MEDION AG

Annual Report • Mar 23, 2006

Annual Report annual report 2005 medion ag

Werte in Mio. €	Jan. 1 –	Jan. 1 –	Jan. 1 –	Jan. 1 –	Jan. 1 –
in € million	Dec. 31, 2005	Dec. 31, 2004*	Dec. 31, 2003	Dec. 31, 2002	Dec. 31, 2001
Sales	2,527	2,624	2,924	2,627	2,117
-inside Germany	1,699	1,549	1,916	1,829	1,620
-outside Germany	828	1,075	1,008	798	497
Sales by product group
-PC/multimedia	1,799	1,919	2,091	1,937	1,553
-Entertainment electronics	632	642	778	651	515
-Communications technology	96	63	55	39	49
EBIT	22.0	*88.2	175.8	146.8	117.4
Net income	9.2	*48.8	103.1	91.3	70.1
Total assets	829	867	982	839	619
Equity-to-assets ratio	53.25%	52.60%	44.71%	43.48%	48.30%
Depreciation/amortization	8.5	7.0	5.5	3.6	1.7
Average number of employees	1,551	1,426	1,092	837	637
Personnel expenses	59.9	*62.7	46.2	34.3	23.7
MEDION stock
Subscribed capital	€48,418,400
Authorized capital	€10,000,000
ISIN	DE0006605009
WKN	660500
Reuters ticker	MDNG.F
Listing	Frankfurt am Main XETRA
Indices	Prime Standard All share, CDAX, DOW JONES STOXX, GEX
Free float	45%
Earnings per share	0.19	*1.01	2.13	1.89	1.46
Free cash flow per share	1.49	0.94	1.20	1.12	1.05
Average number of shares outstanding	48,418,400	48,418,400	48,381,733	48,378,400	48,129,589
Dividends per share	0.19	0.55	0.70	0.60	0.50

Annual Report annual report 2005 medion ag

Contents

1	Letter to Shareholders	7
2	Report of the Supervisory Board	10
3	Corporate Governance Report	14
4	MEDION Business Model	22
5	Management Report of MEDION Group and MEDION AG	46
6	MEDION Stock	84
7	Consolidated Financial Statements	90
8	Notes to the Consolidated Financial Statements	100
9	Auditors´ Report	131
10	Separate Financial Statements of MEDION AG	136

Financial Calendar

Publication Credits

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Dear Shareholders,

Fiscal year 2005 met neither our expectations nor those of the retail sector.

Consumer spending failed to improve in many Central European countries as well as in Germany. In the face of low job security levels and higher costs of living due to rising energy costs, consumers did not express great confidence about the future.

Additional uncertainty was caused by the unresolved political situation lasting until October 2005, in the wake of Germany's parliamentary elections, along with media reports of mass dismissals at big corporations and fears regarding the price of oil. This overall trend led to extremely cautious ordering among our trading partners for the all-important seasonal business at year-end. Our margins were impacted by an above-average price drop in consumer electronic products.

MEDION could not escape these external effects. However, following the sharp sales and earnings declines of the first quarter of 2005, we succeeded in stabilizing sales in the following quarters, even experiencing a slight increase.

Sales decreased 3.7% to €2,527 million in 2005, down from €2,624 million a year earlier. EBIT declined to €22 million from €88 million in 2004, primarily due to the increase in other operating costs based on higher service costs and other selling expenses. In addition, the Company had restructuring expenses of €20.5 million in the fourth quarter of 2005.

Earnings per share were €0.19 for fiscal 2005 in comparison with €1.01 in 2004.

The Management Board is convinced that the Company's realignment will bring positive results. For this reason, it is intended to submit a dividend proposal that will ensure that MEDION shareholders are rewarded for their commitment.

MEDION did not reach all of its targets outside of Germany, with the foreign share of sales declining to 32.8%. One reason for this decrease in comparison with 2004 was the decline in sales in The Netherlands, France and Italy. However, in some cases strategic distribution considerations played a role in these countries, with low-margin sales deliberately being allowed to shrink.

With regard to share price performance in 2005, there can be no doubt that the price trend was just as unsatisfactory for you as shareholders as it was for us. The relatively good performance from May to September 2005 was followed by a sharp price decline in tandem with a clear worsening of the situation in the retail sector.

Our goal remains to create a stable and lasting perspective for MEDION. Share prices reflect the earnings power and performance capacity of a company as well as the assumptions of market participants regarding future sector developments and the company's operating strengths. MEDION's stable position in foreign markets and our continuing strong position in our home market of Germany show that our business model is still viable. Our efforts will now focus on working together with our retail customers to systematically advance internationalization and on using new ideas for products and distribution to generate sales potential.

Our business model of offering innovative, high-quality yet attractively priced consumer electronics products that incorporate current trends has been proven effective, as shown by the speed at which our products were sold out in numerous sales campaigns organized by multinational retail groups. MEDION is one of the top providers of value for money in Europe and plays a leading role in marketing innovative technologies aimed at broad consumer groups.

In 2005, our products again enjoyed a high level of market acceptance, performing well in a variety of test reports and customer surveys both inside and outside of Germany. This favorable response confirms our business model, motivating us to keep improving our products and services on an ongoing basis. In addition to a normalization of consumer spending in Germany and initiatives to step up our foreign business, we attach particular importance to creative and innovative product management. Major sales successes in the mobile computing area, which includes notebooks and mobile navigation equipment, and in consumer electronics with LCD and plasma TVs, have clearly shown that high demand can be generated even in times of consumer restraint.

As a decisive factor, MEDION will continue to rapidly implement the measures decided on to improve productivity and profitability. Product types and distribution structures must be geared toward contribution margins and risk profiles. The Company's business processes must be realigned to give earnings precedence over sales. As already announced, this will initially lead to an unavoidable sales decline in 2006.

We will have to expand our attractive position as a strong retail partner by implementing additional measures to increase our range of services. Initiation of an online photo service and development of mobile phone services are major examples of our new focus on services.

MEDION's business model continues to be promising because of its extremely flexible structures in both purchasing and distribution. Based on this advantage along with our innovative strength geared toward mass markets, we expect to have a good competitive position in the future as well.

Particularly in view of the difficulties faced in 2005, we would like to take this opportunity to sincerely thank all of our employees in Germany and abroad for their exemplary commitment to our Company.

The Management Board

Gerd Brachmann Christian Eigen Dr. Knut Wolf

In the year under review, the Supervisory Board fulfilled all duties pursuant to statute and the Company's Articles of Incorporation. It advised and monitored the Management Board and was consulted on all decisions of fundamental importance to the Company.

The Management Board reported to the Supervisory Board regularly, promptly and comprehensively both in writing and during meetings on all matters pertaining to corporate planning and strategic development, business transactions, and the situation of the Group, including risk exposure and risk management. Any deviations from budgets and targets in the course of business were discussed in detail. The Management Board consulted with the Supervisory Board on the Company's strategic alignment. All significant business transactions were reviewed in detail on the basis of the Management Board's reports.

The Supervisory Board held five meetings in fiscal 2005, all of which were attended by the full Supervisory Board. In addition, the members of the Supervisory Board held several internal preliminary discussions and post-meeting reviews. Between meetings, the Supervisory Board was also provided with detailed information on all projects and undertakings that were of particular significance for the Company or required swift decisions. Wherever necessary and appropriate, the Supervisory Board granted its approval in writing.

In addition to the ongoing and detailed information received on sales, earnings and headcount in the individual divisions and on the Company's financial position and investment planning, the Supervisory Board also considered the following topics in the year under review:

• activities in the U.S. market;
• measures to improve MEDION's productivity and profitability;
• reassessment of unprofitable products and order structures and the related restructuring of product management and sales;
• discussion of the changes in the German Corporate Governance Code as of June 2, 2005.

The Chairman of the Supervisory Board was also in regular contact with the Management Board outside of the meetings and was briefed on current business developments and all significant transactions on the basis of updated figures.

One item of regular discussion during fiscal 2005 was the German Corporate Governance Code, particularly the amendments as of June 2, 2005. On December 7, 2005, the Management Board and the Supervisory Board released an updated declaration of compliance pursuant to Section 161 of the German Stock Corporation Act (AktG), which is available to shareholders on the Company's website. The declaration of compliance states that MEDION AG deviates from the Code in three points, specifically with respect to personalized information on Management Board member compensation, personalized information on Supervisory Board member compensation and the formation of committees. Previous declarations of compliance with the Code are kept available on the Company's website for a period of five years. The corporate governance report of the Management Board and Supervisory Board pursuant to Section 3.10 of the German Corporate Governance Code can be found in the following section of this annual report.

Pursuant to Section 5.6 of the German Corporate Governance Code, the Supervisory Board has undertaken to regularly review the efficiency of its activities. Such reviews were conducted on an ongoing basis in the reporting year, particularly at the meeting held on December 7, 2005. The reviews were assisted by a detailed questionnaire. The main elements of this self-evaluation process entailed:

• advisory, monitoring and review tasks, particularly with respect to the Company's accounting and auditing;
• duties of the Management Board to provide information and reports;
• cooperation of Management Board and Supervisory Board and
• procedures within the Supervisory Board.

The auditor appointed by the Annual Shareholders' Meeting of May 12, 2005 and commissioned by the Supervisory Board, Märkische Revision GmbH Wirtschaftsprüfungsgesellschaft, audited the annual financial statements of MEDION AG, the consolidated financial statements and the Management Report (combined management report of the MEDION Group and MEDION AG pursuant to Section 315 (3) of the German Commercial Code) together with the notes to the financial statements for the year ended December 31, 2005. The audit engagement between MEDION AG and the independent auditor complies with the requirements of the Corporate Governance Code. Märkische Revision GmbH Wirtschaftsprüfungsgesellschaft has submitted a declaration of independence to the Supervisory Board confirming that it has no professional, financial or other relations with MEDION AG or any member of its Supervisory Board or Management Board capable of establishing doubts as to its independence.

The auditors issued an unqualified audit certificate. In addition, they examined MEDION AG's existing risk management system and confirmed that the Management Board had taken the precautions required by Section 91 (2) of the Stock Corporation Act and that the risk early warning system is suitable for identifying any risks to the Company's continued existence at an early stage.

The Supervisory Board was likewise able to satisfy itself that the Management Board had taken suitable measures to identify risks at an early stage and had thus fulfilled the requirements arising from the German Corporate Control and Transparency Act.

The documentation relating to the annual financial statements and the audit reports were forwarded to all members of the Supervisory Board and discussed in detail at the Supervisory Board meeting on March 6, 2006. This meeting was also attended by the auditors, who had already answered questions of the Supervisory Board prior to the meeting, in which they reported on the key findings of their examinations and provided supplementary information to the Supervisory Board.

The Supervisory Board also examined the annual financial statements of MEDION AG, the consolidated financial statements and the combined management report. No objections were raised based on the final results of the audit.

The Supervisory Board noted and concurred with the reports submitted by the auditors. The annual financial statements of MEDION AG and the consolidated financial statements prepared by the Management Board were approved by the Supervisory Board on March 6, 2006. The annual financial statements of MEDION AG have thus been considered and duly adopted. The Supervisory Board has concurred with the proposal of the Management Board for the appropriation of profits.

Pursuant to Section 312 of the Stock Corporation Act, the Management Board of MEDION AG has prepared a report on relations with affiliated companies in fiscal 2005, which it submitted to the Supervisory Board. The auditors also reviewed this report, set down its findings in writing and issued the following opinion:

"Based on our review performed in accordance with our professional duties, we confirm that

• 1. the information provided in the report is correct, and
• 1. with respect to the legal transactions cited therein, the Company's contribution was not inappropriately high."

A review of the report by the Supervisory Board did not result in any objections. The Supervisory Board has concurred with the results of the review. Based on this report as well as the final results of its own review, the Supervisory Board has raised no objections to the declaration of the Management Board at the end of the report on relations with affiliated companies.

The Supervisory Board would like to take this opportunity to thank the Management Board and all MEDION employees in Germany and abroad for their high level of commitment in the difficult economic environment of the past fiscal year.

Essen, March 2006

The Supervisory Board

Dr. Rudolf Stützle Chairman

Corporate Governance Report

Joint Report on Corporate Governance by the Management Board and the Supervisory Board of MEDION AG

Management and Supervisory Structure

Shareholders and the Annual General Meeting

Cooperation between the Management Board and the Supervisory Board

The Management Board

The Supervisory Board

Directors´ Dealings

Transparency

Compliance

Handling Risk

Accounting and Auditing

corporate governance at medion

corporate bodies

compliance implemented

Joint report on Corporate Governance by the Management Board and the Supervisory Board of MEDION AG

MEDION is committed to the principles of transparent, responsible corporate management and supervision, focused on the creation of value. The Management Board, Supervisory Board and senior executives of MEDION identify with these principles. MEDION regards the Corporate Governance obligation as an important mechanism to increase confidence on the part of present and future shareholders, lenders, employees, business partners and the public, in both national and international markets.

The Supervisory Board regularly considers the application and further refinement of the principles of Corporate Governance. MEDION's principles of Corporate Governance are based on the German Corporate Governance Code in the version dated June 2, 2005. The Management Board and Supervisory Board of MEDION AG have made a close study of the new requirements of the Code. At their meeting on December 7, 2005 they approved the current declaration of compliance. This declaration of compliance is published on the MEDION website in German and English. It is updated in the event of changes. Previous declarations of compliance in accordance with section 161 of the German Joint Stock Corporation Act (AktG) are also still available on the website.

The Management Board and Supervisory Board of MEDION AG made the first declaration of compliance in accordance with Section 161 AktG on December 19, 2002. MEDION followed the recommendations of the German Corporate Governance Code in the version of November 7, 2002, with one exception: the Management Board and Supervisory Board declared that the Supervisory Board had formed no committees because it consisted of only three members. The declaration of compliance made on December 9, 2003, which referred to the recommendations on conduct of the German Corporate Governance Code in the version of May 21, 2003, contained two additional derogations from it: no information on the remuneration of individual members of the Management Board and the Supervisory Board was contained in the Notes to the consolidated financial statements, as the statement of overall remuneration – differentiated by fixed and variable components – provided a sufficient basis for assessing whether the remuneration is appropriate. The above-mentioned derogations were retained in the declaration made on December 7, 2004, and they were also unchanged in the declaration based on the new version of the Code that was approved on December 7, 2005.

Management and supervisory structure

In accordance with German law on joint stock companies, to which MEDION AG, with its registered office in Essen, is subject, the Company has a dual management and supervisory structure. This consists of a Management Board and a Supervisory Board, each of which has three members.

Shareholders and the Annual General Meeting

At the Annual General Meeting shareholders are able to exercise their rights, specifically their voting rights. Voting rights can be exercised by shareholders themselves, by proxies selected by them, or by the Company's proxy, who is required to vote in accordance with shareholders' instructions. Matters decided by the Annual General Meeting include the appropriation of profits, the formal approval of the actions of the Management Board and Supervisory Board and the election of the statutory auditors. Amendments to the Company's Articles of Incorporation and measures involving changes to its capital base are the exclusive preserve of the Annual General Meeting.

Cooperation between the Management Board and the Supervisory Board

The Management Board and the Supervisory Board work closely together in the interests of the MEDION Group. The Management Board coordinates the corporate strategy of the MEDION Group with the Supervisory Board, and discusses progress in the implementation of that strategy with it at regular intervals. It also supplies the Supervisory Board with regular, timely and comprehensive information on all questions of planning, business development, risks and risk management that are relevant to the MEDION Group. Where projects and proposals are particularly urgent or important to the Company, the Management Board provides the Supervisory Board with full details between meetings. Transactions of major importance are subject to the approval of the Supervisory Board.

MEDION AG has arranged D&O insurance for the Management Board and the Supervisory Board with a reasonable deductible.

The Management Board

The Management Board of MEDION AG consists of three persons and is solely responsible for managing the MEDION Group. The members of the Management Board are jointly responsible for managing the Company; they are obliged to act in the Company's best interests and to secure a sustained increase in shareholder value. The Chairman of the Management Board coordinates the work of its members.

The Management Board has established rules of procedure for its work. Members of the Management Board may not be more than 60 years of age. When first appointed, they are not usually appointed for the maximum possible five-year term of office.

The Supervisory Board advises on the structure of the remuneration system for the Management Board and reviews it on a regular basis. The remuneration of members of the Management Board is set at a reasonable level by the Supervisory Board on the basis of an assessment of their performance, taking into account any remuneration received from other group companies.

The total remuneration of each member of the Management Board consists of a fixed basic salary, which is based on the respective area of responsibility and is laid down in the contract of employment, and a variable bonus with a fixed absolute ceiling, which is based on personal performance and set by the Supervisory Board after due assessment.

In addition, convertible bonds serve as a variable remuneration component with a long-term incentive effect and a risk character. Under the three convertible bonds issued to date, members of the Management Board are entitled to subscribe for a total of 150,000 shares by 2007. The conversion price is based on the MEDION share price at the beginning of the relevant conversion period and its performance in relation to the MDAX market index since the bond was issued.

In addition, some members of the Management Board receive a profit-related bonus that depends on the absolute amount of the Company's annual net income and its change in comparison with the previous year. For this purpose the annual net-income figure is reduced by any loss carryforwards from the previous year, plus any allocations to retained earnings prescribed by law or the Company's Articles of Incorporation. To allow for extraordinary, unforeseeable developments, the Supervisory Board has set an individual maximum level of remuneration for each member of the Management Board that may not under any circumstances be exceeded.

The Chairman of the Supervisory Board informs the Annual General Meeting of the principal features of the remuneration system and of any changes to them. The remuneration of the Management Board is disclosed in the Notes to the consolidated financial statements. Its various components – fixed basic, performance-related components and components with a long-term incentive effect – are presented separately.

In the event of a conflict of interest, the relevant member of the Management Board is required to disclose such to the Supervisory Board without delay. No such conflicts arose in the past financial year.

The Supervisory Board

The Supervisory Board of MEDION AG consists of three persons and regularly advises and monitors the Management Board in its management of the MEDION Group. It is involved in decisions of fundamental importance to the MEDION Group. The Supervisory Board appoints and dismisses members of the Management Board, acting jointly with it to ensure that long-term succession planning is in place. The Chairman of the Supervisory Board coordinates its work, chairs its meetings and represents it externally.

The Supervisory Board has established rules of procedure for its work. The diverse professional backgrounds of the members of the Supervisory Board ensure that collectively it has the necessary knowledge, abilities and technical experience to perform its duties.

By resolution of the Annual General Meeting on May 14, 2003 the Company's Articles of Incorporation were amended to specify that the remuneration of each member of the Supervisory Board consists of a fixed element of €10,000.00 and a variable element equal to 0.0275% of the Company's unappropriated retained earnings, the latter reduced by a sum equal to 4% of its subscribed capital. The variable remuneration element is increased by half for the Deputy Chairman and doubled for the Chairman. Remuneration is payable after adoption of the annual financial statements. The remuneration of the Supervisory Board is disclosed in the Notes to the consolidated financial statements.

In the event of a conflict of interest, especially one that might arise from an advisory or governance function for customers, suppliers, lenders or other business partners, the relevant member of the Supervisory Board is required to disclose it to the Supervisory Board as a whole. No conflicts of interest of any nature arose in the past financial year. If material conflicts of interest arise in the person of a member of the Supervisory Board that are not merely temporary, that member's appointment is terminated.

Particularly at its meeting on December 7, 2005, in accordance with Section 5.6 of the Code, the Supervisory Board carried out a special review of the efficiency of its activities on the basis of various criteria.

Directors´ Dealings

Members of the Management Board and the Supervisory Board are legally obliged under Section 15a of the German Securities Trading Act (WpHG) to disclose any acquisition or disposal of MEDION AG securities if the value of transactions conducted within a calendar year by a member and persons related to him reaches or exceeds the sum of €5,000. The following transaction was reported to MEDION AG as having taken place in the last financial year:

Christian Eigen, Deputy Chairman of the Management Board, purchased 5,000 MEDION shares on March 21, 2005 to the total value of €61,450.00.

Transactions subject to disclosure were published in the Investor Relations section of the Company's website: www.medion.com.

Transparency

Maximum transparency is ensured by keeping shareholders, all capital-market participants, financial analysts, shareholder associations and the media promptly and regularly informed of the Company's performance. Particular use is made of the Internet to this end. Material that can be downloaded from the website includes annual and quarterly reports, together with ad-hoc announcements and press releases in German and English. The publication dates for regular financial reports are listed in the financial calendar. There is an annual analysts' meeting, and a telephone conference in English is generally held when quarterly reports are published. If the Management Board becomes aware that any holding of voting rights in MEDION AG has reached or moved above or below 5, 10, 25, 50 or 75% of the total by acquisition, disposal or other means, it publishes an announcement to that effect without delay. There were three such announcements in the past financial year. In addition, a securities transaction by a member of the Management Board in 2005 was reported in accordance with Section 15a WpHG. Details of shares held by members of the Management Board and the Supervisory Board, together with information on convertible bonds issued as part of the Employee Share Ownership Program, are disclosed in the Notes to the consolidated financial statements.

Compliance

MEDION has established a Compliance Committee in implementation of the German Investor Protection Improvement Act (AnSVG), which came into force on October 30, 2004, and in accordance with the guidelines for issuers published by the German Financial Supervisory Authority (BaFin). This committee is charged with ensuring compliance with the new regulations on documentation and disclosure. All staff at MEDION AG can familiarize themselves with the new regulations, and with the rules of conduct they contain, via the intranet. All employees classified as insiders have received personal letters detailing the new regulations, especially those relating to the Insider Trading law and the keeping of insider registers.

Handling risk

Corporate Governance at MEDION includes the responsible handling of Company-specific risks. A systematic risk-management system detects risks at an early stage and optimizes possible individual risks. This is continuously refined and adjusted in the light of changing circumstances. Details can be found in the Management Report on pages 68 to 75.

Accounting and auditing

The accounts of the MEDION Group are prepared in accordance with International Financial Reporting Standards (IFRS). The financial statements of the parent company MEDION AG are prepared in accordance with the German Commercial Code (HGB).

The statutory auditors are elected by the Annual General Meeting and appointed by the Supervisory Board. In order to ensure the independence of the statutory auditors, the Supervisory Board asks them for a declaration that there are no existing grounds for exclusion or partiality. When appointing the auditors, the Supervisory Board obtains their consent to inform the Chairman of the Supervisory Board without delay of any grounds for exclusion or partiality arising during the audit that are not immediately eliminated. Furthermore the auditors must notify the Supervisory Board without delay of all material findings and incidents of which they become aware in the course of the audit that are of significance for the referral of the Supervisory Board.

For the Supervisory Board of MEDION AG For the Management Board of MEDION AG

Dr Rudolf Stützle (Chairman) Gerd Brachmann (Chairman)

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4.1	MEDION Group	23
4.2	PC/Multimedia	28
	4.2.1 Market
	4.2.2 Products
4.3	Entertainment Electronics	34
	4.3.1 Market
	4.3.2 Products
4.4	Communication Technology	40
	4.4.1 Market
	4.4.2 Products

MEDION Group

4.1

medion as a full-service partner commercial expertise international sourcing network

The idea behind the MEDION business model is as simple as it is convincing. It has proven effective for more than 20 years on several continents and is continuously being optimized. The principle involves providing customers with high-quality functional products that feature eye-catching designs and incorporate the latest technological advances while offering outstanding value for money. The MEDION range embraces the entire spectrum of modern consumer electronics, including PCs, notebooks, LCD and plasma TV sets, DVD recorders, MP3 players, navigation systems, and a special mobile phone plan. Regardless of the product, MEDION provides its retail partners with the broadest range of modern consumer electronics from a single source.

MEDION is not a product manufacturer. Rather, it is a service provider offering retail partners the right product at the right time at an attractive price so they can pass good value for money on to their customers. MEDION supervises and manages the entire value chain, from the initial product idea right through to after-sales service. Because of its proximity to both end consumers and producers, MEDION has a very clear idea of what customers want and what the latest technological trends are. Essentially, we bring together all of the individual links in the value chain: designers and engineers with new ideas, quality-conscious producers, quality managers, reliable transportation companies and not least of all the retailers. We ensure that the entire process runs smoothly, taking charge of key aspects such as product conceptualization, design, quality management and aftersales service. We source our products and components from globally active brand-name manufacturers, thus ensuring access to technological expertise and production skills. Logistic services are entrusted to renowned transportation companies. By concentrating on our core skills and outsourcing capital-intensive processes to leading global manufacturers, we keep our costs flexible and ensure that our customers receive the very latest products at prices offering excellent value for money.

Our customers are large retail chains, most of which have international operations. We generally organize high-volume projects on their behalf, in many cases in multiple countries or even on several continents at the same time. As a consequence, we reduce the amount of work for our customers to a minimum so they are able to concentrate on retailing the products.

Since the MEDION business model enables everyone involved to focus on what is most important to them, it ensures a win/win situation for all stakeholders:

• End consumers get top quality products and services at an affordable price,
• Manufacturers can take advantage of new sales channels,
• Retailers have the opportunity to market attractive products.

Working with our partners, we create an extensive package covering the entire value chain, from development to after-sales service.

Our clear principles have proven their effectiveness for more than 20 years:

• Marketing products incorporating the latest trends
• Emphasizing high quality
• Offering optimum value for money
• Concentrating on leading global retailers
• Focusing on project business instead of maintaining continuous inventories
• Providing extensive service packages for end consumers
• Following the build-to-order principle
• Hedging currency risks

At the same time, we are able to rely on

• Experience gained from more than 10,000 successfully completed projects
• A sourcing network built up around the world for more than 20 years
• Proximity to our customers
• A well-established 365-day after-sales structure
• Attractive sourcing prices due to high procurement and project volumes
• A presence in more than 25 countries
• Exceptional flexibility thanks to our flat hierarchies and fast decision-making channels
• The commitment of our employees

This business model has proven effective for more than two decades and is now operating successfully on several continents. Going forward, we will systematically continue to follow our tried and tested principles while adapting our successful business model to meet changing market conditions.

source: philips (from ce 4/05)

product life cycle

The Value-Added Chain

For our Projects

* we rely on the assistance of well-known partners and service providers when handling our projects. the services outlined here are supplied by third parties.

*Research and Development international brand manufacturers *Production international brand manufacturers *Logistics forwarding agents; shipping companies *Distribution to the End-User international retail chains Product Idea MEDION conducts market research to make certain the latest market and technology trends are brought to bear in creating new product ideas. Product Conception MEDION offers advice in questions of features, pricing, technical specifications – and then tests probable market acceptance. Product Design MEDION´s in-house Design Department defines the external appearance of the products and the packaging using shapes as part of an interactive process involving purchasing managers, retail companies and manufacturers. Quality Management MEDION uses its integrated quality planning systems to test the utility, reliability, electromagnetic tolerance and safety of the appliances in co-operation with independent testing institutes (e.g. TÜV, VDE, LGA). Logistics Management MEDION manages the entire logistics chain from production to retail companies. Delivery is just-in-time by selecting the right forwarders and transportation modes for the particular job. After-Sales Support MEDION offers comprehensive after-sales service. 365 days a year, expert support is available from the hotline at MEDION's own call center ready to handle questions related to applications, warranty settlements and subse-

quent orders. MEDION carries out any repairs necessary, or for specific products within Germany, contracts a local service which then contacts the enduser and performs the repairs on location.

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But how much does this much convenience weigh? About 2.0 kg including the battery.

The MEDION Business Model PC/Multimedia

Market

pc/multimedia a stable growth market pc sales stable

notebook demand growing

Sales of computer hardware for home use in Germany have retreated over 23% to €4.6 billion since 2001. Germany witnessed a 1.5% drop in 2005 compared to 2004.

As in 2004, sales of products for mobile applications and innovative peripheral devices led the field in 2005. Rising unit sales went hand in hand with falling revenues especially in Europe.

Price pressure in the PC/multimedia sector continued to mount last year. The stable euro/dollar exchange rate also contributed to overall price decline, resulting in an up to 25% drop in average prices in some sectors.

development of sales volumes in the private pc market

in 1,000 units	2001	2002	2003	2004	2005*	+/- % 2004	+/- % 2001
Desktop PCs	2,722	2,357	1,990	1,690	1,656	- 1	- 46.7
Mobile PCs	598	812	1,160	1,420	1,945	+ 37	+ 276.0
Total	3,320	3,169	3,150	3,110	3,601	+ 15	-
Index in %	100.0	95.5	94.9	93.7	108.5	-	-

source: gfu/gfk - bbe unternehmensberatung gmbh, cologne, germany *2005 = preliminary

PC sales in the German private sector have remained at 2004 levels with unit sales of 1.656 million, according to gfu/GFK. Falling average prices meant an 11.7% decline in annual revenues to €1.107 billion in 2005. On the other hand, demand for notebooks remained strong. Due to a 37% surge in unit sales (1.945 million), revenue increased by 17.5% to €2.049 billion.

The MEDION Business Model PC/Multimedia

Products

high-performance multimedia computer product innovation: a notebook with tv reception strong growth for mobile navigation devices

As always, value has played a pivotal role in German PC sales with brand names and manufacturers playing a subordinate role. Much more critical to consumer perceptions are the components used and the potential for multimedia applications. MEDION's aim to offer innovative technology at affordable prices is completely in keeping with this trend. The ability to network other applications such as DVD, music, photography or video is standard today since units with multimedia capacity have become a fact of life. The ongoing convergence of PCs and consumer electronics will continue to drive this trend. Since devices such as these are exhibited predominantly in living rooms, design and low noise levels are becoming increasingly important considerations, as MEDION has noticed early on. Successive introduction of digital television reception via antenna (DVB-T) in nearly every major metropolitan area in Germany has turned out to be a huge success. The number of households having digital reception in Germany rose sharply to roughly ten million in 2005.

Market penetration has surged even more powerfully. Twenty-one million households boasted DVB-T reception in late 2005. MEDION was among the first providers to successfully integrate DVB-T receiver modules into many PCs and notebooks it offered in 2005. MEDION products with three twin tuners are the first to feature satellite television, digital DVB-T and analogue cable TV.

Especially mobile applications for TV, navigation, music or video, will offer solid growth opportunities over the medium term.

changes in pc ownership in private households in germany

MEDION will continue to focus its strategy on powerful multimedia computers. These products set standards for features and price as numerous test reports have confirmed. MEDION utilizes brandname components from such well-known manufacturers as Intel, AMD, Seagate, Western Digital, Philips, ATI or Nvidia. MEDION offered an external hard drive with 250 gigabytes in 2005 for the first time. It functions as a universal external medium via the USB 2.0 interface directly and without a cable, thus expanding the PC's storage capacity. Moreover, MEDION has employed optimum heat management and quieter fans to reduce the noise generated by PCs.

Due to its market relevance, MEDION is a key customer for even large manufacturers, meaning that it has access to the latest technologies in sufficient quantities. Our computers may be combined with a multitude of devices for photography, video, DVD, music processing or home cinema via special connect modules and an extensive software package. We started equipping some of our PCs and notebooks for Internet telephony early on to take advantage of this increasingly popular technology.

We will continue to stake our claim to being among the first to translate the latest technologies and standards into products for a broader user base. For example, we are one of the few companies to offer a full array of products for both PC/multimedia and entertainment electronics. We intend to press our advantage to take a leading role in the convergence of these two formerly disparate market segments.

Besides successful products, extensive after-sales customer service plays an important part in the success of our business model. That is why we have established an efficient call center. The center's employees profit from constant training to keep them up to date with the latest technical developments. Today, they are in a position to solve any consumer electronics problem, and not just in one particular area. Since after-sales service strongly influences customer satisfaction and hence, future purchasing decisions, we believe that we possess a powerful competitive advantage.

We were able to improve upon the revenues obtained from mobile computing last year. At the forefront of this development were sales of notebooks and navigation systems in various combinations. It should be noted that we became one of the market leaders in this sector within a very brief time. This confirms the soundness of our business model, which allows us to open markets for a broad customer base with the right products, at the right time, in the right place.

A good example of the way in which we are able to come up with innovative products is the combination of a PC or notebook with a DVB-T receiver unit. Once again, we succeeded in creating considerable demand by bundling two independent products at an attractive price, much in the same way we integrated a navigation system into a PDA. We will continue to use this approach in order to create interesting business opportunities.

Mobile navigation systems continue to evidence strong growth. MEDION recognized this trend early on. It broadened its offering in 2005 and marketed models with TMC technology to plan routes on the basis of traffic reports in the fourth quarter of 2005. Since there is still no sign of market saturation, the market consultancy BBE expects a quadrupling of sales by 2010 ("Industry report consumer electronics 2006").

The same basic considerations apply to the mobile segment as apply to the desktop sector: extraordinary value for money, premium components, plug-and-play coupled with extensive software and supplemented by a comprehensive service package. Due to the general direction of the market, mobile applications will continue to be a major engine for growth at MEDION.

market for portable navigation solutions in western europe in millions of units source: navtech analysis

An affordable price...

Like with so many of our other products, we have met our goal with the MD31133 LCD television. Being the successor of the prize-winning MD30132 (bearing the "good" rating for both product testing and value; Test "Audio Video Foto Bild"), the MD31133 has an HDMI input for digital video and audio transmission with HDCP decoding. Digital video data can now also be transmitted in concert with the highest quality audio data. This set also has the user interface praised by "Audio Video Foto Bild", is HD READY, and has virtual Dolby Surround and a dual-tuner for picture-in-picture viewing in the TV mode.

Has anything so affordable ever been so indispensable?

The MEDION Business Model Entertainment Electronics

4.3.1

Market

european market in 2005: €36 billion strong market growth for lcd and plasma digitization charges forward

Worldwide, a total of about €200 billion in sales is generated each year in the classic entertainment electronics sector (excluding telephones, PCs, and notebooks). At the same time, digitization and globalization continuously intensify international competition. The speed of innovation is very fast. In the course of its life cycle, a product generates varying margins. The highest margins are achieved with new products that are bought immediately after launch by consumers in the high-income segment of innovators and early adopters. But the price soon begins to drop. Rising sales volumes initially compensate for the reduction in price, but both prices and quantities then start to decline at a disproportionately rapid rate.

Despite the difficult consumer environment in general, the market for classic entertainment electronics experienced growth once again in Germany and throughout Europe in 2005. While sales in Europe totaled more than €36 billion, sales in Germany, the second largest European market, reached €12.4 billion*. TV sets alone contributed €5.758 billion to this total. The IFA consumer electronics fair that took place in Berlin in late summer provided stimulus for the seasonal business at yearend. A number of digital innovations are driving the growth in the market for entertainment electronics. Analog equipment is rapidly being replaced with innovative digital technology, which already represents more than two thirds of the market volume in entertainment electronics. Growth drivers include TV sets with flat displays, set-top boxes for digital TV reception, DVD recorders, digital photo and video cameras, and above all MP3 players.

		Households with	Households with	Percentage of West
	in millions of households	HDTV display	HDTV reception	European households
2008		19	3	12.0%
2007		11.5	1.5	7.0%
2006		5	0.8	3.4%
2005		2.5	0.3	1.2%
2004		0.8	0.25	-

The TV sector recorded growth in 2005 in Germany with its new LCD and plasma screen technologies. LCD TVs increased unit sales by more than 160% to 1.235 million units*. In the same period, sales of plasma sets increased by 200% to 300,000 units*. Unit sales of TVs with conventional picture tube technology declined by 19% to 4.06 million sets*.

hd market prognosis for europe

source: strategy analytics / sony

*Source: gfu/GFK

The MEDION Business Model Entertainment Electronics

potential for flatscreen tvs

source: acta, allensbacher computer-

und technik-analyse

The trend towards convergence in connection with rapid access to the data highway has continued to rise as more households have broadband service. In Germany, the digitalization of television via cable, satellite, and terrestrial reception will be completed by 2010. So far, about 40% of German households have digital TV service. In Europe, the number of households with digital service is expected to grow to more than 120 million by 2008. The significant improvement in picture and sound quality achieved with digitization is transforming the classic television set to a home cinema when paired with larger screen sizes and corresponding audio systems.

The use of televisions, video equipment, and music and photo files is no longer restricted to a specific location in the household or a specific type of product. An increasing variety of entertainment electronics products are being networked both inside the home and in the outside world.

This development is supported by the willingness of young consumer groups to spend more money on entertainment electronics.

According to a study by FOCUS, the German weekly news magazine, on the entertainment electronics market in 2005, young target groups in particular are very enthusiastic about high-tech products with high lifestyle value. Consumers in the 14-to-25-year age group are product pioneers when it comes to camera phones, MP3 players, video games, and mobile content and music downloads. The readiness to buy is the highest in this target group at just under 50%.

Entertainment Electronics

Products

hdtv promises growth

• more households have digital reception
• mobile entertainment

The year 2005 was characterized by a generation shift in the television market. The trend is moving towards large, flat home theater screens in a wide 16:9 format. With these high-definition flat screens based on LCD and plasma technology, demand for pictures in high-definition quality has risen as well. The high-definition television standard HDTV will experience a true breakthrough in Germany and Europe in 2006 due to the Soccer World Cup and new video game consoles that also feature high-definition screens.

The consulting firm Solon says in a recent study that by 2008 more than 5 million households will be equipped with HDTV-capable televisions or projectors. This corresponds to a 13% penetration rate in Germany. According to this study, 1.4 million households will actively use HDTV broadcasters because they have an HDTV-capable digital receiver and access to broadcasts based on this technology. By 2010, these figures are expected to rise to 12.5 million (33%) passive and 5.5 million (15%) active HDTV households in Germany.

trend development of households in germany with digital tvs

in millions of households	DVB-T (terrestrial)	DVB-C (cable)	DVB-S (satellite)	Total
2009	0.7	3.6	10.7	15.0
2008	0.7	3.2	8.4	12.3
2007	0.7	2.9	6.4	10.0
2006	0.7	2.5	4.7	7.9
2005	0.7	2.1	3.4	6.2
2004	0.4	1.7	2.5	4.6
2003	0.2	1.4	2.0	3.6

source: screen digest / goldmedia

High-definition video will also continue to grow thanks to new products and the possibility of watching feature films in HD quality. Two new media formats will be available in the near future: Blu-Ray Disk and HD-DVD. Both are based on short-wave blue laser light, which can read far narrower data tracks than the conventional red laser light in DVD players. This means 30 gigabytes fit on a dual-layer HD-DVD and as much as 50 gigabytes on a Blu-Ray disk. By comparison, a conventional DVD can hold a maximum of 8.5 gigabytes per side.

High-Definition Audio

Digitalization and the accompanying trend towards higher quality in compact formats is steadily advancing in audio media as well. Mobile entertainment products and portable DVD players as well as jukeboxes with hard drives or flash memory and portable MPEG4/DIVX players for viewing videos or listening to music files in a mobile context will become even more popular.

With the launch of the new DVB-S radio transponder, 55 ARD radio programs can now be received in CD quality. This DVB-S transponder provides access to broadcasting capacities for fast data rates of up to 320 kilobits/second to produce exquisite, high-end sound. Surround sound will also be available via digital antenna broadcasting or DAB. The new, stereo-compatible MPEG Spatial Audio Coding digital format makes it possible.

DVB-T Television

The digital antenna television standard DVB-T continued to grow in its distribution range in 2005. The technical scope of digital broadcasting in Germany has grown to 47 million potential television viewers. The number of users is increasing at a corresponding rate. With an integrated tuner, notebook and desktop PCs can easily be used for television viewing.

The increasing convergence between PC/multimedia technology and entertainment and household electronics will be one of the defining trends in consumer electronics around the world in the coming years.

Since MEDION is one of the few international providers with many years of experience in both worlds, the Company has excellent prospects for further expanding the success already achieved with new and innovative product ideas and product solutions.

You decide...

One consumer just wants a phone to talk on, the other wants to send pictures or short videos. Then there's the other one who's got to surf the Net with WAP. So we don't make just one phone for everyone, but the right phone for everyone. For entry-level users or those who just want to talk, there's the MD97100. For Internet access, the MD97200, and if it should be design at its best, there's the MDMP4100 slim line.

It's all up to you.

Communication Technology

Market

german market: €3.9 billion

• digital reception technology
• 3 billion prints made from digital images

The market for communication technology includes classic telecommunications and satellite reception technology.

About 20 million mobile phones were sold in Germany in 2005, up from 18 million units in the year before*. This represents an 11.1% increase. Sales rose by 2.7% to €3.9 billion in 2005 from €3.798 billion in 2004*.

There is a definite trend towards units with better features, and functions like cameras, address books, appointment calendars, e-mail access, and integrated MP3 player are becoming increasingly standard. Among personal services, text messaging still dominates, but image and audio files are increasingly being sent by MMS as well. Downloadable ringtones and wallpaper designs are a market with continuing dynamic growth. High-tech flip phones and phones with slide designs are more in demand.

Digital technology plays an increasingly important role in the reception of television and radio signals. In Germany alone, digital satellite reception recorded growth by 280,000 units to a total of 2.18 million units sold last year*. Set-top receivers for DVB reception by cable rose by 68% from 250,000 units to 420,000 units in 2005*. A total of 1.6 million reception units for antenna-based digital television were sold in 2005, representing a 14.3% increase from 2004*.

Supported by the strong sales of digital cameras, the growth in the business with digital photo prints continued in 2005. The number of photo prints from digital sources is estimated to have risen to about 3 billion in 2005. Internet-based orders recorded the highest growth.

Communication Technology

Products

medionmobile off to a successful start

online photo service expanded

download platforms: "medionmusic" and "medionhandyfun"

Digital satellite and cable receivers are increasingly equipped with digital hard drives. This makes it possible to use the receiver as a video recorder with superb picture and sound quality. It also enables consumers to take advantage of digital delay features. Recordings can easily be transferred to other storage media using corresponding interfaces.

In the telecommunications sector, another rise in the number of users of UMTS technology is to be expected. Transfer rates are now as fast as 2 megabits per second (up to 40 times faster than current GPRS technology and 200 times faster than GSM), making entirely new mobile technologies possible. Internet and mobile communications are continuing to converge. In mobile telephones, a new dimension was achieved with the introduction of smartphones. These are mobile devices that in addition to classic telephones contain PDA and multimedia functions as well as other features.

In its Telecommunications division, MEDION will expand the MEDIONmobile communications line launched at the end of 2005 as well as its online photo service. A number of download options using the platforms Medionmusic and Medionhandyfun will significantly increase the range of products for end consumers. Ringtones, realtones, and games will complete the selection.

In addition, MEDION will also offer satellite and cable receivers with integrated hard drive recorders in 2006. The same applies to set-top receivers for pay-TV providers.

in million units	2004	2005
Digital mini-photolabs	290	400
Large-scale photolabs/online ordering	160	400
Large-scale photolabs/counter ordering	590	1,100
Instant prints (in-store)	100	150
At-home prints	750	950

prints made from digital image files source: bbe report 2006

Communication Technology

In the mobile telephone segment, the product range will be successively expanded to include the full spectrum from entry-level equipment to high-end products. Here, too, additional benefits will be offered to customers through the intelligent integration of functions like navigation systems and MP3 players.

internet and broadband use in germany / forecast until 2007

german consumer electronics market in 2005 by value (structure in %)

source: gfu/gfk

Structure in 2005	Growth segments	Market share in %
TV sets		16.3
Stereos		3.7
MP3 players		3.0
Video games		6.1
Set top boxes		1.6
DVD players		2.8
Digital cameras		8.8
Camcorders		1.8
Desktop PCs		5.1
Notebooks		9.4
Multimedia for cars		3.8
Mobile phones		18.0
Other		19.6

45 |

A superior concept...

MEDION PCs have always rated highly against the competition for the past few years. And we intend to keep it that way.

We've implemented a new concept with the MD Titanium 8800 design PC – the jack for the external MD90046 hard drive. No cables connect the external hard drive with the MEDION PC. Plug it in. You're done.

If you do want to take the hard drive to a friend who still doesn't have a MEDION PC, you can always use a conventional cable.

But, really, we think that this superior concept will also get your friends on board sooner than later.

46 | 5 Management Report of MEDION Group and MEDION AG

5.1		Economic Environment	47
	5.1.1	Economic Trends
	5.1.2	Market for Consumer Electronics
5.2		The Situation at MEDION	49
	5.2.1	Business Model
	5.2.2	Business Performance in 2005
5.3		Financial Position and Performance	54
	5.3.1	Sales Trend
	5.3.2	Financial Performance
	5.3.3	Financial Result
	5.3.4	Balance Sheet Structure
	5.3.5	Cash Flow Statement
5.4	Subsidiaries		62
5.5		Human Resources	64
	5.5.1	Headcount
	5.5.2	Other Statistical Data
	5.5.3	Main Agreements
5.6		Research and Development	66
5.7		Corporate Governance	67
5.8	Risk Report		68
	5.8.1	Risk Management
	5.8.2	Economic Risks
	5.8.3	Operational Opportunities and Risks
	5.8.4	Sales
	5.8.5	Legal Risks
	5.8.6	Financial Risks
	5.8.7	Personnel Risks
	5.8.8	Risk Management Systems
	5.8.9	Overall Risk Situation
5.9	Outlook		76
	5.9.1	Economy
	5.9.2	Corporate Development
	5.9.3	Development of the MEDION Business Model
	5.9.4	Prospects for 2006

Management Report of MEDION Group and MEDION AG Economic Environment

Economic Trends

5.1.1

domestic demand in europe weak

• high fuel costs strain purchasing power
• private consumer spending retreating in all quarters

According to the Autumn Report of the Kiel Institute for the World Economy, the global economy – driven by the USA and China – showed robust expansion in 2005 despite the rise in the price of crude oil and other commodities.

By comparison, economic momentum in the euro region in which MEDION operates was relatively low. Demand from private households in the euro zone was much more affected by the rise in the price of oil and the ensuing higher energy prices and cost of living than were other regions. Accordingly, consumer confidence in Europe has remained low. Although sector sentiment has now improved slightly based on increased orders, this improvement was almost exclusively due to the upward trend in foreign trade. Domestic demand has remained weak in the euro countries. While tension has eased in some local labor markets, the general trend has not improved.

In Germany, economic recovery has remained sluggish, with the economy still reliant on foreign markets. Upswings in other countries have benefited Germany only to a limited extent. The situation on the labor market remains bleak, with a clear decline in the number of jobs as of late fall 2005. Private demand was accordingly weak, particularly in light of the significant decrease in the purchasing power of the majority of private households due to the rise in energy prices. Private consumption declined in all quarters of 2005, even after adjusting for price effects, calendar effects and seasonal effects.

Management Report of MEDION Group and MEDION AG Economic Environment

Market for Consumer Electronics

5.1.2

global market growing with higher volumes

• price-driven drop in sales
• television market growth

The world market for consumer electronics products improved in terms of units sold. However, the continued development of production capacity in the growing economies of the Far East led to a renewed drop in the price of components. Many segments of the consumer electronics market saw revenue declines due to low prices and the added effect of the persistent weakness of the U.S. dollar against the euro.

In Germany, the consumer electronics market grew by approx. 7.5% to €21.7 billion in 2005 (2004: €20.2 billion).*

Sales of traditional entertainment electronics were mainly responsible for the increase – particularly television sales, which account for nearly 30% of all entertainment electronics sales. The continued decline in sales of cathode ray tube TVs was offset by booming demand for flat screen televisions (LCD and plasma sets). In 2005, more than 1.5 million flat screen TVs were sold. This is 2.8 times more than in 2004. Lower prices, however, meant that revenues lagged behind unit sales, increasing approximately 2.3 times from €895 million to €2.046 billion.

The trend toward digital receivers and players has intensified, with equipment incorporating hard disk digital recorders increasing in particular.

Sales of PC/multimedia equipment for private use were much more restrained. Even though the number of desktop PCs sold remained nearly constant, the price decline in this segment led to a decrease in revenue of nearly 12% in Germany to €1.107 billion in 2005 from €1.254 billion a year earlier. Mobile applications such as notebooks and PDAs are still on the rise. The number of units sold rose approx. 37% in the notebook segment, surpassing desktop PCs for the first time in absolute terms. However, revenues rose proportionately less due to falling prices, increasing approx. 17% to €2.049 billion in 2005 from €1.744 billion in 2004.

Total revenues of PCs and notebooks/PDAs rose approx. 5.1% in Germany in the year under review.

* Figures for the development in the consumer electronics market are provided by Gesellschaft für Unterhaltungs- und Kommunikationselektronik (gfu/GFK 03/2006)

Management Report of MEDION Group and MEDION AG The Situation at MEDION

Business Model

high standards of quality

global sourcing network

supplier relationships span years

MEDION's business model

MEDION's business model is geared towards making high-quality, trendy consumer electronics products and services available to the broad public in large quantities. The MEDION name stands for products and services incorporating high quality standards and offering the best value for money in the areas of PC/multimedia, entertainment and household electronics and communications technology.

MEDION customers are primarily international retail groups with whom we carry out high-volume projects and sales campaigns, often selling the same products in several countries at the same time. Our range of services encompasses entire customer projects, from market research, product conception and design through to quality control, logistics and after-sales service. Our customers can rely on a single-source contact with the competence and experience to successfully carry out sales campaigns for consumer electronics products and services both nationally and internationally while also guaranteeing excellent after-sales service.

Our global sourcing network is made up of highly efficient, reliable suppliers and service providers, most of whom we have been working with for many years.

Trends in MEDION Group's market environment

The majority of MEDION's sales is generated in its main area of competence, the PC/multimedia segment, which accounts for a total of 71% of sales. Entertainment and household electronics contributed approx. 25% to sales, while the increasingly important area of communications technology added another 4%.

MEDION occupies a special position in the market with its focus on project-based sales via discount retailers, making the Company especially dependent on the market assessment and business development of its partners in this segment. The discouraging economic trend in the euro zone, particularly the difficulties on the labor markets, have led to major uncertainty among mass market consumers in recent years. This is increasingly evident in other Western European countries outside of the core German market, with low consumer confidence leading to much more cautious ordering among customers.

In addition, the high share of PC/multimedia sales has had a dampening effect on the sales trend since this segment saw much less growth than other consumer electronics segments. Sales of desktop PCs underperformed the overall market. This decline could only be compensated by approx. two thirds by the encouraging increase in sales of notebooks and particularly PDAs.

In the entertainment and household electronics segment, sales were maintained at approximately the level of the prior year. Unit sales of TFT/LCD and plasma televisions were quite encouraging. In communications technology, substantial sales increases were generated thanks to the successful launch of new service areas (mobile phone and photo services), which will also open up interesting perspectives for the future.

definite planned spending basis: germany, population 14 to 64 years of age

source: acta, allensbacher computerund technik-analyse

	in %	in millions
Upgrade
existing PC	10.9	5.5
Computer (new purchase)	12.5	6.3
Flat-screen TV	16.6	8.3
Cellular phone	35.8	18.0

Management Report of MEDION Group and MEDION AG The Situation at MEDION

5.2.2 Business Performance in 2005

gross margin: 9.5%

restructuring costs: €20.5 mill.

measures for optimizing processes and costs

Financial performance

Despite some success in stabilizing and consolidating the business, fiscal 2005 was unsatisfactory for MEDION on the whole. MEDION's financial performance met neither our expectations nor those of the market, with EBIT before restructuring costs of €42.5 million (2004: €88.2 million) and net income after taxes of €9.2 million (2004: €48.8 million).

financial performance

	€ million	%	€ million	%	€ million	%
	2005		2004*		+/-
Sales	2,526.7	100.0	2,624.1	100.0	-97.4	-3.7
Cost of materials	2,285.7	90.5	2,360.4	90.0	74.7	3.2
Gross earnings	241.0	9.5	263.7	10.0	-22.7	-8.6
Personnel expenses	59.9	2.4	62.7	2.4	2.8	4.5
Other operating income and expenses	130.1	5.1	105.8	4.0	-24.3	-23.0
Depreciation/amortization	8.5	0.3	7.0	0.3	-1.5	-21.4
EBIT before restructuring costs	42.5	1.7	88.2	3.4	-45.7	-51.8
Restructuring costs	20.5	0.8	0.0	0.0	-20.5	-
EBIT	22.0	0.9	88.2	3.4	-66.2	-75.1
Financial result	-4.1	-0.2	-4.2	-0.2	0.1	2.4
EBT	17.9	0.7	84.0	3.2	-66.1	-78.7
Taxes	8.7	0.3	35.2	1.3	26.5	75.3
Net income	9.2	0.4	48.8	1.9	-39.6	-81.1

*Changes to previous year figures due to first-time application of IFRS 2

The following factors were of particular significance in this regard:

1. Following a period of declining sales starting in the second quarter of 2004, the sales trend stabilized in the second quarter of 2005, after which sales were maintained above the previous year's level. However, this could not compensate for the sales decline in the first quarter of 2005, meaning that total sales for 2005 were €97.4 million below the prior-year level, a drop of 3.7%.

2. The squeeze on gross margins continued in a persistently sluggish domestic economy and a worsening economic climate in the rest of Europe. On an annual average, the margin fell by 0.5 percentage points to 9.5%. Gross earnings declined by €22.7 million to €241.0 million, decreasing 8.6% from 2004.

3. Costs for logistics and after-sales service increased as a result of the enhancement of the product range in the past with higher unit sales in many product areas, partially insufficient lot sizes and an increasing number of articles backed by guarantees, particularly outside of Germany. This caused a rising number of cases handled by the service department and the call center as well as a corresponding increase in personnel. Non-staff administrative expenses also rose in the areas of repair and secondary logistics (storage and freight).

These developments resulted in a decline in EBIT before restructuring costs to €42.5 million in 2005 (2004: €88.2 million).

Restructuring measures

In order to combat these negative developments and achieve sustained cost reductions while maintaining high quality of service, MEDION has initiated far-reaching measures to improve processes and lower costs. We have already accomplished the first step of reducing total costs for contract logistics and personnel below the previous year's level. In addition, measures for improving processes and restructuring have been implemented in the areas of product management and sales. This involved a comprehensive analysis of the product portfolio and the related order processing, service, and after-sales structures in order to identify and eliminate excess costs. Based on this analysis, the portfolio was revamped at the end of 2005 to ensure efficiency increases and cost savings from 2006 on.

However, these measures initially resulted in restructuring costs of €20.5 million in the fourth quarter of fiscal 2005.

The financial statements for 2005 included inventory write-downs of €15.9 million for expected losses from the disposal of selected article groups, service articles, and returned goods. In addition, losses of €3.4 million have already been incurred for the systematic sale of inventories in these product groups. Expenses of €1.2 million resulted for restructuring MEDION's service and sales locations.

effects of restructuring measures on 2005 earnings

Management Report of MEDION Group and MEDION AG Financial Position and Performance

Sales Trend

5.3.1

sales below previous year's level sales growth in germany entry into new service offerings

Fiscal 2005 was characterized by a sharp sales decline in the first quarter and slight sales increases in the following quarters. However, retail sales expectations were not met in the fourth-quarter, where year-end seasonal sales are of crucial importance for MEDION and the sector as a whole, as political and economic uncertainty impacted the shopping behavior of private consumers.

The new government in Germany, which was not formed until the end of October 2005, has not yet brought about a noticeable revival in consumer spending. High energy prices and uncertainty regarding future tax burdens in addition to persistent high unemployment also impacted the consumer trend in Germany and most other European countries. Together with the sustained weakness of the U.S. dollar, these factors led to a continuation of the trend toward declining revenues per unit.

All in all, MEDION was not able to compensate for the sales loss in the first quarter of 2005 of €135 million against the particularly good first quarter of 2004. As a result, net income decreased by €97 million to €2,527 million.

€ million	%	€ million	%	€ million	%
2005		2004		+/-
1,698.8	67.2	1,548.7	59.0	150.1	9.7
768.9	30.4	978.2	37.3	-209.3	-21.4
24.7	1.0	46.4	1.8	-21.7	-46.8
34.3	1.4	50.8	1.9	-16.5	-32.5
2,526.7	100.0	2,624.1	100.0	-97.4	-3.7

sales by regions

Sales performance varied in the different regions. In Germany, sales increased to €1,699 million in 2005 (2004: €1,549 million). Along with the expansion of business with existing customers and the success of mobile navigation and flat screen TV products, the new services offered by MEDION positively impacted sales.

In the rest of Europe, however, sales declined to €769 million in 2005 (2004: €978 million) due to slowing markets in Western Europe, particularly The Netherlands, France and Italy, based on weak consumer demand. As a result, MEDION customers exercised caution in placing orders. The proportion of sales in European countries outside Germany decreased to 30.4% in 2005 (2004: 37.3%).

In the U.S. market, MEDION's original targets were not fully achieved despite considerable effort. MEDION therefore scaled back capital spending for developing the U.S. market to an economically viable level, streamlining its U.S. operations to avoid any significant losses from the U.S. business.

	€ million	%	€ million	%	€ million	%
	2005			2004	+/-
PC/multimedia	1,798.5	71.2	1,919.1	73.1	-120.6	-6.3
Entertainment and household electronics	632.3	25.0	642.3	24.5	-10.0	-1.6
Communications technology	95.9	3.8	62.7	2.4	33.2	53.0
	2,526.7	100.0	2,624.1	100.0	-97.4	-3.7

Sales of PC/multimedia products fell by 6.3% to €1,799 million in 2005 from €1,919 million in 2004. This decline was largely due to the drop in desktop PC sales, both in terms of number of units sold and average selling price. The total increase of approx. 26% in revenues from mobile equipment (notebooks and PDAs) was not able to compensate for this decline in 2005.

Sales of entertainment and household electronics were relatively stable in 2005, declining only minimally to €632 million in 2005 from €642 million in 2004. In line with the general trend, TFT/LCD and plasma TVs were the main growth drivers, with sales increasing approx. 60%. Strong gains were also made in digital receivers and recorders. By contrast, cathode ray tube TVs and other traditional household electronics products lost in significance.

In the area of communications technology, increased unit sales of mobile phones and the launch of mobile phone services in particular led to a sales rise to €96 million in 2005 (2004: €63 million).

sales by product group

Management Report of MEDION Group and MEDION AG

Financial Position and Performance

Financial Performance

gross margin: 9.5% personnel costs reduced service costs climbing

Gross margin

The average annual gross margin declined to 9.5% in 2005 from 10.0% in 2004. Margins for the different product types varied greatly. For much of the product portfolio, especially innovative, high-quality products, margins remained decent and even encouraging in some cases. However, certain sales channels and product areas experienced considerably worse margins and unfavorable service and return rates, in particular commodity products such as simple entertainment and household electronics products at entry-level prices. Due to reduced sales and lower margins, the gross margin declined by €23 million to €241 million in 2005.

Personnel expenses

Although the number of Group employees increased by 125, personnel expenses fell by €2.8 million to €59.9 million in 2005 (2004: €62.7 million), or by €1.7 million after adjustment for special effects from the first-time application of IFRS 2. These cost reductions resulted from the introduction of modified compensation systems leading to lower salary expenditure per employee as well as solidarity contributions from employees and the Management Board. New employees were hired to meet increased service and call center requirements and to assume service functions previously performed by external service providers.

personnel expense

	2005	2004
Total personnel expense in € thousand (adjusted for IFRS 2)	58,983	60,721
Average number of employees	1,551	1,426
Personnel expense per employee in €	38,029	42,581

Depreciation and amortization

Depreciation/amortization increased by €1.5 million to €8.5 million due to additional investments in the Company's building in Essen-Kray and in computer software and hardware. This figure includes depreciation on property, plant and equipment of €4.7 million, primarily relating to operating and office equipment, and amortization of €3.8 million related to computer software.

Financial Performance

Other operating expenses

other operating expenses

in € million	2005	2004
Selling expenses	110.9	97.3
Administrative expenses	16.1	16.3
Operating expenses	5.8	4.6
Other	7.2	1.2
	140.0	119.4

Selling expenses primarily include costs for freight and storage, costs for customer service and marketing, and packaging expenses. Selling expenses increased by €13.6 million in 2005. Some of these expenses decreased, such as costs for primary contract logistics, which reflected lower negotiated freight rates. Other costs increased significantly, however, as seen in after-sales service costs which were impacted by customer service and repair expenses and the related freight costs. Due to the wider product range and increased number of units sold in many product groups, the number of articles on the market backed by guarantees rose considerably. As a result, the number of service cases climbed. This was particularly evident in foreign sales, which have grown at aboveaverage rates in recent years.

Furthermore, costs for handling and marketing the products returned by end customers have increased. The number of returned products has risen due to the decrease in disposable income of end consumers as well as the return policies practiced by our major customers, which are far more generous than those of the competition. This has had a negative effect on the gross margin as well as on handling costs.

Marketing activities were increased to improve name recognition and brand value for MEDION in Germany and abroad. These activities included increasing our presence at numerous trade fairs and industry events inside and outside of Germany. Expenses for advertising and trade fairs climbed to €10.4 million in 2005 (2004: €5.1 million).

Administrative expenses remained constant at €16.1 million, while operating expenses rose by €1.2 million to €5.8 million, reflecting costs for renovating and maintaining the Company's building in Essen-Kray. Other expenses, which rose to €7.2 million, primarily include off-period expenses of €2.1 million, exchange rate differences of €1.2 million, and valuation allowances for receivables of €0.9 million.

Management Report of MEDION Group and MEDION AG

Financial Position and Performance

5.3.3

Financial Result

equity-to-assets ratio: 53.25%

tied-up funds reduced

liquidity increased

In the interest of medium-term project financing, MEDION concluded a three-year syndicated loan agreement with eight banks in the reporting year. Finance costs increased by approx. €1.1 million based on the higher financing volume for the seasonal business at year-end and modified credit terms. However, the increase in finance costs was offset by a rise in interest income, which also increased by €1.1 million due to investment of surplus liquitidy. The financial result was therefore at the prior-year level of -€4.1 million.

5.3.4 Balance Sheet Structure

Financial position

Despite a decline in total assets of 4.4% from the prior-year level to €828.7 million, the balance sheet was strengthened again in 2005.

The equity-to-assets ratio was 53.25% after 52.60% in 2004. The good performance of past years has given MEDION a sound internal financing base for continuing to develop the business.

Funds tied up in working capital were appreciably reduced. Active receivables management served to decrease trade receivables by €60.6 million to €350.8 million. In addition, the funds released due to the decline in inventories by €31.7 million to €246.3 million were used to reduce trade payables by €38.9 million and increase available liquidity by €39.7 to €127.1 million as of the balance sheet date.

Management Report of MEDION Group and MEDION AG Financial Position and Performance

5.3.4

Balance Sheet Structure

balance sheet structure

	€ million	%	€ million	%	€ million	%
	2005		2004*		+/-
Cash funds	127.1	15.3	87.4	10.1	39.7	45.4
Inventories	246.3	29.7	278.0	32.1	-31.7	-11.4
Trade receivables	350.8	42.3	411.3	47.4	-60.5	-14.7
Other current assets	50.9	6.2	40.9	4.7	10.0	24.4
Total current assets	775.1	93.5	817.6	94.3	-42.5	-5.2
Non-current assets	53.6	6.5	49.3	5.7	4.3	8.7
Total assets	828.7	100.0	866.9	100.0	-38.2	-4.4
Trade receivables	237.9	28.7	276.8	31.9	-38.9	-14.1
Tax provisions	0.6	0.1	7.1	0.8	-6.5	-91.5
Other provisions	124.2	15.0	108.0	12.5	16.2	15.0
Other current liabilities	21.5	2.6	15.8	1.8	5.7	36.7
Total current liabilities	384.2	46.4	407.7	47.0	-23.5	-5.8
Non-current liabilities	3.3	0.3	3.2	0.4	0.1	0.0
Shareholders' equity	441.2	53.3	456.0	52.6	-14.8	-3.2
Total shareholders' equity and liabilities	828.7	100.0	866.9	100.0	-38.2	-4.4

Management Report of MEDION Group and MEDION AG

Financial Position and Performance

Cash Flow Statement

5.3.5

free cash flow increased to €72.4 million investments in operations properties medium-term project financing defined

Gross cash flow declined to €31.0 million as a result of the decrease in earnings. However, cash inflows from operating activities grew to €84.9 million based on the decrease of €53.0 million in funds tied up in net current assets and the reduction of €31.3 million in income tax payments. The improvement in net current assets is primarily due to further optimization of receivables management and reduced inventories.

Cash outflows from investing activities declined by €7.2 million to €12.5 million – a decrease of 36.5% from 2004. Investment focused on conversion of the Company's building in Essen-Kray at a cost of €8.3 million along with additions to and replacement of software and hardware in the amount of €1.9 million.

Cash used for financing activities primarily relates to dividend payments for 2004 of €26.6 million. Net payments for financing costs, which increased by €1.5 million, include payments of €1.4 million on the syndicated loan taken out for a period of three years with a banking syndicate, which represent expenses for future fiscal years.

Cash and cash equivalents of €127.1 million were offset by liabilities to banks and bonds of only €1.6 million at year-end. Net liquidity thus increased by €40.6 million to €125.5 million in comparison with 2004.

The MEDION Group had a positive net cash position during almost the entire year. Bank loans were only taken out on a short-term basis to finance specific large-scale projects, particularly during the year-end seasonal business. All in all, MEDION AG enjoys sound financing conditions with a high equity-to-assets ratio of over 53%, high net liquidity of over €125 million and a medium-term syndicated loan for project financing.

cash and cash equivalents 2005 / 2004

Management Report of MEDION Group and MEDION AG Financial Position and Performance

5.3.5

Cash Flow Statement

cash flow

2005	2004*	+/-	+/-
	€ million		%
22.0	88.2	-66.2	-75.1
9.0	7.3	1.7	23.3
31.0	95.5	-64.5	-67.5
76.5	23.4	53.1	226.3
-22.6	-53.9	31.3	58.1
84.9	65.0	19.9	30.6
-12.5	-19.7	7.2	36.5
72.4	45.3	27.1	59.8
-26.6	-33.9	7.3	21.5
-6.5	-5.0	-1.5	-30.0
-33.1	-38.9	5.8	14.9
39.3	6.4	32.9	514.1
0.4	-0.3	0.7	233.3
87.4	81.3	6.1	7.5
127.1	87.4	39.7	45.4

5.4

usa structures adapted

• central coordination for projects and logistics
• call center streamlined

MEDION subsidiaries are predominantly companies providing sales and after-sales services for MEDION AG in the countries of operation.

Project handling and logistics is generally managed centrally by the MEDION organization in Germany. The German organization includes Allgemeine Multimedia Service GmbH, which handles call center activities, and MEDION Service GmbH, which is responsible for repairs and logistics related to after-sales and e-commerce services.

Structural adjustments were made at the U.S. subsidiary, since this company on the whole failed to meet targets. The restructurings were largely concluded in fiscal 2005, thus no significant losses from the U.S. business are expected for the future. Capacity can be extended if needed in case a change in market or competitive situation should offer improved possibilities for a profitable business.

To take advantage of synergy potential, call center and repair services for the Austrian market were centralized in Germany in 2005. These services are now performed by MEDION Service GmbH.

subsidiaries of medion ag

Allgemeine Multimedia Service GmbH, Essen, Germany

MEDION Service GmbH, Mülheim an der Ruhr, Germany

MEDION FRANCE S.A.R.L., Villaines sous Malicorne, France

MEDION ELECTRONICS LIMITED, Swindon, United Kingdom

MEDION NORDIC A/S, Skovlunde, Denmark

MEDION AUSTRIA GmbH, Wels, Austria

MEDION B.V., Panningen, Netherlands

MEDION ITALIA S.r.I., Milan, Italy

MEDION IBERIA, S.L., Madrid, Spain

MEDION SCHWEIZ ELECTRONICS AG, Schlieren, Switzerland

MEDION USA, Inc., Delaware, USA

MEDION AUSTRALIA PTY LTD., Sydney, Australia

MEDION KOREA ELECTRONICS Yuhan Hoesa, Seoul, Korea*

MEDION International (Far East) Ltd., Hong Kong, China

LIFETEC International Ltd., Hong Kong, China

MEDION Asia Pacific Ltd., Hong Kong, China

sales support and service

no operating business

*wound up as of august 31, 2005

Management Report of MEDION Group and MEDION AG Human Resources

Headcount

5.5.1

more employees in the service areas

• training concepts implemented
• more flexible working hours

An average total of 1,551 employees (full-time equivalents) were employed by the MEDION Group in fiscal 2005. This corresponds to an increase of 125 full-time equivalents from 1,426 in 2004. A total of 1,237 of these employees were attributable to MEDION AG and its domestic subsidiaries (2004: 1,180) and 314 to foreign companies (2004: 246). The increase in employee numbers related mainly to the call center and after-sales service areas. New employees were hired to meet increased service and call center requirements and to assume service functions previously performed by external service providers.

personnel 2005 / 2004

Number

5.5.2 Other Statistical Data

The rapid personnel build-up of recent years is reflected in the young average age and relatively short length of employment of our employees. The average age of employees at MEDION AG and its domestic subsidiaries was 33.9 years in 2005. The average length of employment was approx. 3.2 years, and the percentage of female employees was 38%.

MEDION places great value on an open and friendly corporate culture. With the help of the employee representatives, a personnel development concept was created and set down in a works agreement. The concept supports friendly interaction of all individuals working for the Company. Both the Management Board and the employee representatives are convinced that socially competent behavior will have a sustained positive effect on the atmosphere at the Company, improve work processes, increase operational productivity and work quality as well as entailing a variety of positive factors for the Company and its employees.

Management Report of MEDION Group and MEDION AG Human Resources

Main Agreements

Together with the Works Council, other important works agreements were also concluded in 2005 in the interests of the Company and its employees. These agreements were aimed at long-term employee commitment as well as increasing flexibility within the Company to meet market requirements.

One agreement, for example, provides for flexible working hours at the MEDION call center. Flexible hours for call center employees allow the Company to adapt to the varying workloads typical of the sector. This more flexible, needs-based organization also enables MEDION to meet increased customer requirements, with the added benefit of allowing the Company to offer third-party call center services in the future as market demand for such services increases.

Another works agreement governs on-call services, ensuring that a team of selected IT specialists is available around the clock to support all business-critical hardware and software applications.

In addition, employees are entitled to anniversary bonuses after a certain length of service to promote long-term employee ties and are also able to participate in a Company pension plan.

MEDION actively supports Company training programs for young people. In 2005, MEDION AG and its domestic subsidiaries had a total of 24 trainees: 14 in wholesale and export trade, 1 in media design for digital and print media, 2 in IT sales, 4 in IT system integration and 3 in IT system electronics. After passing their final exams, 6 trainees from various programs were hired by different Company departments. Moreover, 2 employees completed the dual training system in 2005 and were granted the degree of Diplom-Betriebswirt in business administration.

Research and Development

5.6

close cooperation with leading manufacturers technology digitization

• networking for entertainment electronics

MEDION works very closely with leading manufacturers of components and products in the fields of multimedia and entertainment electronics. We therefore have ongoing access to the latest findings from research and development projects.

Our business model, however, focuses on providing a wide range of consumers with rapid access to innovative technologies. For this reason, we do not maintain our own R&D facilities for work on basic technologies. MEDION is, however, working with partners on numerous projects to use digitalization to integrate PC/multimedia technology with traditional entertainment electronics equipment.

Networked entertainment electronics makes it possible to link television, video and audio equipment via a home network in order to exchange digital images or recordings or download them from the Internet. Entertainment electronics systems can be networked via increasingly popular broadband DSL for fast Internet access, WLAN for wireless transfer of images and sounds or via the power grid available in the home.

5.7

MEDION is committed to observing the principles of transparent, responsible corporate governance aimed at maximizing value. The Management Board, Supervisory Board and executive staff of MEDION AG identify with these principles. MEDION considers compliance with corporate governance principles as an important means of instilling confidence on the part of present and future shareholders, creditors, employees, business partners and the public in national and international markets. MEDION AG accordingly complies with the requirements and recommendations of the German Corporate Governance Code as amended on June 2, 2005.

At variance with the recommendations of the Code, the Supervisory Board of MEDION AG has not formed any committees as it comprises only three members. Moreover, compensation for the members of the Management Board and Supervisory Board was not disclosed for the individual Board members in the notes to the consolidated financial statements.

The Management Board of MEDION AG reported to the Supervisory Board on relations with affiliated companies in the past fiscal year, declaring the following pursuant to Section 312 of the German Stock Corporation Act (AktG):

"The Company received appropriate compensation for all legal transactions in accordance with the conditions known to the Management Board at the time such transactions were undertaken. No measures subject to reporting requirements were either undertaken or omitted in fiscal year 2005."

Risk Management

Risk management at MEDION is aimed at achieving sustained growth and increasing corporate value. Consideration of risk management issues is a central component in planning and executing MEDION's business strategy.

Based on the Company's organizational structure, the divisions are required to anticipate, measure and monitor risks and, with the assistance of the Company's internal control system, to avoid unacceptable risks to the greatest extent possible.

5.8.2 Economic Risks

Like any company operating in the consumer goods sector, MEDION's success hinges greatly on the purchasing power of consumers and their buying inclinations. While purchasing power is influenced by general economic parameters such as economic growth, inflation and unemployment, buying inclination is shaped by soft factors such as overall economic sentiment and consumer confidence.

As a provider of innovative products offering excellent value for money, we have in the past succeeded in maintaining our position even in difficult economic conditions. However, consumer purchasing power and buying inclination were muted in our core market of Germany and other Central European countries in the year under review. Should consumer confidence in our key markets continue to deteriorate, this will have repercussions for MEDION's sales and earnings. On the other hand, a noticeable improvement in the consumer climate would benefit our business performance, since our excellent purchasing contacts enable MEDION to quickly cater to any additional demand.

5.8.3 Operational Opportunities and Risks

Product concept

The essence of MEDION's business model involves marketing attractive products reflecting the latest trends. The challenge lies in launching the right product concept at the right time.

MEDION has a solid sourcing network built up over more than 20 years. This network acts as an information channel, providing us with a multitude of ideas. In addition, we constantly factor in the latest market research data. Our presence at important trade fairs and exhibitions allows us to participate in discussions and maintain contacts with expert committees and similar institutions. MEDION's product management division is composed of experienced staff with many years of experience in the sector. They have direct contact with the innovations and trends generated in the market and work in creative teams to systematically assess these developments and their suitability for mass marketing. The ideas for our newly launched services were also generated and implemented using this systematic approach. Thus it is no accident that for many years, MEDION has had great success in placing its products – with the recent addition of services – via marketing campaigns.

Sourcing

MEDION makes use of external partners for key links in the value chain, especially for the manufacture of products and components and the handling of logistics processes. To this extent, MEDION is reliant on a large number of partners with regard to both quality and pricing. The supply markets for PC components and logistics services tend to be particularly volatile in terms of both availability and prices.

Supply bottlenecks at our main suppliers may lead to price risks and a loss of sales. MEDION has an extremely stable relationship with suppliers thanks to the extensive sourcing network established over the course of many years. With our high purchasing levels, MEDION is as a rule an A-rated customer, receiving preferential treatment in the event of supply shortages.

Quality defects in our products can lead to major expenses, particularly for service and after-sales costs, and may damage our reputation. We procure our goods from internationally leading manufacturers who maintain high quality standards. In general, the supplier bears the risk for the quality of the goods. In order to minimize product risks and identify any defects in quality as early as possible to allow us to take preventive measures if necessary, MEDION carries out its own quality controls before, during and after production, usually on site at the supplier's place of business.

5.8.3 Operational Opportunities and Risks

MEDION sources many of its products and components from suppliers whose operations are located in Asia. This entails a variety of risks, such as risks related to changes in levies, customs duties and trade restrictions as well as natural disasters and political instability. Moreover, in many Asian regions risks can ensue from an uncertain legal situation which limits the possibility of asserting and enforcing rights. MEDION counteracts these risks by conducting meticulous analyses of sourcing markets and taking great care in the selection of suppliers. This ensures diversification in supply sources so that we are able to react to changing conditions. In addition, we place great value on long-term, fair cooperation with efficient and reliable suppliers.

Logistics

Since MEDION concentrates on project business, an essential element of our service package is the guarantee to deliver our product to the retailer within a very tight time frame.

Delays can result in contractual penalties for non-performance or cause additional costs as a result of the need for alternative methods of transport. MEDION works with a limited number of international logistics companies known for their excellent quality standards and reliability. Logistics processes at these companies are integrated into MEDION's own IT process control, resulting in a high degree of process security in the area of logistics.

Sales

Given the dynamic nature of technological advances, high-grade consumer electronics products can become outdated very quickly and must therefore be sold as swiftly as possibely to avoid the risk of value impairment. MEDION minimizes inventory risks by adhering to the build-to-order principle. Accordingly, MEDION inventories largely consist of goods already sold or service goods.

Our customers are subject to a general sales risk. MEDION contains the sell-off risk faced by our retail partners by means of targeted market research, test campaigns for new product launches and careful volume planning.

The money-back guarantees common among many retailers allow customers to return even flawless goods to the retail store. These returned goods are usually sent back to the manufacturer, who allocates them to alternative marketing channels. Such inventories are subject to a particularly high sell-off risk. MEDION has opened a MEDION outlet store to supplement the sale of returned goods, B goods and surplus inventories via third parties. The outlet has enjoyed initial success.

MEDION's customers number among the top 20 in the international retail market, meaning that individual customers account for high project volumes. The loss of even a small number of customers could significantly dent sales. MEDION is an attractive partner with stable customer relationships due to our good competitive position and the advantages we offer in terms of excellent value and quality. At present, there is no evidence to suggest that any of our large retail partners has any plans to sever its links with MEDION. However, the process of consolidation has continued in the retail sector. Together with weak consumer demand in Germany and the rest of Europe, this has led to increased competition and pressure on prices and margins among retailers and suppliers. Should competition continue to increase, the squeeze on MEDION's margins and earnings power could become even greater.

Customer receivables

Generally poor economic conditions have led to a large number of bankruptcies, particularly over the past years. Frequently, this has meant that the suppliers of bankrupt companies have seen considerable defaults on their receivables.

MEDION limits the risk of default by concentrating on sales to internationally operating retail groups with Class A credit ratings. Customers not falling into this category are of lesser significance for MEDION and are supplied only if their orders are backed by credit insurance or guarantees or if the customers pay in advance.

Legal Risks

As a producer and vendor of personal computers, MEDION is exposed to the risk of royalty backpayments for past deliveries of PCs. For instance, VG Wort, a copyright collecting society, has demanded a lump-sum amount of €30.00 per unit for text and images in a test case against Fujitsu Siemens Computers. The case is currently pending before the German Federal Supreme Court (BGH) in the last instance. Shortly before the end of 2005, the German Central Agency for Private Copying Rights (ZPÜ), representing the authors of works of music and film, filed suit against approximately 20 PC manufacturers and retailers demanding an additional copyright payment of €18.42 per unit sold. As in the previous year, MEDION has set aside provisions on the balance sheet to cover the risks. Should it emerge in the course of the legal disputes that any copyright payments to be made retrospectively will exceed the provisions made, this would lead to a corresponding earnings impairment. In accordance with IAS 37.92, we have waived specification of a predetermined payment to quantify this risk.

Apart from the aforementioned proceedings, no other court or arbitration proceedings are pending against MEDION that could materially impact the Company's net income.

On July 1, 2006, Directive 2002/95/EC on the restriction of the use of certain hazardous substances in electrical and electronic equipment (RoHS) will be transposed into German law. MEDION has made the preparations considered necessary for compliance with the restrictions of the new legislation. In cooperation with suppliers, control mechanisms were installed to ensure compliance with the official limits on lead, cadmium, hexavalent chromium, mercury and polybrominated flame retardants for new electrical and electronic products.

Financial Risks

Project business necessitates the availability of considerable financial resources for short periods of time. The absence of financing options may retard Company growth.

In MEDION's business model, many of those sections of the value chain requiring major capital outlays, such as R&D, production, logistics and POS sales, are covered by our partner companies. MEDION is able to make substantial use of trade terms based on long-standing business relations and our solid capital and financial structures. Given our ample equity of €441.2 million as of December 31, 2005, our funding requirements are confined almost exclusively to obtaining short-term cover for financing peaks arising from large-scale projects. These requirements are covered by bank facilities and a syndicated loan. The Company is therefore not dependent upon individual banks.

As a globally operating company, MEDION is subject to risks from currency fluctuations. Payments are made in foreign currencies on the sourcing side in particular, since the majority of our suppliers are located in Asia and the transactions are executed in U.S. dollars. MEDION makes use of derivative financial instruments in the form of standard forward currency contracts, supplemented by swap transactions in some cases, to hedge the risk of fluctuations in foreign currencies.

5.8.7 Personnel Risks

Competition for highly qualified executives and technical staff remains high in the consumer electronics sector. Project-based business is especially reliant on experienced, well-trained employees; such employees make up our single most important business resource. Only trained and qualified staff can manage or prevent risks. For this reason, MEDION adopts a proactive approach to training its staff, offering advanced training opportunities as well. In addition, our workflow management system documents all key processes in such a manner that their performance is not dependent on any one individual.

On the whole, MEDION staff consists of a young, highly motivated team – a healthy mix of employees who have been with the Company for many years and experienced colleagues who have come to MEDION from other companies.

Risk Management Systems

Risk management at the MEDION Group rests on four pillars: our internal control system, ongoing review of the internal control system, internal auditing and a risk early warning system. MEDION is continually working to improve its internal control system. The calculation schemes have been harmonized for the entire Group and optimized by the newly established project control team. After a successful start, the project for re-engineering SAP-based customer and article performance accounting has now been implemented for the most part. With this as a basis, the planning process has been further improved and extended to form an integrated rolling system. The internal control system is used to safeguard the Company's assets, the reliability and precision of the accounting system, the operative efficiency and to comply with business policies. Key principles include the separation of functions and double-sign-off rules. Specific rules are documented in organizational instructions. For example, there are rules governing capital spending, recruitment, customs duties and purchasing as well as modified guidelines for dealing with insider information and the according communications based on the new German Investor Protection Improvement Act.

Internal auditing at MEDION is responsible for performing cross-process checks in all parts of the Group on the Management Board's behalf. This includes checks to determine the appropriateness and efficiency of the internal control system.

The risk early warning system covers business risks that threaten strategic targets or endanger the continued existence of the Company. In this sense, it is designed to detect future risks. Business risks are managed from the bottom up. They are identified on the basis of indicators and communicated across the Company via the reporting system. The early warning indicators have been determined on the basis of a balanced score card. MEDION tracks these risks in quarterly intervals using ratios viewed over time. The changes in these ratios can be used to identify tends, making it possible to assess corporate risk. In the event of any deterioration in these ratios, specific individual analyses are performed. For each ratio, targets and thresholds that may not be breached are defined on an annual basis. The Management Board and the heads of the departments within the Company are briefed on the ratios no later than 20 working days after the end of the quarter.

Overall Risk Situation

All in all, MEDION has a low risk profile. The portion of fixed costs the Company has to shoulder is kept low by the fact that partner companies cover the sections of the value chain entailing intensive capital investments. Process risks are minimal, as MEDION can rely on more than 20 years' experience in the business and has successfully completed over 10,000 projects. The quality of MEDION products is monitored in all stages of the process. MEDION minimizes inventory risks by adhering to the build-to-order principle. Payment of receivables is ensured by concentrating on Arated customers. Moreover, our risk management system identifies and monitors any current risks.

In the opinion of the Management Board, no risks are discernible that could threaten the survival of the Company either at the present time or in the future.

Management Report of MEDION Group and MEDION AG Outlook

Economy

5.9.1

• still no recognizable growth in european consumer spending
• economic recovery in germany needed
• increased demand for mobile devices in the ce market

Economic environment

The Autumn Report of the Kiel Institute for the World Economy projected an increase of 1.2% in Germany's gross domestic product after 0.8% in 2005, anticipating somewhat stronger growth in 2006, though no real economic momentum is yet to be seen. This slight recovery will not suffice for a breakthrough in Germany's most urgent problems – high unemployment and public budget deficits. However, assuming wage contracts remain moderate, improving the ability of German companies to compete on an international level in a sustained global economic upturn, experts anticipate a slight increase in the number of jobs starting in the second half of 2006 for the first time since 2000. Should the employment situation improve and the effects of higher energy costs diminish, consumer spending could pick up slightly over the course of 2006, boosting domestic demand. However, with very little domestic momentum, the economy in Germany is still reliant on foreign influences. Even slight disturbances from abroad could reduce the German economy to near stagnation once again. For instance, further increases in the energy prices could have a major impact on the German economy.

In its forecast for 2006, the German federal government has predicted growth in consumer spending of private households of 0.3%. No major growth incentives or increases in domestic demand or consumer spending are in sight in Germany. This assessment is likely to also be valid for the rest of the euro regions and thus for all core markets of the MEDION Group.

The growth markets of Eastern Europe offer increasing opportunities for many companies, including MEDION. However, purchasing power among the broader public is still relatively low, and trade structures have not yet been extended to all areas. At present, these markets do not have the necessary infrastructure for successful campaigns involving large quantities and efficient logistics as foreseen by MEDION's business model. MEDION has nevertheless been in close contact with potential market partners in these countries for some time now in order to ensure that the Company will able to make use of any opportunities arising.

Market trend in consumer electronics

After growth of approximately 13% in 2005, the traditional entertainment electronics market in Germany is expected to experience further growth, according to Gesellschaft für Unterhaltungsund Kommunkationselektronik (gfu), a market research institute. Modern entertainment electronics products stand for lifestyle, adventure and innovation. These products are highly valued by customers, are fun to use and offer many benefits. This is what makes consumer electronics products attractive and fascinating. Market researchers expect good things for 2006 based on the major events occurring, starting with the Winter Olympics and continuing with the World Soccer Cup in Germany.

The PC/multimedia market is expected to make slower progress than entertainment electronics. Mobile equipment will continue to experience gains. Innovations in PC applications and the growing number of increasingly complex computer viruses call for new, secure systems. Additional demand is also anticipated from the market launch of Microsoft's new operating system for PCs, "VISTA", planned for the fourth quarter of 2006. The new software will enable higher security and reliability for PCs, simple multimedia applications for users and direct links to all important information and services.

5.9.2 Corporate Development

Cost management and focus on sustained improvement in financial performance

In a systematic process at the end of 2005, MEDION analyzed the causes of the Company's declining performance and implemented far-reaching measures aimed at reversing the trend toward rising process costs in product management, sales and after-sales service amidst decreasing gross profits.

The measures implemented focused on targeted reductions in the product portfolio to ensure a more profitable sales base as well as a simplification of product management and sales. The large number of product groups with low sales potential and contribution margin potential as well as the small lot sizes in some areas that cause relatively high transaction costs have led to unprofitable cost structures in such functions as Product Management/Evaluation, Sales and After-sales Service. The analysis showed that divesting non-core products comprising approx. 20-25% of sales would lead to a greater decrease in costs than the gross profit generated by these products in the medium-term. The restructuring of these areas has been planned and is currently being implemented.

Another crucial part of the restructuring measures are concepts to limit costs in after-sales service and returned merchandise management. These concepts were developed in close cooperation with our customers and have been implemented via agreements.

Due to the time delay typical of costs in the service and after-sales area, the savings anticipated from the restructuring measures will take some time to materialize to the full extent, with first savings becoming apparent in the second half of 2006.

78 | 5.9.2 Corporate Development

Systematic expansion of market position as leading technology integrator

Along with measures geared toward increasing efficiency and lowering costs, MEDION has maintained its strengths in its operating business, confirming its position as a price/performance leader in sales campaigns involving consumer electronics in Germany. MEDION notebooks and PCs regularly achieve first place in tests and market overviews conducted by national and international computer magazines due to their outstanding features offering excellent value for money, and remain a favorite among end consumers. In the growth market for TFT/LCD and plasma TVs, MEDION has established itself as a popular alternative to other brand-name manufacturers. The Company has also reaffirmed its leading position and competence in the integration of new, userfriendly technologies into the mass market through the extremely successful launch of new services and products involving digital content, such as music downloads, photo services and mobile phone services.

MEDION presented solutions for development of the "digital home" at the IFA consumer electronics fair in September 2005. The main component is an entertainment PC on which music, videos and photos are digitally stored and processed and which is linked to other entertainment electronics equipment such as televisions, stereos, MP3 players and digital cameras, all having a uniform, integrated user interface. These functions require the latest in processor technology. The PC is able to receive digital TV programs, using rapid graphics processing units to create high-quality images and colors.

MEDION plans to continue systematically updating its business model in the future. The Company's strategic goal and the development steps connected with the trend toward digitalization and the integration of informational and entertainment media in a "digital home" are clear:

MEDION intends to be the leading supplier of the "digital home" in the German and European mass markets.

Management Report of MEDION Group and MEDION AG Outlook

Development of the MEDION Business Model

An essential component of this plan is to continue expanding the MEDION brand as the embodiment of products and services offering best value for money, both in the interest of the Company as well as of our customers and partners in the market. Another major factor is adding additional services to our product range, as has already successfully begun with our photo service and entry into the mobile phone business as a service provider in 2005. We will also expand direct marketing of our products via the www.medion.de platform in 2006.

Internationalization of the business

Foreign sales declined by approximately 23% in 2005 due to extremely cautious ordering from customers in the euro zone and the realignment of activities in the United States. Foreign sales made up 32.8% of total sales in 2005.

In addition to consumer restraint, which is now also prevalent in core European markets such as Great Britain, The Netherlands, or Italy, the following factors led to reduced sales, particularly in the fourth quarter: Due to higher logistics and after-sales costs, foreign sales were more affected than domestic sales by the initial portfolio adjustments in the area of household electronics and standard entertainment electronics products at entry-level prices. In addition, the mutually agreed termination of the partnership with Hewlett-Packard for the production and marketing of desktop PCs at the beginning of 2005 negatively impacted foreign sales.

5.9.3

5.9.3 Development of the MEDION Business Model

There will be a certain time delay before the products newly launched with success in Germany in the fourth quarter will lead to multinational orders of German customers. High capacity levels in the domestic business, where product management has already been streamlined, led to shortterm supply bottlenecks, which also dampened foreign sales.

MEDION has sales and service units covering the entire euro region. MEDION's products enjoy top test results in European countries outside of Germany as well, and the MEDION brand name is becoming more and more well known. These are excellent conditions for stepping up business in the euro zone to meet increasing demand. In light of the sustained pressure on margins, however, MEDION will act with caution, only pushing those transactions that will be sufficiently profitable after taking service and follow-up costs into account.

MEDION sees good chances for profitably marketing high-quality, innovative products and new services that have already been successfully launched in Germany in other countries as well. In the medium term, MEDION aims to again generate approx. 40% of sales in the euro region while also taking advantage of potential existing in the Eastern European market.

Management Report of MEDION Group and MEDION AG Outlook

Prospects for 2006

2006 sales: €2.0 billion gross margin stabilized cost structure adapted

Prospects for performance in 2006

The opportunities and risks ensuing for the future development of MEDION as a leading supplier of products in the PC/multimedia and entertainment electronics segments in the mass market depend in large part on the development of economic conditions and consumer sentiment in Germany and the rest of the euro region. Based on the restrained forecasts for the development of consumer spending in Germany and the rest of Europe, the Management Board expects the trend toward cautious ordering among customers and the price slide in the PC/multimedia segment to continue, assuming a largely unchanged currency parity. Combined with the effects of product portfolio adjustment, the Management Board anticipates that sales will decline approx. 20% in 2006 to a level of around €2.0 billion. This trend is already evident in sales for the first quarter, which based on current insights are in a similar scale under the prior-year level.

With weak consumer spending, margins will generally remain under pressure. However, the measures implemented to streamline the product portfolio and reduce costs for after-sales service and product returns will have a positive impact, allowing the margin to stabilize at the 2005 level of 9.5%, with chances for improvement to 10%. Gross profit is thus not expected to reach the level of 2005 due to the accepted sales declines. This deficit is expected to be offset later by increasing cost savings in the area of personnel costs, selling expenses, service costs and after-sales costs, allowing earnings before interest and tax to at least reach the prior-year level and comprise 1.0 to 1.5% of sales in 2006.

The Management Board is optimistic that the measures implemented to adjust cost structures will take effect as planned. It is expected that the turnaround in follow-up costs will play an increasing role starting in the second half of 2006, which will increase earning power in subsequent years starting in 2007. Based on our continuing good customer relations and the innovativeness and creativity of our employees, the MEDION Group has good prospects for once again achieving sales and earnings growth in an improved economic climate.

83 |

Flow past traffic...

What good is the best navigation system when it leads you right to a traffic jam? Very little. That's why we brought the first portable MEDION navigation device with a builtin TMC (Traffic Message Channel) receiver to market in 2005. The PNA260T looks for traffic jams via FM radio and calculates the detour for you.

Smarter navigation lets you flow right past all that traffic.

MEDION Stock in 2005

Dividend

Compliance

Investor Relations

2005 Annual Shareholders' Meeting

share price impacted by weakened consumer spending and earnings

• stable shareholder structure
• compliance principles implemented

MEDION stock in 2005

European equity markets benefited from low interest rates, high liquidity and brightening economic prospects in 2005. MEDION stock, however, performed unsatisfactorily in response to reports of continued consumer restraint and market reactions to the publication of Company figures throughout the year. MEDION stock underperformed the DAX, MDAX and SDAX indices in the year under review.

In March 2005, the share price fell to €11 in the wake of MEDION'S 2004 annual report and the announcement that first-quarter sales and earnings were well below the previous year's level. The stock had not recovered by the time of the Annual Shareholders' Meeting on May 12, 2005. Improved retail expectations, however, then led to a 20 percent rise in share price to over €13. The gain in share price could not be maintained after Germany's federal elections, and MEDION shares moved sideways in a range between €11 and €12.50.

On the occasion of publication of the nine-months report on November 10, 2005, MEDION management noted that it might become necessary to report restructuring costs in the 2005 financial statements relating to expenses recognized after the balance sheet date, as it was apparent that the product portfolio and the related order and service structures needed to be reviewed for potential to increase efficiency and optimize costs.

On January 6, 2006, MEDION published preliminary sales and earnings figures for 2005, upon which the price of MEDION stock softened to just over €10. The expectation held by many market participants that MEDION stock would be downgraded from the MDAX mid-cap index to the SDAX small-cap index also impacted the share price. However, in response to a rising number of reports forecasting a revival in consumer spending in Germany, MEDION's share price climbed to over €12 in February 2006 amidst strong trading.

Renowned foreign investment funds with long-term horizons made use of our soft share price to invest in MEDION. In 2005 and early 2006, these funds built up stakes exceeding 5% of MEDION's share capital which triggered legal announcements to this effect. MEDION shares still offer a decent dividend yield even after the dividend reduction from €0.55 to €0.19 per share, as dividends declined less than earnings.

The decisive factor for the performance of our shares, however, will be the outlook for the coming years. MEDION sees itself as well-positioned for the future with its business concept, innovative power and flexible structures. The Company's goal must be to improve cost structures and harness potential in foreign markets. A turnaround in German consumption would provide additional support. New service offerings, such as the start of mobile phone activities at the end of December 2005, may also attract stronger interest in MEDION's shares.

Dividend of €0.19 per share

Net income amounted to €9.2 million in 2005, down from €48.8 million in 2004.

At the Annual Shareholders' Meeting on May 12, 2006, the Supervisory Board and the Management Board will propose a dividend payment of €0.19 per share for fiscal 2005.

Compliance

The subject of compliance is even more important now that the German Investor Protection Improvement Act has taken effect and the German Federal Financial Supervisory Authority (BaFin) has presented extensive issuer guidelines. MEDION made preparations for compliance early on, informing all potentially affected employees of the new legal situation in 2005. The Company's intranet provides all employees with access to comprehensive information, offering an up-to-date presentation with recommendations on the correct handling of confidential information.

The compliance committee consists of the CFO and one representative each from Human Resources and Investor Relations. The obligatory lists of persons with access to insider information are compiled on paper and in electronic form. All relevant press releases issued by the Company, including those on products and market developments, are reviewed for capital market relevance prior to publication.

Investor relations

Communication with the financial markets is of prime importance, especially in difficult times. MEDION holds conference calls in English at the time of publication of all quarterly reports. In 2005, both the Chairman of the Management Board as well as the CFO took part in these calls. The Management Board gives presentations at major investor conferences and selected events, for example on the topics of retail sales and consumption.

Particularly in times in which business performance falls short of original expectations, the capital market expects open and detailed communications to maintain confidence in the Company's longterm success. MEDION stock is actively covered and analyzed by approximately 20 investment banks as part of their equity research. This is supplemented by direct contact with many international institutional investors.

2005 Annual Shareholders' Meeting

On May 12, 2005, the Annual Shareholders' Meeting authorized the Management Board to buy back shares amounting to up to 10% of the Company's current share capital. No use was made of this authorization in fiscal 2005. In addition to other items on the agenda, a resolution was passed approving payment of a dividend of €0.55 per share for fiscal 2004. The Company presented a voting proxy bound to act in accordance with instructions at the Annual Shareholders' Meeting. All items on the agenda were approved by an overriding majority.

medion stock 2005

Average daily trading volume, units	190,000
Volatility	36%
High	€17.00
Low	€10.50

Easy listening...

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Easy listening, indeed.

Consolidated Financial Statements

7.1	Key Indicators
7.2	Consolidated Income Statement
7.3	Consolidated Cash Flow Statement
7.4	Consolidated Balance Sheet
7.5	Consolidated Statement of Changes in Equity
7.6	Segment Report
7.7	Consolidated Fixed Assets Schedule

Key Indicators

in € million	Jan. 1 - Dec. 31, 2005	Jan. 1 - Dec. 31, 2004
Sales	2,527	2,624
-inside Germany	1,699	1,549
-outside Germany	828	1,075
Sales by product group
-PC/multimedia	1,799	1,919
-Entertainment and household electronics	632	642
-Communications technology	96	63
EBIT	22.0	*88.2
Net income	9.2	*48.8
Total assets	829	867
Equity-to-assets ratio	53.25%	52.60%
Depreciation/amortization	8.5	7.0
Average number of employees	1,551	1,426
Personnel expenses	59.9	*62.7
MEDION stock
Subscribed capital	€48,418,400
Authorized capital	€10,000,000
Earnings per share	0.19	*1.01

Consolidated Income Statement

		Jan. 1 -	Jan. 1 -
in € thousand	Note	Dec. 31, 2005	Dec. 31, 2004
1. Sales	(19)	2,526,668	2,624,108
2. Other operating income	(20)	9,946	13,569
3. Cost of materials	(21)	2,285,715	2,360,439
4. Personnel expenses	(22)	59,903	*62,658
5. Depreciation/amortization		8,476	7,041
6. Other operating expenses	(23)	139,992	119,386
7. Restructuring expenses	(24)	20,513	0
8. Operating earnings (EBIT)		22,015	*88,153
9. Other interest and similar income	(25)	2,263	1,118
10. Interest and similar expenses	(25)	6,391	5,323
11. Earnings before taxes (EBT)		17,887	*83,948
12. Taxes on income	(26)	8,567	35,106
13. Other taxes		120	57
14. Net income		9,200	*48,785
Earnings per share in € (basic)		0.19	*1.01
Average number of shares outstanding (basic)		48,418,400	48,418,400
Earnings per share in € (diluted)		0.19	*1.01
Average number of shares outstanding (diluted)		48,418,400	48,418,400

Consolidated Cash Flow Statement

	in € thousand		Jan. 1–Dec. 31, 2005	Jan. 1-Dec. 31, 2004
1.		Operating earnings (EBIT)	22,015	*88,153
2.		+/- Depreciation/amortization/write-ups of non-current assets	8,476	7,041
3.		+/- Increase/decrease in pension provisions	462	242
		Gross cash flow	30,953	*95,436
4.		-/+ Decrease/increase in other provisions	15,966	-30,152
5.		-/+ Increase/decrease in inventory, trade receivables as well as other assets not attributable to investing and financing activities	90,985	141,013
6.		-/+ Decrease/increase in trade payables as well as other liabilities not attributable to investing and financing activities	-30,455	*-87,414
7.	-	Income taxes paid	-22,591	-53,875
8.	=	Cash flow from operating activities (sum of 1 to 7)	84,858	65,008
9.	+	Proceeds from disposal of non-current assets and redemption of loans	377	680
10.	-	Payments for additions to non-current assets	-12,865	-20,407
11.	=	Cash flow from investing activities (sum of 9 and 10)	-12,488	-19,727
12.	-	Dividends paid	-26,630	-33,892
13.	+	Interest received	2,263	1,118
14.	-	Interest paid	-7,808	-5,323
15.	-	Payments for the redemption of bonds and the repayment of borrowings	-883	-768
16.	=	Cash flow from financing activities (sum of 12 to 15)	-33,058	-38,865
17.		Changes in cash and cash equivalents (sum of 8, 11 and 16)	39,312	6,416
18.		+/- Foreign exchange differences	416	-275
19.	+	Cash and cash equivalents at the beginning of the period	87,398	81,257
20.	=	Cash and cash equivalents at the end of the period (sum of 17 to 19)	127,126	87,398

Consolidated Balance Sheet

Assets
in € thousand	Note	Dec. 31, 2005	Dec. 31, 2004
Current assets
Cash funds	(1)	127,126	87,398
Trade receivables	(2)	350,738	411,316
Inventories	(3)	246,279	277,985
Deferred taxes	(10)	0	657
Other current assets and prepaid expenses	(2, 4)	50,925	40,274
Total current assets		775,068	817,630
Non-current assets
Property, plant and equipment	(5)	37,055	30,879
Intangible assets	(6)	9,378	11,460
Goodwill	(7)	194	194
Financial assets	(8)	2,827	2,717
Loans	(9)	261	415
Deferred taxes	(10)	3,794	3,477
Other non-current assets and prepaid expenses	(11)	73	157
Total non-current assets		53,582	49,299
Total assets		828,650	866,929

95 | 7.4

Shareholders' equity and liabilities
--------------------------------------	--	--	--

in € thousand	Note	Dec. 31, 2005	Dec. 31, 2004
Current liabilities
Short-term loans and short-term portion of long-term loans	(12)	292	721
Trade payables	(12)	237,888	276,818
Tax provisions	(10, 13)	593	7,029
Other provisions	(14)	124,178	108,019
Other current liabilities	(12)	21,248	15,085
Total current liabilities		384,199	407,672
Non-current liabilities
Bonds	(15)	947	1,171
Long-term loans	(16)	356	586
Pension provisions	(17)	1,924	1,462
Total non-current liabilities		3,227	3,219
Shareholders' equity	(18)
Subscribed capital		48,418	48,418
- Contingent capital: €21,982 thousand (prior year: €21,982 thousand)
- Authorized capital: €10,000 thousand (prior year: €10,000 thousand)
Capital reserves		141,665	*140,745
Retained earnings		242,742	*241,499
Unappropriated retained earnings		9,200	26,630
Foreign exchange differences		-801	-1,254
Total shareholders' equity		441,224	456,038
Total shareholders' equity and liabilities		828,650	866,929

Consolidated Statement of Changes in Equity

					Foreign
in € thousand	Subscribed capital	Capital reserves	Retained	Unappropriated earnings* retained earnings	exchange differences	Total
Balance as of January 1, 2005	48,418	**140,745	**241,499	26,630	-1,254	456,038
Changes recognized directly in equity
Changes in currency translation differences	0	0	0	0	453	453
Addition to hedging reserve in acc. with IAS 39	0	0	1,243	0	0	1,243
Distributions to shareholders for fiscal year 2004	0	0	0	-26,630	0	-26,630
Measurement of share-based payments in acc. with IFRS 2 for 2005	0	920	0	0	0	920
Net income	0	0	0	9,200	0	9,200
Balance as of December 31, 2005	48,418	141,665	242,742	9,200	-801	441,224
Balance as of January 1, 2004 - old	48,418	138,324	202,067	51,253	-950	439,112
Changes due to first-time application of IFRS 2	0	484	-484	0	0	0
Balance as of January 1, 2004 - new	48,418	138,808	201,583	51,253	-950	439,112
Changes recognized directly in equity
Changes in currency translation differences	0	0	0	0	-304	-304
Additions to retained earnings	0	0	18,288	- 18,288	0	0
Additions to hedging reserve in acc. with IAS 39	0	0	400	0	0	400
Distributions to shareholders for fiscal year 2003	0	0	0	-33,892	0	-33,892
Measurement of share-based payments in acc. with IFRS 2 for 2004	0	1,937	0	0	0	1,937
Net income after adjustment in acc. with IFRS 2	0	0	**21,228	27,557	0	**48,785
Balance as of December 31, 2004	48,418	140,745	241,499	26,630	-1,254	456,038

*thereof in accordance with Section 218 (2) of the German Stock Corporation Act (AktG): €0 (prior year: €368 thousand)

**Change due to first-time application of IFRS 2

Consolidated Financial Statements

Segment Report

	2005	2004	2005	2004	2005	2004	2005	2004	2005	2004
in € thousand		Germany	Europe		America		Rest of World/Elimination		Group
External sales (net)	1,698,782	1,548,682	768,944	978,237	24,722	46,430	34,220	50,759	2,526,668	2,624,108
Intercompany sales (net)	51,305	60,948	22,404	21,275	6,180	702	-79,889	-82,925	0	0
Sales (net)	1,750,087	1,609,630	791,348	999,512	30,902	47,132	-45,669	-32,166	2,526,668	2,624,108
EBIT	13,018	*53,137	13,908	39,733	-3,599	-1,994	-1,312	-2,723	22,015	*88,153
Gross cash flow	19,762	*58,462	15,935	41,135	-3,437	-1,827	-1,307	-2,334	30,953	*95,436
Segment assets	545,836	532,772	274,174	317,500	16,008	15,669	-7,368	988	828,650	866,929
Segment liabilities	284,617	262,745	104,836	146,632	7,540	6,280	-9,567	-4,766	387,426	410,891
Capital expenditure	9,646	15,506	2,869	4,381	174	433	176	87	12,865	20,407

*Change of prior-period figures due to first-time application of IFRS 2

97 | 7.6

Consolidated Fixed Assets Schedule

					Currency	Balance as of
	Balance as of				translation	December
	January 1,2005	Additions	Disposals	Transfers	differences	31, 2005
			Cost
Land and buildings	23,461	1,764	3	307	0	25,529
Other equipment, operating and office equipment	19,744	2,663	798	205	61	21,875
Advance payments made and assets under construction	750	6,416	0	-307	0	6,859
Property, plant and equipment	43,955	10,843	801	205	61	54,263
Licenses	1,880	1,299	54	0	5	3,130
IT software	15,130	607	0	137	1	15,875
Advance payments made	413	6	0	-342	0	77
Intangible assets	17,423	1,912	54	-205	6	19,082
Goodwill	516	0	0	0	0	516
Shares in affiliated companies	3	110	0	0	0	113
Advance payments made for equity investments	2,714	0	0	0	0	2,714
Financial assets	2,717	110	0	0	0	2,827
Loans	415	0	154	0	0	261
	65,026	12,865	1,009	0	67	76,949

<-- PDF CHUNK SEPARATOR -->

Consolidated Fixed Assets Schedule

Balance as of	Balance as of	Balance as of	Currency				Balance as of
December	December	December	translation				January 1,
31, 2004	31, 2005	31, 2005	differences	Transfers	Disposals	Additions	2005
	Carrying amounts			Depreciation, amortization
20,588	21,781	3,748	0	0	0	875	2,873
9,541	8,415	13,460	24	0	589	3,822	10,203
750	6,859	0	0	0	0	0	0
30,879	37,055	17,208	24	0	589	4,697	13,076
1,553	2,257	873	6	0	43	583	327
9,495	7,046	8,829	-1	0	0	3,195	5,635
412	75	2	0	0	0	1	1
11,460	9,378	9,704	5	0	43	3,779	5,963
194	194	322	0	0	0	0	322
3	113	0	0	0	0	0	0
2,714	2,714	0	0	0	0	0	0
2,717	2,827	0	0	0	0	0	0
415	261	0	0	0	0	0	0
45,665	49,715	27,234	29	0	632	8,476	19,361

99 | 7.7

8.1	General		101
	8.1.1	Basis of Presentation
	8.1.2	Scope of Consolidation
	8.1.3	Principles of Consolidation
	8.1.4	Currency Translation Principles
8.2		Notes to the Consolidated Balance Sheet	105
		and the Consolidated Income Statement
	8.2.1	Notes to the Balance Sheet
	8.2.2	Notes to the Income Statement
8.3		Other Disclosures	122
	8.3.1	Notes to the Cash Flow Statement
	8.3.2	Segment Reporting
	8.3.3	Earnings per Share
	8.3.4	Other Financial Obligations
	8.3.5	Management of Currency Risks
	8.3.6	Events after the Balance Sheet Date
	8.3.7	Related Party Disclosures
	8.3.8	Management Board
	8.3.9	Supervisory Board
	8.3.10	Corporate Governance
	8.3.11	Proposal for the Appropriation of Profits

General

101 | 8.1.1

Basis of Presentation

MEDION AG is a stock corporation under German law with its registered office in Essen. The Registration Court of jurisdiction is also located in Essen.

The consolidated financial statements of MEDION AG and its subsidiaries were prepared in accordance with the International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB) and the additional provisions contained in Section 315a (1) of the German Commercial Code (HGB). All standards and interpretations of the IASB required to be applied for reporting periods beginning on or after January 1, 2005 and endorsed by the EU were applied. In August 2005, the IASB issued IFRS 7, "Financial Instruments: Disclosures," which will result in a fundamental restructuring of the disclosure requirements for financial instruments. This standard is applicable to reporting periods beginning on or after January 1, 2007 and will not be applied to earlier periods.

The amounts recognized for share-based payments in 2004 have been restated due to the firsttime application of IFRS 2. The amount for fiscal year 2003 was taken directly to equity. The adjustment of the 2004 amounts was recognized in profit or loss. If significant, these adjustments were disclosed in the relevant notes.

All other prior-year comparative figures for the balance sheet and the income statement correspond to the amounts reported in the audited consolidated financial statements for fiscal year 2004.

Uniform accounting policies based on IFRS have been applied for assets and liabilities of the consolidated companies. Deferred taxes have been recognized to account for any measurement differences in comparison with the tax base.

The consolidated financial statements as of December 31, 2005, were prepared in euros. Unless otherwise indicated, all amounts are stated in € thousand.

Scope of Consolidation

The consolidated financial statements as of December 31, 2005 include the parent company, MEDION AG, Essen, as well as the following subsidiaries that are fully consolidated using the purchase (book value) method:

	Share capital on			Date of initial
Name and registered office	Dec. 31, 2005	Share	Date of acquisition	consolidation
1. Allgemeine Multimedia Service GmbH, Essen, Germany ("AMS")	€25,000.00	100.00%	Founded in 2002	December 1, 2002
2. MEDION Service GmbH, Mülheim an der Ruhr, Germany ("MSG")	€25,000.00	100.00%	Founded in 2004	September 1, 2004
3. MEDION FRANCE S.A.R.L., Villaines sous Malicorne, France ("MEDION FRANCE")	€150,000.00	100.00%	Founded in 1998	July 1, 1999
4. MEDION ELECTRONICS LIMITED, Swindon, United Kingdom ("MEDION UK")	£200,000.00	100.00%	Founded in 1998	July 1, 2000
5. MEDION NORDIC A/S, Skovlunde, Denmark ("MEDION Nordic")	DKK 500,000.00	100.00%	Acquired in 2002	July 1, 2002
6. MEDION AUSTRIA GmbH, Wels, Austria ("MEDION AT")	€50,000.00	100.00%	Founded in 2002	December 1, 2002
7. MEDION B.V., Panningen, Netherlands ("MEDION NL")	€650,000.00	100.00%	Founded in 2001	July 1, 2001
8. MEDION ITALIA S.r.l., Milan, Italy ("MEDION Italia")	€30,000.00	100.00%	Founded in 2002	January 1, 2002
9. MEDION IBERIA, S.L., Madrid, Spain ("MEDION Iberia")	€5,000.00	100.00%	Founded in 2001	July 1, 2001
10. MEDION SCHWEIZ ELECTRONICS AG, Schlieren, Switzerland ("MEDION Schweiz")	CHF 100,000.00	100.00%	Founded in 2004	February 1, 2004
11. MEDION USA, Inc., Delaware, USA ("MEDION USA")	US\$10,100,000.00	100.00%	Founded in 2001	April 1, 2001
12. MEDION AUSTRALIA PTY LTD., Sydney, Australia ("MEDION Australia")	AU\$10,000.00	100.00%	Founded in 2003	November 1, 2003
13. MEDION KOREA ELECTRONICS Yuhan Hoesa*, Seoul, Korea ("MEDION Korea")	KRW 120,000,000.00	100.00%	Founded in 2004	July 1, 2004

The subsidiaries are predominantly companies providing sales and after-sales services for MEDION AG in the respective countries.

Within the scope of restructuring international activities, the operations of MEDION USA were adjusted and consequently streamlined at the end of the reporting period. This restructuring had become necessary since the Company had not been able to achieve the goals previously set for the operations in the North American market.

AMS provides call-center services. MSG's business activities entail repair and logistics services for the after-sales and e-commerce business.

The subsidiaries were consolidated on the basis of their partially audited separate financial statements for the fiscal year ended December 31, 2005, which were prepared in accordance with local law. The reconciliations to IFRS submitted by the respective subsidiaries were certified by the auditors.

The other foreign subsidiaries of MEDION AG were not consolidated as they are insignificant to the Group (see 8.3.7, "Related party disclosures").

8.1.3 Principles of Consolidation

Business combinations are accounted for using the purchase method in accordance with IFRS 3 on the basis of the relevant date of acquisition. Any excess of the cost of acquisition over the Group's share in the equity of the relevant company is capitalized as goodwill. In accordance with IAS 36, goodwill must be regularly tested for impairment.

In addition, receivables and liabilities as well as income and expenses are consolidated. The exchange differences arising from the consolidation of income and expenses are recognized in profit or loss.

Elimination of intragroup profits was not necessary under IFRS as the amounts concerned were immaterial.

General

8.1.4

Currency Translation Principles

Foreign subsidiaries which do not prepare their separate financial statements in euros are classified as foreign entities pursuant to the criteria set out in IAS 21. The functional currency of these companies is the local currency.

Foreign currency items are translated using the modified closing rate (IAS 21.39). Accordingly, all monetary and non-monetary assets and liabilities recognized in the balance sheet are translated at the closing rate, while equity is translated at the historical rate prevailing on the date of acquisition or, where applicable, on the date of any capital increase. Income and expenses included in the income statement as well as net income for the fiscal year are translated at the average rate for the year in accordance with IAS 21.40.

The rates used for the translation of foreign currency items are as follows:

		2005	2004	2005	2004
	1€ =		Balance sheet closing rate as of Dec. 31		Income statement average rate
Australia	AU\$	1.6145	1.7489	1.6326	1.6893
Denmark	DKK	7.4603	7.4385	7.4517	7.4399
United Kingdom	£	0.687	0.7071	0.684	0.6787
Korea	KRW	1,191.00	1,412.29	1,265.82	1,415.45
Switzerland	CHF	1.5555	1.5437	1.5483	1.5442
USA	US\$	1.1834	1.364	1.2451	1.2434

The translation differences included in the balance sheet (-€801 thousand) result from exchange rate differences at MEDION USA (-€752 thousand) and MEDION UK (-€49 thousand). These differences were recognized directly in equity as a separate item.

Notes to the Consolidated Balance Sheet and the Consolidated Income Statement

Notes to the Balance Sheet

Current assets

(1) Cash funds consist of cash on hand and bank balances. Cash funds are measured at nominal value. Foreign currency items are measured at fair value. The total amount of cash funds corresponds to the cash and cash equivalents reported in the cash flow statement.

(2) Trade receivables, other current assets and prepaid expenses are regarded as financial assets and classified as loans and receivables in accordance with IAS 39.45. They are measured at amortized cost, less any valuation allowances considered necessary on the basis of prudent business judgment.

For the trade receivables of €350,738 thousand (2004: €411,316 thousand), valuation allowances amounting to €7,349 thousand (2004: €9,070 thousand) were made to account for identifiable risks of default and for general credit risks.

(3) Inventories mainly relate to merchandise stored at external warehouses and logistics companies for fixed project orders as well as floating goods, service parts and returned merchandise. They are carried at cost plus incidental acquisition costs. Generally, the acquisition cost is determined using the weighted average cost method. Inventories are measured on the balance sheet date at the lower of their weighted average value and net realizable value. Valuation allowances in the amount of €35,118 thousand (2004: €21,260 thousand) have been made for merchandise returned by end consumers. In addition, write-downs for impairment of inventories were recognized in certain product groups of productive inventories amounting to €12,389 thousand (2004: €1,505 thousand).

Inventories are broken down by product groups as follows:

in € thousand	Dec. 31, 2005	Dec. 31, 2004
PC/multimedia	179,596	229,117
Entertainment and household electronics	55,073	40,231
Communications technology	11,610	8,637
	246,279	277,985

Notes to the Consolidated Balance Sheet and the Consolidated Income Statement

(4) Other current assets and prepaid expenses are as follows:

in € thousand	Dec. 31, 2005	Dec. 31, 2004
Outstanding supplier credit notes	19,215	24,209
Tax receivables
- Income taxes	14,876	7,464
- VAT and other taxes	8,154	4,313
Prepaid expenses	2,638	659
Other	6,042	3,629
	50,925	40,274

Prepaid expenses include prepayments for the medium-term syndicated loan agreed upon during 2005 in the amount of €1,417 thousand. In addition, this item contains prepaid license fees, service costs, maintenance, insurance, rental and other prepayments as well as the short-term portion of a loan discount of €5 thousand.

Non-current assets

(5) Property, plant and equipment is carried at cost less straight-line depreciation over the relevant expected useful life. The following useful lives are applied:

	useful life
Buildings and exterior fixtures	10–33 years
Leasehold improvements	3–20 years
Other equipment, operating and office equipment	3–13 years
Low-value assets	1 year

Additions primarily relate to reconstruction and renovation of the Company's building in Essen-Kray (€8,250 thousand).

There were no revaluations of items of property, plant and equipment.

(6) Intangible assets (industrial rights and software acquired for a consideration) are carried at cost and amortized over a useful life of three to ten years on a straight-line basis. Additions in 2005 totaling €1,912 thousand mainly refer to the purchase of licenses in connection with the development and the distribution of systems for digital television, €1,250 thousand.

No research and development costs had to be capitalized.

(7) Goodwill arose from including MEDION Nordic in the consolidated financial statements. The related impairment test as required in accordance with IFRS 3 and IAS 36 did not result in any write-downs.

Notes to the Consolidated Financial Statements Notes to the Consolidated Balance Sheet and the Consolidated Income Statement

108 | 8.2.1 Notes to the Balance Sheet

(8) Financial assets are carried at cost plus incidental acquisition costs. Payments made on account include an advance payment totaling €2,714 thousand for the 24.9% stake in GERICOM AG, Linz, Austria. Since June 2004, litigation concerning MEDION AG's claim to release the above mentioned shares is pending with Oberlehner Deutschland Beteiligungsgesellschaft mbH, Munich. The outcome of these proceedings is still unclear.

In the year under review, MEDION Asia Pacific Ltd., Hong Kong, China, was established at a cost of €110 thousand. The company has not been included in the consolidated financial statements as it has not yet begun its operating activities.

(9) Loans include an interest-bearing loan which is carried at its nominal value and runs until June 30, 2007.

The changes of individual items of the Group's non-current assets are included in the fixed assets schedule on pages 98 and 99.

(10) Deferred taxes arise from differences between the IFRS carrying amounts and the corresponding tax base and are reported in a separate item. Deferred taxes are calculated on the basis of future expected uniform income tax rates in Germany and the USA of approximately 40%. Deferred tax assets and liabilities result from the following balance sheet items:

	Assets	Liabilities	Assets	Liabilities
in € thousand	Dec. 31, 2005		Dec. 31, 2004
Current:
From direct recognition
in equity	0	172	657	0
Non-current:
Property, plant and equipment	329	71	276	72
Inventories	0	0	122	0
Pension provisions	343	0	226	0
Other provisions	3,122	1	2,853	7
	3,794	72	3,477	79
	3,794	244*	4,134	79*

*Reported under tax provisions due to insignificance

Deferred taxes resulting from items taken directly to equity arose from cash flow hedges in connection with hedge accounting pursuant to IAS 39.

(11) Other non-current assets and prepaid expenses mainly comprise rent deposits (€70 thousand) as well as the long-term portion of a loan discount (€3 thousand) (2004: €9 thousand).

Current liabilities

(12) Short-term loans and the short-term portion of long-term loans, trade payables as well as other current liabilities are recognized at their redemption amounts. Foreign currency items are carried at fair value.

Short-term loans and the short-term portion of long-term loans comprise solely liabilities to banks. Other current liabilities mostly relate to VAT and payroll liabilities.

in € thousand	Dec. 31, 2005	Dec. 31, 2004
MEDION AG
Deferred taxes	243	72
Trade tax	2	6,531
Corporate tax/solidarity surcharge	0	4
MEDION UK	151	12
MEDION NL	78	87
MEDION France	57	99
MEDION Italia	20	39
AMS	20	32
Others	22	153
	593	7,029

(13) Tax provisions can be broken down as follows:

Notes to the Consolidated Financial Statements Notes to the Consolidated Balance Sheet and the Consolidated Income Statement

110 | 8.2.1

(14) In accordance with IAS 37, other provisions take account of all identifiable risks and uncertain obligations towards third-parties resulting from past transactions or past events, the amount or due date of which are uncertain. The amount of the provision has been determined on the basis of best estimates of the expenditure required to settle the obligations. Positive earnings contributions have not been offset. During the restructuring process, the Company also recognized provisions for future-period expenses (€606 thousand) at MEDION USA and MEDION AT.

	108,019	77,642	394	93,924	271	124,178
Other provisions	1,448	1,419	4	2,118	82	2,225
Personnel	4,976	3,870	317	4,360	15	5,164
Guarantees	51,186	44,966	0	44,993	101	51,314
Outstanding invoices	50,409	27,387	73	42,453	73	65,475
in € thousand	Jan. 1, 2005	Utilization	Reversal	Additions	differences	Dec. 31, 2005
					Exchange rate

The provision for outstanding invoices includes uninvoiced services as well as credits to be granted for bonuses and product returns. In addition, levies related to copyrights are included in this item. The risk of a potential copyright levy on PCs and notebooks has been taken into account. In the reporting period, the Company for the first time recognized a provision for the obligation to take back waste electrical and electronic equipment (WEEE) under the relevant EU directive.

Provisions for guarantees were recognized for any necessary subsequent repairs or credits. The provisions were calculated on a lump-sum basis in accordance with the sales volume of the products subject to guarantees. The percentages used vary according to the relevant product group. Provisions are utilized on the basis of lump-sum rates calculated on the basis of historical figures over the applicable guarantee period (12-36 months). Since the guarantees arise in connection with operating activities, the portions of the provisions relating to periods longer than 12 months can also be classified as current provisions.

Personnel provisions include outstanding expenses for vacation leave, remuneration for overtime work, anniversary bonuses, severance payments, other employee bonuses as well as membership dues for professional organizations.

Other provisions mainly relate to expenses for preparing financial statements, legal fees and remuneration for members of the Supervisory Board.

Non-current liabilities

(15) Bonds include three convertible bonds in a total amount of €946,700.00 issued to management and executive staff under an employee compensation plan.

The bond issued in April 2000 was repaid to all bondholders on the maturity date (March 31, 2005) at a nominal amount of €183,650.00. The bond had been issued at a nominal interest rate of 4%.

In July 2001, a convertible bond with a total nominal amount of €221,600.00 was issued to management and executive staff. The bond is divided into equally ranking bearer bonds of €1.00 each. The bond carries an annual interest rate of 4%. If the conversion right is not exercised, the bond must be repaid no later than July 26, 2006. In the reporting period, no conversion rights were exercised by management or staff, while dismissals and cancellations of employment contracts led to early redemptions of some bonds. The last conversion period for the bond ended in late fall 2005. The bond amounted to €180,600.00 as of the balance sheet date.

Another convertible bond with a total nominal amount of €482,000.00 was issued in August 2002 to management and executive staff. The bond carries an annual interest rate of 4%. One convertible bond with a nominal amount of €1.00 may be converted into one share. The conversion right could have been exercised for the first time on the second banking day after the publication of the report for the second quarter of 2004. The conversion right expires upon dismissal or cancellation of the employment contract, resulting in early redemption of the bond. The conversion price payable upon exercise of the conversion right by the employees is based on the price of MEDION stock at the beginning of the exercise period and its performance relative to the MDAX. In the reporting period, no conversion rights were exercised by management or executive staff, while dismissals and cancellations of employment contracts led to early redemptions of some bonds. The bond amounted to €415,500.00 as of the balance sheet date.

Another convertible bond with a total nominal amount of €387,600.00 was issued in September 2003. The terms and conditions of the convertible bond correspond to the terms and conditions of the above-mentioned bond. The right of conversion could have been exercised for the first time on the second banking day after the publication of the report for the second quarter 2005. In the reporting period, no conversion rights were exercised by management or executive staff, while dismissals and cancellations of employment contracts led to early redemptions of some bonds. The bond amounted to €350,600.00 as of the balance sheet date.

In aggregate, the Management Board and staff are entitled to acquire a total of 698,800 MEDION shares via convertible bonds. The nominal amount totals €766,100.00.

As of December 31, 2005, the number of bonds can be broken down as follows:

	2001/2006	2002/2007	2003/2008
	Conversion period	Conversion period	Conversion period
	Late Fall 2003; 2004; 2005	Late Summer 2004; 2005; 2006	Late Summer 2005; 2006; 2007
Gerd Brachmann	35,000	30,000	30,000
Christian Eigen	35,000	30,000	30,000
Dr. Knut Wolf	0	0	30,000
Staff members	269,200	307,000	241,800
Total shares	339,200*	367,000	331,800
Nominal in €	180,600	415,500	350,600

*Last conversion period already expired

In the event conversion rights are exercised, the Company will take all necessary measures to ensure that the shares are placed without any disruption to the market

113 | 8.2.1 Notes to the Balance Sheet

(16) Long-term loans mainly relate to liabilities to banks for the financing of a Company building. The full amount of the liabilities is secured by real property liens. €135 thousand of these loans have a remaining term of more than five years.

(17) Pension provisions are recognized for pension commitments to members of the Management Board and calculated using actuarial methods in accordance with IAS 19. Under the projected unit credit method, the vested benefits as well as expected future salary and pension increases are taken into account. The 10% corridor as defined in IAS 19.92 is not applied. Instead, the actuarial losses that have been incurred for the first time in the year under review are immediately recognized in profit or loss in accordance with IAS 19.93. In the reporting period, the Company applied the "2005 G" mortality tables compiled by Dr. Klaus Heubeck for the first time.

The calculation of the present value of the defined benefit obligation is based on the following actuarial assumptions:

in %	2005	2004
Discount rate	4.5	5.0
Salary increases	2.0	3.0
Pension increases	1.5	1.5

During fiscal 2005, pension provisions changed as follows:

in € thousand	2005	2004
Balance on January 1	1,462	1,220
Interest cost	73	61
Service cost	257	181
Recognized actuarial gains/losses	132	0
Balance on December 31	1,924	1,462

As of the balance sheet date, there were no differences between the pension provisions and the present value of the defined benefit obligation.

Notes to the Consolidated Financial Statements Notes to the Consolidated Balance Sheet and the Consolidated Income Statement

(18) Shareholders' equity

As in the previous year, the Company's subscribed capital amounts to €48,418,400.00 and is divided into 48,418,400 no-par value bearer shares with a nominal amount of €1.00 each. The shares are fully paid.

At the Annual Shareholders' Meeting held on May 22, 2001, the shareholders resolved to increase contingent capital I from €1,200,000.00 divided into 1,200,000 bearer shares to €2,400,000.00 divided into 2,400,000 bearer shares. Contingent capital I is used solely for granting conversion rights for convertible bonds under the employee compensation plan. The new shares are entitled to participate in dividends as of the beginning of the fiscal year in which they arise as a result of exercising conversion rights. Following the exercise of conversion rights for the 1999 convertible bond in August 2001 as well as the 2001 convertible bond in November 2003, contingent capital I decreased by €378,400.00 and €40,000.00, respectively, to €1,981,600.00.

At the Annual Shareholders' Meeting held on May 15, 2002, the shareholders authorized the Management Board and the Supervisory Board to issue bonds with warrants or convertible bonds for a total nominal amount of up to €500,000,000.00 and to grant holders of such bonds option or conversion rights of up to €20,000,000.00. For this purpose, the Annual Shareholders' Meeting resolved to create contingent capital II in the amount of €20,000,000.00.

Furthermore, the Management Board and the Supervisory Board were authorized to increase the Company's capital by up to €10,000,000.00 using authorized capital.

On May 12, 2005, the Annual Shareholders' Meeting authorized the Management Board to buy back shares of up to 10% of the current share capital in the period from May 13, 2005 to November 12, 2006.

These authorizations were not used in the year under review.

Please see page 96 to this annual report for the statement of changes in equity.

No additions were made to the legal reserve since the capital reserves amounting to €138,324 thousand already satisfy the requirements contained in Section 150 (2) of the German Stock Corporation Act (AktG). Statutory reserves are not required. Additions totaling €3,341 thousand relate to the first-time application of IFRS 2.

Retained earnings can be broken down as follows:

in € thousand	Dec. 31, 2005	Dec. 31, 2004
Effect from first-time application of IFRS 2	-2,421	-2,421
Revaluation reserve (IAS 39)	257	-986
Other retained earnings	244,906	244,906
	242,742	241,499

In accordance with IFRS 2, the fair value of share-based payments – at MEDION, convertible bonds only – must be recognized for the first time starting on January 1, 2005. According to IFRS 2.53, the standard must be applied for convertible bonds issued after November 7, 2002. The fair value of the services of the employees as consideration for granting options is recognized in profit or loss under personnel expenses over the term of the lock-up period. The options are measured on the basis of the Monte Carlo simulation and are accounted for retrospectively from the date of issue. For the previous years, an amount of €484 thousand for 2003 was recognized directly in equity and an adjustment amounting to €1,937 thousand was made necessary to a change in prior-period figures under personnel expenses. In the year under review, €920 thousand were recognized in profit or loss under personnel expenses.

Retained earnings include effects from the measurement of currency forwards in accordance with IAS 39, which are partially recognized directly in equity, as well as the related deferred taxes.

In addition, foreign exchange differences of €801 thousand (2004: €1,254 thousand), mainly relating to the USA and the United Kingdom, led to a reduction in equity.

Notes to the Consolidated Balance Sheet and the Consolidated Income Statement

Notes to the Income Statement

The income statement has been prepared under the nature of expense method.

(19) Sales are recognized in profit or loss at the time the risk is transferred to the customer. Sales are recognized after deducting product returns and rebates as well as sales-related trade discounts and other sales deductions.

Sales were generated in the following markets:

in € thousand	2005	2004
Germany	1,698,782	1,548,682
Europe	768,944	978,237
USA	24,722	46,430
Asia/Australia	34,220	50,759
	2,526,668	2,624,108

Sales are allocated to the following product groups:

in € thousand	2005	2004
PC/multimedia	1,798,477	1,919,134
Entertainment and household electronics	632,252	642,265
Communications technology	95,939	62,709
	2,526,668	2,624,108

(20) Other operating income primarily relates to commission income, insurance benefits, reversals of provisions and exchange rate differences. It also includes off-period income of €3,056 thousand (2004: €1,376 thousand).

Notes to the Consolidated Financial Statements Notes to the Consolidated Balance Sheet and the Consolidated Income Statement

(21) Cost of materials comprises expenses arising from the procurement and contract manufacturing of the goods sold in connection with projects in the areas of PC/multimedia, entertainment and household electronics as well as communications technology. Incidental acquisition costs are included.

(22) Personnel expenses comprise the following items:

in € thousand	2005	2004
Wages and salaries	50,070	*52,962
Social security contributions	9,462	9,454
Pensions	371	242
	59,903	*62,658

*) Change due to first-time application IFRS 2

The following shows the average number of employees in the MEDION Group:

Employees by group (full-time equivalents)	2005	2004
Administrative staff	669	623
Industrial/technical staff	246	230
Call center	636	573
	1,551	1,426

Note: absolute numbers were reported in the previous year.

Notes to the Consolidated Balance Sheet and the Consolidated Income Statement

118 | 8.2.2

2005	2004
584	541
150	160
503	479
1,237	1,180
85	82
96	70
133	94
314	246

(23) Other operating expenses can be broken down as follows:

in € thousand	2005	2004
Selling expenses	110,885	97,248
Administrative expenses	16,150	16,343
Operating expenses	5,782	4,634
Other	7,175	1,161
	139,992	119,386

Selling expenses primarily include costs for freight and packaging, service and marketing costs, commissions and levies for decommissioning as well as other ancillary distribution costs. This item also includes levies related to the German green dot (Grüner Punkt) program and the EU directive on waste electrical and electronical equipment introduced in 2005.

119 | 8.2.2

Administrative expenses include expenses for insurance, legal and consulting fees, costs for thirdparty services, bank transaction costs and other general administrative expenses. Operating expenses include expenses for rentals, repairs and office supplies. Other expenses mainly comprise offperiod expenses, specific and general valuation allowances for receivables and exchange rate differences.

Administrative expenses include auditing fees for the consolidated financial statements of €235 thousand. Fees for tax advisory services and other consulting services amounted to €24 thousand and €61 thousand, respectively. In addition, the audit of foreign subsidiaries' financial statements resulted in auditing fees of €115 thousand.

(24) In the year under review, the Company incurred restructuring expenses in connection with restructuring measures as well as streamlining and optimizing the product portfolio. Restructuring expenses can be broken down as follows:

in € thousand

Impairment losses on inventories	15,906
Recognized losses from sell-offs	3,402
Restructuring of service and sales locations	1,205
	20,513

(25) Net interest income can be broken down as follows:

in € thousand	2005	2004
Interest income	2,263	1,118
Interest expense	-4,533	-3,549
Borrowing costs	-1,858	-1,774
	-4,128	-4,205

Interest income and expenses as well as borrowing costs resulted in a corresponding change of cash and cash equivalents in the year under review, with the exception of the expensed reversal of a discount of €6 thousand.

Notes to the Consolidated Balance Sheet and the Consolidated Income Statement

(26) Taxes on income are broken down as follows:

2005	2004
3,756	18,209
3,421	15,250
515	563
389	497
237	99
184	116
178	-16
100	182
92	130
-305	76
8,567	35,106

As of the balance sheet date, MEDION AG had a corporate tax credit balance pursuant to Section 37 (1) of the German Corporate Tax Act (KStG) of €3,113 thousand not carried on the balance sheet. In the case of dividend payments after December 31, 2005 and before December 31, 2019, one-sixth of the dividend payments will be netted against the corporate tax liability for the year of the dividend payment pursuant to Section 37 (2a) Sentence 2 of the Corporate Tax Act. In the year under review, €222 thousand was capitalized for the dividends for 2005, which will be paid out in 2006.

121 | 8.2.2

The following table shows the reconciliation of the imputed expected tax expense to the current income tax expense in accordance with IAS 12.79 et seq.:

in € thousand	2005	2004
1. Group earnings before income taxes	17,767	*83,891
2. Applicable imputed tax rate (%)	39.85	39.67
3. Imputed tax	7,080	*33,277
4. Differences vs. foreign and deferred taxes
Effect from tax-exempt expenses (IFRS 2)	367	768
Losses that cannot be utilized	1,504	1,213
Other	-409	–300
5. Reduction of corporate taxes due to dividend payments	-222	0
6. Tax payments/rebates for prior years	150	127
7. Taxes on non-deductible operating expenses	97	21
8. Current income tax expenses	8,567	35,106
9. Current income tax rate in %	48.22	*41.85

*Change of prior-period figures due to first-time application of IFRS 2

The uniform imputed income tax rate of 39.85% for 2005 is based on the effective trade tax charge of 18.3%, the corporate tax rate of 25.0% and a solidarity surcharge of 5.5%.

Notes to the Cash Flow Statement

In accordance with IAS 7, the cash flow statement shows the changes in cash and cash equivalents in the Group during the course of the reporting period in the form of cash inflows and cash outflows. The cash flow statement distinguishes between cash flows from operating activities, investing activities and financing activities. Net cash provided by operating activities is determined using the indirect method.

Cash and cash equivalents as presented in the cash flow statement include all cash funds recognized in the balance sheet in the form of checks, cash on hand and bank balances.

8.3.2 Segment Reporting

In the period under review, MEDION AG was engaged almost exclusively in a single segment, specifically, the provision and arrangement of services together with the distribution of PC/multimedia, entertainment and household electronics as well as communications technology. The value creation processes for all product groups largely exhibit the same structure with respect to the levels of production as well as marketing methods and channels. The organizational structure is therefore uniformly based on the typical sequence of action for projects. The risk structure of the projects is to a very large extent identical for the various product types. Given the uniform project sequence, the individual projects are largely characterized by the same income structures even on international markets. Therefore, the product groups cannot be viewed as separate segments as defined in IAS 14. As a result, segment reporting is limited to a break-down by region of the main items of the income statement and the balance sheet in accordance with IAS 14.50-67.

• External sales are attributed to the regions in which they are generated (i.e. the customer's region).
• Intercompany sales are recognized on the basis of arm's length prices. They are eliminated in the "rest of world/elimination" column.
• Segment EBIT is adjusted for intercompany balances.
• Segment cash flow is calculated on the basis of the EBIT of the relevant segment plus segment depreciation and amortization.
• Segment assets include assets used to generate the relevant segment's EBIT. Segment liabilities contain the debt of the relevant segment. Intercompany assets and liabilities are eliminated in the "rest of world/elimination" column.
• Capital expenditure includes additions to property, plant and equipment and intangible assets in the year under review.

Please refer to the table on page 97 for an itemized presentation of the segment report.

Earnings per Share

Earnings per share are calculated by dividing the profit attributable to shareholders by the weighted number of shares outstanding.

	2005	2004
Weighted number of shares outstanding	48,418,400	48,418,400
Net income (in € thousand)	9,200	*48,785
Earnings per share (basic, in €)	0.19	*1.01
Earnings per share (diluted, in €)	0.19	*1.01

*Change of prior-period figures due to first-time application of IFRS 2

8.3.4 Other Financial Obligations

Other financial obligations are broken down as follows:

	2005	2004	2005	2004	2005	2004
in € thousand		<= 1 year		> 1 year <= 5 years		> 5 years
Office and storage premises	1,704	1,603	2,665	1,948	522	0
Operating leases	533	477	362	616	0	5
	2,237	2,080	3,027	2,564	522	5

Management of Currency Risks

MEDION AG uses derivatives to reduce market risks resulting from fluctuations in exchange rates in connection with its purchasing operations, which are primarily invoiced in US dollars and partly in pounds sterling. For this purpose, the Company enters into hedges in the form of forward currency contracts on the date the purchasing contract is concluded. The hedges essentially match the underlying delivery transactions in terms of maturity and amount. The forward currency contracts used by MEDION comply with the effectiveness requirements as defined in IAS 39.88 for the application of hedge accounting principles. Accordingly, pursuant to IAS 39, they are recognized in the balance sheet at their fair value on the balance sheet date. The fair values of the forward currency contracts, designated as cash flow hedges as of the balance sheet date, are recognized directly in equity in a separate hedging reserve. Forward currency contracts designated as hedges of currency risks related to balance sheet items (fair value hedges) are recognized in profit or loss, as are the corresponding gains or losses from remeasurement of the hedged items. As the financial instruments are used solely to hedge currency risks in connection with the calculated exchange rates for purchasing contracts, income and expenses arising from currency translation and hedging transactions in the form of forward currency contracts are recognized in cost of materials.

The nominal amount of forward currency contracts entered into as of the balance sheet date was approximately US\$158.0 million. In addition, currency swaps for a total nominal amount of US\$134.0 million were also used to provide for short-term adjustments of the maturity dates to the actual payment dates of the liabilities. As of the balance sheet date, exchange rate movements led to a positive fair value of €1,225 thousand, which is recorded in other current assets. For the fair values of the forward currency contracts designated as cash flow hedges, the Company recognized a valuation reserve of €257 thousand directly in equity as well as deferred tax liabilities amounting to €172 thousand. The valuation reserve recognized directly in equity is offset by corresponding unrecognized foreign currency gains resulting from the related outstanding purchasing contracts. The other changes in the fair value of forward currency contracts of €796 thousand were offset directly in profit or loss.

8.3.5

	Nominal amount	Fair value	Nominal amount	Fair value
	US\$ thousand	€ thousand	US\$ thousand	€ thousand
	Dec. 31, 2005		Dec. 31, 2004
Currency transactions
Forward currency contracts in US\$	158,000	948	200,449	–4,572
Interest rate transactions
US\$ swaps	134,020	277	102,270	–120
	292,020	1,225	302,719	–4,692
of which recognized in
equity (gross)		429		–1,642
less deferred taxes		-172		657
Cash flow hedges		257		–985
of which recognized in profit or loss		796		–3,050

The fair value on the balance sheet date is based on the closing rate.

In addition, the Company uses stop-loss orders to hedge currency risk. For this purpose, MEDION instructs banks to buy US dollars for the Company when the exchange rate of the euro against the US dollar is likely to fall below the exchange rate calculated for the purchasing contract. The reverse product (take profit orders) is also used on a case-by-case basis.

The Company does not expect the use of derivative financial instruments to have an adverse effect on its financial position. The Company does not use financial instruments for trading or speculative purposes.

8.3.6 Events after the Balance Sheet Date

No significant events had occurred up until February 20, 2006 (date of authorization for publication by the Management Board).

Related Party Disclosures

	Share capital as of		Net income/loss for
Name and registered office	Dec. 31, 2005	Share	the year in € thousand
1. Allgemeine Multimedia Service GmbH, Essen, Germany	€25,000.00	100.00%	471
2. MEDION Service GmbH, Mülheim an der Ruhr, Germany	€25,000.00	100.00%	277
3. MEDION FRANCE S.A.R.L., Villaines sous Malicorne, France	€150,000.00	100.00%	165
4. MEDION ELECTRONICS LIMITED, Swindon, United Kingdom	£200,000.00	100.00%	155
5. MEDION NORDIC A/S, Skovlunde, Denmark	DKK 500,000.00	100.00%	1,314
6. MEDION AUSTRIA GmbH, Wels, Austria	€50,000.00	100.00%	87
7. MEDION B.V., Panningen, Netherlands	€650,000.00	100.00%	396
8. MEDION ITALIA S.r.l., Milan, Italy	€30,000.00	100.00%	13
9. MEDION IBERIA, S.L., Madrid, Spain	€5,000.00	100.00%	21
10. MEDION SCHWEIZ ELECTRONICS AG, Schlieren, Switzerland	CHF 100,000.00	100.00%	13
11. MEDION USA, Inc., Delaware, USA	US\$10,100,000.00	100.00%	-3,250
12. MEDION AUSTRALIA PTY LTD., Sydney, Australia	AU\$10,000.00	100.00%	43
13. MEDION KOREA ELECTRONICS Yuhan Hoesa, Seoul, Korea*	KRW 120,000,000.00	100.00%	-35
14. MEDION International (Far East) Ltd., Hong Kong, China	HK\$10,000.00	100.00%	non-operating
15. LIFETEC International Ltd., Hong Kong, China	HK\$10,000.00	100.00%	non-operating
16. MEDION Asia Pacific Ltd., Hong Kong, China	HK\$1,000,000.00	100.00%	non-operating

* wound up as of August 31, 2005.

Business relations between MEDION AG and its subsidiaries, which are classified as related parties, have been eliminated and will not be explained in further detail.

In the normal course of business, the Company also maintains relations with related parties in connection with the delivery of goods and the provision of services. Such business relations are governed by contractual arrangements and are reported using arm's length prices. The following transactions are required to be disclosed in accordance with IAS 24:

		Receivable/
	Sales	liability (-)
in € thousand	2005	Dec. 31, 2005
MEDION Unterhaltungsmedien GmbH & Co. KG, Essen
Goods	5,533
Services	-57	708 (net)
Lifetec Electronics GmbH, Essen
Goods	1,696
Commission agreements	31	2,074 (net)
MEDION Brachmann oHG, Essen
License agreements	29	0
	7,232	2,782

Management Board

During the period under review, the Management Board comprised:

Gerd Brachmann, Essen (Chairman of the Management Board), Christian Eigen, Essen (Deputy Chairman of the Management Board), Neosino Nanotechnologies AG, Griesheim – Member of the Supervisory Board –

Dr. Knut Wolf, Mülheim an der Ruhr.

Total compensation paid to the members of the Management Board came to €720 thousand (2004: €1,808 thousand). The variable compensation paid in 2005 for 2004 amounted to €138 thousand (2004: €828 thousand).

As of December 31, 2005, the Management Board held 26,579,018 shares (Gerd Brachmann: 26,565,018; Christian Eigen: 14,000; Dr. Knut Wolf: zero shares). As of December 31, 2004, the Management Board held 26,574,018 shares (Gerd Brachmann: 26,565,018; Christian Eigen: 9,000; Dr. Knut Wolf: zero shares).

An overview of the possibilities for the Management Board to acquire shares via convertible bonds is included in Section (15) on page 111.

Mr. Gerd Brachmann, Essen, holds a majority stake in MEDION AG as defined in Section 16 of the Stock Corporation Act.

Supervisory Board

In the year under review, the Company's Supervisory Board consisted of:

Dr. Rudolf Stützle, Essen (Chairman),

Deutsche Bank AG, Frankfurt am Main, Global Banking – Managing Director – Carl Spaeter GmbH, Duisburg – Deputy Chairman of the Supervisory Board – METRO Capital B.V., Venlo, Netherlands – member of the Supervisory Board until June 30, 2005 – DB Consult Gesellschaft mbH, Frankfurt am Main – member of the Advisory Board –

Dr. Klaus Eckert, Düsseldorf (Deputy Chairman),

Carl Spaeter GmbH, Duisburg – Chairman of the Supervisory Board – Rudolf Flender GmbH & Co. KG, Siegen – member of the Advisory Board –

Kim Schindelhauer, Aachen,

AIXTRON AG, Aachen – Chairman of the Supervisory Board – Deutsches Aktieninstitut e.V., Frankfurt am Main – member of the Management Board –

The compensation paid to the Supervisory Board consists of a fixed component of €10 thousand per member and a variable component of 0.0275% of the Company's unappropriated retained earnings, the latter reduced by a sum equal to 4% of its subscribed capital. The variable component is twice this amount for the Chairman and one and one-half times this amount for the Deputy Chairman. The compensation is payable after the adoption of the annual financial statements.

The members of the Supervisory Board receive a fixed compensation of €30 thousand (2004: €30 thousand) as well as a variable component of €10 thousand (2004: €31 thousand). In the year under review, expense reimbursements came to €0.3 thousand (2004: €0.3 thousand). As of December 31, 2005, members of the Supervisory Board held 160 shares (2004: 160 shares), held entirely by Dr. Rudolf Stützle.

Corporate Governance – Declaration of Compliance Pursuant to Section 161 of the German Stock Corporation Act (AktG)

The German Corporate Governance Code (GCGC) as amended on June 2, 2005 represents the key recommendations relating to the management and supervision (governance) of German listed companies and contains standards for responsible corporate management. On December 7, 2005, the Management Board and the Supervisory Board submitted the updated declaration of compliance in accordance with Section 161 of the Stock Corporation Act and made it accessible to shareholders on the Company's website.

8.3.11 Proposal for the Appropriation of Profits

For fiscal year 2005, the Management Board and the Supervisory Board of MEDION AG are proposing the following appropriation of profits of MEDION AG in accordance with the Company's single-entity financial statements:

• payment of a dividend of €0.19 per share (2004: €0.55).

Essen, February 2006

MEDION AG

Gerd Brachmann Christian Eigen Dr. Knut Wolf Chairman of the Deputy Chairman of the Member of the Management Board Management Board Management Board

"We have audited the consolidated financial statements – consisting of the balance sheet, income statement, statement of changes in equity, cash flow statement and the notes – and the combined Group management report and management report of MEDION AG, Essen, for the fiscal year from January 1 to December 31, 2005. The preparation of the consolidated financial statements and the combined Group management report and management report in accordance with IFRS, as adopted by the EU, and the supplementary provisions stated in Section 315a (1) of the German Commercial Code and the supplementary provisions of the Company's Articles of Incorporation are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and the combined Group management report and management report based on our audit.

We conducted our audit of the consolidated financial statements in conformity with Section 317 of the German Commercial Code and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer in Deutschland (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the combined Group management report and management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the combined Group management report and management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of the companies included in consolidation, the determination of the companies to be included in consolidation, the accounting and consolidation principles used and significant estimates made by the Company's management, as well as evaluating the overall presentation of the consolidated financial statements and the Group management report. We believe that our audit provides a reasonable basis for our opinion.

Our audit has not led to any reservations.

In our opinion, based on the results of our audit the consolidated financial statements are in compliance with the IFRS, as adopted by the EU, and the additional provisions stated in Section 315a (1) of the German Commercial Code and the supplementary provisions of the Company's Articles of Incorporation and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these provisions. The combined Group management report and management report is in accordance with the consolidated financial statements and provides on the whole a suitable understanding of the Group's position and suitably presents the opportunities and risks for future development."

Essen, February 20, 2006

MÄRKISCHE REVISION GMBH WIRTSCHAFTSPRÜFUNGSGESELLSCHAFT

Dipl.-Ök. K.-H. Berten Dipl.-Kfm. H.-H. Schäfer Wirtschaftsprüfer Wirtschaftsprüfer

135 |

Deciding on some core values...

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Fully equipped with a 65,000 hue display, tri-band, polyphonic ring tones, class 10 GPRS and a mini SD memory card jack.

With this much value at the core, we think the decision is pretty easy.

Separate Financial Statements of MEDION AG

• 10.1 Income Statement
• 10.2 Balance Sheet

in € thousand	Jan. 1 - Dec. 31, 2005	Jan. 1 - Dec. 31, 2004
1. Sales	2,518,302	2,616,425
2. Other operating income	10,705	14,412
3. Cost of materials
a) Cost of goods purchased	2,296,867	2,353,314
b) Cost of services purchased	2,836	2,111
	2,299,703	2,355,425
4. Personnel expenses
a) Wages and salaries	18,939	25,666
b) Social security contributions and pension expenses	3,404	4,557
	22,343	30,223
5. Depreciation, amortization of
intangible and tangible fixed assets	7,877	6,423
6. Other operating expenses	176,962	150,680
7. Income from equity investments	6,089	699
8. Other interest and similar income	2,246	1,114
9. Impairment of financial assets	6,405	1,654
10. Interest and similar expenses	6,343	5,329
11. Profit from ordinary activities	17,709	82,916
12. Taxes on income	7,968	32,644
13. Other taxes	25	32
14. Net income for the year	9,716	50,240
15. Retained earnings	0	18,289
16. Allocation to other revenue reserves	0	41,899
17. Unappropriated retained earnings	9,716	26,630

Assets

Balance Sheet

in € thousand	Dec. 31, 2005	Dec. 31, 2004
A. Fixed assets
I. Intangible assets
1. Industrial rights, software	9,178	10,935
2. Payments on account	73	409
	9,251	11,344
II. Tangible assets
1. Land and buildings	21,701	20,493
2. Other equipment, operating and office equipment	6,812	7,803
3. Payments on account	6,859	750
	35,372	29,046
III. Financial assets
1. Shares in affiliated companies	3,629	10,009
2. Loans to affiliated companies	420	0
3. Other loans	261	415
4. Advances paid for investments	2,714	2,714
	7,024	13,138
	51,647	53,528
B. Current assets
I. Inventories
Goods and merchandise	244,834	273,524
II. Receivables and other assets
1. Trade accounts receivable	347,347	407,501
2. Receivables from affiliated companies	10,948	3,973
3. Other assets	44,533	38,850
	402,828	450,324
III. Cash on hand and bank balances	121,667	84,145
	769,329	807,993
C. Prepaid expenses	2,457	550
D. Deferred taxes	2,872	3,443
	826,305	865,514

Separate Financial Statements of MEDION AG

Shareholders' equity and liabilities

in € thousand	Dec. 31, 2005	Dec. 31, 2004
A. Shareholders' equity
I. Subscribed capital	48,418	48,418
- thereof common shares: €48,418
- contingent capital: €21,982 thousand
- authorized capital: €10,000 thousand
II. Capital reserves	138,324	138,324
III. Retained earnings	245,351	245,351
IV. Unappropriated retained earnings	9,716	26,630
	441,809	458,723
B. Provisions
1. Pensions provisions	1,067	897
2. Tax provisions	73	6,607
3. Other provisions	120,531	105,622
	121,671	113,126
C. Liabilities
1. Bonds	947	1,171
2. Liabilities to banks	598	1,264
3. Trade accounts payable	234,911	275,969
4. Liabilities to affiliated companies	8,442	8,053
5. Other liabilities	17,631	7,208
	262,529	293,665
D. Deferred income	296	0
	826,305	865,514

Financial Calendar

March 23, 2006	Annual Report 2005
March 23, 2006	Analysts Conference
May 12, 2006	Interim Report as of March 31, 2006
May 12, 2006	Annual Shareholders' Meeting
August 10, 2006	Interim Report as of June 30, 2006
November 9, 2006	Interim Report as of September 30, 2006
March 2007	Annual Report 2006
March 2007	Analysts Conference

Publication Credits

MEDION AG Investor Relations Am Zehnthof 77 D-45307 Essen

Phone +49(0)201-83 83 6500 Fax +49(0)201-83 83 6510 e-mail aktie@medion.com Website www.medion.de / www.medion.com

Photo credits: MEDION AG Layout/typography: mueller.design, Büro für Gestaltung D-44793 Bochum Printing: Druckpartner D-45307 Essen

Product names mentioned in this report may refer to registered trademarks.

This Annual report is available in English (convenience translation) and German (original and authoritative version).

© 2006 MEDION AG Essen

medion ag investor relations

am zehnthof 77 d-45307 essen

phone +49 (0)201-83 83 6500 fax +49 (0)201-83 83 6510