Management Report of MEDION Group and MEDION AG. for the Fiscal Year from January 1 until December 31, 2008

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1 Management Report of MEDION Group and MEDION AG for the Fiscal Year from January 1 until December 31, 2008

2 Management Report of MEDION Group and MEDION AG Economic Environment General Economic Trends The economic trend in the eurozone and in Germany in 2008 was characterized by progressive deterioration from quarter to quarter. The real estate market crisis in the USA reached the global financial markets in Q After initially affecting the financial sector, the crisis also spread to the non-financial sector. Countries in the eurozone are being directly and indirectly affected by the fallout from the financial market crisis and the global economic downturn, not least because of their extensive involvement in highrisk US securities and the high degree of openness of the European markets. In the first half of 2008, the economy was still growing comparatively well in Germany and in the eurozone. In the second half of 2008, however, there were noticeable signs of the downturn, particularly in foreign trade and in the manufacturing industry. The significant growth in the value of the euro compared to the US dollar as well as the drastic increase in crude oil prices up to the middle of 2008 also contributed to an abrupt end of the economic boom in the eurozone in Q Beginning in Q3 2008, the recession also reached Germany with a clear weakening of investment activity and a disproportionately sharp decline in order backlogs. Furthermore, registered unemployment in Germany and the eurozone grew considerably in Q Germany s price-adjusted GDP did grow by 1.3% compared to 2007, although this can be attributed solely to growth in the first half of 2008, which was still satisfactory. Private consumption declined slightly in the eurozone and Germany in 2008 compared to the previous year. Despite improved income prospects, private consumption in 2008 was dampened primarily by sharp price increases for energy and food, as well as the continued upward trend in saving behavior among private households. The determining factor for private consumer spending is disposable income, which is determined based upon net wages and salaries (42%), monetary social benefits minus tax contributions for social benefits (approximately 24%), and independent and investment income minus income taxes (approximately 34%). The rate of change in the consumer price index in 2008 was characterized by a significant increase in crude oil prices, from around USD 70 on average in 2007 up to a daily high of more than USD 140 per barrel at the middle of the year. Uncertainty regarding further economic trends and the extremely volatile prices for fuel and heating have severely inhibited consumption, particularly of durable goods, in Germany and the eurozone.

3 Management Report of MEDION Group and MEDION AG Economic Environment Market for Consumer Electronics The German consumer electronics market reported sales growth of 1.7% to billion in Market growth in consumer electronics continued to surpass overall economic growth. The main growth driver is the digitalization of products, content, and transmission lines, which continued unabated in TV As in previous years, devices such as high-resolution flat-screen televisions and all devices that permit mobile use of media were again in particularly high demand in The market for TV displays rose by billion, or 21.4%, to billion, and the market for home audio grew by 27 million, or 3.6%, to 749 million. In terms of televisions, LCD TVs accounted for 83% of sales volume (5.9 million units) in Germany in 2008 and plasma TVs accounted for 14% (0.7 million units). Overall, just under 7.5 million television sets (+25%) were sold in Germany in 2008 (including projection TVs, mobile TV receivers, and CRT devices). Notebooks Sales growth in the consumer electronics market was also supported by the continued strong growth in demand for notebooks. The information technology sector achieved sales of billion overall, an increase of 5.5%. Growth in the PC/multimedia area was driven primarily by notebooks, with volume sales rising by 47.3% to 4.43 million units. Notebook sales grew by 15.2% to billion, while average unit prices fell by 21.8% to 695. Consumer demand for mobility was the main growth driver in this segment as evidenced by the immediate market success of mini-notebooks. By comparison, the market for desktop PCs declined by 7.5% to a sales level of billion, with a 4% decline in units to 1.35 million. Navigation devices As expected, unit sales of navigation devices increased, with growth of 16.1% to million units. But because the average price was significantly reduced to 204 per unit, a 28.4% drop, revenues also declined by 16.8% to billion in this market segment. MEDION s core competency and sales focus is the PC/multimedia area, which contributes approximately 63% of total Group sales. The entertainment electronics/services division is increasing its share of sales and contributes more than 37% of total sales. 1 Growth figures for the German consumer electronics market reflect the consumer electronics market index (CEMIX) published jointly by the Gesellschaft für Unterhaltungs- und Kommunikationselektronik (gfu) and the Gesellschaft für Konsumforschung (GfK).

4 Management Report of MEDION Group and MEDION AG The MEDION Group MEDION s Business Model MEDION s business model, which has proven itself nationally and internationally over the past 20 years, focuses on using retail partners to provide consumers with high-quality and innovative trend products in appealing designs at the cutting edge of technology. These consumer electronics products reflect the best price-performance ratio, making them accessible to a broad range of buyers at an early stage in the market cycle. In addition to its traditional marketing campaign business with consumer electronics products, MEDION is increasingly concentrating on developing and marketing a complementary line of services, particularly in the areas of telecommunications/medionmobile, the MEDION Photo Service, software downloads, and online services. MEDION products are also marketed over the Internet and in the Company s own Webshops in Germany and important Central European markets. In its relationships with its customers, the internationally established large retail chains, MEDION acts not only as a supplier but also as a full-service provider that manages and controls the entire value creation chain, from the development of the product idea through manufacturing and logistics to after-sales service. As a rule, high-volume sales campaigns are structured and implemented jointly with the customer; in many cases, these take place simultaneously in several countries or sometimes even on several continents. With its full-service expertise, MEDION reduces the workload for its retail customers so that they can focus fully on distributing the products. MEDION does not perform all steps of the value creation chain using its own capacities, but instead uses its global procurement process to integrate highly capable international partners into the various stages of a project. After the product idea and design have been developed by MEDION in coordination with the customer, the components and products are procured from well-known manufacturers with global operations, thus incorporating their know-how and production expertise into the procurement process. MEDION structures, manages, and monitors the logistics process, which is carried out by highly capable forwarding agents. A key success factor for MEDION as well as its customers is MEDION s comprehensive, efficient after-sales service. This service ensures that the end customer receives any support needed in setup and operation 365 days a year and, if necessary, facilitates fast repair or equipment exchange. By engaging the most efficient and capable partners, particularly in the investment-intensive links of the value creation chain, MEDION guarantees its flexibility with respect to both the product range offered and the cost structure. In this way, it is able to offer its customers the most cutting-edge products at extremely favorable price-performance ratios.

5 Management Report of MEDION Group and MEDION AG The MEDION Group MEDION s Business Model MEDION s range of products covers the entire product mix of modern consumer electronics. Whether it involves a PC, a notebook, an LCD or plasma screen TV, a DVD recorder, an MP3 player, a navigation system, or a special cell phone plan, MEDION provides its retail partners with the broadest range of modern consumer electronics with the best price-performance ratio from a single source. This increasingly includes complementary services, particularly in the areas of telecommunications/medionmobile, software downloads, and online services such as the photo service. Moreover, the general trend towards Internet shopping is making direct sales to consumers via the MEDION website an increasingly important factor. 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: products in generally time-limited sales campaigns. Together with its partners, MEDION offers a wide-ranging package that covers the entire value creation chain, from development to after-sales service. The following principles have applied for the past 20 years: and the European core markets

6 Management Report of MEDION Group and MEDION AG The MEDION Group MEDION s Business Model / Corporate Management MEDION distinguishes itself by the following: rapid decision-making processes MEDION operates primarily in Germany and the rest of Europe, and is continuously strengthening its brand by growing its business model with new products, expanding complementary services, and conducting marketing activities aimed at specific target groups Corporate Management In the MEDION Group, strategic and operational goals are established by the Management Board. In the operational area, key account managers are responsible for the most important customers, and product managers are responsible for the main product groups, such as notebooks, PCs, LCD TVs, mobile navigation devices, and the relevant offerings in the service area (MEDIONmobile, MEDION Photo Service, Webshop). Purchasing, design, quality control, logistics, and marketing are cross-departmental functions that are implemented throughout the company. MEDION considers itself to be a partner of retail, and is therefore focused on maximizing customer satisfaction, particularly in terms of product quality and service. All business in the MEDION Group is subjected to a preliminary audit and a follow-up audit designed to maximize profit. The value driver for the profit orientation within the MEDION Group is the requirement that each completed project achieves an EBIT margin that equals or exceeds the goal for the Group EBIT in the current fiscal year.

7 Management Report of MEDION Group and MEDION AG The MEDION Group The Value Creation Chain The Value Creation Chain for MEDION Products Product Idea MEDION conducts market research to capitalize on the newest market and technology trends by converting them to product ideas. * Research and Development international brand manufacturers Product Conceptualization MEDION offers advice on features, pricing and technical specifications and then tests probable market acceptance. Product Design MEDION s in-house design department defines the external appearance of products and packaging based on current trends and colors, in an interactive process involving purchasing managers, retail companies, and manufacturers. * Production international brand manufacturers Quality Management MEDION uses its integrated quality planning system to test the user-friendliness, reliability, electromagnetic compatibility, and safety of the appliances in co-operation with independent testing institutions (e.g. TÜV, VDE, LGA). Logistics Management MEDION manages the entire logistics chain from manufacturers to retail companies. Delivery is on a just-in-time basis, using appropriate modes of transportation. * Logistics forwarding agents, shipping companies * Distribution to the End-User international retail chains After-Sales Support MEDION offers comprehensive after-sales service. Expert support is available 365 days a year from the hotline at MEDION s own call center, ready to handle questions related to applications, warranty processing, and followup orders. MEDION performs any necessary repairs. For specific products within Germany, MEDION contracts a local service, which then contacts the end-user and performs the repairs on site. * We rely on the assistance of well-known partners and service providers when handling our projects. The services outlined here are provided by third parties.

8 Management Report of MEDION Group and MEDION AG The MEDION Group Structure of the MEDION Group MEDION s foreign subsidiaries are predominantly companies that provide sales and after-sales services for MEDION AG in their respective countries. As a rule, the actual project management and logistics are controlled centrally by the MEDION organization in Germany. Within the German organization, call center activities are consolidated in Allgemeine Multimedia Service GmbH, and repair and logistics services for after-sales and e-commerce business are consolidated in MEDION Service GmbH. One company was removed from the group of consolidated companies in the MEDION Group in The liquidation of the subsidiary MEDION ITALIA S.r.l., Milan, Italy, was completed in April 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, Glostrup, Denmark MEDION AUSTRIA GmbH, Wels, Austria MEDION B.V., Panningen, Netherlands MEDION IBERIA, S.L., Madrid, Spain MEDION SCHWEIZ ELECTRONICS AG, Wettingen, Switzerland MEDION USA Inc., Delaware, USA MEDION AUSTRALIA PTY LTD., Sydney, Australia MEDION Elektronika d.o.o., Ljubljana, Slovenia 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

9 Management Report of MEDION Group and MEDION AG Financial Report Business Performance Overview of financial performance million % million % million % /- Sales 1, , Cost of materials -1, , Gross earnings Personnel expenses Other expenses and income Depreciation/amortization EBIT Financial result > EBT Taxes Net income Although economic conditions in Germany and the eurozone have deteriorated from quarter to quarter, fiscal year 2008 was an overall success for MEDION. The structural price deterioration among MEDION s main product groups (notebooks, desktop PCs, mobile navigation devices) continued during the past year as well. Following a rise in sales during the nine-month period of 2008, the MEDION Group recorded a significant sales decline in Q4, particularly due to receding business in important European core markets toward the end of the quarter. Nevertheless, the targeted streamlining of the product portfolio initiated in the previous years, eliminating transaction-intensive segments and the concentration on efficient order structures, led to a substantial improvement in earnings. The operating result (EBIT), which grew by 20.7% to 34.4 million, as well as improved interest income resulted in a 30% increase in net income as well as growth in earnings per share from 0.42 to Given this positive growth in earnings, the Management and Supervisory Boards intend to propose to the Annual Shareholders Meeting on May 15, 2009 that a dividend of 0.15 per share be paid for each dividend-entitled share.

10 Management Report of MEDION Group and MEDION AG Financial Report Business Performance Overview of financial performance / Sales Trend Because of the significantly worsening prospects for the business environment and consumer behavior in the eurozone, and the difficulty in predicting overall economic conditions, a forecast for the current fiscal year continues to be associated with a high level of uncertainty. The Management Board presumes that given the sustained economic pressures caused by the recession in the eurozone, 2009 will bring reduced consumer demand for consumer electronic products. Thus a noteworthy decrease in sales is also to be expected for MEDION in 2009; overall, however, the company should still achieve a positive operating result Sales Trend Market stabilization and the resulting positive performance in 2007 continued in the first nine months of Despite sustained price pressure and increasingly short product cycles, MEDION was able to exceed sales of the previous year during the nine-month period of the year under review, thus maintaining its market position and even strengthening it in some areas with new innovative products. In particular, trends for new products and designs such as the mini-notebook or new widescreen formats in notebooks reinforced MEDION s product strategy. Due to the global financial crisis, however, the last quarter of 2008 saw a constantly increasing and thus perceptible cooling off of the retail climate. Even though consumer interest continued to be high, the effects of the financial crisis on the business environment were reflected in more cautious order volumes from the major retail customers. MEDION therefore experienced a 12.7% decrease in sales in Q4 compared to Q Overall, sales of 1,603.7 million remained 3.4% below 2007 levels ( 1,659.3 million). sales by region million % million % million % /- Germany 1, , Europe Other foreign Sales 1, ,

11 Management Report of MEDION Group and MEDION AG Financial Report Sales Trend The most important market in 2008 continued to be Germany, where sales experienced only a slight decline of 2.4% to 1,091.3 million, thus maintaining approximately the level of The rest of Europe experienced an uneven trend, however. Sales grew significantly throughout the entire year in the Benelux countries, Austria, Switzerland, and the Iberian market, but could not compensate for sales decreases in important markets such as France and the United Kingdom. Overall, foreign sales of million were 5.3% below the 2007 levels. sales by product group million % million % million % /- PC/multimedia 1, , Entertainment electronics/ services Sales 1, , The PC/multimedia product group continues to represent the largest share of sales for MEDION. Its share of total sales declined, however from 68.4% in 2007 to 62.8% in This decline can be attributed to the trend towards smaller, more inexpensive devices such as the mini-notebook and the significant price decline in mobile devices such as navigation devices. Nevertheless, it also shows the success of continuous product developments by MEDION. The company was able to achieve further important progress in 2008 in terms of services and business with digital content, resulting in a corresponding 13.8% increase in sales to million.

12 Management Report of MEDION Group and MEDION AG Financial Report Financial Performance Gross earnings With a gross margin of 11.5%, financial performance was stabilized in 2008 at the level of 2007 (11.4%). Despite price pressures created by competition, MEDION was clearly able to maintain its profitability, also due in particular to the trend towards smaller but more powerful products such as the mini-notebook. This is evidence of the success of the strategy introduced in previous years and consistently followed in 2008, namely an efficient product and customer portfolio management as part of a targeted elimination of transaction-intensive products. It also underscores MEDION s success in refining its business model and transforming it from a purely project business with hardware to include digital content and service offerings. Over the long term, this will help to secure income by building sustainable customer relationships. Personnel expenses Following the significant decrease of approximately 9.3% in 2007, personnel expenses remained constant at 46.7 million in 2008 (2007: 47.0 million). The MEDION Group had 1,069 employees (full-time equivalents) on the balance sheet date (2007: 1,093). personnel expenses Total personnel expense in thousand 46,641 46,982 Average number of employees 1,072 1,138 Personnel expense per employee in 43,508 41,285 The decline in personnel was primarily in the Service area (-105 FTE) as a result of further outsourcing of repair and call-center services. The 5.4% increase in average personnel expense per employee to 43,508 can be explained in light of this circumstance, as well as the strengthening of the core area of Sales in particular.

13 Management Report of MEDION Group and MEDION AG Financial Report Financial Performance development of average number of employees (full-time equivalents) The following table provides an overview of the decline in average number of employees, subdivided by employee groups and by Germany vs. foreign employees. Germany Number 2008 Number 2007 Number +/- % +/- Sales Service Administration Foreign Sales Service Administration Total Sales Service Administration ,072 1, Depreciation and amortization Depreciation and amortization declined by 20.9% to 5.3 million during the period under review due to reduced investment activity (2007: 6.7 million). Although depreciation on property, plant and equipment remained relatively constant, depreciation on software and licenses declined by 38.7% to 2.1 million (2007: 3.5 million).

14 Management Report of MEDION Group and MEDION AG Financial Report Financial Performance Other operating expenses/income million million million % /- Other operating expenses Selling expenses for marketing for customer service for miscellaneous Administrative expenses Operating expenses Other Other operating income Balance

15 Management Report of MEDION Group and MEDION AG Financial Report Financial Performance Following an increase in other operating expenses in 2007, these declined by 10.6 million (or 9.4%) to million in the year under review, and thus represent 6.4% of sales (2007: 6.8%). This reduction is due primarily to a 10.9% decline in selling expenses to a 5.1% share of sales, compared to 5.5% in Even though marketing expenses grew by 6.3 million to 33.8 million through targeted investments in strengthening MEDION s brand attractiveness and developing new designs and products, expenses for customer service were reduced by 34.3% to 22.8 million. The basis for this reduction was the expiration of warranty for the record sales year 2005, the consistent relocation of repair activities to Eastern Europe, and individual measures aimed at a sustained reduction of transaction costs. In the area of other selling expenses, declines in freight and return volumes as well as optimization measures resulted in further savings. Other operating income relates to income from the liquidation of provisions, earnings from commissions, and income from other periods.

16 Management Report of MEDION Group and MEDION AG Financial Report Operating Result (EBIT) Operating Result (EBIT) million million million % /- Germany Europe Other foreign >100.0 EBIT Thanks to the previously mentioned operational and strategic measures, the MEDION Group was able to noticeably strengthen its profitability. Despite a marked decline in sales in the important fourth quarter of the year, the operating result increased by 20.7% overall to 34.4 million (2007: 28.5 million). From a qualitative standpoint, this reflects a strengthening of profitability in the year under review to 2.2% of sales, compared to 1.7% in Profitability showed positive growth in both Germany and the foreign markets. The 23.6 million share of EBIT earned through sales in Germany corresponds a return on sales of 2.2% compared to 2.0% in 2007, while foreign return on sales increased by 1.3% to 2.1%.

17 Management Report of MEDION Group and MEDION AG Financial Report Taxes on Income Taxes on income million million Actual tax payments Deferred income taxes Use of deferred tax assets Recognition of deferred tax assets Tax rate effect from tax reform Other deferred taxes Income tax expense, total Due to regulations on minimum taxation in Germany, effective tax charges of 4.4 million must be paid in the year under review despite the tax loss carryforwards that still exist for MEDION AG. Based upon MEDION AG s 2008 net income, 6.8 million of the deferred tax assets on tax loss carryforwards ( 26.1 million) capitalized as of December 31, 2007 were used in the year under review. Given the Company s medium-term planning, which was adjusted to the change in the current general economic situation, MEDION assumes, that all existing tax loss carryforwards can be used within a sufficiently defined planning horizon.

18 Management Report of MEDION Group and MEDION AG Financial Report Financial Position balance sheet structure million % million % million % Dec. 31, 2008 Dec. 31, /- Cash and cash equivalents Inventories Trade receivables Other current assets Total current assets Property, plant and equipment Intangible assets Deferred taxes Other non-current assets Total non-current assets Total assets Trade payables Tax provisions Other provisions Other current liabilities Total current liabilities Non-current liabilities Shareholders equity less purchased own shares Shareholders equity as reported in the balance sheet (IFRS) Summe Passiva

19 Management Report of MEDION Group and MEDION AG Financial Report Financial Position The total assets of the Group declined by 13.7% to million compared to the previous year. On the asset side, inventories in particular declined significantly by 73.1 million to million. In 2007, high order volumes for projects to be delivered in January 2008 were already in inventory on the balance sheet date. By comparison, trade receivables of million based on invoices were 36.1 million higher as of December 31, 2008 than in Due to a reduction in inventories, trade payables declined compared to the previous year by 34.0 million to million. MEDION s very solid balance sheet structure further improved in fiscal Shareholders equity (prior to the acquisition of own shares) increased by 12.6 million to million due to the net income for 2008, thereby constituting 56.9% of total assets (as reported on the balance sheet: 50.7%); in the previous year the ratio of shareholders equity as reported on the balance sheet was 44.4%. The Group purchased more of its own shares during the course of 2008, whose repurchase value for the present total of 3,169,104 shares is 43.0 million, and which will be recognized according to IFRS as a separate item directly in equity. Despite the liquidity required for the purchase of its own shares, the Group has free liquidity reserves of million. It must also be considered that the volume of ABS transactions recognized at 83.3 million in 2007 was reduced as planned to 2.2 million as of December 31, 2008.

20 Management Report of MEDION Group and MEDION AG Financial Report Cash Flow Statement cash flow million million million % /- Earnings before interest and taxes on income (EBIT) Depreciation, amortization and other non-cash expenses Gross cash flow Changes in net current assets > Changes in other provisions Payments for taxes/cash receipts from tax refunds > Cash flow from operating activities Cash used for investing activities Free cash flow Payments for the purchase of own shares Dividends paid Payments of financial liabilities (net) Cash used for financing activities Change in cash and cash equivalents > Foreign exchange differences >100.0 Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period

21 Management Report of MEDION Group and MEDION AG Financial Report Cash Flow Statement Gross cash flow increased to 39.2 million based on improvements in earning power achieved in In addition, 9.6 million from earnings was added to the other provisions, which have not yet led to cash outflows. The result is 42.7 million in cash flow from operating activities. Cash used for investing activities continues to be low at 2.9 million. The primary investing activity was related to expansion and replacement expenditures for office equipment and hardware and software, particularly for the new Webshop system, totaling 3.3 million (2007: 2.0 million). Disposals of assets led to cash inflows of 0.3 million (2007: 0.5 million). Disbursements for the acquisition of own shares in the amount of 17.2 million and a reduction in liabilities from ABS financing (payments of financial liabilities of 76.8 million), as well as the dividends paid in 2008 for fiscal year 2007 in the amount of 6.9 million, resulted in million in net cash outflows from financing activities. Net cash outflows from financing activities led to a cash-effective decline of 61.1 million in cash and cash equivalents to million at year s end. Liquidity on the balance sheet date In contrast to the situation as of December 31, 2007, cash and cash equivalents of million (2007: million) as of December 31, 2008 were contrasted by only minor net liabilities from asset-backed security financing (2007: 83.3 million) and thus, with the bonds that were also repaid (2007: 0.3 million), liquidity on the balance sheet date closely approximates cash and cash equivalents. Net cash is calculated as follows: in million Dec. 31, 2008 Dec. 31, 2007 Cash and cash equivalents less: Net liabilities from ABS transactions Bonds

22 Management Report of MEDION Group and MEDION AG Financial Report / Human Resources Cash Flow Statement / Changes in Employee Numbers The recognized net cash of million is therefore the result of the high level of in-house financing within the Group and further optimization of working capital management. The MEDION Group had a clearly positive net cash position throughout the entire year. There was no need to take out bank loans during the year under review. The Group s sound liquidity is reflected in the positive financial result of 4.5 million. On the whole, MEDION AG enjoys good financing conditions with high shareholders equity of more than 355 million, an equity-to-assets ratio (shareholders equity as reported on the balance sheet) of 50.7%, high liquidity of million on the balance sheet date, and a flexible and low-cost financing instrument in the form of contractually agreed asset-backed security financing alternatives, as well as the existing multi-year project financing framework (syndicated loan) Changes in Employee Numbers As in the previous year, the Company was able to achieve savings in personnel expenses in The average number of employees (converted to full-time equivalents) in the MEDION Group in 2008 decreased by 5.8% from 1,138 in 2007 to 1,072 in Of these employees, 848 worked for MEDION AG and its domestic subsidiaries (2007: 913) and 224 worked for foreign subsidiaries (2007: 225). These personnel adjustments decreased personnel expenses, 46,641 thousand, during the year under review by 341 thousand, or 0.7%, compared to 2007 ( 46,982 thousand). The cost savings achieved in accordance with the plan can be attributed essentially to personnel reductions through attrition. These personnel changes affected every division of the Company. The measures introduced in previous years for structural improvement, process streamlining, and increased efficiency were consistently continued under consideration of the changes in the overall environment. The savings in personnel expenses achieved in 2008 also resulted from the relocation of the After Sales Service warehouse of MEDION Service GmbH. The relocation was in the form of a partial transfer of operations to the external service provider, which had already taken over incoming mail service for MEDION Service GmbH in 2006.

23 Management Report of MEDION Group and MEDION AG Human Resources Changes in Employee Numbers The corporate decision to have this external company perform warehousing and spare parts provisioning services that had previously been performed by MEDION Service GmbH itself is intended to create further synergy effects, and above all to empty the MEDION Technology Center in Mülheim an der Ruhr and make it available for other use. As part of the plan to secure the Group s overall competitiveness, a works agreement was signed between Company management and the Works Council. This arrangement specifies that the employees affected by the partial transfer of operations would be transferred to the new employer pursuant to 613 a of the German Civil Code (BGB), maintaining their full vested rights under labor law as well as their full social benefits. The works agreement also defines comprehensive measures to protect the transferred employees. These measures apply for a period of 18 months and will come into effect in the unlikely event that the new employer is forced to lay off employees within this period. In addition to financial compensation in the form of severance payments in such a case, the works agreement also contains an arrangement concerning a special fund that would be set up to mitigate specific hardship cases. A total of 30 employees were affected by the partial transfer of operations.

24 Management Report of MEDION Group and MEDION AG Human Resources Changes in Employee Numbers The following overview shows changes in employee numbers (full-time equivalents) as of December 31, 2008, compared with the same date in development of number of employees (full-time equivalents as of dec. 31) Germany Number 2008 Number 2007 Number +/- % +/- Sales Service Administration Foreign Sales Service Administration Total Sales Service Administration ,069 1, Further measures for the optimization of structures and processes are planned in Further cost savings potentials in addition to personnel attrition are possible in this context.

25 Management Report of MEDION Group and MEDION AG Human Resources Personnel Structure The Company s swift growth in the years leading up to 2004 and the associated rapid build-up in personnel is reflected in our employees young average age and relatively short duration of employment. During the year under review, employees at MEDION AG and its domestic subsidiaries consisted of 39.0% women (2007: 35.9%) and 61.0% men (2007: 64.1%). The average age changed only slightly in the year under review compared with the previous year, and was 35.9 years in 2008 (2007: 35.7). The following chart provides an overview of the employees age structure, differentiated by men and women. age structure in % male female less than 20 years years years years years more than 61 years The average duration of employment at MEDION AG and its domestic subsidiaries in 2008 was approximately 5.2 years (2007: 4.9 years). duration of employment in % male female less than 2 years 2-5 years 6-10 years more than 11 years The percentage of staff sick days at MEDION AG was 3.7% (2007: 3.3%) and thus below the national average of 3.8% (2007: 3.8%).

26 Management Report of MEDION Group and MEDION AG Human Resources Main Agreements MEDION places a high priority on maintaining an open and friendly corporate culture, and fostering an atmosphere of trust and collaboration with employee representatives and individual employees. Even during the period of cost-cutting and rightsizing measures in 2008, relations between company management and the Works Council were characterized by a spirit of constructive dialogue. Personnel changes were implemented while taking into account social conditions and acceptable standards of corporate behavior. The decisions made by company management were supported by the Works Council in a responsible and helpful manner. Despite the inevitable consequences of such efforts, they were widely accepted by the employees, who understood their necessity. Both the Management Board and the employee representatives are convinced that socially responsible behavior will have a sustained positive effect on the working atmosphere at the Company, improve work processes, increase operational productivity and work quality, and thereby produce a variety of positive effects for the Company and its employees. With the help of the employee representatives, a career development concept was created and codified in a works agreement. This concept promotes teamwork and a spirit of partnership between all of the individuals working for the Company. The MEDION Group has also entered into a number of other important works agreements aimed at ensuring long-term employee loyalty as well as increasing flexibility within the Company to meet market requirements. One significant agreement, for example, provides for flexible working hours at the MEDION call center. Because of the varying workloads typical for this sector, there was a need to adjust individual employee hours in the call center in order to accommodate the strong fluctuations in capacity utilization that occur during sales campaigns. The objective was to achieve a more flexible and appropriate structuring of working hours in the call center so as to adapt to increased customer requirements caused by greater product complexity. These measures are strategically important because the efficiency of the call center is a fundamental factor in achieving customer satisfaction and thus the sustained success of MEDION products on the market. Ultimately these measures serve to maintain and increase our competitiveness. At the same time, we have created the organizational prerequisites that will enable us to offer appropriate call center services to third parties as well in the future.

27 Management Report of MEDION Group and MEDION AG Human Resources Main Agreements In the year under review, a works agreement was signed between Company management and the Works Council to introduce quality improvement measures in the call center, and was successfully implemented following a three-month introductory phase. The purpose of these measures is to sustain competitiveness and support vital customer relationships as well as to retain and create secure jobs for the future. One instrument that MEDION AG and its domestic subsidiaries use to promote employee loyalty is the Company s pension plan. Since its introduction in 2005, approximately 30% of MEDION AG employees have taken advantage of the opportunity to purchase direct insurance and participate in the pension fund. During the year under review, MEDION AG successfully continued the Company s health promotion plan introduced in A significant component of this plan is providing financial support for all employees of the Group who are interested in undergoing medically accepted smoking cessation programs. The compensation systems have been adjusted to the changing requirements. The uniform salary model introduced in one area of the Company in 2005, in which employees are grouped into specific salary groups based upon their skill level and receive further systematic training in communication and management development, has proved to be extraordinarily effective and successful during the period under review, resulting in a qualitative improvement of service. Across-the-board compensation systems have been introduced for management. The systems consist of a fixed portion and a variable portion based upon individually agreed performance targets. The individual performance targets are established based upon Company objectives and personal objectives. As part of the Company s career development plan, quality improvement measures were introduced during the year under review, particularly in the call center. A total of 31 employees (2007: 36) participated in an assessment center exercise conducted for this purpose. In 2008, the use of the assessment center was expanded for the first time to cover not only career development, but also the recruitment of new employees. Other external training courses were also offered to employees, as were IT-related training sessions for SAP R/3 conducted by an SAP Inhouse Competence Center, and training in Microsoft Office conducted by external and in-house training teams.

28 Management Report of MEDION Group and MEDION AG Human Resources Main Agreements As part of the compliance principles implemented in the Company regarding non-public information in the corporate environment, a total of 85 employees, who are listed as insiders in the insider directory pursuant to BaFin (Federal Financial Supervisory Authority) guidelines, were briefed in a training session during the year under review regarding the most recent relevant legal provisions. In addition, employees who are involved in purchasing, product development and management, or sales tasks as part of their job responsibilities, or who otherwise confirm orders to third parties or are involved in a broader sense with price and contractual negotiations or their implementation were required to comply with the corresponding statutory provisions by signing supplemental agreements. This ensured that all necessary measures were taken on both the employee and management side to counteract and/or prevent corruption and acceptance of benefits. MEDION actively supports Company training programs for young people. During 2008 a total of 45 (2007: 33) trainees were employed at MEDION AG, of whom 13 were in commercial wholesale and foreign trade, 5 in commercial office communications, 5 media designers for digital and print media, 2 IT specialists, and 5 IT systems electronics experts. The Dialogue Marketing training program, which was offered for the first time in 2007, had a total of 15 trainees in All 5 trainees, who successfully completed their final examinations, were hired by various departments of MEDION AG and its domestic subsidiaries. One employee undertook a part-time course of study in Business Administration in 2008.

29 Management Report of MEDION Group and MEDION AG Research and Development Research and Development MEDION works very closely with leading manufacturers of components and products in the fields of multimedia and entertainment electronics. This has given us continuous access over many years to the latest findings from research and development projects. Our business model, however, focuses on providing rapid access to innovative technologies for a wide range of consumers. For this reason, we do not maintain our own R&D facilities for work on basic technologies. Nevertheless, MEDION is working with other partners on a number of projects to promote the integration of PC/multimedia technology into traditional entertainment electronics equipment as part of the digitalization trend. In these efforts, MEDION is valued by leading technology firms for its ability to act as a rapid technology integrator of new applications for the mass market. Among other projects, the Company made large numbers of mininotebooks ready for market in 2008, and MEDION engineers worked together with international corporate partners to further integrate digital multimedia applications into notebooks and desktop PCs. MEDION also refined new software applications for mobile navigation devices in 2008 together with navigation software vendors and introduced them onto the market. Last but not least, the many good test results and numerous test victories in Germany and abroad prove that MEDION products are leaders in both technology and ease of use.

30 Management Report of MEDION Group and MEDION AG Corporate Governance / Compensation Report Corporate Governance / Compensation for Management Board 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 to be 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 fulfills in principle the requirements and recommendations of the German Corporate Governance Code in the version dated June 6, In deviation from the recommendations of the Code, the Supervisory Board of MEDION AG has not formed any committees because it consists of only three members. A detailed report by the Management and Supervisory Boards on corporate governance in the MEDION Group can be found in the annual report. Pursuant to Section 312 of the German Stock Corporation Act (AktG) the the Management Board of MEDION AG reported to the Supervisory Board on relations with related companies in the past fiscal year, declaring the following: 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 during the fiscal year Compensation for Management Board The total compensation for members of the Management Board consists of a number of compensation components. Specifically, this involves a fixed portion, variable compensation, fringe benefits, and pension commitments. The Supervisory Board determines the appropriate compensation and therefore the total compensation structure. Compensation for members of the Management Board consists of performance-related components and non-performance-related components. The non-performance-related components consist of the fixed portion and fringe benefits as well as pension commitments, while the performance-related components consist of a variable compensation.

31 Management Report of MEDION Group and MEDION AG Corporate Governance / Compensation Report Compensation for Management Board The fixed basic compensation is paid as a salary on a monthly basis. Fringe benefits include non-cash compensation, consisting primarily of insurance and a company car. The individual Management Board member must pay taxes on these fringe benefits, as they are part of his compensation package. In principle, these fringe benefits are available equally to all Management Board members; the amount varies based upon each individual s personal situation. No loans or advances on salary were granted to Management Board members in the year under review. Variable remuneration consists of two components: Board based upon the extent to which targets agreed for individuals have been achieved, As planned, new agreements were signed between the Supervisory Board and the Management Board in the period under review. For the period from January to August 2008, the performance-related bonus was calculated based upon the following formula: Calculation basis x bonus percentage. The calculation basis for the bonus in each fiscal year is the Company s net income for the year, reduced by any loss carryforward from the previous year and the amounts from the net income for the year that must be allocated to retained earnings pursuant to statute or the Company s Articles of Incorporation. Pursuant to the new contractual conditions, beginning in September 2008 the performancerelated bonus for Gerd Brachmann and Christian Eigen is calculated in accordance with the degree of achievement of the corporate objective agreed in writing at the beginning of the fiscal year with the Supervisory Board and based upon EBIT (earnings before interest and taxes). The agreement provides for correction of the EBIT in the event of certain extraordinary expenses/income. In addition, for the period beginning in September 2008, Management Board members are also entitled to a share-based compensation as follows: The number of shares of MEDION AG allocated will be defined individually for the Management Board members for the term of the agreements, and is likewise dependent upon the degree of achievement of personal objectives previously agreed upon in writing.