial engineering company with a partner in 1974, which he expanded in the 1990s by means of acquisitions. In 1987, he became one of the co-founders of Masterflex Kunststofftechnik GmbH. Mr. Bischoping resigned from the senior management of his engineering companies in 1998. When Masterflex Kunststofftechnik GmbH became an Aktiengesellschaft (a German public company limited by shares), Mr. Bischoping resigned from the senior management team and became Chairman of the Supervisory Board.

Prof. Dr.-Ing. Detlef Stolten (Vice-chairman since June 9,

2004) After graduating with a degree in metallurgy/geology, Prof. Stolten joined the research unit of Robert Bosch GmbH in 1986 where he also wrote his doctoral thesis. Following positions at Daimler-Benz/Dornier research and Dornier Satellitensysteme GmbH, he became Director of the Institute for Materials and Processes in Energy Systems at the Forschungszentrum Jülich GmbH (Research Center Jülich) in 1998. His research projects focus on energy systems process technology for PEFC and SOFC fuel cells, i.e. the areas of electrochemistry, stack technology, process and system technology, as well as systems analysis. In 2000, he joined RWTH Aachen as Professor for Fuel Cell Technology. Among other posts, Prof. Stolten serves as a member of the EU's Advisory Council Hydrogen and Fuel Cell Technology Platform, where he chairs the Strategic Research Agenda steering panel.

Prof. Dr. Paulus Cornelis Maria van den Berg (member of the Supervisory Board since June 9, 2004) After completing his medical studies and receiving his PhD from the University of Amsterdam, Prof. van den Berg continued his education at several institutions including the Harvard School of Clinical Health, Boston. Currently, he is the Director of Intensive Care at the University of Leiden, the Netherlands. In addition to intensive care, his research focuses on anesthesia. Prof. van den Berg organized the 10th European Congress on Intensive Care, among other achievements. He is a member of organizations including the Nederlandse Vereniging voor Intensive Care (the Dutch Intensive Care Association), the European Society of Intensive Care, and the Society of Critical Care Medicine.

Glossary

Angiography	An X-ray examination in which the blood vessels can be seen via the use of
	an X-ray contrast medium
Autologous blood donation	"online", or machine-assisted autodonation. Blood is harvested, processed,
	and returned directly to the patient during an operation.The benefits are a
	reduction in heterotransfusion and therefore in the possible risk of infection
Break-even	The point at which revenues equal expenses
Cardiology	The science, i.e. the diagnosis and treatment, of heart disease, or more bro
	adly cardiovascular disease.
Cash flow	The cash flows generated in a particular period, adjusted for significant non
	cash expenses and income; this demonstrates a company's ability to finance
	itself, i.e. its earnings power
Cathode	A negatively-charged electrode
Corporate governance	Corporate governance refers to responsible corporate management and
	supervision aimed at creating long-term enterprise value
Disposable	Medical product which is only used once, and therefore does not need sterilization
DRG	Diagnosis Related Groups or fee per case payments in medical technology
EBITDA	Earnings before interest, taxes, depreciation and amortization
EBIT	Earnings before interest and taxes
EBT	Earnings before taxes
Electrolysis	Process in which a chemical compound is broken down using electricity, e.g. in
	order to split water into hydrogen and oxygen
Electron	Negatively charged particle which generates electricity on movement, e.g. in
	a semiconductor
Enteral nutrition	Artificial nutrition via stomach and intestinal tubes, used with disorders of the
	digestive tract
Extrusion	A process used in plastics manufacture.The raw materials (in granulated form)
	are broken down and heated in an extruder until they are plasticized, i.e.
	moldable and can be processed further
Free float	Refers to the percentage of share capital which is freely available for trading on the
	stock market.The opposite of this is the non-free float, in which the total shares
	held by one shareholder account for five percent or more of the share capital
Fuel cell	A device that transforms chemical energy directly into electrical energy.The
	principle is based on a discovery by Sir William Robert Grove in 1839
Gross domestic product	The total value of all goods and services produced by an economy for the
	market within a reporting period

IASs	International Accounting Standards
IFRSs	International Financial Reporting Standards; the EU accounting standards for
	listed companies
IPO	Initial Public Offering, the stock market flotation of a company
Kits/surgery kits	Medical instruments are assembled into a complete set to suit physicians' indivi
	dual requirements
LaryVent respiratory mask	A medical respiratory device that is specially designed to prevent the risk of vocal
	cord damage, which is common in operations, and asphyxiation from vomiting
Market capitalization	The share price multiplied by the number of shares in free float
MEA	Membrane electrode assembly, a key component of PEM fuel cells
Medical devices	Medical components/parts such as infusion tubes, catheters, etc.
Mobile computing equipment	TCarrying systems designed to facilitate the mobile use of communications
	technology (printers, notebooks, etc.)
Multi-lumen tubing	Medical hose with multiple chambers
Mobile office systems	see Mobile computing equipment
Net dividend yield	Dividend per share divided by the share price
Pedelec	Derived from "pedal electric"; this is an electric bike with a force or motion
	sensor that automatically couples the power of the motor with the muscle
	power of the rider
PEM	Proton exchange membrane
Polyurethane (PUR)	Highly versatile special polymer
RMS	Risk management system
Stack	Several individual fuel cells are combined to form a stack. In a bipolar stack,
	electrical contact between individual cells is ensured by a bipolar plate
	sandwiched between them

Financial Calendar 2006

Annual earnings press conference	March 31th
DVFA analysts' meeting	April 3rd
International road show	April/May
Interim report for Q1	Mid May
Annual General Meeting	June 14th
Dividend payment	June 16th
Interim report for H1	Mid August
Interim report for Q3	Mid November
International road show	November/December
http://www.masterflex.de

Imprint

Editor

Masterflex AG Willy-Brandt-Allee 300 45891 Gelsenkirchen

Entered in the Commercial Register of Gelsenkirchen District-Court under HRB 2962

Fon: (+49) 209-97077-0 Fax: (+49) 209-97077-33 e-Mail: [email protected]

Layout by

Viskon Kommunikation & Design, Neustadt an der Weinstraße

Imprint

Druck- und Verlagshaus Fromm GmbH & Co. KG, Osnabrück

Translation by

HR Übersetzungsagentur & Sprachschule, Saarbrücken

Masterflex AG Willy-Brandt-Allee 300 45891 Gelsenkirchen

Masterflex AG | Geschäftsbericht 2005

Geschäftsbericht 2005

* Vorschlag zur Hauptversammlung am 14. Juni 2006

6,0

5,9

in Mio. Euro

87,8

75,8

66,9

70 80 90

3,7

123

1,37

1,4

in Euro

12,6

in Mio. Euro

1,33

1,2

0,84

10,6

0,8 1,0

0,2

Konzern-Ergebnis pro Aktie

7,6

789

2005

Konzern-EBIT

31.12.2005

87.773

14.584

12.263

9.719

5.965

31.040

97.832

31,7%

14,0%

6,8%

1,37

0,80*

2,9%**

656 75.752

13.544

10.553

9.423

5.942

28.848

87.259

33,1%

13,9%

7,8%

1,33

0,80

2,9 %

473

31.12.2004

Veränderung

15,9 %

16,2 %

7,7 %

3,1 %

0,4 %

7,6 %

12,1 %

38,7 %

3,0 %

0,0 %

2004

2003

2004

2003

0,4 0,6

** Kurs am 31.12.05: 27,00 ¤

Masterflex im Überblick

Geschäftsbericht 2005 |

Umsatzerlöse (T¤)

Eigenkapital (T¤)

Bilanzsumme (T¤)

Eigenkapitalquote %

Mitarbeiter (31.12.)

Nettoumsatzrendite

IAS-Ergebnis pro Aktie (¤)

Netto-Dividende pro Aktie (¤)

Netto-Dividendenrendite (31.12.)**

EBIT-Marge

EBITDA (T¤)

EBIT (T¤)

EBT (T¤)

Überblick – Zahlen, Daten, Fakten

IAS-Konzern-Jahresüberschuss (T¤)

Konzern-Umsatz

2005

2004

2003

2005

Konzern-Jahresüberschuss

10 20 30 40

2004

2003

Tel.: +49(0)209-97077-0 Fax: +49(0)209-97077-20

[email protected] www.masterflex.de

AI assistant

Masterflex SE — Annual Report 2005

276_10-k_2006-04-28_09bc8f71-6b08-4688-bb26-5d31385d1a9e.pdf

Consolidated balance sheet

Highlights of 2005

March

April

May/June

August

September

November

Dear Shareholders,

Masterflex shares

Share information

Price performance of Masterflex shares versus DAX and SDAX

Share price statistics

Dividend payment for the fifth year running

Earnings development in 2005

Financial Calendar 2006

Corporate governance report

Exceptions

Key elements of corporate governance at Masterflex AG

Group Management Report

I. Business and business conditions

Group structure and business activities

Corporate bodies

Board remuneration

Supervisory Board remuneration

Employee compensation system

Market and competition

High-tech Hose Systems

Masterflex AG Applications

Fuel Cell Technology

Medical Technology

Mobile Office Systems

Advanced Material Design

Corporate governance, objectives and strategies

Objectives and strategies

Market leadership

Research & development focus

Implementation of innovative materials and technologies

Presence in profitable niche markets

Expansion in new markets

Research and development

Nanotechnology

Environmental protection

Internal corporate governance system

Value-oriented corporate management via key performance indicators

The 2005 Fiscal Year

General economic situation

Plastics processing industry

Masterflex AG

High-tech Hose Systems

Medical Technology

Mobile Office Systems

Advanced Material Design

Developments at our subsidiaries

Masterflex S.A.R.L.

Masterflex Technical Hoses Ltd.

Flexmaster USA, Inc. and Masterduct Inc.

TECHNO Handelsgesellschaft mbH

Masterflex Bulgaria Eood

Matzen & Timm GmbH

NOVOPLAST Schlauchtechnik GmbH

ANGIOKARD Medizintechnik GmbH & Co. KG (Subgroup)

DICOTA GmbH (Subgroup)

SURPRO Verwaltungs GmbH (subgroup)

Masterflex Brennstoffzellentechnik GmbH

II. Earnings position, Financial Situation and Net Assets Earnings position

Financial Situation

Principles and goals of financial management

Financing analysis

Investment analysis

Liquidity analysis

Net assets

Analysis of the asset structure

Company acquisitions

Employees

III. Supplementary report

Material events after the close of the fiscal year

Masterflex SE Annual Report 2005