Annual Report PiCCO-Technology has become the medical standard

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Facts and figures

PULSION 2004

PULSION (GROUP) 2004 Variance 2003 2002

in %

Revenues EUR million 16.3 19 % 13.7 11.5

Gross profit EUR million 11.0 23 % 9.0 6.9

EBITDA EUR million 2.2 221 % 0.7 – 2.0

EBIT EUR million 1.2 n.a. – 0.4 – 2.9

Net income/net loss EUR million 0.9 n.a. – 0.7 – 3.3

Cash flows used in operating activities EUR million 2.2 165 % 0.8 – 3.9

Shareholders’ Equity1) EUR million 9.0 10 % 8.2 7.4

Shareholders’ Equity percentage1) % 52 % 50 % 38 %

Total assets1) EUR million 17.5 6 % 16.5 19.5

R&D expenses EUR million 0.9 – 14 % 1.1 1.2

Employees (average) Amount 79 – 2 % 81 88

Revenue per employee KEUR 206 22 % 169 131

Installed base – PiCCO monitors1) Units 3,479 22 % 2,854 2,474

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05

Foreword by the Management Board

07

Highlights 2004

09

Products and Technologies

12

Markets and business model

14

Investor Relations

15

Our Vision

16

Report of the Supervisory Board

19

Consolidated financial statements (U.S. GAAP)

20

Group Management Report

32

Consolidated balance sheet

34

Consolidated income statement

35

Consolidated cash flow statement

36

Consolidated statement of changes

in stockholders’ equity

36

Consolidated analysis of non-current assets

38

Notes to the consolidated financial statements

58

Independent Auditors’ Report

59

Financial calender

Contents

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“With PULSION now operating on a profitable basis

with a stable cash flow, this will clearly help us to achieve

our ambitious targets.”

Stefan Land

Member of the Management Board

Matthias Bohn

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Dear customers, shareholders and colleagues,

2004 was a year of rich harvest and simultaneous expansion for PULSION. On the one hand, we were able to start reaping the benefits of the 2003 cost-saving program and our efforts to build up the business over the past years, as can be seen by the fact that PULSION’s sales revenue increased by 19 % to Euro 16.3 million and EBIT grew to Euro 1.2 million. On the other hand, we also made substantial investments during the past financial year in the area of research and development and to prepare the market in North America.

This success is founded on the unique position of PULSION’s products within the market and the fact that our customers can be offered significant cost savings compared to the cost of conventional diagnostic and therapeutic methods. After achieving the turnaround in the second half of 2003, the EBIT percentage margin has risen in 2004 to approximately 7 %. Earnings per share amounted to Euro 0.09.

PiCCO-Technology, which is the driving force behind PULSION, has established itself as the medical standard for haemodynamic monitoring in Germany and Europe and is now marketed using a smoothly functioning multi-channel sales strategy. Following on from license agreements with Philips Medical Systems and Dräger Medical, PULSIONsucceeded in 2004 in convincing two further leading medical equipment manufacturers - GE Healthcare Technologies and Spacelabs Medical – to link up PiCCO-Technology in future with their patient monitoring systems. In future, therefore, our technology will be used by virtually all of the major suppliers in this area or will be capable of being used in conjunction with their systems. The installed base of PiCCOsystems, which is the foundation for our business with disposable catheter kits, rose during the year under report from 2,854 to 3,479 units, an increase of 22 %. On top of this, almost 6,800 PiCCOmodules have been sold in the meantime by our partner, Philips Medical Systems.

Obtaining approval for ICG-PULSIONin further European countries is essential to our future growth. ICG-PULSIONis now being actively marketed in these countries – both in the field of ophthalmics, where it is used independently of our technology, and in conjunction with PULSION’s LiMONand IC-VIEWtechnologies, both of which are based on ICG-PULSION. PULSIONhas been able to register good performances with these technologies in 2004. The number of LiMONmonitors rose by 29 % to 347 and, in addition, an important license was issued for IC-VIEWwhich enables this technology to be incorporated into Carl Zeiss’ neuro-surgical microscopes and therefore opens up an additional new sales channel for PULSION. CeVOX, which was first presented in March 2004, is yet another promising technology which is about to be launched. This is another example of how PULSIONis creating additional highly promising product lines, alongside the core product, PiCCO, for use in the treatment of critically ill patients in casualty departments and intensive care units.

PULSIONproducts are extremely innovative and introduce into clinical practice new or additional measurement indicators, which allow decisions relating to treatment to be made sooner, more quickly and more accurately. Appropriate marketing strategies are required to ensure that this new approach to diagnosis, patient monitoring and therapy management

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endeavours with PiCCO-Technology in Europe are already beginning to pay off. This success will be extended successively to our other product lines and markets. Most important of all, we are able to use good scientific arguments to advance the process of ensuring that our highly innovative technologies become an established part of hospital clinical routines in the long-term. In Germany, we have already been able to convince a host of influential hospitals – mainly university hospitals or renowned specialist clinics – to use our LiMONand IC-VIEWtechnologies.

With PULSIONnow operating on a profitable basis with a stable cash flow, this will clearly help us to achieve our ambition targets. The scope for growth remains enormous, both in PULSION’s core business and with our new products. Although PULSIONis therefore now in a comfortable position, there will be no let-up in our policy of making continual improve-ments. This applies in particular to the expansion of marketing, sales and production activities as well as to the development of new technologies. The first PiCCOexpertise centers have been set up in the USA, creating the basis for new partnerships to support an effective and powerful sales organization.

We have set the following priorities for the financial year 2005: pushing ahead with our US strategy; obtaining approvals for ICG-PULSIONin the remaining EU countries and submitting an application for approval in the US; marketing CeVOXon a broader basis; starting CiMONsales; and advancing the process of embedding our technologies into clinical routines.

We would like to express our gratitude to all of our employees for their huge commitment. The success achieved over the past years would not have been possible without them. Thank you very much!

Yours truly

After achieving the turnaround in the second half of 2003, the EBIT grew to Euro 1.2 million in 2004. 2003 2004 -0,2 0,2 0,6 1,0 1,4 EUR 0,0 0,4 0,8 1,2 -0,4 million Stefan Land Member of the Management Board Matthias Bohn Member of the Management Board

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Highlights 2004

March:

PULSION introduces a new product, CeVOX, for which there is a great deal of demand. With this product,

pre-heart oxygen saturation can be measured continuously and economically with a minimally invasive

approach, using a process which does not require an additional venous line, thus making it possible to

make an early diagnosis of sepsis, one of the most common causes of death in intensive-care patients.

June:

A British-American research group publishes favourable research results on the PiCCO radial catheter.

This provides the basis for the application of PiCCO-Technology in operations where it is not possible to

catheterise the femoral artery. It opens up a completely new market segment, significantly widening the

overall market for PULSION.

September:

The British medical authority, MHRA, informs PULSION of the favourable conclusion of reciprocal EU

approval proceedings to recognise the drug ICG-PULSION in Belgium, Ireland, Italy, the Netherlands,

Austria, Portugal and Sweden. In line with EU law, PULSION will soon have the required approval to be

able to market ICG-PULSION in the above-named countries.

November:

Arrangements are put in place to allow PiCCO to be linked up to patient monitoring systems sold by

GE Healthcare Technologies and Spacelabs Medical. This means that almost all leading manufacturers of

patient monitoring systems will offer PiCCO-Technology.

November:

PULSION doubles its EBIT forecast for 2004 from Euro 0.5 million to Euro 1 million.

December:

Leading authorities in the medical field acknowledge PiCCO-Technology as the accepted standard

for Germany.

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The rising number of PiCCO systems ensures a constant growth in business with sterile products.

PULSION’s most important line of products at present relates to PiCCO-Technology, a system used for diagnosis, monitoring and therapy regulation in the management of critically ill patients in the perioperative period and in intensive care. With the aid of an arterial catheter, and making use of the central venous line which is already in situ, PiCCOmeasures and collects data on important cardiac and circulatory functions, such as cardiac output, the contractile force and efficiency of the heart, the blood volume in the chambers of the heart, the water content of the lungs and the systemic vascular resistance. PiCCO-Technology is protected by more than 150 patents and patent applications.

Simple, safe, quick, accurate

PiCCOis increasingly taking over from the right-heart catheter, which has been in use since the seventies, to take the relevant measurements. PiCCOhas several advantages over the right-heart catheter which has to be flushed through the chambers of the heart and into the pulmonary artery. The data collected enable rapid and more accurate diagnoses to be made; the procedure is less invasive and therefore represents a lower risk for the patient. The PiCCOcatheter can also be used over a longer period of time. PiCCOis also simpler for medical and nursing staff to use and interpret. Yet PiCCOis considerably more economical than the right-heart heart catheter. As a result PULSIONhas consistently recorded double-digit sales volume growth rates for equipment and catheters over several years.

Cooperation agreements with manufacturers of patient monitoring systems

In its stand-alone monitor form, PiCCOis sold directly by PULSION. Many hospitals prefer, however, to integrate PiCCOinto their existing patient monitoring systems. It is therefore PULSION’s aim to enter into cooperation agreements with all leading manufacturers of such monitoring systems. In 2004, PULSIONsucceeded in reaching agreements with GE Healthcare Technologies and Spacelabs Medical to add PiCCO-Technology to their monitoring systems. Thus the world’s three largest manufacturers of patient monitoring systems – Philips Medical Systems, Dräger Medical and GE Healthcare Technologies – will in future be offering PiCCO actually integrated into their systems or linked with their systems.

On the way to becoming the “gold standard”

The aim is for PiCCO-Technology to become the recognised standard and thus a routine item on hospitals’ tenders for new patient monitoring systems. This can be achieved by familiarising the medical profession more and more with PiCCO, using the opportunities offered by the world’s major congresses on intensive care as well as by means of scientific and clinical studies. PULSION reached an important milestone in Germany at the end of last year. At the congress of the German Interdisciplinary Association of Intensive Care and Emergency Medicine, (DIVI 2004), PiCCOwas declared to be the new preferred clinical standard for cardio-vascular monitoring and management. PULSIONhas thus moved one step closer to its goal of making PiCCOthe "gold standard” for haemodynamic diagnostics.

Huge market potential

PiCCOis the most important source of revenue for PULSIONand the underlying basis for profitabi-lity; it is also the “way-in” for other PULSIONproducts which cater for the needs of intensive care and emergency medicine. No other methods – apart from the right-heart catheter – have so far been able to prove their worth in the area of intensive care medicine. The potential for expansion with PiCCOis far from being exhausted. In Europe, PiCCO-Technology is winning the battle to get itself established; in Asia, the ground is currently being laid to repeat the success already achieved in our

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ICG-PULSION –

a whole world of new opportunities

ICG-PULSION (Indocyanine green) is a very well-tolerated diagnostic agent which is injected into the bloodstream. Its main applications are for investigations of the cardiovascular system, liver func-tion and microcirculafunc-tion. LiMONand IC-VIEWtechnologies work on the basis that ICG-PULSIONis only broken down by the liver and that ICG-PULSIONhas excellent contrast properties.

ICG-PULSIONhas already received approval for Germany, Great Britain and Israel, and is actively sold on these markets; several other European states have issued approvals and marketing is due to commence shortly (see highlights, page 7). ICG-PULSIONis used particularly successfully in oph-thalmics to provide a graphic depiction of the fundus of the eye. In this way, it is possible, above all, to diagnose diseases which can be identified through alterations in the blood vessels, such as diabe-tes. In both surgery and internal medicine, ICG-PULSIONis employed in conjunction with IC-VIEW to depict the blood supply to the skin, tissues, and organs; in intensive-care medicine, it is used with LiMONto measure liver function non-invasively at the bedside. Other innovative technologies, based on the use of ICG-PULSION, are due to follow in the coming years.

Once licences have been issued for ICG-PULSIONin the remaining EU countries and the USA, there will be a marked increase in sales revenues generated by ICG-PULSION.It is difficult to predict how soon these approvals will be issued since it depends to a large extent on the speed at which each individual authority works.

LiMON –

liver results in real-time

LiMONmakes it possible for the first time ever for liver function to be tested and monitored at the bedside. Previously liver function readings could only be taken from blood samples in the laboratory. LiMONoffers several advantages over this static method. Via special single-use sensors, which are manufactured by PULSION, and which are attached to the finger or ear, LiMON measures the rate at which ICG-PULSIONis being broken down and thereby provides a “real-time” reading of the liver function.

There are numerous applications: in intensive care, LiMONcan be used in cases of impending sepsis or septic shock, and in internal medicine it opens up whole new fields for the diagnosis of liver disorders. LiMONprovides continuous monitoring of liver function during surgical operations. Threatening complications can be identified quickly and the appropriate corrective measures taken. With the aid of LiMON, indications of possible liver failure can be recognised much earlier than is possible when other diagnostic methods are employed.

As a result of positive experience gained from long years of clinical studies, the University of Vienna Hospital for Anaesthesiology and Intensive Care Medicine and the University of Vienna Hospital for Surgery now both employ LiMONas a routine measure during all liver transplant operations. Both hospitals are convinced that this has led to higher survival rates and a reduc-tion in costs. LiMONtechnology is protected by 20 patents and patent applications.

LIMON could soon become the standard monitoring technology for liver operations. ICG-PULSION is in the process of obtaining for approval in a number of important EU countries.

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Equipped with a camera with a special infra-red laser light, IC-VIEWmakes even the most minute blood vessels visible. Blood vessel deformities can also be easily diagnosed. IC-VIEWcan also quantify and record details of the blood supply to tissues and organs. With the aid of this techno-logy, surgeons can carry out an entirely new kind of visual check on the progress of their surgery whilst the operation is still being performed. An intravenous injection of ICG-PULSIONis requi-red as a fluorescent medium when using IC-VIEW.

In July 2004 PULSIONissued an exclusive five-year licence forIC-VIEWto Carl Zeiss. As a result, IC-VIEWwill become available as a fully integrated optional extra in the new Carl Zeiss neurosur-gical microscope, OPMI Pentero. Carl Zeiss, the worldwide market leader in the manufacture of surgical visualising systems, has plans to integrate IC-VIEWinto other products in the future, thus making it available for other specialised fields of surgery. The licence arrangements, together with the commencement of our own dynamic strategy for surgical sales, have contributed greatly to the establishment of this technology on the worldwide market.

PULSIONhas several patents and patent applications which protectIC-VIEWtechnology. IC-VIEW is of great importance to PULSIONbecause, above all, it creates opportunities for further applica-tions for ICG-PULSION.

Using a single-use fibre-optic probe, CeVOXcarries out continuous measurements of the central venous oxygen saturation of pre-heart blood. This enables an assessment to be made of the state of the oxygen balance in the body, thus making it possible to recognise signs of impending sepsis at an early stage. CeVOXhas the advantage over traditional methods of measurement that, if necessary, the probe can be introduced using the standard central venous catheter line which is already in position.

Sepsis is the most common cause of death in intensive care patients, resulting in more fatalities than the combined figures for cancer of the breast, bowel, pancreas and prostate gland. Diseases associated with sepsis are on the increase and related annual cost to the health service in the USA alone amounts to approximately US dollar 17 billion. In a remarkable study published in the New England Journal of Medicine, the most authoritative medical journal, it was reported as early as 2001 that the mortality rate of patients with pre-sepsis syndrome can be reduced by 34 % and the length of hospitalization can be reduced by 3.8 days if continuous monitoring of pre-heart oxy-gen saturation is commenced at an early stage in the casualty department and an appropriate follow-on therapy is carried out. PULSIONhelps to achieve these results by offering CeVOXas the appropriate tool.

CeVOXshould be instrumental in reinforcing our position as market leader in the field of

mini-CeVOX – early diagnosis

and treatment in cases of sepsis

Thanks to the cooperation agreement with Carl Zeiss, IC-VIEW is becoming an integrated additional option for patient operation microscopy

By measuring the oxygen saturation of pre-heart blood, an impending sepsis can be recognised at an early stage.

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Markets and business model

Steady flow of sales revenue from disposable products

Technology is our admission ticket

PULSIONdevelops, manufactures and markets innovative technologies which set the standard for systems used in medical diagnosis and therapy. These systems give doctors access to unique, reliable parameters which they can use to apply new and improved examination methods, to make swifter, more accurate diagnoses and to monitor patients without exposing them to excessive risks. However, the sale of patient monitors is not the sole aim of our business.

Sales revenue is determined by the diversity of applications

PULSION’s business model combines medical technology, a medical preparation and sterile medical products. Whilst sales of patient monitors do generate some profits, their main function is to open the door to generate continuous business with disposables, covering the whole ranging from ICG-PULSION, via PiCCOcatheter sets, through to LiMONsensors. PULSION’s growth is mainly attributable to the increasingly wide range of applications for its technologies. It is therefore in a considerably stronger position than other manufacturers of medical technological equipment whose existence mainly depends on initial installations of equipment in hospitals and medical practices, investments in replacement items and technical services. Less than 20 % of our total sales revenue in the past financial year was generated by one-off revenues from licence issues and equip-ment sales, whereas the sales of disposable products and ICG-PULSIONaccounted for more than 80 %. By gearing the business model towards meeting the continual demand for disposable products in medical practice, PULSION’s business activities are only subject to slight fluctuations and remain largely unaffected by investment cycles in the health-care sector.

We are committed to efficiency

PULSIONproducts are extremely efficient because they combine minimally-invasive methods of examination and monitoring with improved therapeutic options. This is very much in the interests of the various ever-expanding health-care markets throughout the world which are endeavouring to reduce costs. PULSION’s products reduce both the cost of materials per operation and the manpower input of medical and nursing staff. In addition, monitoring systems which are simple to operate and minimally invasive reduce the frequency and severity of complications which result in higher costs.

Many more untapped markets

In 2004, 41 % of total sales revenue were generated in Germany where our main product-line, based on PiCCO-Technology, is already employed in most hospitals as the standard method for diagnosis and monitoring in intensive care medicine. Our next aim is to develop markets in Europe, the Asian-Pacific region and North America. Establishing our highly innovative products on the market always involves a number of steps. The first is to prove, with the aid of scientific studies and tests carried out in clinical practice, that PULSIONtechnologies provide medical and economic advanta-ges compared with other methods. The next step is for our equipment to prove its worth in trials carried out in leading hospitals recognised for their influence and high standards. Ultimately, in successive stages, hospitals will embrace our technologies as the general standard: this is the phase where our business model attains its full potential.

All PULSIONproducts are currently still at the beginning of their product life-cycles. Nevertheless, the Company is already showing signs of dynamic growth with an international presence of six sales subsidiaries. The Company has revolutionary technologies which, in certain areas, face no competition with a number of international licence agreements already in place.

The frequency of applica-tions – and hence the sales volume achieved with disposable products – increases with the growing equipment base.

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license and equipment sales already accounted for less than 20 % of our total sales revenue in 2004 – by contrast, more than 80 % is generated by sales of disposable pro-ducts and ICG-PULSION.

Intensive-care medicine is our core market. With new technologies, we are expanding this market to include emergency medicine and surgery. We are currently setting up and operating highly qualified sales organisa-tions for these markets.

PULSION systems which are already in place in market have considerable future potential, which shall be exploited systematically over the coming years.

The advantages:

➔patent protection at several levels,

➔additional protection in the form of system licences

➔exclusive use of PULSION products

Products and markets

Emergency care

CeVOX

****

Products and market potential

*

*) LiMON and IC-VIEW both require ICG-PULSION ****) product not yet available on the market

PiCCO

EUR 2,200 million

LiMON

** ***

EUR 277 million

CeVOX

** **** EUR 140 million

IC-VIEW

** ***

EUR 186 million

CiMON

** **** EUR 170 million

*) market potential on the basis of PULSION's own estimates (basis health care market 2004) **) estimates were only made for the USA and Europe

***) in relation to ICG-PULSION used ****) product not yet available on the market

Equipment

Disposable products

ICG-PULSION

+

+

Surgery

LiMON

*

IC-VIEW

*

PiCCO

Intensive care

PiCCO

CeVOX

****

LiMON

*

CiMON

**** Ophthalmology ICG-PULSION Internal medicine

LiMON

*

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Investor Relations

Upward trend for PULSION stock

In 2004, the market price for PULSIONstock rose by more than 71 % from Euro 2.85 to Euro 4.88 (Basis: Xetra-index closing price). During the same period, the Prime Pharma & Healthcare

Performance sector index rose by just 19 % and the TecDAX fell by 4 %. PULSIONstock’s performance was therefore significantly stronger than that of the market as a whole. The main factors behind this pleasing development were the sharp rise in sales revenue, a continually improving gross profit margin since the turnaround in mid-2003, and the conceivable reality that PiCCO-Technology will become the standard method for monitoring critically ill patients, thereby ensuring lasting growth for PULSIONbeyond any current market trends.

The liquidity of PULSIONstock, which is an important investment criterion, especially for institu-tional investors, more than doubled in the period under report. The daily trading volume rose from an average of 10,015 shares in 2003 to over 21,000 shares in 2004. This means a marked improve-ment in the tradability of PULSIONstock and demonstrates that our efforts are coming to fruition.

Better information for investors

Investor Relations activities were further expanded in 2004. The objective of work in this area is to build up a good relationship with investors based on trust and to offer them the highest possible degree of transparency into the business, at a reasonable level of cost to the entity.

The financial markets’ thirst for first-hand corporate information increased significantly during the period under report. PULSIONmade a very successful presentation at the Deutsche Eigenkapital-Forum (German Equity-Eigenkapital-Forum) in November 2004 and held six investor information days, or “Roadshows”, in Germany and Great Britain. In addition to the quarterly reports, shareholders were also provided with 14 press releases and 11 ad-hoc reports on important matters relating to the Group in 2004. We have also expanded the scope of our investor relations website in the Internet.

The price of PULSION stock rose by more than 71 % in 2004.

PULSION stock has shown a long-term constant upwards trend, clearly performing better than the index.

31.12.2003 01.04.2004 01.07.2004 01.10.2004 31.12.2004

PULSION AG

Prime Pharma & Healthcare TecDax 170 160 150 140 130 120 110 100 90 80 180 %

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PULSIONdevelops innovative, minimally invasive systems for the diagnosis and monitoring of critically ill patients. Our focus is on vital organs and bodily functions.

PULSIONtechnologies reduce the risks to patients because only minimal intervention is required. They also help considerably to cut the cost of treatment because the time required by medical and nursing staff is reduced to a minimum. With the aid of new parameters, PULSIONtechnologies enable more rapid and well-founded decisions to be made for therapies and also allow an immediate assessment of how successful the chosen therapy is. Hence, PULSIONtechnologies are making their contribution towards achieving a significant reduction in treatment times.

Intensive-care medicine is our core market. With new technologies, we are expanding this market to include emergency medicine and surgery. We are currently setting up and operating highly qualified sales organisations for these markets in the most important regions of Europe, Pacific Asia and the USA. Peripheral markets are reached mainly through cooperative agreements and dealer networks.

It is our aim, as the technological leader in the field, to establish worldwide diagnostic standards, which will then be maintained and expanded with the aid of continuous research and development. In order to achieve this, we work in close cooperation with hospitals and institutes in countries at the forefront of medical

Our Vision

We are setting the standard for diagnostics

and monitoring methods throughout the world

The increasing liquidity of PULSION stock reflects the success of our investor relation work.

Key data on PULSION stock at December 31, 2004

ISIN-Code (previously WKN) DE 0005487904 (548790)

Stock market abbreviation PUS

Stock market segment Prime Standard

Sector index Prime Pharma & Healthcare Performance Index

Subscribed capital EUR 9,446,052

Bearer shares 9,446,052

Closing market price 2003* EUR 2.85

Closing market price 2004* EUR 4.88

Highest price (52 weeks)* EUR 4.97

Lowest price (52 weeks)* EUR 2.64

Market capitalisation (December 31, 2004)* EUR 46.1 million

Earnings per share (diluted) 0.09 EUR

* Xetra index closing price

2003 2004 0,0 1,0 2,0 3,0 4,0 1,5 2,5 3,5 4,5 0,5 Code, and considers them indispensable. In this way, we seek to satisfy the needs of shareholders, business partners and employees of a listed company up to the highest level possible.

The only divergences made by PULSIONfrom the Corporate Governance Code relate to the deducti-ble for D&O (Directors’ and Officers’) liability insurance policy, the deadline for publication of interim reports and the individualized listing of Management and Supervisory Board compensation. Details of and the reasons for these divergences can be found in the Internet at www.PULSION.com.

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PULSION Medical Systems AGcan report on a successful financial year 2004. The Group recorded a profit for the first time in 2004, made possible by a strict focus on core technologies, improved product margins and the implementation of a consistent cost policy, coupled with continued sales revenue growth. The Group reports a net profit of EUR 0.9 million for 2004. The improved cash flow situation meant that, as well as investing in items of capital expenditure, it was also able to reduce loans. The Company has thus succeeded in further strengthening its market position.

During the financial year 2004, the Supervisory Board carried out all its tasks in accordance with the law and Company statutes and assured itself of the proper governance of the Company. We have monitored the activities of the Management Board on a regular basis and stood by it in an advisory capacity. This was based on numerous oral, telephonic and written reports provided by the Management Board. In five meetings, including one by telephone, the Management Board informed the Supervisory Board in detail of business poli-cies, corporate planning, risks and the course of business of the Company. Any business transactions requiring approval were examined, discussed and authorized by the Supervisory Board. In addition, the Company has an Audit Committee which deals specifically with issues arising from the year-end audit.

The main areas of focus of the Supervisory Board deliberations were sales revenue and earnings developments, medium-term financing, the conclusion of further important cooperation arrangements and the alignment of the Company’s risk policy to the future size of the enterprise. It also considered the strategic position of the Group’s products and technologies and the future prospects of the Company and its subsidiaries. The Supervisory Board was kept informed in detail by the Management Board about the Group’s overall position, including issues relating to the risk management system. The bookkeeping system, the U.S. GAAP consolidated financial statements, the annual statutory financial statements of PULSION Medical Systems AG, as well as the management reports of the Company and the Group for the financial year 2004 were audited by RSM Haarmann Hemmelrath GmbH, Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft Munich, elected by the Annual Shareholders’ Meeting as independent auditors, and received unqualified audit opinions. The financial statements and management reports – for the AG and Group – and the long-form reports of the auditors were submitted to all of the members of the Supervisory Board. In the meeting to approve the financial statements, the relevant documents were discussed in detail following the report of the auditors, and in the presence of the auditors. We have examined the financial statements and management reports – for the AG and Group – and the proposed appropria-tion of results. No objecappropria-tions were raised. We also concur with the result of the audit. The annual and consolidated finan-cial statements prepared by the Management Board are thus approved and the annual finanfinan-cial statements adopted in accordance with § 172 AktG (German Stock Corporation Act). We also endorse the proposed appropriation of results. There has been one change in the composition of the Supervisory Board during the past year. Dr. Walter Wenninger, Chair-man, departed from the Supervisory Board with effect from November 30, 2004 and Claus F. Vogt joined with effect from December 1. Michael Bourjau, who was previously Deputy Chairman, took over the Chairmanship from Dr. Wenninger. The Chairman of the Management Board, Dr. Pfeiffer, resigned on March 15, 2005 with immediate effect. The Supervisory Board thanks Dr. Pfeiffer for his many years of service to the Group.

PULSION’s successful performance would not have been possible without the commitment of the employees of PULSION Medical Systems AGand its subsidiaries: the Supervisory Board thanks them all. The Supervisory Board also thanks the Management Board for the work performed and for its close cooperation.

Munich, March 22, 2005

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of PULSION Medical Systems AG

as of December 31, 2004

20 Group Management Report Summary

Financial report

21 General economic conditions and market 21 Revenue trends

23 Earnings 23 USA

23 Assets, liabilities and financial position 25 Capital expenditure

25 Production and purchasing 25 Research and development 26 Employees

26 Patents and approvals

26 Environmental care and quality management 26 Corporate Governance

27 Events after the balance sheet date Risk report

27 Risk management system 27 Market and competition 28 Product liability 28 Growth and financing 28 Approvals

28 Dependence on suppliers 28 Credit risk

28 Patents and intellectual property 29 Personnel

29 Warehousing and transportation

29 Protection from loss of confidential information 29 Subsidiaries

29 Litigation Forward-looking report

30 Prospects 2005 30 Long-term Strategy 32 Consolidated balance sheet 34 Consolidated income statement 35 Consolidated cash flow statement

36 Consolidated statement of changes in stockholders’ equity 36 Consolidated analysis of non-current assets

38 Notes to the consolidated financial statements

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Summary

In 2004, PULSION(PULSION Medical Systems AG) succeeded in strengthening its position as an innovative supplier of minimally invasive diagnostic and monitoring systems to improve and simplify the management of treatment and care in critically ill patients.

The turn-around achieved in the second half of 2003 resulted in 2004 being a successful year. Due to the better than expected performance, the Company was able, on November 8, 2004, to double the forecast for the operating profit (EBIT) from EUR 0.5 million to EUR 1.0 million; it is now able to report that even this forecast figure has been surpassed.

The following major milestones were reached during the past year:

Expansion of the CeVOX product range

PULSIONhas now presented its fourth technology platform – CeVOX, a minimally invasive system for continuous monitoring of the oxygen saturation in the bloodstream – and plans to commence with marketing activities during the first quarter of 2005.

Exclusive licence agreement with Carl Zeiss for IC-VIEW technology

Carl Zeiss will integrate PULSION’sIC-VIEWtechnology into its surgical microscope for the intraoperative visualisation of blood vessels. This will significantly increase the technology's market penetration and bolster sales of ICG-PULSION.

ICG-PULSION receives approval in key EU countries

Following the positive result of the EU reciprocal approval proceedings to recognise ICG-PULSIONin Belgium, Ireland, Italy, the Netherlands, Austria, Portugal and Sweden, it will soon be possible to commence marketing activities in these countries once local marketing permission has been received.

PiCCO connected up with GE Healthcare and Spacelabs patient monitoring systems

A significant step has been made towards PiCCO-Technology becoming universally accessible by linking PiCCO -Techno-logy to patient monitoring systems made by GE Healthcare and Spacelabs; the relevant products will be available for use in 2005. This development is a clear demonstration of PiCCO’s importance in the area of acute medicine. In spite of the recent economic development of the world’s leading industrial countries, PULSIONcontinued to grow strongly, and thus provide clear evidence of the sustainability of its innovative business model.

Sales revenue amounted to EUR 16.3 million, an increase of EUR 2.6 million compared to the previous year. This 19 % increase was all achieved through organic growth. Excluding the one-off income generated by technology licensing agreements, sales revenue grew by 22 %.

At an EBIT level, the result turned round from a loss EUR 0.4 million in 2003 to a profit of EUR 1.2 million in 2004. The net result for the year turned round from a consolidated net loss of EUR 0.7 million to a consolidated net income for the year EUR 0.9 million.

Cash flow from operating activities increased during the year under report to EUR 2.2 million, an increase of 165 % compared to the previous year’s figure of EUR 0.8 million. After taking account of the cash outflows from investing activities (EUR 1.5 million) and financing activities (EUR 0.8 million), cash and cash equivalents fell slightly during 2004 from EUR 4.6 million to EUR 4.5 million.

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Financial report

General economic conditions and market

Growth drivers gain in strength

Despite major changes in the general economic climate in recent years, the MedTech and Life-Science sector has continued to achieve robust growth throughout the period. Analysts forecast that the medical technology sector will continue to grow in the future, up to USD 215 billion p.a. depending on definition (Credit Suisse First Boston, Global MedTech, Industry Overview, Zurich 2004).

Numerous market analyses show that there is an enormous potential for growth for medical-care related technolo-gies which are innovative and which, at the same time, can cut costs. This is the result of demographic developments in the major industrial countries, the increasing degree of self-responsibility and health-awareness on the part of patients, and the increased desire for more rationalisation in the world's health systems.

PULSIONidentified these trends a long time ago and now has four technology platforms, which are particularly sui-ted to coming to grips with pressures on costs and the objective of greater efficiency in the health-care sector. At the same time, PULSION’s technology platforms are aimed at some of the major markets in the MedTech and Life-Science sector.

Revenue trends

International sales platforms offer additional potential

PULSIONrecorded worldwide group revenues of EUR 16.3 million during the financial year 2004, 19 % more than in the previous year (2003: EUR 13.7 million). Excluding one-off revenues generated from the sale of technology licenses to Dräger Medical and Carl Zeiss in 2003 and 2004, revenues grew by 22 %. Currency factors did not have a significant impact in 2004.

Regions

The core region of PULSION’s sales continued to be Europe, where 90 % of total revenues (EUR 14.7 million) were generated. The German-speaking region (Germany, Austria and Switzerland), with revenues of EUR 7.9 million (+23 % compared to the previous year) remained the strongest selling market for PULSION. Excluding the one-off revenues from licensing IC-VIEWtechnology to Carl Zeiss, this region generated a pleasing 19 % growth rate in 2004.

PULSION’s European sales platforms in the UK, France, Spain and Belgium also performed well, with revenues growing by 23 % to EUR 5.3 million. Sales generated through European dealers fell slightly in 2004.

Group sales by geographical region:

in EUR million 2004 2003 Change

German speaking countries* 7.9 6.5 23 % Europe

(excl. German speaking countries*) 6.8 5.8 16 %

USA 0.1 0.6 - 83 %

Australia Pacific 0.7 0.5 27 %

Other 0.8 0.3 174 %

Total 16.3 13.7 19 %

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Revenues in the USA fell to EUR 0.1 million (-83 %). Excluding the one-time income recognized in 2003 on the issue of a further non-exclusive PiCCOlicense, revenues rose by 7 %. The weakness of the US Dollar held down the real growth in the USA (+22 % compared to 2003) by 15 % (see also Section USA).

Revenues generated by the sales platform in Australia rose encouragingly by 27 % to EUR 0.7 million in 2004. Sales generated via dealers outside Europe increased to EUR 0.8 million (+172 % compared to 2003).

Product lines

Overall, revenues generated by the equipment product area stagnated in 2004. However, excluding the one-off income from licensing IC-VIEWtechnology in 2004 and the issue of a further non-exclusive PiCCOlicense in 2003, revenues from equipment sales rose from EUR 2.6 million to EUR 3.0 million (+16 %).

Despite the difficult situation of many of the world’s health-care systems, PULSIONagain succeeded in selling its innovative products to, or placing them in, numerous hospitals and clinics. The installed base of PiCCOmonitors – in other words the total number of all monitors sold or loaned out – increased during 2004 by 625 units to 3,479 monitors at the year-end, an increase of 22 % compared to one year earlier. On top of this, the number of PiCCOmodules sold via Philips jumped to 6,794 (+36 % compared to the end of the previous year).

LiMONand IC-VIEWare still at the beginning of their product life-cycle and have been marketed so far, to all intents and purposes, only in Germany. These products are generally placed with customers on a loan basis in return for com-mitments to purchase ICG-PULSION. The total installed base at December 31, 2004 of LiMONand IC-VIEWwas 347 (+29 %) and 74 units (+17 %) respectively. Following receipt of approval for ICG-PULSIONin a number of important European countries, the Group can now begin active marketing of both technologies in the near future.

Group sales by product lines:

in EUR million 2004 2003 Change

Equipment 3.1 3.1 2 %

Disposables 10.8 8.4 29 %

ICG-PULSION 2.3 2.2 6 %

Other 0.1 0.1 18 %

Total 16.3 13.7 19 %

The new sales approach adopted in 2003 based on a strategy of establishing a long-term tie-up with customers, and generating revenue in the short-term on the basis of consumable products, created further growth momentum for sales of sterile disposable products during 2004. Revenue from sales of sterile disposable products in 2004 increased by 29 % to EUR 10.8 million (2003: EUR 8.4 million), a particularly pleasing performance. During the same period, sales of PiCCOcatheter kits went up from 49,608 units to 63,851 units, an increase of 29 %.

Revenues generated with ICG-PULSIONrose by 6 % to EUR 2.3 million. The receipt of approval for ICG-PULSIONin a number of European countries in 2004 should create additional impetus for growth in this area during the coming year. In the medium-term, further momentum should be generated by the new sales force which is currently being built up for IC-VIEW, the new licensing agreement with Carl Zeiss which was signed in 2004 and by a further expansion in the coverage of ICG-PULSIONapproval throughout Europe (with a second wave of applications planned for 2005) and in the USA (planned for 2006 at the earliest).

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Earnings

Business model manifests high potential for efficiency

PULSIONcan report a significantly improved result for the financial year 2004. Gross profit increased for example from EUR 9.0 million in 2003 to EUR 11.0 million in 2004 (+EUR 2.0 million). The gross profit percentage therefore improved by a further 2 percentage points to over 67 %. This development was due primarily to a further optimization of manu-facturing costs and a more favourable sales mix.

Fixed costs also continued to develop favourably in 2004. Aggregate expenditure for selling, marketing and general administrative functions amounted to EUR 9.1 million, marginally higher (+6 %) than in 2003 despite the 19 % increase in revenue. Fixed costs in this area as a percentage of revenue therefore fell from 62 % in 2003 to 56 % in 2004.

Key performance indicators for these areas should continue to improve in the future as the Group efficiently expands its existing sales platforms and further optimises the processes and systems in place across the Group.

Research and development expenses in 2004 amounted to EUR 0.9 million, 14 % less than in the previous year. Other operating income was down slightly to EUR 0.2 million (2003: EUR 0.3 million).

As a result, earnings before interest and taxes (EBIT) turned round from a loss of EUR 0.4 million in 2003 to a profit of EUR 1.2 million in 2004. The return on sales at an EBIT level improved from a negative percentage of 3 % to a positive one of 7 %.

The improvement in net interest expense for 2004 (+KEUR 147) was more than offset by the lower tax income for 2004 (down by KEUR 120) and the higher level of minority interest (up by KEUR 38). The total net expense from these three items was virtually unchanged at EUR 0.3 million.

The consolidated net income for 2004 therefore amounted to EUR 0.9 million, compared to the consolidated net loss of EUR 0.7 million reported in 2003.

USA

The challenge

In 2003, PULSIONdecided to implement a new marketing and sales strategy for North America, with a view to moving into this market as successfully and quickly as possible in the medium term.

The first phase of this strategy implemented over the past financial year has been to focus on renowned American partners and to establish PiCCOcenters of expertise, whilst the American sales organization concentrated solely on servicing existing customers. Both of these areas – study partners and key users – were able to register good progress in 2004. PULSIONplans to complete this phase in 2005 and, together with a partner entity, to implement an active and wide-ranging sales strategy in North America.

PULSION’s operating result (EBIT) is stated after expenses of EUR 0.3 million incurred for the marketing preparation measures described above.

Assets, liabilities and financial position

Solid balance sheet structure as the basis for growth

The consolidated balance sheet total (total assets/total capital employed), at EUR 17.5 million, was slightly higher than one year earlier (+6 %) when it stood at EUR 16.5 million. The balance sheet structure continued to improve.

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Key financial indicators relating to the balance sheet and financial position:

Indicator Description Units 31/12/04 31/12/03 Diff.

Days of Sales Trade accounts receivable x 360 days

Outstanding Consolidated revenues days 76 86 – 12 %

Inventory Cost of sales

turnover Average level of inventories 1.3 1.0 32 %

Net debt Liabilities less cash and cash equivalents EUR m. 3.8 3.6 5 % Equity ratio Shareholders' equity / Balance sheet total % 52 % 50 % 4 % Non-current asset Shareholders' equity

coverage Non-current assets % 1.9 2.2 – 15 %

Cash and

cash equivalents Cash on hand and at bank EUR m. 4.5 4.6 – 2 % Net Working Current assets less cash and cash

Capital equivalents less current liabilities EUR m. 2.5 3.3 – 22 %

On the assets side of the balance sheet, non-current assets went up from EUR 3.7 million to EUR 4.6 million at December 31, 2004. This increase was partly due to capital expenditure on intangible assets (expenditure to expand the coverage of ICG-PULSIONapprovals, software programming applications and for patent-related costs) and partly due to placing further loan equipment on the market using sale and lease-back arrangements. The non-current portion of deferred tax assets also increased.

Accounts receivable remained almost unchanged at EUR 3.4 million (December 31, 2003: EUR 3.3 million) despite the 19% jump in revenues. This was achieved by optimising receivables management. Inventories were reduced by 7 % over the same period from EUR 4.3 million to EUR 4.0 million, whereas other current assets increased marginally (+EUR 0.2 million). Cash and cash equivalents remained virtually unchanged at EUR 4.5 million (December 31, 2003: EUR 4.6 million). At December 31, 2004, approximately EUR 0.5 million (December 31, 2003: EUR 0.6 million) of the cash and cash equivalents, held in accounts of the Group, were pledged.

On the equity and liabilities side of the balance sheet, total liabilities increased by EUR 0.1 million to EUR 8.3 mil-lion at the end of 2004 (December 31, 2003: EUR 8.2 milmil-lion). The change in liabilities was attributable mainly to the partial repayment of loans, the effect of which was more than offset by the increase in trade accounts payable and capital lease liabilities. The repayment of loans related primarily to the loan from Technologie Beteiligungsgesellschaft mbH (tbg), which was reduced by EUR 0.8 million to EUR 1.2 million.

The minority interest increased by KEUR 54 to KEUR 161. As a result of the net income recorded for 2004, equity increased again and stood at EUR 9.0 million at the year-end (December 31, 2003: EUR 8.2 million). The equity ratio improved accordingly from 50 % to 52 %.

The financial strength of PULSIONimproved significantly during the year under report. Cash inflow from opera-ting activities, which represents a core performance indicator to manage the business, increased from EUR 0.8 million in 2003 to EUR 2.2 million in 2004 (+165 %). This was primarily brought about by the improvement in earnings and further measures to optimise the level of working capital.

The cash outflow from investing activities in 2004 amounted to EUR 1.5 million (+67 %). The increase was largely due to placing loan equipment in the market and to expenditure incurred in conjunction with the expansion of the coverage of ICG-PULSIONapprovals. The full amount of the free cash flow generated (EUR 0.7 million) was used to reduce liabilities.

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The cash outflow from financing activities in 2004 amounted to EUR 0.8 million (2003: EUR 1.2 million). Overall, cash and equivalents fell marginally, from EUR 4.6 million at the end of the previous year to EUR 4.5 million at December 31, 2004.

Capital expenditure

Focus on internationalization and technologies

Capital expenditure rose sharply, from EUR 1.0 million in 2003 to EUR 2.2 million in 2004 (+126 %). Of the total amount of capital expenditure

41 % related to placing loan equipment on the market, thus allowing hospitals and clinics in low-investment regions to introduce PULSION’s technologies in return for guaranteed purchase volumes of consumable products. 38 % related to internally generated intangible assets (such as the expansion of coverage of ICG-PULSIONapprovals, patents and software programming,

and 21 % related to investment in technical plant and equipment and other equipment.

This comparatively high level of capital expenditure increases PULSIONworldwide market penetration and consequently the competitive position of PULSIONproducts. It also creates the basis for future volume growth with consumable products.

Production and purchasing

Benefits of scale generated

PULSION’s core areas of expertise are product development, the design of key production processes and the marketing of new technologies. PULSION’s approach is to keep production depth as low as possible in order to maintain a high level of flexibility whilst, at the same time, keeping the level of risk to a minimum. This also involves building up an effective network of suppliers, thus safeguarding the supply line and forming part of a steady and efficient added value chain.

The gross profit margin improved by a further 2 percentage points to 67 %. This was achieved by generating benefits of scale, enhancing the utilization of production capacities and optimizing the marketing of the Group’s range of products.

Research and development

The basis for future growth

Research and development (R&D) is one of the mainstays of PULSION’s business strategy. Only companies which take a long-term view and pursue a forward-looking technological strategy can hope to grow successfully and profitably.

Important product developments were pursued in the area of R&D during 2004, with a view to maintaining PULSION’s competitive position and improving future profitability through innovative technologies. As well as exten-ding the scope of application of existing technologies, other central issues during 2004 were the development and validation of the new platform CeVOX, a system for continuous monitoring of central venous oxygen saturation by means of single-use fibre-optic catheters. The start of sales is planned for the first quarter of 2005.

In addition, the Company pushed ahead with its development of a further technology (CiMON), which is designed to monitor intra-abdominal pressure (IAP) and intra-thoracic pressure (ITP) in the abdominal cavity for intensive-care patients on a continuous basis. It is planned to launch CiMONon the market during the coming year.

R&D will continue to constitute a vital element for the Group, supported by a Medical Advisory Board consisting of ten members internationally acclaimed in the fields of heart surgery, anaesthetics and intensive care medicine. The members of this board advise PULSIONon medical issues and represent an important factor for the long-term and sustainable development of business.

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Employees

Motivation provides the basis for the future

PULSION’s dynamic and profitable growth in 2004 has been made possible, above all, by its enterprising and motivated employees. They are also the most important factor for economic success in the future.

PULSIONhad an average of 79 employees during the past financial year, 2 % less than during the previous year. Personnel expenses remained practically unchanged at EUR 5.2 million.

By December 31, 2004, the workforce stood at 92 employees. In the course of the coming year, the Company’s organisational structure will be put on a wider base in a number of key areas to allow PULSIONto achieve its forecast growth and to take advantage of other potential opportunities in the medium-term.

Further successful development of the Group is encouraged by a range of measures, including internal and external training programs for the benefit of individual employees, a performance-related compensation scheme applying to all levels within the Group, a share option plan and a system to encourage suggestions for improvements.

Patents and approvals

Further scope for opportunities

At the end of 2004, PULSIONhas 118 national patents (December 31, 2003: 84) at its disposal in various countries. This comprises 83 patents held by PULSIONand 35 patent rights licensed to PULSION. In addition, PULSIONis currently in the process of applying for a further 273 patents (December 31, 2003: 230) in various countries. The patents and patent applications relate to 40 (December 31, 2003: 31) patent groups. The patents cover, on a modular basis, processes, equipment and disposable products and various elements used in existing and future systems. The Company also has 14 registered trade names which are either already in force or have been applied for.

PULSIONsucceeded in obtaining further approvals in 2004. As one example, ICG-PULSIONreceived approval in a number of important EU countries. More EU approvals will follow in 2005, and the Company aims to obtain US appro-val in 2006.

On November 5, 2004, the then Chairman of the Management Board, Dr. Dr. Pfeiffer, made a general claim for the return of patents which were, at that stage, not being used commercially or being marketed by the Company. It has not yet been determined whether the claim can be substantiated and how many patents are affected. The impact on future product development and marketing opportunities cannot be assessed at present.

Environmental care and quality management

An absolute “must”

PULSION’squality management system has been certified by Dekra ITS Certification Services GmbH to EN ISO 13485/11.2000 standard. In accordance with the European Union Directive on medical devices (MDD 93/42/EEC), PULSIONis entitled to use the CE label for products brought into use within the European Union. The PULSIONquality management system also complies with the requirements of the US American authorities (FDA) and with Canadian approval directives.

PULSIONcomplies with all relevant environmental care regulations. Neither the production process nor the products themselves pose any direct or indirect risks to the environment.

Corporate Governance

Transparent communication generates trust

PULSIONexplicitly welcomes the recommendations and suggestions of the German Corporate Governance Code, since they encourage value-orientated corporate policy and help to create a basis of trust between the Company’s shareholders, management and controlling bodies.

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During the past financial year, PULSIONcarefully considered the principles contained in the Corporate Governance Code in its currently valid version of May 21, 2003. With the approval of the Supervisory Board, various decisions were taken and implemented, resulting in a reduction in the number of divergences.

PULSIONonly diverges from the code’s recommendations in a very small number of points, in order to take account of specific circumstances and management’s approach to governance.

The Declaration of Compliance of the Management and Supervisory Boards, in its modified form, was posted to the Group’s website under www.PULSION.comin December 2004 and is available for inspection there.

Events after the balance sheet date

The Chairman of the Management Board, Dr. Dr. Pfeiffer resigned on March 15, 2005.

Risk report

Entrepreneurial activities always involve risk

Risk management system

All companies are faced with a two-fold challenge – on the one hand they must promptly recognise economic opportu-nities and make the best possible use of them; on the other hand, they must be able to identify the risks accompanying every business activity, analyse the effects they may have on the enterprise and, as far as possible, use preventive measures to avoid or stave off dangers which could arise.

Early recognition of risks at all levels of an enterprise is an essential prerequisite for risk management. PULSION is therefore intent on creating the best possible structure for collating and communicating information. PULSION recognises that risk management is part and parcel of running a business. The only way to recognise and evaluate risks systematically at an early stage, and to take the necessary steps against them in good time, is to have an effective and dynamic risk management system.

Under the leadership of PULSION’s risk manager, the responsible members of staff carry out regular checks on processes, procedures and developments with regard to the existence of risks. Current and future risks, and the factors influencing them, are reported regularly to the Management Board and these issues are discussed thoroughly at Board meetings.

The risk management manual, which is constantly revised and kept up to date in line with current information, provides staff with a helpful tool for identifying and correctly evaluating risks and the probability of their occurrence.

Standardised reporting structures which include comparisons with the previous year's actuals, forecasts or estimated figures are an essential feature of the system.

Using the procedures described above, the appropriate measures are taken, either to avoid potential risks which have already been identified, or to minimize the probability of a risk arising and the possible damaging financial effect that it could have.

Market and competition

Competition in the MedTech and Life-Science markets will become even more intense in the future. There is, therefore, a constant risk that PULSION, by comparison with its competitors, may not react quickly enough to market trends by developing new products or technologies. This could have an adverse impact on the financial position and the results of the Group.

PULSIONcounters these risks by continually further developing its existing technologies and improving patent protection on the one hand, and by continuously observing the market via intermediary organizations and networks on the other.

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Product liability

Product liability has always represented a substantial risk for enterprises in the MedTech and Life-Science sector, since it is feasible that patients could suffer physical injury, resulting in substantial product liability claims against the Group. PULSIONcounters this risk with a comprehensive Total Quality Management (TQM) system to ensure the highest standards of safety and quality of product. In addition, product liability insurance policies with international coverage for substantial amounts are in place.

Growth and financing

In the light of the further growth which is planned and the investments that this will entail, it is possible that cash funds could be reduced in the future, since the operating margins which are currently generated cannot entirely finance the targeted level of growth. The existing cash funds of the Group will continue to decrease as a result of loan repayment commitments, in particular because of the repayment of the loan (EUR 1.2 million) from tbg Technologie-Beteiligungs-Gesellschaft mbH in 2005 and possibly also in 2006.

The Company addresses this risk with a very detailed forecasting and control system, carried out on a weekly and monthly basis, to identify variances from budget at an early stage so that measures can be taken. The Company is also continuing its endeavors to find a long-term substitution for the reducing level of third party capital.

Approvals

Very strict approval rules which can differ from country to country apply in the MedTech and Life-Science sector. The failure to obtain a new approval for the Group’s products or a delay in obtaining approval could have a negative impact of the future level of PULSION’s revenues and earnings. PULSIONworks together with experienced external consultants in order to manage these risks.

Dependence on suppliers

Since PULSIONkeeps the depth of production at a low level, it is necessary to buy in a relatively large volume of pre-manufactured components and parts. In order to minimize dependency on suppliers, PULSIONpursues a second-source policy and also agrees framework agreements with suppliers containing guaranteed supply clauses. In addition, the Group maintains a high level of inventory of key components and materials to enable it to make alternative supply arrangements in the case of the failure of a supplier to deliver.

Credit risk

The Group counters bad debt risk with a tight receivables management system and provides for such risk in the form of specific and general allowances. At an international level, PULSIONoperates applies payment in advance terms to protect itself from bad debt risks. The risk is mitigated also by the fact that the Group does business with a wide range of customers, many of which are financed by public sector budgets or which are public sector organizations themselves.

Patents and intellectual property

PULSIONis not aware of any infringements of patents or other protected industrial rights of third parties. It cannot be ruled out, however, that third parties will not make claims in the future. In the event of such claims, a negative outcome could impair the net assets, financial position and results of operations of the Company.

In order to safeguard competitive advantages for the future, PULSIONregisters patents for innovations and improve-ments as quickly as possible. This is based on a modular approach which serves to protect the system as a whole.

On November 5, 2004, the then Chairman of the Management Board, Dr. Dr. Pfeiffer, made a general claim for the return of patents which were, at that stage, not being used commercially or being marketed by the Company. It has not yet been determined whether the claim can be substantiated and how many patents are affected. The impact on future product development and marketing opportunities cannot be assessed at present. PULSIONis currently seeking legal advice on this matter from renowned firms of attorneys.

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Personnel

As a manufacturing company in the MedTech and Life-Science industry, PULSIONis dependent to a certain extent on personnel with specialist medical know-how. As a rapidly growing enterprise with worldwide operations, it is essential that existing sales and management capacities are optimized on an on-going basis.

In order to minimize the risk of fluctuation, the Group has introduced pleasant and modern working conditions, flat hierarchies, flexible work-time arrangements and an appropriate remuneration system which provides motivation to staff. A stock option plan is in place to tie employees into the Group on a long-term basis.

Warehousing and transportation

These risks are covered by appropriate insurance policies. Delays in sales, however, can lead to increases in inventories which, in turn, adversely affect liquidity. With the aid of flexible framework agreements with suppliers, and a monthly up-date of worldwide sales forecasts, PULSIONendeavors to identify this risk as early as possible and adjust production accordingly.

Protection from loss of confidential information

In the various information technology solutions used by PULSION, a wide range of security measures have been imple-mented to protect confidential and insider information. Nevertheless, breaches of security and the loss of confidential information cannot be ruled out entirely. Such occurrences could have a negative impact on PULSION’s competitive position.

Subsidiaries

PULSIONis also indirectly exposed to the risk environment facing the Group’s subsidiaries. PULSIONcould be affected negatively by the statutory and contractual position of Group companies. PULSIONcounters this risk by integrating subsidiaries into the Group reporting system. In addition to the day-to-day flow of information, meetings are held at a management level on a monthly basis.

Litigation

It cannot be ruled out at present that, in conjunction with the resignation of the Chairman of the Management Board and the claim for the return of patents, claims will not be brought against the Company which could have a significant adverse impact on the net assets, financial position and results of operations of the Group in the future. PULSIONis currently seeking legal advice on this matter from renowned firms of attorneys.

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Forward-looking report

Prospects 2005

Organic growth to be strengthened

With its robust and innovative business model, PULSIONconsiders that it is well-equipped for the financial year 2005. Although the economic conditions prevailing in the most important industrial countries are hardly likely to provide any growth momentum in the health-care sector, existing market forces – doctors, clinics and hospitals – will ensure that demand for PULSION’s products will continue to grow. Only innovative technologies which minimize risk and reduce costs will allow public-sector budgets and private-sector health-care organizations to achieve the substantial – and abso-lutely vital – cost savings necessary to operate clinics and hospitals.

PiCCO-Technology’s future link with systems sold by GE Healthcare and Spacelabs, the planned introduction of a PiCCOmodule by Dräger Medical, the start of sales of CeVOXtechnology and the first successes of ICG-PULSIONto penetrate the market in a number of EU countries, should all provide PULSIONwith a stable and broad-based platform to continue to achieve organic growth in the coming years.

PULSIONwill focus in 2005 on improving its strategic position in the market, in order to accelerate medium-term growth. Cash flow from operating activities will remain an important indicator to manage growth.

PULSIONplans to achieve double-digit growth in the coming year and earnings before interest and tax (EBIT) of EUR 1.5 million.

Long-term strategy

PiCCO to become the “gold standard”

PULSIONhas already secured a very good technological position in Europe and can press ahead, on a stable and steady basis, to increase market penetration with the aid of its worldwide sales platforms.

PULSIONmust now use its flagship, PiCCO-Technology, to become the market leader in the field of intensive-care patient monitoring and, using the LiMON, IC-VIEWand CeVOXtechnology platforms, to establish a robust and leading position for PULSIONin the market.

PULSIONwill focus on the following areas:

further licensing of PULSION’s technologies to manufacturers of monitoring systems to make it a standard component of available systems

successful implementation of a marketing strategy for North America in order to penetrate the world’s most important market

extending the Group’s technological advantage to keep ahead of competitors working in partnership with other enterprises to enhance the sales network further development towards active management of critically ill patients wider coverage of approvals, in order to open up new regions and applications

Further expansion of the Group's technology platforms will continue to create the basis for the sustainable sale of specialized consumable materials. The steady cash flow generated by these sales will be used primarily to finance development activities.

Munich, March 2005

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Note Dec. 31, 2004 Dec. 31, 2003

KEUR KEUR

Current Assets

Cash and Cash Equivalents* 4,491 4,596

Trade Accounts Receivable, net of allowance

for doubtful accounts of 3,423 3,254

KEUR 20 (prior year: KEUR 77) thereof from related parties KEUR 322 (prior year: KEUR 469)

Other Assets 13 662 487

thereof from related parties KEUR 191 (prior year: KEUR 169)

Inventories 12 3,980 4,287

Deferred Charges 187 192

Deferred Tax Assets 8 116 26

Total Current Assets 12,859 12,842

Non-current Assets

Intangible Assets, net 9 749 205

Property, Plant and Equipment, net 9 2,343 2,354

Capital Leases, net 9/10 518 522

Investments, net 11 63 63

Deferred Tax Assets 8 938 508

Total Non-current Assets 4,611 3,652

Total Assets 17,470 16,494

* thereof pledge of fixed term deposits amounting to EUR 0.5 million (Dec. 31, 2003: EUR 0.6 million)

ASSETS

Figure

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References

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