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• 1 Organisation and Operations of the SinnerSchrader Group
• 2 Summary of Significant Accounting Policies
• 3 Balance Sheet Components
• 4 Components of the Statement of Operations
• 5 Pension Plans
• 6 Shareholders’ equity
• 7 Share-Based compensation
• 8 Income tax
• 9 Related Party Transactions
• 10 Major Events after the Balance Sheet Date
• 11 Supplementary Information Required by the German Commercial Code
• 12 Summary of Significant Differences between US-GAAP and German Law with Regard to Accounting, Valuation and Consolidation Principles

The Consolidated Financial Statements of SinnerSchrader have been prepared according to the US Generally Accepted Accounting Principles ("US-GAAP"). They refer to the financial years extending from 1 September 2004 to 31 August 2005 (“2004/2005”) and from 1 September 2003 to 31 August 2004 (“2003/2004”) respectively, and to the balance sheet dates of 31 August 2005 and 31 August 2004 respectively.

The Consolidated Financial Statements include the accounts of SinnerSchrader AG and its direct or indirect subsidiaries which are majority-owned and effectively controlled by SinnerSchrader AG. The Consolidated Fnancial Statements of 2004/2005 and 2003/2004 thus include the accounts of SinnerSchrader AG, SinnerSchrader Deutschland GmbH, SinnerSchrader UK Limited, and SinnerSchrader Benelux BV, as well as the indirect subsidiaries SinnerSchrader Neue Informatik GmbH, SinnerSchrader Studios GmbH and SinnerSchrader Studios Frankfurt GmbH starting from 1 April 2004.

Subsidiaries are those entities over whose financial and operating policies the Group has the ability to exercise control so as to obtain benefits from their activities. All inter-company transactions and balances between the companies have been eliminated. The accounts have been prepared after making necessary adjustments to the Group companies’ books and records that are maintained in accordance with respective local GAAPs, prominently the German Commercial Code.

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported details of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results might differ from those estimates.

The functional currencies of SinnerSchrader’s subsidiaries outside of the euro zone, i.e. the group of European countries that adopted the euro as their currency, are the local currencies. The financial statements of these subsidiaries are translated into euros using period end exchange rates for assets and liabilities and average rates during the period for revenues, cost of revenues, and expenses. Translation gains and losses are accumulated and reported as a component of shareholders’ equity under the “accumulated other comprehensive income/loss” item. Transaction gains and losses are reported in the Consolidated Statements of Operations.

SinnerSchrader’s financial instruments, including liquid funds, accounts receivable, and accounts payable, are carried at amounts that approximate fair value.

• Accounts receivable are carried at the nominal value less allowances for potential credit losses (see 2.5).
• Unbilled services are presented at a percentage of the total project value according to the percentage of completion method.
• Other assets are carried at their nominal values.
• Short-term liabilities are stated at their payback amounts.
• Marketable securities are carried at their fair value.

Financial instruments which potentially subject SinnerSchrader to a concentration of credit risk are liquid funds, marketable securities, accounts receivable and unbilled services.

Concerning credit extended to customers shown under the “accounts receivable and unbilled services” item, SinnerSchrader performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on an assessment of the potential credit loss.

Table 1a presents the percentage of total accounts receivable less allowances for doubtful accounts and unbilled services for those customers for whom the percentage was more than 10 % on either 31 August 2005 or 31 August 2004.

Table 1b shows gross sales to significant customers in their percentage of total gross revenues for the 2004/2005 and 2003/2004 financial years.

On 31 August 2005 and 31 August 2004, SinnerSchrader’s marketable securities consisted of marketable fund certificates of money market funds and similar funds. SinnerSchrader holds these marketable securities available to sell them at its discretion to cover any short-term cash requirements.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115 of the Financial Standards Board (“FASB”), “Accounting for Certain Investments in Debt and Equity Securities”, SinnerSchrader has categorised its marketable securities as “available-for-sale”. Consequently, they are carried on the balance sheet at their fair market value. Unrealised holding gains or losses are included, net of tax, as “accumulated other comprehensive income” directly under the “shareholders’ equity” item, unless they are qualified as permanent.

SinnerSchrader evaluates its marketable securities for other than temporary impairment on a security by security basis. If an impairment were considered to be other than temporary, the unrealised losses would not be shown under “accumulated other comprehensive income” but recorded as an expense in the income statement. The Group had no other than temporary impairments for the years ended 31 August 2005 and 31 August 2004.

Table 2 summarises the structure of marketable securities and unrealised gains and losses as of 31 August 2005 and 31 August 2004.

As of 31 August 2005 all marketable securities either had contractual maturities of less than one year or no contractual maturity.

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the Straight Line method over the estimated useful lives of the assets ranging from three to thirteen years. Computer hardware and software is generally depreciated over three years, other electronic or electrical equipment over four to eight years, motorcars over six years, and office furniture over eight to thirteen years. Leasehold improvements are depreciated over the lesser of the estimated useful lives of the assets or over the lease term. Depreciation expenses are included in the cost of revenues and operating expenses.

The cost of maintenance and repair is expensed when incurred.

When an item is sold or retired, the cost and related accumulated depreciation is relieved, and the resulting gain or loss, if any, is recognised in the statement of operations.

In accordance with SFAS No. 144, SinnerSchrader reviews the carrying value of long-lived assets when facts or circumstances may suggest that the carrying value might not be recoverable. In order to assess whether any impairment has occurred, SinnerSchrader compares undiscounted net cash flows assumed to be generated by the assets under review to the carrying amount of those assets. If the undiscounted net cash flows are less than the carrying amounts of the assets, SinnerSchrader will record impairment losses to write the asset down to fair value, measured by the discounted estimated net future cash flows expected to be generated from the assets.

In the periods ended 31 August 2005 and 31 August 2004, SinnerSchrader did not record any impairment charges.

SinnerSchrader performs services of various types which are treated differently with respect to revenue recognition. In general, revenues are recognised only after the service has been rendered, when there is persuasive evidence of an agreement, the fee is fixed and determinable, delivery has occurred and collectability of the claim is probable. Additionally, revenue recognition for the various types of services follows the following principles:

Project services:

Services provided by SinnerSchrader range from consulting services for e-business strategies and concepts for Internet-based business applications, the design and production of web-based user frontends, to the implementation of software for middleware and backend systems, and also include maintenance and content management services for installed solutions.

Project and service agreements are either on the basis of time and material incurred or on a fixed-fee basis. Revenues pursuant to a fixed-fee contract are generally recognised on the basis of the percentage of completion method of accounting according to the provisions of Statement of Position (“SOP”) No. 81-1 of the American Institute of Certified Public Accountants (“AICPA”), “Accounting for Performance of Construction Type and Certain Production Type Contracts”. Percentage of completion is determined based on the total efforts expended to date measured in man hours as a percentage of the total efforts expected to be incurred under the contract. Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognised in the period in which such losses become probable. Revenues pursuant to time and material contracts are generally recognised as services performed on a monthly basis.

Revenues recognised on the basis of the percentage of completion method in advance of contractual billings are presented on the balance sheet as unbilled revenues. Amounts invoiced to customers and received in excess of revenues recognised are shown as advance payments.

Media services:

Online media services entail the planning, design, execution, and controlling of online marketing campaigns for websites. Customers making use of these services are billed for the cost of the related advertising space on the one hand, and on the other hand are charged for the campaign planning and controlling services rendered by SinnerSchrader either on the basis of a monthly fixed rate or as a percentage of the total value of advertising space managed and for the design and production of related online-marketing instruments on an hourly basis. Revenue from the reselling of advertising space is generally recognised according to the appearance of the respective advertisements. The additional services are generally recognised as performed on a monthly basis. While gross revenues include the entire amount invoiced, net revenues do not include the reimbursed cost of advertising space. Any revenues recognised in advance of contractual billing are presented in the balance sheet as unbilled revenues net of advance payments received and plus advance payments made for advertising space.

Other services:

SinnerSchrader also provides operational services, e.g. hosting services, application management and monitoring, as well as web data mining services. Fees for these services often have a component that is fixed over the term of the contract and a variable, performance-based component. They are usually billed and recognised on a monthly or quarterly basis. In addition, SinnerSchrader provides customers with any required hardware and software they request. Revenue from the sale of third party hardware and software is realised upon delivery.

As required by Emerging Issues Task Force (“EITF”) Issue No. 01-14 issued in November 2001, revenues include reimbursable expenses charged to and collected from customers.

SinnerSchrader generally expenses the cost of advertising and promoting its services and the image of SinnerSchrader as incurred. These expenses are included in selling and marketing expenses in the consolidated statement of operations. They totalled € 95,229 and € 48,425 in the 2004/2005 and 2003/2004 financial years respectively.

SFAS No. 123, “Accounting for Stock-Based Compensation”, permits the use of either a fair-value-based method or the method defined in Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, to account for stock-based compensation arrangements. SFAS No. 123 requires all companies choosing to account for stock-based compensation plans on the basis of APB No. 25 to provide pro-forma net income/loss and net income/loss per share information in the notes as if the fair-value-based method of accounting as defined as the preferable method of accounting for stock-based compensation in SFAS No. 123 had been adopted.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transitional Disclosure”, which amends SFAS No. 123 and provides alternative methods of transition for a voluntary change from the accounting methods defined in APB No. 25 to the fair-value-based method defined in SFAS No. 123. It also prescribes a specific form, content, and location within the notes for the pro-forma information required by SFAS No. 123 from those companies choosing to apply APB No. 25.

As at 31 August 2004, SinnerSchrader had two stock option plans which are described more fully in note 7.1. SinnerSchrader had already decided to account for its employee stock option plans in accordance with the provisions of APB No. 25, and has now chosen to continue to do so. Under APB No. 25, compensation expenses are based on the difference, if any, on the date of grant between the fair market value of SinnerSchrader’s capital stock and the exercise price of the options granted. In the 2004/2005 and 2003/2004 financial years, SinnerSchrader did not grant any options under its two option plans. Consequently, no compensation costs had to be recognised for these option plans in either year.

In accordance with SFAS No. 148 in conjunction with SFAS No. 123, Table 3 shows the pro-forma net income/loss and net income/loss per share for 2004/2005 and 2003/2005 that would have resulted if SinnerSchrader had chosen to account for its stock option plans based on the fair value of the options at grant date as prescribed by SFAS No. 123.

In 2004/2005, SinnerSchrader AG granted a stock-based compensation to a member of its Management Board. Under this arrangement Sinner Schrader AG will pay a cash bonus determined on the basis of the stock price performance over a vesting period of three years. Details of the arrangement are described in note 7.2. According to ABP No. 25, SinnerSchrader has to recognise a liability against personnel expenses for each period, taking into account the stock price at the end of the period and the remaining time of the vesting period. In case the value of the liability is reduced by the stock price development in one period, the liability accumulated over previous periods has to be adjusted downwards for that period in favour of personnel expenses. As of 31 August 2005 no liability had to be recognised for this arrangement. Thus, it did not lead to personnel expenses in the 2004/2005 financial year. Since APB No. 25 sets the same accounting rules as SFAS No. 123 regarding that arrangement, no pro-forma effect had to be determined.

The pro-forma impact shown in the table for 2004/2005 and 2003/2004 is not necessarily representative of the pro-forma effects which may be expected in future years, because the number of new option grants as well as cancellations due to terminations of employment contracts might differ significantly from the levels in 2004/2005 and 2003/2004.

SFAS No. 130, “Reporting Comprehensive Income”, requires the presentation of “comprehensive income”. Comprehensive Income is the total of net earnings and all other non-owner changes in equity. As of 31 August 2005 and 31 August 2004, accumulated other comprehensive income as part of shareholders’ equity consisted of the components presented in Table 4a.

Table 4b shows the changes in those components for the 2004/2005 and 2003/2004 financial years. The changes represent the other comprehensive income/loss for these periods.

In principle, the components of other comprehensive income are to be presented in shareholders’ equity net of tax. In previous years, the presentation was adjusted for the respective tax effects because valuation allowances on the deferred tax position including the deferred taxes on unrealised gains or losses on marketable securities available for sale were made due to the loss situation of SinnerSchrader. In 2004/2005 the cumulative tax adjustments of the previous years were rescinded because SinnerSchrader returned to profitability.

SinnerSchrader records income taxes using the liability method in accordance with SFAS No. 109, “Accounting for Income Taxes”. Deferred income tax assets and liabilities are recognised for temporary differences between the carrying amounts of assets and liabilities in the financial statements according to US-GAAP and their respective income tax base. Deferred taxes are measured using tax rates expected to apply to taxable income in the years in which the temporary differences are reversed. Effects of tax rate changes are recorded in the year in which those changes are enacted.

For loss carry-forwards which will reduce taxable income in future years, deferred tax assets are recognised in as much as it is more likely than not that they will be realised. In 2004/2005 and 2003/2004 € 148,412 and € 0 respectively were recognised as deferred tax assets on loss carry-forwards.

SinnerSchrader computes earnings per share in accordance with SFAS No. 128, “Earnings per Share”. Basic earnings per share are computed using the weighted average number of vested shares of common stock outstanding. Diluted earnings per share are computed using the weighted average number of vested shares of common stock outstanding and, if dilutive, of unvested common stock outstanding from options and warrants to purchase common stock determined by the treasury stock method. SinnerSchrader has granted options to purchase shares of common stock to its employees under the 1999 Employee Stock Option Plan and under the 2000 Employee Stock Option Plan. In 2004/2005, the weighted average number of potential common shares outstanding were dilutive and were thus included in the computation of the diluted net income per share.

In 2003/2004, the potential common shares were excluded from the computation of the diluted net loss per share because the effect would have been antidilutive due to the negative net result of the year.

In the 2004/2005 financial year, SinnerSchrader adopted EITF No. 03-6 from November 2003, “Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share”. EITF No. 03-6 addresses how to determine whether a security should be considered a “participating security” for purposes of computing earnings per share and how earnings should be allocated to a participating security when using the two-class method of computing basic earnings per share. The adoption of these rules did not have any impact on the calculation of earnings per share.

SinnerSchrader reports cash flows according to SFAS No. 95, “Statement of Cash Flows”. These statements show the change in liquid funds by cash inflows and outflows. For the purpose of the Consolidated Statements of Cash Flows, SinnerSchrader considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash equivalents consist of amounts on deposit at commercial banks.

In the 2004/2005 and 2003/2004 financial years, SinnerSchrader paid interest in the amounts of € 19,927 and € 1,093 respectively. Due to withholding taxes on interest received and gains realised on marketable securities, SinnerSchrader paid taxes on capital gains in the amounts of € 52,757 and € 125,517 in 2004/2005 and 2003/2004 respectively. In those periods SinnerSchrader received refunds of taxes on capital gains in the amounts of € 442,900 and € 1,815,649 respectively.

As part of a fundamental reorganisation of its operations during the 2003/2004 financial year, SinnerSchrader gave up on its business approach of delivering integrated e-business services and rendered full operating responsibility for separate parts of its service portfolio to newly installed operating business units. According to SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information”, SinnerSchrader is required to present segment information for the newly-formed segments.

The Interactive Software segment focuses on designing, implementing and maintaining customised interactive IT systems. SinnerSchrader Neue Informatik GmbH has been assigned to that segment. The Interactive Marketing segment comprises the business with consulting, creative design and implementation services for brand building and management as well as marketing and sales activities on the Internet or other digital channels. The companies SinnerSchrader Studios GmbH and SinnerSchrader Studios Frankfurt GmbH have been assigned to the Interactive Marketing segment. In its Interactive Services segment SinnerSchrader bundles three service offers around the management of already existing transactional web sites. Those services are the planning, execution and reporting of online media campaigns, the technical administration and maintenance of hardware and software systems for operating websites, and the statistical analysis of the behaviour of website visitors. These units are jointly managed within SinnerSchrader Deutschland GmbH.

The new organisational structure was introduced on 1 April 2004. Effective on that day, personnel, customer relationships, ongoing projects and all other operative assets and related liabilities were reassembled according to the new unit structure and in large parts transferred into newly-founded companies. The changeover to the new organisation resulted in significant changes to the accounting system. Consequently, the calculation of the segment information required by SFAS No. 131 for the entire 2003/2004 period would have caused unusually high costs, so that the Management Board of SinnerSchrader AG decided to do without that information.

Therefore, SinnerSchrader made use of the respective rule under SFAS No. 131 and did not restate segment information for periods prior to 1 April 2004 in the new segment structure. Consequently, segment information for the 2003/2004 period is available only as long as it relates to the rump period from 1 April 2004 to 31 August 2004 and the respective period end date.

Table 6a presents the segment information for the 2004/2005 financial year and the balance sheet date 31 August 2005; Table 6b shows the segment information for the rump period of the financial year 2003/2004 and for the period end of this financial year.

Segment accounting follows the same accounting principles as those applied for the entire Group. All administrative costs that are incurred by SinnerSchrader AG and that are attributable to the operative segments are charged to the segments. Costs that are not attributable to the operations are not distributed across the reportable segments. Those costs are primarily costs incurred by central holding functions, e.g. investor relations, and costs for unused office space in the office building in Hamburg leased by SinnerSchrader AG. Transactions between reportable segments are executed on an arm’s-length-basis and accounted for accordingly.

Table 6c shows the reconciliation of total segment earnings to Group earnings before tax for the periods 1 September 2004 to 31 August 2005 and 1 April 2004 to 31 August 2004.

With respect to regional data, revenue by geographic location is attributed to the country from which the sale is made. For 2004/2005 and 2003/2004, all of SinnerSchrader’s revenues were to be attributed to Germany.

In the 2004/2005 period, SinnerSchrader generated more than 10 % of its total revenues with three customers. The revenues with these customers amounted to € 2,898,682, € 1,912,689, and € 1,737,993 respectively. Together, these three customers had a share of total revenues of 45.7 %. In 2003/3004, the number of customers with whom SinnerSchrader had realised 10 % or more of its revenues had also been three. The amounts of revenue were € 2,213,419, € 1,952,208, and € 1,948,660 respectively. The combined share of Group revenues was 49.6 %. In both financial years all three SinnerSchrader segments delivered services to the three major customers.

The major components of fixed assets as of 31 August 2005 and 31 August 2004 as well as the changes in fixed assets in the financial year which ended on 31 August 2005 are presented in Table 7. In the 2004/2005 and 2003/2004 financial years, expenditures for purchases of property and equipment amounted to € 229,599 and € 147,307 respectively. Depreciation of property and equipment in those years was € 540,993 and € 631,709 respectively.

Leasehold improvements contain an amount for asset retirement obligations that SinnerSchrader recognised upon the initial adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations”, on 1 September 2002 and that it depreciates over the remaining term of the lease. Upon adoption of SFAS No. 143 SinnerSchrader determined the fair value of the asset retirement obligations stipulated in the lease contracts, credited the amount to long-term liabilities and correspondingly increased the carrying value of fixed assets concerned. As of 31 August 2005 and 31 August 2004, the net book value of the capitalised asset retirement obligation amounted to € 11,343 and € 24,954 respectively.

The major components of other current assets and prepaid expenses are shown in Table 8.

The tax receivables shown in Table 8 relate to taxes on capital gains, a withholding tax levied on interest and other capital gains received. Due to loss carry-forwards and a negative net income for tax purposes respectively, SinnerSchrader is entitled to a refund of the withholding tax paid vis-à-vis the tax authorities. In 2004/2005 and 2003/2004, SinnerSchrader paid withholding taxes to the amount of € 52,757 and € 125,517 respectively.

Accrued expenses consist of the items shown in Table 9.

On 28 January 2004, SinnerSchrader AG’s shareholders passed a resolution to distribute € 20,768,780 from its capital reserve to all shareholders by means of an increase of common stock capital from the capital reserve and a subsequent decrease of common stock capital by the same amount for the purpose of returning that capital to shareholders. The resolution became effective with its entry into the trade register on 13 April 2004. According to Article 225 para. 2 of the German Stock Corporation Act (“Aktiengesetz”, “AktG”), the capital was distributed to shareholders on 8 November 2004, six months after the day on which the resolution’s entry into the trade register was publicly announced. In the balance sheets of 31 August 2004 the amount of € 20,768,780 to be distributed had been subtracted from the shareholders’ equity and was shown as a liability to shareholders. Due to the execution of the payment to shareholders, the liability was paid off and, consequently, no liability to shareholders is shown in the balance sheets of 31 August 2005.

Other short-term liabilities and deferred income consist of the components presented in Table 10.

The long-term liability of € 86,841 shown in the balance sheets as of 31 August 2004 concerned asset retirement obligations from the lease contract for the office building in Hamburg, which will become due upon termination of that contract at the earliest date possible, which is 30 June 2006. As of 31 August 2005 the respective liability had to be classified as short-term. It is presented in Table 10 with its value as of the balance sheet date of € 93,788. The changes in the liability from asset retirement obligations by € 6,947 and € 6,433 in 2004/2005 and 2003/2004 respectively reflect the accretion of the liability according to SFAS No. 143.

SinnerSchrader leases its office facilities in Hamburg and Frankfurt and certain equipment and cars under operating leases. As of 31 August 2005 future annual minimum lease payments from those contracts amount to the sums shown in Table 11.

The total costs of revenues plus selling and administrative as well as research and development expenses by expenditure was divided as shown in Table 12.

Starting in 2000/2001, SinnerSchrader undertook consecutive steps to align its cost base to the severe decline in demand for Internet-related consulting, design, and IT services by reducing its workforce, consolidating its facilities and closing its foreign operations.

In the 2004/2005 financial year, SinnerSchrader did not undertake new workforce-related restructuring measures. However, as of 31 August 2005, accruals had to be increased by € 49,500 due to unsettled law suits relating to workforce reductions in the years 2003/2004 and 2002/2003. An amount of € 92,977 from accruals and liabilities related to personnel measures was paid out. Consequently, total accruals and liabilities for workforce-related restructuring measures amounted to € 90,000 and € 133,477 in 2004/2005 and 2003/2004 respectively.

With respect to the consolidation of office space, an increase of accruals and liabilities was necessary in 2004/2005. In order to adjust the current office space in Hamburg of approx. 6,500 sqm to the reduced headcount, SinnerSchrader had to terminate the rent agreement early, with effect from 30 June 2006. The early termination triggered a one-time compensation obligation of € 306,775 payable at the end of the rent agreement. As of 31 August 2005, a liability to cover that obligation is recorded. The accrual of € 67,376 shown as of 31 August 2004 was used up completely.

Hence, in the 2004/2005 period, total restructuring charges amounted to € 356,275. In 2003/2004 the restructuring costs were € 557,647 split into € 546,685 and € 10,962 for workforce reductions and for the consolidation of facilities respectively. Restructuring charges concerning workforce reductions include all costs relating to the termination of employment contracts including severance payments, payroll cost for periods in which the respective employees were released from their work duty, and legal costs. Restructuring charges concerning facilities include rent and service charges, the cost of efforts to sublet or to be released from the rent agreements (such as the cost of legal advice, premium payments to surrender, and fees to real estate agents), as well as depreciation/impairment charges on leasehold improvements and office equipment that had to be abandoned.

Table 13 summarises restructuring and other related charges for the years ended 31 August 2005 and 31 August 2004 as well as the amount of accrued restructuring expenses and restructuring liabilities as of the respective balance sheet dates.

The financial income and expenses item consists of the components listed in Table 14:

On 31 August 2005 and 31 August 2004 the common stock of SinnerSchrader AG amounted to € 11,542,764 and € 11,542,764 respectively. It was divided into 11,542,764 no-par value ordinary shares with a nominal value of € 1 per share.

On 31 August 2005 and 31 August 2004, 11,411,417 shares and 10,937,164 shares respectively of all shares issued were outstanding. The remaining respective 131,347 and 605,600 shares were held by SinnerSchrader AG as treasury stock (see note 6.5).

The capital reserve stems primarily from SinnerSchrader AG’s initial public offering (”IPO”) in November 1999. At the IPO SinnerSchrader AG issued a total of 2,475,000 new shares of common stock from a capital increase (including greenshoe) at a price of € 12 per share. Net of expenses for the flotation of € 1.7 million, the offering raised aggregate proceeds of € 28.0 million. The costs resulting from the initial public offering were charged against the capital reserve net of tax effects of € 0.9 million.

On 28 January 2004, SinnerSchrader AG’s shareholders passed a resolution to distribute € 20,768,780 from the capital reserve to all shareholders by means of an increase of common stock capital from the capital reserve and a subsequent decrease of common stock capital by the same amount for the purpose of returning that capital to shareholders. The resolution became effective with its entry into the trade register on 13 April 2004. Consequently, the capital reserve was reduced by € 20,768,780 as of 31 August 2004.

In 2004/2005 the reserve increased by € 1,001,165 through the sale of shares from the treasury stock.

On 31 August 2005 and 31 August 2004 the Company’s capital reserve amounted to € 17,596,005 and € 16,594,840 respectively.

On 28 January 2004, the shareholders of SinnerSchrader AG cancelled their authorisation of the Management Board to increase the AG’s common stock with the approval of the Supervisory Board in one or more steps until 30 September 2004 by up to a maximum of € 4,650,000 in so far as that authorisation had not already been used.

At the same time the shareholders of SinnerSchrader AG authorised the Management Board to increase the AG’s common stock with the approval of the Supervisory Board in one or more steps until 15 January 2009 by up to a maximum of € 5,770,000. The resolution became effective by entry into the trade register on 13 April 2004.

The authorisation to increase the common stock was not used in either 2004/2005 or in 2003/2004.

On 31 August 2005 and 31 August 2004, SinnerSchrader AG had conditional capital of € 750,000 covering the grants under SinnerSchrader’s 2000 Stock Option Plan and 1999 Stock Option Plan described under note 7.1.

SinnerSchrader 1999 Stock Option Plan:

In October 1999, the shareholders of SinnerSchrader AG approved the SinnerSchrader 1999 Stock Option Plan (the “1999 Plan”), which provides for the granting of stock options to the members of the Management Board of SinnerSchrader AG, the management of affiliated companies, all employees of SinnerSchrader AG, as well as all employees of affiliated companies. The total number of options that can be assigned by the Management Board and the Supervisory Board of SinnerSchrader AG is 375,000, of which 40,000, 10,000, 55,000, and 270,000 respectively are dedicated to the aforementioned groups. Under the 1999 Plan the Management Board and the Supervisory Board were authorised to grant options until 8 November 2004.

Options granted under the 1999 Plan have an exercise price of 120 % of the average Frankfurt closing price during the ten trading days prior to the grant date. Options granted on 1 November 1999, the day of the initial public offering, had an exercise price of € 14.40. The options of the 1999 Plan vest in equal instalments of one third over two, three, and four years. They have to be exercised within six years after the date of grant. As of 31 August 2005, a total of 186,343 stock options from the 1999 Plan were outstanding and were granted with an average exercise price of € 19.95. In 2004/2005 and 2003/2004, employees exercised 0 and 2,559 options at an average exercise price of 0 and € 2.76 respectively.

SinnerSchrader 2000 Stock Option Plan:

In December 2000, the shareholders of SinnerSchrader AG approved the SinnerSchrader 2000 Stock Option Plan (the “2000 Plan”), which provides for the granting of stock options to the members of the Management Board of SinnerSchrader AG, the management of affiliated companies, all employees of SinnerSchrader AG, as well as all employees of affiliated companies. The total number of options that can be assigned by the Management Board and the Supervisory Board of SinnerSchrader AG is 375,000, of which 40,000, 40,000, 55,000, and 240,000 respectively are dedicated to the aforementioned groups. Under the 2000 Plan the Management Board and the Supervisory Board are authorised to grant options until 10 January 2006.

Options granted under the 2000 Plan have an exercise price of 120 % of the average Frankfurt closing price during the ten trading days prior to the grant date. The options of the 2000 Plan vest in equal instalments of one third over two, three, and four years. They have to be exercised within six years after the date of grant. As of 31 August 2005 a total of 107,794 stock options from the 2000 Plan were outstanding and were granted with an average exercise price of € 2.37. In 2004/2005 and 2003/2004, employees exercised 19,018 and 3,668 options at an average exercise price of € 2.76 and € 2.76 respectively.

Table 15a summarises the changes in the number of options outstanding from the 1999 Plan and 2000 Plan for the years which ended on 31 August 2005 and 31 August 2004.

Additional information on all options outstanding on 31 August 2005 is listed in Table 15b.

The income tax provisions/benefits presented in the statement of operations of the 2004/2005 and 2003/2004 financial years are split into current and deferred tax provisions/benefits as shown in Table 16a.

The income tax provisions/benefits shown in the statement of operations differ from the amounts computed by applying the statutory income tax rate to income before taxes. For the financial years which ended on 31 August 2005 and 31 August 2004 the statutory income tax rate was at 40.4 %, consisting of municipal trade tax (“Gewerbesteuer”) at 19.0 %, corporate tax (“Körperschaftsteuer”) at 25 % and a corporate tax surcharge (“Solidaritätszuschlag”) of 5.5 %. The computation of the total statutory income tax rate takes into account that the municipal trade tax charge reduces the tax base for corporate tax purposes (including the surcharge).

Table 16b presents the reconciliation of tax provisions/benefits shown in the statements of operations to the income tax provisions/benefits expected under the statutory income tax rate.

The deferred tax positions as of 31 August 2005 and 31 August 2004 is shown in Table 16c.

As of 31 August 2005 and 31 August 2004 SinnerSchrader had tax loss carry-forwards in Germany, the UK, and the Netherlands. Table 16d shows the volume of those carry-forwards for each tax jurisdiction together with the applicable tax rate.

Supplementary information to the notes to consolidated financial statements of SinnerSchrader Aktiengesellschaft regarding the board of management, the supervisory board, and the declaration of compliance according to § 161 of the German Stock Coporation Act (AktG) are presented in the notes to the financial statements of SinnerSchrader Aktiengesellschaft.

The Consolidated Financial Statements of SinnerSchrader AG as of 31 August 2005 were drawn up in accordance with Article 292a of the German Commercial Code (“Handelsgesetzbuch”, “HGB”) applying the US Generally Accepted Accounting Principles (“US-GAAP”) and German Accounting Standard (“Deutscher Rechnungslegungs Standard”, “DRS”) No. 1 of the German Accounting Standards Committee (“Deutscher Standardisierungsrat DRSC e.V.”) as consolidated financial statements with discharging effect.

The regulations of the Commercial Code and of the German Stock Corporation Act differ in certain key aspects from the US-GAAP. The main differences which could be relevant for assessing the assets and liabilities, financial position and results of the company are presented below.

Under the German Commercial Code, all balance sheet and income statement lines must be presented in the form and sequence specified in Articles 266 and 275 HGB. Under US-GAAP, items are compiled differently and the sequence of the balance sheet lines begins with the short-term items.

Under US-GAAP, the short-term parts of long-term receivables and liabilities are stated in a separate line of the balance sheet. The part which is due within one year is treated as short-term.

Unlike in the HGB accounts, acquired standard software for internal use is not shown as an intangible asset but is included in the property and equipment item as plant and office equipment. The manufacturing cost of software developed in-house can be capitalised under US-GAAP and depreciated over the normal useful life. Under HGB, software created in-house cannot be capitalised as a tangible asset. In the reporting period and in the previous years the Company charged all manufacturing costs of software developed in-house against income also under US-GAAP. Pursuant to HGB, accelerated depreciation permitted under Article 7 German Income Tax Act (“Einkommensteuergesetz”, “EStG”) is stated as special reserves and dissolved as expenses over the useful life of the assets concerned. In accordance with US-GAAP depreciation only permissible under tax legislation was not taken into account.

Under HGB, depreciation was charged in agreement with the tax regulations on a straight-line basis applying the half-year method (“Halbjahresmethode”) until 31 August 2003. Under US-GAAP, straight-line depreciation was charged as from the day the asset was put to use.

According to HGB, deferred tax refund claims arising from tax loss carry-forwards may not be stated in the balance sheet, as the expected future tax savings are deemed to have not yet been realised.

Under US-GAAP such future tax benefits have to be realised as tax assets. These deferred tax assets have to be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realised. The valuation allowance should be sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realised.

Under US-GAAP, stock-based compensation paid to staff in the form of stock options can be accounted for in two ways. According to one method the market value of the employee shareholding is determined and distributed as expense over the vesting time of the share option. Alternatively, only the difference between the exercise price of an option and the market price of the stock concerned at the time the option was granted (intrinsic value) may be spread as expense over the vesting period. When applying the latter method, the impact on net income of accounting for stock-based compensation using the first method must be disclosed in a pro-forma calculation in the financial statements. SinnerSchrader AG has selected the intrinsic value method to account for its stock option plans.

Under the prevailing accounting practice pursuant to HGB, only the capital increase upon exercising of the options would be accounted for. Personnel expense is not taken into account.

As defined in the German Commercial Code, provisions for asset retirement obligations are generated by a one-time allocation of the total amount of the obligation when the obligation is established. The expenditures thus incurred are recorded in the operating results.

From the beginning of the financial year which started on 15 June 2002, US-GAAP governs balance sheet procedures for recording asset retirement obligations as defined in SFAS No. 143. With the introduction of SFAS No. 143, companies are required to record liabilities for asset retirement obligation at fair value. In parallel, the asset retirement cost must be capitalised and depreciated over the remaining useful life of the asset. The obligation accrues interest until a drawdown occurs.

When valuing certain types of accruals, US-GAAP requires other criteria to be met in order for expenses to be eligible for accruing than are required under HGB. In the financial statements of SinnerSchrader AG, differences in criteria primarily exist with respect to expenses and obligations from the rent agreement for the office in Hamburg.

For accruing rent expense for unused office space, US-GAAP requires the respective space to be separable, while under HGB the cost of non-separable unused space must be accrued. With respect to severance payments which become due upon making use of contractual breakout clauses, US-GAAP requires the notice to have been given to the other party to the contract before the respective expense can be accrued, while under HGB a resolution taken by SinnerSchrader AG is sufficient for accruing.

Under HGB, SinnerSchrader AG would have had to draw up Consolidated Financial Statements for the first time following the acquisition of SinnerSchrader Interactive Marketing GmbH and Sinner-Schrader Interactive Software GmbH on 27 August 1999. The difference between the investment stated at market value and the equity of the subsidiaries would have had to be distributed in line with the actual values of the assets and liabilities included and the remaining amount would have had to be stated as goodwill and either amortised over the expected useful life or netted with the capital reserve on the face of the balance sheet. The subscribed capital of the Company would have been formed by the capital of the individual financial statements.

Under US-GAAP, the capital consolidation of SinnerSchrader AG was prepared in line with APB No. 16, “Business Combinations” as a “transaction under common control”, according to which the shares of SinnerSchrader Interactive Marketing GmbH and SinnerSchrader Interactive Software GmbH were contributed to SinnerSchrader AG at the book value of the respective equity. Consequently, no differential amount arose from these transactions under US-GAAP.

According to HGB, treasury stock has to be shown as a current asset. Thus, the strict lower of cost or market value principle according to Article 253, para. 3 has to be adopted, i.e. treasury stock has to be written off if the market price at the balance sheet date is lower than the purchase price. Earnings from the sale of treasury stock have to be accounted for as other operating income.

Under US-GAAP treasury stock is shown as an off-setting item at purchase price directly in shareholder’s equity. Changes in the market price of treasury stock are not accounted for by adjustments of the respective equity position. Earnings from the sale of treasury stock are credited to capital surplus.

In connection with the acquisition of Netmatic Internet/Intranet Solutions GmbH, part of the purchase price paid in shares of the Company was accrued indirectly to the staff of the acquired company. Under US-GAAP, this part is to be charged against income over the period over which the shares are likely to be issued to the employees. As these shares derive from a capital increase, the shareholders’ equity has to be corrected accordingly by a deferred compensation item. The deferred compensation item is dissolved pro rata through the retained earnings, so that at no time an increase of shareholders’ equity is shown for this portion of the capital increase.

Under HGB, this part of the capital increase would have been attributed to the acquisition cost and as a result would have increased goodwill.

Under US-GAAP, revenue for services is recognised in accordance with SOP No. 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts”. Under US-GAAP, services in process are entered according to the percentage of completion method in which the respective project progress leads to the proportional recognition of revenue. Application of the percentage of completion method is subject to the traceable and verifiable recording of project progress.

Under HGB, the Completed Contract method must be applied, under which services in process are included in inventories at manufacturing cost. The revenue is not taken into account until the services have been completed.

Under US-GAAP, securities under current assets are stated at their market value on the balance sheet date if they are held available for sale at any time. Gains or losses that have not yet been realised by sale are stated without affecting net income as an adjustment item in the shareholders’ equity and are part of the comprehensive income.

Under HGB, SinnerSchrader AG states securities classified as current assets at the lower of either acquisition cost or market value.

Hamburg, November 2005