(“Medco”) Is a Company Incorporated in the Republic of Philippines with Limited Liability Whose Shares Are Listed on the Philippines Stock Exchange, Inc

Medco Holdings, Inc (“Medco”) is a company incorporated in the Republic of Philippines with limited liability whose shares are listed on The Philippines Stock Exchange, Inc. (“PSE”). Lippo China Resources Limited (“LCR”) is currently interested in approximately 70.7 per cent. of the issued share capital of Medco, making it a subsidiary of LCR. Lippo Limited (“Lippo”) owns shares representing approximately 71.1 per cent. of the issued share capital of LCR. Accordingly, each of LCR and Medco is a subsidiary of Lippo. The quarterly report of Medco ended 30th June, 2005 (the “Quarterly Report”) was released on the website of PSE today. The following is a reproduction of the Quarterly Report for information purpose only. COVER SHEET

39652 SEC Registration Number

MEDCO HOLD I NGS , I NC . AND SUBS I D I A

(Company’s Full Name)

31st Floor,Rufino Pacific Tower,

6784 Ayala Avenue , Makat i Ci ty

(Business Address: No. Street City/Town/Province) Dionisio E. Carpio, Jr. 811-0465 (Contact Person) (Company Telephone Number)

09 30 17-Q Month Day (Form Type) Month Day 2004 AMENDED (Annual Meeting)

(Secondary License Type, If Applicable)

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document ID Cashier

S T A M P S Remarks: Please use BLACK ink for scanning purposes. SECURITIES AND EXCHANGE COMMISSION Metro Manila, Philippines ______

SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 11 OF THE REVISED SECURITIES ACT AND RSA RULE 11(a)-1(b)(2) THEREUNDER ______

1. For the quarterly period ended 30 September 2005

2. SEC Identification Number 39652 3. BIR Tax Identification No. 004-844-938

3. Medco Holdings, Inc. (“Medco”) (formerly Mindanao Exploration and Development Corp.) Exact name of registrant as specified in its charter

4. Metro Manila, Philippines Province, country or other jurisdiction of incorporation or organization

5. (SEC Use Only) Industry Classification Code

6. 31st Floor, Rufino Pacific Tower, 6784 Ayala Avenue, Makati City, Metro Manila, Philippines 1229 Address of principal office Postal Code

7. Registrant's telephone number, including area code: (632) 811-0465 to 67

8. Securities registered pursuant to Sections 4 and 8 of the RSA

Title of each class Number of shares of common stock outstanding and amount debt outstanding Common 700,000,000 shares

9. Are any or all of these securities listed on the Philippine Stock Exchange. Yes [ / ]No [ ]

10. Check whether the registrant:

(a) has filed all reports required to be filed by Section 11 of the Revised Securities Act (RSA) and RSA Rule 11(a)-1 thereunder and Sections 26 and 141 of The Corporation Code of the Philippines during the preceding 12 months (or for such shorter period that the registrant was required to file such reports). Yes [ / ] No [ ]

(b) has been subject to such filing requirements for the past 90 days. Yes [ / ] No [ ] PART I - FINANCIAL INFORMATION

Item 1. Financial Statements See Attachment A

Item 2. Management's Discussion and Analysis or Results of Operation.

2005 Third Quarter Financial Highlights

There was no significant change in the consolidated revenues for the third quarter of 2005. It only posted an increase of approximately 0.71% compared to the prior year’s third quarter figure. During the quarter under review, the revenue account consisted mainly of interest income from short-term placements (69%), fees and other commissions (17%), dividend income (8%) and other income (7%). Last year’s third quarter revenue was composed of interest income from short-term placements (37%), gain from foreign exchange transactions (17%), fees and other commissions (14%), equity in net earnings of investee (12%), gain from trading account securities (11%), and other income (9%).

Interest income increased significantly by 87% due to the increase in the dollar deposit placement rate of 2.775% to 5.75%. In spite of the significant increase in this revenue component, total revenue only posted a 0.17% increase due to the non-recognition of equity in the net earnings of investee account and the absence of any foreign exchange gain. In fact, for this year’s third quarter there was an unrealized foreign exchange loss which was presented as part of the expense account.

Consolidated expenses increased by approximately 3%. The expenses were mainly composed of salaries and wages (23%), representation and entertainment (21%), interest expense (19%), professional and consultancy fees (13%), unrealized loss from foreign exchange transactions (7%), and other expenses (17%).

The Company’s major subsidiary incurred an unrealized foreign exchange loss of P2 million compared to its last year’s third quarter foreign exchange gain of P2.9 million. At the end of the third quarter of 2005, the peso exchange rate stood at P56.055 vis-à-vis the US dollar, appreciating by P0.286 or approximately 0.51% during the said quarter. On the other hand, last year’s exchange rate for the end of the third quarter went up to P56.336 to a dollar compared to the December 31, 2003’s rate of P55.5690. Furthermore, interest expense also increased by 16% due to the additional short- term loans obtained from a local bank for the Company’s working capital requirement.

Over all, there was no significant movement in the expense components except for the accounts mentioned above.

There was also no significant change with respect to the Balance Sheet account. The equity investment accounted for the 62% of total assets for the third quarter of 2005 and 2004. Cash and cash equivalent comprised 36% in 2005 and 34% in 2004, and the other assets accounted for 1.05% in 2005 and 3.3% in 2004. The significant decrease in the other assets account was a result of the reclassification of the asset component, from the common trust fund which was recorded under the other assets account to the cash and cash equivalent account which bore a higher interest rate. On the liabilities side, as mentioned above, Medco obtained additional short-term loans from a local bank for its working capital requirement and to partially pay-off its advances from affiliates. This transaction caused the loan payable account to increase by 18%. There are no events that will trigger direct or contingent financial obligation that is material to the Company, including any default or acceleration of an obligation.

There were also no material off-balance sheet transactions, arrangements, obligations (including contigent obligations), and other relationships of the Company with unconsolidated entities or other persons created during the reporting period.

The Company is not aware of any trends, events or uncertainties that would materially affect its liquidity and its operations as a whole. The Company does not also anticipate any liquidity problem within the next twelve (12) months. The Company has no default or breach of any note, loan, lease or other indebtedness or financing arrangement. There are also no past due trade payables.

The Company’s internal sources of short-term and long-term liquidity are its liquid assets and those of its subsidiaries, which as at September 30, 2005 consisted of P356 million of cash and cash equivalents. Its external sources of liquidity would consist of advances from its affiliate companies or major shareholders.

Furthermore, there were no known trends, events or uncertainties that have had or that are reasonably expected to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. The Company is also not aware of any events that will cause a material change in the relationship between costs and revenues.

2004 Third Quarter Financial Highlights

Consolidated revenues for the third quarter of 2004 decreased by 11.78% compared to the prior year’s third quarter figure. The revenue account consisted mainly of interest income from short-term placements (37%), gain from foreign exchange transactions (17%), fees and other commissions (14%), equity earnings (12%), gain from trading account securities (11%), and other income (8%). On the other hand, last year’s revenue account for the third quarter were mainly composed of interest income from short-term placements (57%), gain from foreign exchange transactions (31%), and fees and other commissions (11%).

The decrease in the consolidated revenues was mainly due to the interest income and gain from foreign exchange transaction accounts. These two accounts significantly decreased during the quarter under review. In 2003, income received from short-term placements was credited to “interest income”. However, in 2004, when Medco’s subsidiary, Medco Asia Investment Corp. (MAIC), started placing its fund in common trust accounts( under trading account securities-TAS), income received or accrued from this transaction are credited to the “gain on trading account securities”.

The gain from trading account securities is derived by valuing the TAS at market. As discussed in a succeeding paragraph, there was a shift from cash and cash equivalent to TAS. The income earned from the cash and cash equivalent account is credited to interest income from short-term placements, while the income earned from trading account securities is credited to the gain on trading account securities. Because of the aforementioned shift in the type of investment, interest income from short- term placements decreased and there was a corresponding increase in the gain from trading account securities. Because of the volatile peso, the Company earned consolidated foreign exchange gains of P3.2 million in 2004. However, this amount represented a substantial decrease of 51% relative to the forex gains of 2003. These gains came from the restatement of the US dollar placements, consisting of investments in prime marketable securities and bank placements of MAIC. In 2004, the peso exchange rate vis-à- vis the US dollar depreciated by 1.4% from a rate of P55.5690 on December 31, 2003 to P56.3360 on September 30, 2004, while in 2003, dollar depreciated by 4% from a rate of P53.0960 on Decmber 31, 2002 to P54.9420 on September 30, 2003.

The expenses were mainly composed of salaries and wages, comprising 28% in 2004 and 37% in 2003, representation expenses, comprising 20% in 2004 and 22% in 2003, professional and consultancy fees, comprising, 19% in 2004 and 24% in 2003, and interest expense, accounting for 17% in 2004 and 1% in 2003.

Over all, consolidated expenses increased by approximately 25%. The increase was mainly attributable to the incurrence of interest expense related to the loan obtained from a local bank. Aside from this, professional fees also increased because the audit fee for the year 2003 was only paid in 2004, and there was no accrual made during 2003. These are the only factors that affected the revenues and expenses for the first quarter of 2004.

With respect to the Balance Sheet, the cash and cash equivalents account, which consisted mainly of short-term time deposit accounts with different banks, decreased by 4% during the third quarter of the year as mentioned above. MAIC converted a portion of its peso time deposits to USDollar placements. The bulk of the newly-converted dollar funds were placed in a common trust fund, which was recorded under “trading account securities” (TAS). This caused the aforementioned decline in the cash and cash equivalent account and the increase in TAS. On the other hand, the other assets account also decreased by 11% due to the decline in accrued interest income, which is classified under this account. As of Decembber 31, 2003, based on the audited financial statements, accrued interest amounted to P1.7 million. This was subsequently collected during the year 2004.

As a whole, the asset composition remained the same for the third quarter of 2004 and the 2003 yearend, except for the shift from cash and cash equivalent account to trading account securities as mentioned above. The equity investment accounted for the 62% of the total asset both for 2004 and 2003. Cash and cash equivalent followed with 33% in 2004 and 34% in 2003, and the TAS account with 4% in 2004 and 2% in 2003.

On the liabilities side, Medco obtained an additional short-term loan from a local bank for its working capital requirement and to partially pay-off its advances from affiliates. The additional loan caused the loans payable account to increase by 30%. The advances from affiliates was included under “accounts payable and accrued expenses” , which declined by 16% due to the said partial payment.

The Company is not aware of any trends, events or uncertainties that would materially affect its liquidity and its operations as a whole. There are also no material commitments for capital expenditure or any significant elements of income or loss from continuing operations. The Company does not also anticipate any liquidity problem within the next twelve (12) months. The Company has no default or breach of any note, loan, lease or other indebtedness or financing arrangement. There are also no past due trade payables. Aside from those already mentioned above, there are no events that will trigger direct or contingent financial obligation that is material to the Company, including any default or acceleration of an obligation. There were no off-balance sheet transactions, arrangements, obligations (including contigent obligations), and other relationships of the Company with unconsolidated entities or other persons created during the reporting period.

The Company’s internal sources of short-term and long-term liquidity are its liquid assets and those of its subsidiaries, which as at September 30, 2004 consisted of P361 million of cash and cash equivalents and trading account securities. Its external sources of liquidity would consist of advances from its affiliate companies or major shareholders.

2003 Third Quarter Financial Highlights

Consolidated revenues for the third quarter of 2003 significantly increased compared to the prior year’s third quarter figure. The revenue account consisted mainly of interest income from short-term placements and loans receivables, fees and other commission, and unrealized gain from foreign exchange transactions.

Almost all of the revenue components increased for the quarter under review. Interest rates on the dollar-denominated placements of its major subsidiary, Medco Asia Investment Corp., improved in 2003. Furthermore, the interest earned on the said dollar-denominated placements was recognized and recorded in the third quarter. The unrealized foreign exchange gain due to peso depreciation also increased for the third quarter vis-à-vis the third quarter of last year. On the other hand, consolidated expenses decreased because of the reduction in consultancy and professional fees, rent and representation expenses during the third quarter of 2003. These are the only factors that affected the revenues and expenses for the third quarter of 2003.

The beginning balance of the retained earnings account as at September 30, 2003 significantly increased versus the comparable quarter last year because the Company in 2001 recognized its equity in the net loss of Export Bank amounting to P190,147,729 based on the net loss of P637,437,911, that Export Bank would have incurred in 2001 if it had recognized during that year the additional provision for probable losses amounting to P673,000,000. Such additional provision was originally intended to be recognized by Export Bank on a staggered basis over a period of seven years starting February 1, 2002, the effectivity of the merger among Export Bank, Urban Bank, Inc. and Urban Investment, Inc.. As of December 31, 2002, however, the management of Export Bank determined that no additional allowance for probable losses was necessary and the staggered booking of the provision for probable losses relating to 2001 was no longer required. Accordingly, the Company’s share in net earnings of Export Bank in 2002 includes the share in the adjusted net assets of Export Bank which no longer included the additional provision previously made in 2001. As a result of this adjustment, net income for the year ended December 31, 2002 increased substantially by 180% that was eventually closed to the retained earnings account, which served as the beginning balance of the retained earnings account in the first quarter of 2003. There was no significant change noted in the total assets nor on its components except for the other asset account which decreased by 16%. The decline was due to the reclassification to trading account securities of the investment in trust in Exportbank that was previously included in the other assets account. On the other hand, the accounts payable and accrued expenses account increased by 15% because of the advances made from one its affiliated company. These advances were used to fund the parent company’s daily operations.

The peso depreciation and the interest rate uptrend in the third quarter of 2003 relative to 2002 are expected to contribute to a less favorable peso exchange rate and the higher interest rates on the average for the whole year of 2003 versus 2002. Although said expectations are unfavorable from the macro-economic standpoint, these factors may turn out to be favorable to the Company as their impact on its major revenue accounts, namely foreign exchange gains and interest income, could be positive. Aside from this, management is not aware at this time of any forthcoming trends, uncertainties, demands, or events that would materially affect the Company’s liquidity and would have a material impact on its net income from continuing operations. SIGNATURES

Pursuant to the requirements of the Securities Regulation Code, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MEDCO Holdings, Inc.

By:

______DIONISIO E. CARPIO, JR. MA. LOURDES B. BATHAN Treasurer/ Director Chief Accountant Third Quarter Top Five (5) Performance Indicators September 30, 2005, 2004 and 2003 Medco Holdings, Inc. Medco Asia Investment Corp (Consolidated) ( Major Subsidiary) 2005 2004 2003 2005 2004 2003

1. Revenue Growth Revenue Y1-Y0 Revenue Y0 0.71% -11.78% 44.66% -2.10% -29.51% 44.77%

2. Net Income Growth Net Income Y1-Y0 -7.80 Net Income Y0 % -126.25% 56.88% 13.70% -92.10% -6406.42%

3. Return on Equity Net Income Stockholders' -1.29 Equity % -1.17% -0.53% 0.22% 0.19% 2.44%

4.Current Ratio Current Assets Current Liabilities 4.15x 4.75x 12.65x 222.67x 142.27x 210.33x

5. Debt-to-Equity- Ratio Total Liabilities Stockholders' Equity .29x .27x .21x .020x .025x .019x

Note: Y1= Current year Y0= Previous year MEDCO HOLDINGS, INC. AND SUBSIDIARY

Financial Statements September 30, 2005 and 2004 MEDCO HOLDINGS, INC. AND SUBSIDIARY Consolidated Balance Sheets September 30, 2005 and December 31, 2004 (Audited) 2005 2004 ASSETS

Cash and cash equivalents P 355,938,900 P 335,345,768 Loans- net 1,208,260 1,511,773 Equity Investments 608,400,841 608,400,841 Property and Equipment 31,155 35,446 Other assets 10,274,237 32,154,290

TOTAL ASSETS P 975,853,393 P 977,448,118

LIABILITIES & STOCKHOLDERS' EQUITY

LIABILITIES Loans Payable (Note 6) P 72,423,681 P 61,581,717 Accounts Payable and Accrued Expenses ( Note 3) 15,679,220 18,620,700 88,102,901 80,202,417

MINORITY INTEREST 130,960,272 130,670,836

STOCKHOLDERS' EQUITY Capital Stock - P1 par value Authorized, Issued & outstanding- 700,000,000 shares 700,000,000 700,000,000 Additional paid-in capital 25,498,912 25,498,912 Retained earnings 31,291,308 41,075,953 Total Stockholder's Equity 756,790,220 766,574,865

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY P 975,853,393 P 977,448,118 MEDCO HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004

JULY TO SEPTEMBER JANUARY TO SEPTEMBER 2005 2004 2005 2004

REVENUES P 5,772,047 P 7,639,725 P 18,789,525 P 18,656,701

EXPENSES 7,893,475 8,649,000 28,284,733 27,478,406

LOSS BEFORE MINORITY SHARE IN NET INCOME (2,121,428) (1,009,275) (9,495,208) (8,821,705)

LESS: MINORITY SHARE IN NET INCOME 630,495 435,246 289,436 254,566

LOSS BEFORE FINAL TAX (2,751,923) (1,444,521) (9,784,644) (9,076,271) LESS: PROVISION FOR FINAL TAX DEFERRED TAX - - - -

NET LOSS (2,751,923) (1,444,521) (9,784,644) (9,076,271) RETAINED EARNINGS AT BEGINNING OF YEAR/QTR 34,043,231 49,428,893 41,075,952 57,060,643

RETAINED EARNINGS AT END OF YEAR P 31,291,308 P 47,984,372 P 31,291,308 P 47,984,372

LOSS PER SHARE P (0.0039) P (0.0021) P (0.0140) P (0.0130) MEDCO HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005, 2004, AND 2003

2005 2004 2003

CASH FLOWS FROM OPERATING ACTIVITIES Net loss before tax and minority interest P (9,495,208) P (8,821,705) P (791,000) Adjustments for: Depreciation 21,782 6,875 9,320 Equity in net earnings of investees (2,242,350) Unrealized gain on trading account securities - (1,185,092) - Decrease(increase) in: Trading account securities - (13,751,464) 2,129,630 Receivables 303,513 - 235,803 Other assets 21,880,052 1,084,442 5,583,573 Increase (Decrease) in accounts payable and accrued expenses (2,941,480) (3,305,745) 3,390,226 Cash generated from (used in) operations 9,768,659 (28,215,039) 10,557,552 Cash paid for income taxes - - -

Net Cash Provided by (Used in) Operating Activities 9,768,659 (28,215,039) 10,557,552

CASH FLOWS FROM INVESTING ACITIVITY Acquisition of office equipment (17,491) - -

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds of loan 10,841,964 13,531,204 -

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,593,132 (14,683,835) 10,557,552

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 335,345,768 337,584,242 261,842,242

CASH AND CASH EQUIVALENTS AT END OF QUARTER/ YEAR P 355,938,900 P 322,900,407 P 272,399,794 MEDCO HOLDINGS, INC. AND SUBSIDIARY STATEMENTS OF CHANGES IN EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005, 2004 and 2003

2005 2004 2003

Capital Stock- P1par value Authorized, issued and outstanding- 700,000,000 P 700,000,000 P 700,000,000 P 700,000,000

Additional Paid-In Capital 25,498,912 25,498,912 25,498,912

Retained Earnings Balance, beginning of year 41,075,952 57,060,643 38,639,736 Net loss (9,784,644) (9,076,271) (4,011,641) Balance, end of quarter 31,291,308 47,984,372 34,628,095

Total Equity P 756,790,220 773,483,284 760,127,007 MEDCO HOLDINGS, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS

1. Corporate Information

Medco Holdings, Inc. (the Parent Company) was originally registered with the Securities and Exchange Commission (SEC) as Mindanao Exploration and Development Corporation. The change in name of the Parent Company was approved by the stockholders on February 10, 1995 and by the SEC on April 11, 1995. Its primary purpose was also changed from that of being a mining company to that of a holding company.

The Parent Company holds a 64.54% interest in Medco Asia Investment Corporation (MAIC) and a 16.90% interest in Export and Industry Bank, Inc. (EIB). MAIC was registered with the SEC on April 7, 1995 primarily to conduct business as an investment house.

The registered office of the Parent Company is located at the 31st Floor, Rufino Pacific Tower, 6784 Ayala Avenue, Makati City.

The Company operates within the Philippines and has four employees as of September 30, 2005

2. Summary of Significant Accounting Policies

Basis of Financial Statements Preparation and Consolidation The Group’s financial statements have been prepared in accordance with the accounting principles generally accepted in the Philippines (Philippine GAAP). These financial statements generally follow the historical cost convention, except that trading and investment securities are carried at fair value.

The Group’s consolidated financial statements include the accounts of the Parent Company and its subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

The investments in a subsidiary and an associate in the balance sheets are accounted for under the equity method. A subsidiary is an entity in which the Parent Company, directly or indirectly, holds more than 50% of the issued share capital, or controls more than 50% of the voting power, or exercises control over the operation and management of the entity. An associate is an entity in which the Group or Parent Company exercises significant influence (presumed when the ownership is 20% or more) and which is neither a subsidiary nor a joint venture. Under the equity method, investments are carried in the balance sheets at cost plus post-acquisition changes in the share in the net assets of the subsidiary or associate less any impairment in value, if any. Post acquisition changes include the share in (a) the subsidiary’s and associate’s net income or losses and (b) increase or decrease in the net assets of the subsidiary or associate arising from capital-related transactions. These changes are included as part of equity in net earnings or losses which is credited or charged to operations.

The Group accounts for its 17.49% equity interest in EIB using the equity method since it continues to exercise significant influence over the management and operations of EIB.

The excess of the Parent Company’s cost of investment over the underlying share in net assets of the subsidiary at the date of acquisition (included as part of the carrying value of Equity Investments in the Parent Company balance sheets and shown as Goodwill which is part of Other Assets in the Group’s balance sheets) is being amortized over a period of 10 years.

Other equity investments where the Group has no significant influence are carried at cost less allowance for decline in value. The allowance for decline in value, if any, is set up by a charge to current operations.

Use of Estimates in the Preparation of the Financial Statements The preparation of the financial statements in accordance with Philippine GAAP requires the Group to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses, and disclosures of contingent assets and contingent liabilities. Future events may occur which will cause the assumptions used in arriving at the estimates to change. The effects of any changes in estimates will be reflected in the financial statements as they become reasonably determinable.

Changes in Accounting Policies On January 1, 2004, the following new accounting standards became effective and were adopted by the Group:

• Statement of Financial Accounting Standards (SFAS) 12/International Accounting Standard (IAS) 12, Income Taxes, requires deferred income taxes to be determined using the balance sheet liability method of accounting for deferred income taxes.

• SFAS 17/IAS 17, Leases, prescribes the accounting policies and disclosures applicable to finance and operating leases.

The adoption of the foregoing standards in 2004 has no material impact on the financial statements. Additional disclosures required by the new standards were included in the financial statements, where applicable.

New accounting standards based on IAS and International Financial Reporting Standards referred to as Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards, respectively, will become effective in 2005. The Group will adopt the following new accounting standards, to the extent that they are applicable, effective January 1, 2005. •PAS 19, Employee Benefits, provides for the accounting for long-term and other employee benefits. The standard requires the projected unit credit method in determining the retirement benefits of the employees and a change in the manner of computing benefit expense relating to past service cost and actuarial gains and losses. It requires the Group to determine the present value of defined benefit obligations and the fair value of any plan assets with sufficient regularity that the amounts recognized in the financial statements do not differ materially from the amounts that would be determined at the balance sheet date. The Group has not yet determined the effect of adoption of this standard in 2005 as the Group is yet to obtain an actuarial estimate of its retirement obligations.

•PAS 21, The Effects of Changes in Foreign Exchange Rates, provides restrictive conditions for the capitalization of foreign exchange losses. The standard also addresses the accounting for transactions in foreign currency and translating the financial statements of foreign operations that are included in those of the reporting enterprise by consolidation, proportionate consolidation and equity method. The adoption of this standard will have no material impact in the financial statements.

•PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, provides for the required disclosure and presentation in respect of the accounts of banks and similar financial institutions. It also provides that provision for general banking risks is treated as appropriation of surplus and should not be included in the determination of net income for the period. The adoption of this standard will have no material impact on the financial statements. The required disclosures will be included in the financial statements.

•PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclosure and presentation of all financial instruments. The standard requires more comprehensive disclosures about the Group’s financial instruments, whether recognized or unrecognized in the financial statements. New disclosure requirements include terms and conditions of financial instruments used by the Group, types of risks associated with both recognized and unrecognized financial instruments (market risk, price risk, credit risk, liquidity risk, and cash flow risk), fair value information of both recognized and unrecognized financial assets and financial liabilities, and the Group’s financial risk management policies and objectives. The standard also requires financial instruments to be classified as liabilities or equity in accordance with their substance and not their legal form. The required new disclosure will be included in the financial statements.

•PAS 39, Financial Instruments: Recognition and Measurement, establishes the accounting and reporting standards for recognizing and measuring information about the Group’s financial assets and financial liabilities. The standard requires a financial asset or financial liability to be recognized initially at fair value. Subsequent to initial recognition, the Group should continue to measure financial assets at their fair values, except for loans and receivables and held-to-maturity investments, which are measured at cost or amortized cost using the effective interest rate method. Financial liabilities are subsequently measured at cost or amortized cost, except for liabilities classified as “at fair value through profit and loss” and derivatives, which are subsequently measured at fair value.

The adoption of PAS 32 and PAS 39 will not result in a restatement of prior year’s financial statements. The disclosures required by these standards will be reflected in the financial statements, where applicable, upon their adoption in 2005. • PAS 40, Investment Property, prescribes the accounting treatment for investment property and related disclosure requirements. This standard permits the Group to choose either the fair value model or cost model in accounting for investment property. Fair value model requires an investment property to be measured at fair value with fair value changes recognized directly in the statements of income. Cost model requires that an investment property should be measured at depreciated cost less any accumulated impairment losses. Upon effectivity of PAS 40, the Group will adopt the cost model and will continue to carry its investment property at depreciated cost less any accumulated impairment losses. Therefore, the adoption of this standard will not have a material impact on the financial statements.

•PFRS 3, Business Combination, which will result in the cessation of the amortization of goodwill and a requirement for an annual test for goodwill impairment. Any resulting negative goodwill after performing reassessment will be credited to income. Moreover, pooling of interests in accounting for business combination will no longer be permitted. The effect of adopting this standard will not result in retroactive adjustment of prior years’ financial statements but will affect prospective financial statements as a result of nonamortization of goodwill.

The Group will also adopt in 2005 the following revised standards as applicable:

•PAS 1, Presentation of Financial Statements, provides a framework within which an entity assesses how to present fairly the effects of transactions and other events; provides the base criteria for classifying liabilities as current or noncurrent; prohibits the presentation of income from operating activities and extraordinary items as separate line items in statements of income; and specifies the disclosures about key sources of estimation uncertainty and judgments that management has made in the process of applying the entity’s accounting policies. It also requires changes in the presentation of minority interest in the balance sheets and statements of income.

•PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, removes the concept of fundamental error and the allowed alternative to retrospective application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors. It defines material omissions or misstatements, and describes how to apply the concept of materiality when applying accounting policies and correcting errors.

•PAS 10, Events After the Balance Sheet Date, provides a limited clarification of the accounting for dividends declared after the balance sheet date.

•PAS 16, Property, Plant and Equipment, provides additional guidance and clarification on recognition and measurement of items of property, plant and equipment. It also provides that each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.

•PAS 17, Leases, provides a limited revision to clarify the classification of a lease of land and buildings and prohibits expensing of initial direct costs in the financial statements of lessors.

•PAS 24, Related Party Disclosures, provides additional guidance and clarity in the scope of the standard, the definitions and the disclosures for related parties. It also requires disclosure of the compensation of key management personnel by benefit type.

•PAS 27, Consolidated and Separate Financial Statements, reduces alternatives in accounting for subsidiaries in consolidated financial statements and in accounting for investments in the separate financial statements of a parent, venturer or investor. Investments in subsidiaries will be accounted for either at cost or in accordance with PAS 39 in the separate financial statements. Equity method of accounting will no longer be allowed in the separate financial statements. This standard also requires strict compliance with the adoption of uniform accounting policies and requires the parent to make appropriate adjustments to the subsidiary’s financial statements to conform them to the parent’s accounting policies for reporting like transactions and other events in similar circumstances.

•PAS 28, Investments in Associates, reduces alternatives in accounting for associates in consolidated financial statements and in accounting for investments in the separate financial statements of an investor. Investments in associates will be accounted for either at cost or in accordance with PAS 39 in the separate financial statements. Equity method of accounting will no longer be allowed in the separate financial statements. This standard also requires strict compliance with the adoption of uniform accounting policies and requires the investor to make appropriate adjustments to the associate’s financial statements to conform them to the investor’s accounting policies for reporting like transactions and other events in similar circumstances.

•PAS 31, Interests in Joint Ventures, reduces the alternatives in accounting for interests in joint ventures in consolidated financial statements and in accounting for investments in the separate financial statements of a venturer. Interests in joint ventures will be accounted for either at cost or in accordance with PAS 39 in the separate financial statements. Equity method of accounting will no longer be allowed in the separate financial statements.

• PAS 33, Earnings Per Share, prescribes principles for the determination and presentation of earnings per share for entities with publicly traded shares, entities in the process of issuing ordinary shares to the public, and any entities that calculate and disclose earnings per share. The standard also provides additional guidance in computing earnings per share including the effects of mandatorily convertible instruments and contingently issuable shares, among others.

• PAS 36, Impairment of Assets, establishes frequency of impairment testing for certain intangibles and provides additional guidance on the measurement of an asset’s value in use. • PAS 38, Intangible Assets, provides additional clarification on the definition and recognition of certain intangibles. Moreover, this revised standard requires that an intangible asset with an indefinite useful life should not be amortized but will be tested for impairment by comparing its recoverable amount with its carrying amount annually and whenever there is an indication that the intangible asset may be impaired. The effect of the adoption of this standard will not result in retroactive adjustment of prior year financial statements but will affect prospective financial statements as a result of the nonamortization of Goodwill.

The Group does not expect any significant impact on the financial statements of the adoption of the foregoing revised standards, except for the impact of adopting the cost method in accounting for its investments in subsidiaries, associates and joint ventures in the separate (parent company) financial statements, which is expected to reduce both the carrying amounts of investments and total capital funds by 143.0 million equivalent to the undeclared undistributed retained earnings of said investees and other equity adjustments as of December 31, 2004. The disclosures required by these revised PAS will be reflected in the 2005 financial statements, where applicable.

Cash Equivalents For purposes of reporting cash flows, the Group considers as cash equivalents all highly liquid debt instruments purchased with original maturities of three months or less from dates of acquisition and that are subject to insignificant risk of changes in value.

Investment in Common Trust Fund (CTF) Investment in CTF is carried at face amount plus or minus unrealized gains or losses arising from the difference between the face amount and the net asset value.

Loans and Other Receivables Loans and other receivables are stated at the outstanding balance, reduced by allowance for probable losses. Loans and other receivables are classified as past due when in the opinion of management, collection of interest or principal is doubtful. These receivables are not reclassified as current until interest and principal payments are brought current or the receivable is restructured and future payments appear assured.

Income Recognition Income is recognized to the extent that it is probable that the economic benefits will flow to the Group and the income can be reliably measured. The following specific recognition criteria must also be met before income is recognized:

Interest Income Income on interest-bearing placements is recognized as the interest accrues taking into consideration the yield on the assets.

Dividends Dividend income is recognized when the shareholders’ right to receive the payment is established.

Allowance for Probable Losses The allowance for probable losses is the estimated amount of losses in the Group’s receivable and investments portfolio, based on management’s evaluation of the collectibility or recoverability and prior loss experience. The allowance for probable losses is established through provisions charged to current operations. Receivables and investments are written off against the allowance for probable losses when management believes that the collectibility or recoverability is unlikely.

Property and Equipment Property and equipment is stated at cost less accumulated depreciation and amortization and any impairment in value. The initial cost of property and equipment consists of the purchase price and directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property and equipment have been put into operation, such as repairs and maintenance, are normally charged against operations in the year in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional costs of property and equipment. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is credited to or charged against current operations.

Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the properties and equipment ranging from two to five years.

The useful life and the depreciation and amortization method are reviewed periodically to ensure that the period and the method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment.

Impairment of Assets An assessment is made at each balance sheet date to determine whether there is any indication of impairment of any long-lived asset, or whether there is any indication that an impairment loss previously recognized for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the asset’s recoverable amount is estimated. An asset’s recoverable amount is computed at the higher of the asset’s value in use or its net selling price.

An impairment loss is recognized by a charge against current operations for the excess of the carrying amount of an asset over its recoverable amount. An impairment loss is charged against operations in the year in which it arises.

A previously recognized impairment loss is reversed by a credit to current operations to the extent that it does not restate the asset to an amount higher than the carrying amount that would have been determined (net of any accumulated depreciation) had no impairment loss been recognized for the asset in prior years.

Income Taxes Deferred income tax is provided, using the balance sheet liability method, on all temporary differences at the balance sheet date between the tax bases of asset and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable temporary differences. Deferred income tax are recognized for all deductible temporary differences, carryforward of unused tax credits from excess minimum corporate income tax (MCIT) over regular corporate income tax and the net operating loss carryover (NOLCO) to the extent that it is probable that the tax profit will be available against which the deductible temporary differences and carryforward of unused MCIT and NOLCO can be utilized.

Goodwill The excess of the acquisition cost over the Parent Company’s interest in the fair market value of the net identifiable assets acquired as of the date of the exchange transaction is recorded as goodwill and recognized as an asset in the balance sheet. Goodwill is carried at cost less accumulated amortization. Goodwill was previously amortized on a straight-line basis over forty (40) years until December 31, 2001. Starting January 1, 2002, goodwill is being amortized over the remaining term based on a 20-year period. Effective January 1, 2005, in accordance with PFRS 3, goodwill will no longer be amortized. Goodwill is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

Foreign Currency Translation and Transactions Assets and liabilities denominated in foreign currencies are translated to Philippine pesos at the prevailing Philippine Dealing System weighted average rate (PDSWAR) at the balance sheet date. Income and expense items are translated at rates at transaction dates. Foreign exchange differentials arising from foreign currency transactions and restatement of foreign currency- denominated assets and liabilities are credited to or charged against current operations.

Retirement Cost The Group determines retirement expense under Republic Act (RA) No. 7641 to qualified employees. The expense is computed as a certain percentage of basic monthly salary for every year of service.

Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing net income (loss) for the year by the weighted average number of common shares outstanding during the year giving retroactive effect to stock dividends declared, stock rights exercised and stock splits made during the year, if any.

Provisions and Contingencies Provisions are recognized when the Group has a present obligation (legal or constructive) where, as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessment of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense.

Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized but are disclosed in the financial statements when an inflow of economic benefits is probable. Subsequent Events Post year-end events that provide additional information about the Group’s position at the balance sheet date (adjusting events) are reflected in the financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the financial statements when material.

3. RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Parent Company has transactions with its subsudiary and associate and other related parties consisting of advances and banking transactions.

The significant intercompany transactions and outstanding balances of the Group were eliminated in consolidation.

These advances consist of the following:

Due to affiliates 2005 2004 Capital Place International Ltd P 3,824,389 P 4,623,335 Lippo Securities, Inc. 2,725,428 2,416,056 P 6,549,817 P 7,039,391

4. Equity Investments

The details of equity investments follow:

2005 2004 Export & Industry Bank – 17.49% owned Beginning P 577,132,091 P 576,495,676 Equity in net earnings for the period 636,415

577,132,091 577,132,091 Manila Exposition Complex, Inc. -18.18% owned 31,268,750 31,268,750 I-Mart International Corp - 10% owned 45,000,000 45,000,000 Less: Allowance for probable losses (45,000,000) (45,000,000) P 608,400,841 P 608,400,841

Equity Investment in EIB The Parent Company’s interest in EIB decreased to 16.90% in 2002 from 29.83% in 2001 as a result of the merger of EIB with Urban Bank, Inc. (UBI) and UBI’s associated company Urbancorp Investment, Inc. (UII) and the conversion of certain deposits of UBI into common shares pursuant to UBI’s and UII’s rehabilitation plan discussed below. The Group’s effective ownership in EIB is at 17.49% as a result of the intention of the subsidiary of holding onto its investment in EIB shares of stock for strategic purposes.

Merger and Rehabilitation Information of EIB In May 2001, EIB signed an agreement with the major stockholders of UBI and UII for UBI’s and UII’s rehabilitation through a merger with EIB. The salient provisions of the agreement include the following: a) The merger of EIB, UBI and UII, with UBI as the surviving entity, where the name of UBI shall be changed into Export and Industry Bank, Inc.;

b) The conversion into common shares of the merged bank of 1.1 billion, more or less, of deposits and similar liabilities of UBI and UII equivalent to an average of 10% of total deposits and placements, excluding deposits and placements of UBI’s three major depositors/creditors and bills payable to financial institutions; and

c) Repayment and servicing within three years of the balance of said deposits and similar liabilities of UBI and UII (excluding the deposits and placements of the three major depositors/creditors and bills payable to financial institutions which are covered by a separate repayment agreement), after the aforementioned 10% conversion with interest at a fixed rate of 6% gross per annum on peso-denominated deposits and similar liabilities and 2% gross per annum on US dollar-denominated deposits payable quarterly.

The rehabilitation plan including the proposed merger of EIB, UBI and UII, was approved by the Philippine Deposit Insurance Corporation and the Bangko Sentral ng Pilipinas (BSP) on July 9, 2001 and July 12, 2001, respectively. The plan of merger and articles of merger of EIB, UBI and UII were approved by BSP and SEC on January 30 and 31, 2002, respectively.

Upon merger, the Parent Company recognized a gain on capital transaction (included as part of equity in net earnings) amounting to 51,041,653 from its equity investment in EIB resulting from the reduction of its equity interest from 29.83% to 17.49% and with a corresponding increase in its share of the net assets of EIB, resulting from conversion of various deposits and similar liabilities of UBI and UII, as mentioned above, into EIB common shares.

. 5. Property and Equipment and Other Assets

Changes in the Group’s property and equipment account are as follows:

2005 Furniture, Fixtures Transportation Leasehold and Office Equipment Improvements Equipment Total 2004 Cost Balance at beginning of year 493,000 1,810,131 2,408,354 4,711,845 4,663,118 Additions – – 17,491 17,491 48,367 Balance at end of year 493,000 1,810,131 2,425,845 4,728,976 P4,711,485 Accumulated depreciation and amortization Balance at beginning of year 493,000 1,810,131 2,372,908 4,676,039 4,663,118 Depreciation and amortization – – 21,782 21,782 12,921 Balance at end of year 493,000 1,810,131 2,394,690 4,697,821 P4,676,039 Net book value at end of year – – 31,155 31,155 35,446

Other assets account consists of:

2005 2004 Other investments P - P 24,121,411 Property and equipment (net) Accrued Interest income - 915,655 Goodwill 4,051,174 4,051,174 Accounts Receivable 2,000 2,000 Miscellaneous 6,211,063 3,064,050 P 10,274,237 P 32,154,290

The Group’s other investments include investment in common trust fund with EIB amounting to P22,444,781 on December 31, 2004.

Goodwill arose from the additional investment made by the Parent Company Company to its subsidiary in 2000. Annual amortization amounts to P763,682 over a period of 10 years.

6. Loans Payable

This account represents short-term loans obtained from a local bank discounted at a rate of 10.25%. Such loan is due within 3 months from the balance sheet date.

7. Lease Agreement

The subsidiary leases its office space from Capital Place International Limited - Philippine Branch, an affiliate, for a period of two years until May 31, 2004, renewable for another one year period upon mutual agreement of the parties. In 2005, the lease agreement was subsequently renewed for one year until May 31, 2006. The lease requires an annual rental of P1,053,183 in 2004 for the Group (P312,000 for the Parent Company) and advance rental and security deposit totaling P610,042 (shown under Other Assets in the balance sheets).

8. Retirement

RA No. 7641 requires the recognition of a minimum retirement pay liability to qualified private sector employees equivalent to at least one half month salary including certain benefits for every year of service. Pending the implementation of a formal retirement plan, the Group has provided for estimated retirement contribution amounting to 450,358 in 2004 and 426,564 in 2003.

The cost of defined retirement benefits should be determined using the accrued benefit valuation or the projected benefit valuation methods. Both methods require an actuarial valuation which the Company has not undertaken. Management believes, however, that the effect of the difference between the retirement expense determined under the current method by the Company and an acceptable actuarial valuation method is not material to the financial statements.

9. Segment Information

The Group’s operating businesses are recognized and managed separately according to the nature of services provided and the different markets served, with each segment representing a strategic business unit.

The Group’s business segments are as follows:

• Investment banking - principally engaged in activities such as debt and equity underwriting, money market placements, structured financing and corporate financial advisory services.

• Others - consists mainly of investment holding activities of the Parent Company.

The business segment information of the Group as of and for the Second Quarter Ended September 30, 2005 and for the year ended December 31, 2004 follows: 2005 Investment Banking Others Total Income: Equity in net earnings of an associate - - - Interest income 13,023,127 8,767 13,031,894 Other income 3,619,449 2,138,182 5,757,631 Gross income 16,642,576 2,146,949 13,017,478 Expenses 15,826,251 12,458,482 28,284,733 Income (loss) before income tax P816,325 (P10,311,533) (P9,495,208) Provision for income tax Operating loss (P9,495,208) Minority interest in income of a subsidiary 289,436 Net loss (P9,784,644) Segment assets 376,610,067 595,192,152 971,802,219 Goodwill 4,051,174 Total assets 975,853,393 Segment liabilities 1,610,853 80,852,823 82,463,676 Intra-segment liabilities 5,639,225 Total liabilities P88,102,901

2004 Investment Banking Others Total Income: Equity in net earnings of an associate – 636,415 636,415 Interest income 10,819,110 2,670 10,821,780 Other income 8,625,886 3,703,228 12,329,114 Gross income 19,444,996 4,342,313 23,787,309 Expenses 20,651,242 19,795,390 40,446,632 Income (loss) before income tax (P1,206,246) (P15,453,077) (P16,659,323) Provision for income tax (369,832) Operating loss (16,289,491) Minority interest in income of a subsidiary 304,801 Net income (P15,984,690) Segment assets P377,799,859 P595,597,085 P973,396,944 Goodwill 4,051,174 Total assets P977,448,118 Segment liabilities P3,616,988 P70,946,206 P74,563,194 Deferred tax liability 5,639,223 Total liabilities P80,202,417

10. Income and Other Taxes

Under Philippine tax laws, the Group is subject to percentage and other taxes (presented as Taxes and Licenses in the statements of income) as well as income taxes. The Subsidiary’s percentage and other taxes consist principally of gross receipts tax (GRT) (GRT was in effect until 2002) and documentary stamp taxes. Effective January 1, 2003, the Subsidiary is subject to the value-added tax instead of GRT. However, Republic Act (RA) No. 9238 reimposed GRT on banks and financial intermediaries effective January 1, 2004.

As of December 31, 2004, the Group did not set up deferred tax assets on the following:

Group Parent Company 2004 2003 2004 2003 Temporary differences arising from: Allowance for probable loss 40,313,000 40,313,000 40,313,000 40,313,000 NOLCO 28,634,035 20,838,741 28,634,035 18,261,691 MCIT – 252,908 – – Others 335,127 297,178 335,127 211,838

The Group believes that it is not reasonably probable that these temporary differences will be realized in the future.

As of December 31, 2004 the net deferred tax liability (included in Accounts Payable and Accrued Expenses in the Group balance sheets) of the Subsidiary consists of the following:

2004 2003 Tax effects of: Unrealized foreign exchange gain (5,566,918) (7,611,073) Unrealized gain on investment in CTF (533,805) (175,336) Accrued retirement expense 311,298 27,308 Allowance for probable losses 150,202 – NOLCO – 824,656 MCIT – 252,908 (5,639,223) (6,681,537)

11. Loss per Share

The following table presents information used to calculate basic loss per share (EPS):

2005 2004 2003 a. Net income (loss) ( 9,784,644) (9,076,271) (4,011,641) b. Weighted average number of outstanding common shares 700,000,000 700,000,000 700,000,000 (0.0140 (0.0130 (0.0057 c. Basic EPS (a/b) ) ) ) MEDCO HOLDINGS, INC.and SUBSIDIARY AGING OF ACCOUNTS RECEIVABLE As of September 30, 2005

NO OF DAYS OUTSTANDING 1 -30 31-60 61-90 91-120 Over 120 AMOUNT days days days days days

1,208, Various 1,208,260 - 260