More success with joined forces

Transcription

1 More success with joined forces Annual Report 2006/2007 The More You See...

2 Key Figures Consolidated total operating revenue EBITDA-EBIT-statement (in F thousand/%) 2006/2007 in Percent 2005/2006 in Percent Group net sales 51, % 47, % Capitalized developments 7, % 5, % Total operating revenue 58, % 53, % Material costs 13, % 10, % Personnel costs for production 11, % 11, % Production costs 24, % 22, % Gross Profit 33, % 31, % Research and development costs 9, % 7, % Marketing and sales 8, % 6, % Administration 4,454 8 % 2,953 6 % Sales and administration costs 13, % 9, % Other operational profit 94 0 % % EBITDA 10, % 14, % Depreciation and amortization 4,787 8 % 5, % Total costs 27, % 22, % EBIT 6,150 10% 9,723 18% Financial result % % EBT 6, % 9, % Taxes % 3,681 7 % Net profit for the period 5,539 9 % 6, % Minority interests % 0 0 % Net profit for the period after minority interests 5,121 9 % 6, % Selected financial data Percentage (in TF/%) change ROCE (Return on Capital Employed) 7% 13% Equity Ratio 49% 73% Cash-flow from operating activities 6,699 7,706-13% Fund assets September, 30 22,292 15,514 44% Earnings per share in E % Dividend per share in E 0.15* % Equity per share in E % Shares issued 4,337,940 4,147,226 5% No of employees (annual average) % * subject to the agreement of the General Meeting

3 ISRA VISION Contents 1 Contents Leading the race together to the top 2 On Top of the Top 4 Staying ahead with the right strategy 6 More success with joined forces 8 From wherever the wind blows it is important to know, how to set the sails 10 ISRA-shares in a stormy sea 12 From inspection to decision with an expanded product portfolio in sight new targets on the horizon 16 Group Management Report 20 Report of the Supervisory Board 29 Corporate Governance 31 Consolidated Financial Statements (IFRS) 33 Reproduction of the Auditor s Report 56

4 2 ISRA VISION Letter from the Chairman of the Executive Board Leading the race together to the top Dear Shareholders, Business Partners and Friends of ISRA, dear Colleagues, in the 2006/2007 fiscal year, ISRA increased its revenue for the tenth straight year. With three acquisitions, Image Automation Ltd. in December 2006, Image Automation Inc. in January 2007 and Parsytec in July 2007, ISRA is approaching significantly its target of exceeding 100 million Euros in revenues within the next 3 years. The acquisition of Parsytec made the ISRA Group the world leader in the paper and metal inspection. This also resulted in strengthening ISRA group s presence in North America and China. With the addition of Image Automation Ltd. and Image Automation Inc., ISRA expanded its world leading market position in the glass sector and its international sales presence in Ireland, Great Britain and the USA. The extensive investment to acquire Parsytec along with related expenses for future growth mitigated the growth in profitability short term. With a revenue growth of eight percent up to more than 51 million Euros, an EBT (earnings before taxes) of 6.3 million Euros (previous year: 10.0 million Euros) and an EBT margin of twelve percent, ISRA significantly exceeded the adjusted forecasts by the end of the fiscal year. The earnings per share reached 1.18 Euros (previous year: 1.51 Euros). In November 2007, in the first quarter of the new 2007/2008 fiscal year, ISRA acquired Metronom. Metronom specializes in quality measurement technology and general image processing. Metronom s innovative software technology, control and automation of measurement procedures, is a perfect complement to ISRA s product portfolio. Through the acquisitions and the resulting synergy and enthusiasm created, ISRA succeeded not only in strengthening its excellent market position, but also significantly enlarging its range of services, capability and value to the customer. The result is that ISRA is the worldwide technological leader in Surface Inspection. With new products and product lines, ISRA intends to win new customers and enter into fast growing markets. In the metal and paper sectors, product portfolios are being optimized to strategically fit the needs of the customers in these segments. ISRA is also expanding its inspection capability and presence in the Printed Electronics market. With the advancement and integration of new PDI software (Production-Decision-Intelligence), it was possible to make the significant leap from inspection technology to production optimization. Defects are not only detected, but real time production decisions can be made through the analysis of the defects on line. 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 Sales (in Mio G) Total Operating Revenue (in Mio G)

5 ISRA VISION Letter from the Chairman of the Executive Board 3 ISRA will be continuing its growth trend consequently. After the strong external growth, ISRA will be focusing more on organic expansion. The integration of the four executed acquisitions is moving along as planned. Most of the integration measures have been introduced and good progress is being made in their completion. Further synergies from the acquisitions are also expected in sales with the expansion of key accounts and a joint, central, customer oriented Customer Service and Support Center. The continued expansion of the worldwide sales and service network is an important pillar in the growth strategy. In January, for example, a new sales office was opened in Brazil for Latin America. Further strong growth is expected from the rapidly growing countries of South America. Additional sales offices are also planned in Eastern Europe and India. For the current 2007/2008 fiscal year, the Executive Board has planned for revenues exceeding 65 million Euros. The gross profit (EBT) is expected to increase 50 percent and the EBT margin is expected to reach 15 percent of the total operating revenue. In the following 2008/2009 fiscal year, revenues of 75 million Euros is projected with an EBT margin of 19 percent, primarily through internal growth. Due to the further expansion of the group, many new employees have joined ISRA. We welcome all of you very warmly and are looking forward to working with you. We have already started and accomplished many things together. The altered revenue expectations and need to work together as a team to accomplish our goals will require adaptability, diligence, creativity and a significant amount of perseverance of all employees. The Executive Board and the Supervisory Board are proud of the work contributions from all of the ISRA employees. I, dear Colleagues, along with the members of the Executive and Supervisory Boards, and the shareholders would like to thank you very much for your personal commitment to ISRA. I also want to thank our Customers, Business Partners and Shareholders for the trust and support that you once more gave us this last fiscal year. Sincerely, Enis Ersü, Executive Chairman On behalf of the Management 1,60 1,40 1,20 1,00 0,80 0,60 0,40 0,20 1,5 2,6 3,4 4,1 5,7 8,3 10 6,3 EPS ( G per share) 0,9 0,00 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 EBT (in Mio G) EPS ( G per share)

6 4 ISRA VISION Strategy On Top of the Top ISRA is one of the "top five Machine Vision companies worldwide. Machine Vision companies teach computers how to see. Besides cameras, lighting systems and PCs that make vision possible, the intelligent software "Brainware", the heart of ISRA systems, ensures the recognition of faults and objects. The newest Machine Vision solutions by ISRA deliver additional decision alternatives for the optimization of production and for maximum utilization of the materials produced. As a result of the benefits that customers have derived from the ISRA systems, ISRA has been propelled to the top of the Machine Vision industry. In the Robot Vision technology sector, robots have the ability to differentiate objects in an area during a work cycle, move them, transport them, check them for completeness, precise dimensions, and fit them into their correct destinations. In production, robots with these capabilities are performing various complex tasks. A piece of chocolate candy, as an example, is taken from the moving conveyer belt, checked for color, shape and intactness and then placed in the correct place in a cardboard box. Car windshields are taken out of a transport rack by a robot and checked for dimensional accuracy and fit into the car body to a tenth of a millimeter accuracy. In the fiscal year 2007/2008 with revenues of approximately 50 million Euros in the Surface Inspection sector, ISRA is the unchallenged world market leader in size as well as innovative technologies. Inspection systems from ISRA inspect to determine whether the surface of materials are100 percent fault free. The systems accomplish this task reliably, regardless of the material, whether it is coming out of a furnace under several hundred degrees of heat, or whether the material is printed or coated or moving through a production line at more than 200 km/h. ISRA's core competence is a combination of intelligent software and selected strategically important, hardware components. For its broad product portfolio, ISRA utilizes standardized components from well-known producers, in addition to its own in-house developments. This ensures fast availability of the components and reduces the maintenance expenditures to a minimum. Thus, the investments in Machine Vision solutions by ISRA are characterized by a short amortization period. This guarantees our customers a fast ROI (return on investment).

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8 6 ISRA VISION Strategy Staying ahead with the right strategy ISRA is operating in a global growth market with its Machine Vision solutions. This industry has grown by more than seven percent per year in the last several years. This market growth, based on present information, is expected to continue to grow minimally at this rate over the next several years. The strategy of ISRA is to participate in this growth at the same time concentrating on increasing efficiencies in the manufacture of the inspection systems. Machine Vision systems work faster, more precisely and cost-efficiently than the human eye. They are tirelessly on duty - 24 hours a day, 365 days per year. The vast amounts of data that is generated, saved and stored during the inspection at high speed on the production line cannot be grasped by the human brain, much less saved or processed. A multitude of possible future applications has not yet even been recognized or developed. ISRA wants to participate in this enormous market potential with continued growth - preferably, double digit percentage, annual growth. To do so, ISRA is pursuing a multi segment strategy. With its Robot Vision technology division, ISRA primarily offers solutions for companies in the Automotive, Food & Packaging and General Industries sectors. The leading Surface Vision technology from ISRA is based on a common platform for all areas of application. Thus, with its extensive innovative abilities, ISRA offers solutions in all areas of application that are always of the best performing ones. ISRA currently specializes in solutions for the Float Glass, Display Glass, Plastics, Print, Paper and Metal sectors. Going forward ISRA will also be offering solutions for the new Printed Electronics market. With the dual technologies of Robot and Surface Vision, ISRA is diversified in different sectors. Besides assuring relative independence from economic fluctuations, global orientation also secures growth in the individual industries. The multi segment strategy additionally permits cross market selling and offers further growth potential by introducing new or enhanced technologies to existing customers, to new customers in existing sectors and to new sectors in new regions. After the latest expansion through acquisition, the expansion of the worldwide distribution and service network is on top of the agenda. To generate organic growth ISRA aims to benefit from the synergies of the acquisitions.

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10 8 ISRA VISION Strategy More success with joined forces ISRA is continuing its growth trend undiminished. The unification with Parsytec was an important measure to reach the goal of crossing the 100 million Euro in revenues by the year In addition, it was the most important M&A transaction in the worldwide, strongly fragmented, Machine Vision sector. With the merger, ISRA has actively contributed to the consolidation of the market and moved up to the far front in the international Machine Vision industry. The effort now is to rapidly advance the integration of Parsytec. The integration of Parsytec into the ISRA Group has been progressing well. The organization has been restructured, to a large extent, to increase the efficiency and productivity for the long term. The synergy potentials have been identified and will be tapped gradually. All employees in key positions have been fully integrated into the joint ISRA-Parsytec organization. Furthermore, a new sales and marketing-oriented Executive Board is composed of experienced ISRA and Parsytec managers. The most important decisions and measures for increasing revenues and profit have been put in motion and most of them have already made good progress. The international sales organization has been redefined and the Parsytec and ISRA sales teams have been combined. The combination of the research and development teams in the paper and metal sectors has nearly been completed, as has the integration of engineering and production. At the end of March 2008, a joint Customer Service and Support Center will be available for Parsytec and ISRA worldwide. Important successes can also be seen in the joint global purchasing activity. It has led to significant cost reductions in the area of material costs. The delisting of the Parsytec shares enacted in December 2008 will prevent possible manipulations of the market while additionally reducing costs.

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12 10 ISRA VISION Strategy From wherever the wind blows - it is important to know, how to set the sails ISRA took over the company Metronom Automation GmbH, Mainz, at the beginning of November Metronom is a well-positioned specialist in the areas of in-line quality measurement technology. Metronom s software technology is expanding ISRA's skills and abilities and will help in continuing to expand the penetration in the market for control and automation of measurement procedures. With Metronom's technology, important growth potential can be realized in the automotive sector, for the specialized software from Metronom enables comprehensive analysis possibilities of the quality in the production. In the area of general image processing, Metronom has specialized in various inspection applications in the non-industrial sector. Here, ISRA will be expanding its product offering in the coming years. Metronom operates profitably and is presently achieving margins that are planned for ISRA in the near future. Both sister companies, the British Image Automation Ltd. and American Image Automation Inc., strengthen ISRA s competitive position as global market and innovations leader in the glass sector. Due to their acquisitions, the local presence in the British, Irish and US market has been expanded. It was important that the experienced managers stay on board to enrich the know-how of the sales team and to win new customers.

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14 12 ISRA VISION The Stock ISRA-shares in a stormy sea The German stock market overall showed a favorable trend in 2007 nervousness on the capital market, however, led to volatile share prices. There were obvious differences between the high values and the small and mid-cap segments. For the third year in a row, the DAX grew considerably at 22 percent. The TecDAX showed extraordinary growth at plus 30 percent. The performance, however, is mainly due to enormous growth in shares for large companies in the solar industry. Some of these shares even tripled in the course of the year. The Mid-Cap-Index MDAX had to be satisfied with a growth of only five percent. It showed to be very sensitive with regard to the business cycle, and at minus eleven percent, it gave up large parts of the gains made in the first half of the year. The insecurity of the financial markets triggered by the subprime crises affected small companies especially hard. The SDAX was forced to yield seven percent in the course of the year. Finance calendar January 31, 2008 February 29, 2008 May 30, 2008 August 26, 2008 August 29, 2008 November 10-12, 2008 December 15, 2008 Publishing 2006/2007 financial reports Report about the first quarter Report about the second quarter Small Cap Conference in Frankfurt Report about the third quarter German Equity Forum in Frankfurt Publishing of the preliminary figures of the 2007/2008 fiscal year Master data of ISRA VISION AG Security identification number ISIN Stock symbol Transparency level Index affiliation Stock category DE ISR Prime Standard Number of shares 4,337,940 Base capital as of September 30, ,337,940 E Peak share price at October 02, E Lowest share price at September 20, E Designated Sponsors CDAX, GEX, Prime All Share, Technology All Share No-par share with a nominal value of 1.00 Euro Equinet AG, LBBW The ISRA stock had been vacillating between Euro and Euros since the start of the 2006/2007 fiscal year at the beginning of October The low level of incoming orders at the end of the first half of the fiscal year prompted the Executive Board, to be on the safe side, to make downwards revisions in the revenue and profit forecasts. The shareholder reacted to this by selling. In the course of September, the ISRA shares fell to Euros, but subsequently recovered slightly. The better than forecast numbers in the middle of December 2007 resulted in only a short recovery in the share price.

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16 14 ISRA VISION Technology From inspection to the decision with an expanded product portfolio With new products and product lines, ISRA intends to attract new customers and increase its market penetration. In the metal sector, ISRA will be offering an expanded portfolio of products to meet the variety of needs of the customers; from high end solutions for several hundred thousand Euros that begin directly after the furnace, down to a low-budget stand-alone solution that is easy to operate, for only a few ten thousand Euros. In the paper sector, ISRA is now offering comprehensive solutions from inspection in the wet areas to web break monitoring. For this purpose, Parsytec components and software are being combined with hardware solutions from ISRA to achieve the optimum solutions by combining the best technologies from both companies. In software, ISRA will continue to increase the capability for its customers through continued innovations. Until now, the inspection systems from ISRA have delivered ample data about the condition of the surface. The systems detect defects, classifies them, measures them precisely, and identifies the exact location on the material. With the new software, all defect data generated from the different systems will be processed centrally. The information obtained delivers important data for optimizing the production processes. The information will no longer be available only at the machine, but also at independent sites worldwide and integrated into the customer s other business management programs. Thus, decisions can be made centrally regarding what should be manufactured from a material that has been produced somewhere in the world. In addition, customer quality data from the processed material can be measured and compared across locations to assure meeting common quality standards. This aspect makes it easier to decide which production batch should be delivered to which customer. For example, the data from a certain strip of steel can result in the conclusion that it would be better, from an economic point of view, to use the material in an alternative application as opposed to the one for which the material was originally intended. This could result not only in costs savings, but also, potentially, in higher sales profits being achieved. This innovative "Production Decision Intelligence" (abbreviated with PDI) will highly increase the benefit for the customer through fast decision making about the optimal yield (yield maximization) of the produced material. The efficiency of the production and the customer s competitiveness in the market will thus improve.

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18 16 ISRA VISION Perspectives 100+ in sight - new targets on the horizon With its latest acquisitions, ISRA has come significantly closer to its 100+ target (exceeding the 100 million Euro revenue line). Now, the company gets ready for its next strategic growth targets in the expanding global Machine Vision market. With its proven strategy, the worldwide leading market position will be expanded by winning new customers in the markets that ISRA already supplies. New and existing customers mainly global players from the old economy will be offered a broader product portfolio where the performance is exactly tailored to suit the needs of the user. New solutions from ISRA will revolutionize production and ensure customers a high return on investment. The technologically leading Surface Vision technology from ISRA, that has proven itself in numerous applications, will now also be offered to the Printed Electronics market segment. ISRA is expanding its global position so that it can offer optimal solutions to its international customers at their locations worldwide. The company is also utilizing this local presence to win new customers in places such as South America and, in the near future, India and Eastern Europe. With the multi segment strategy, ISRA is diversified in both the Surface and Robot Vision technologies, as well as into different sectors. This strategy makes the company somewhat independent of market fluctuations. The utilization of economies of scale and potential for increases in efficiency should improve profitability even further. In order to improve the working capital management, and to support investor relations, the finance sector has been enhanced with personnel to increase the most important goal value of the company in the long term.

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20 18 ISRA VISION Reports and Consolidated Financial Statements

21 ISRA VISION Reports and Consolidated Financial Statements 19 Reports and Consolidated Financial Statements - Group Management Report - Report of the Supervisory Board - Corporate Governance

22 20 ISRA VISION Group Management Report Group Management Report, ISRA VISION AG Fiscal Year 2006/ Business Situation and Operating Environment 1.1. ISRA is a specialist in intelligent systems for industrial image processing The ISRA group develops, produces and markets intelligent systems for industrial image processing (Machine Vision) using applicationspecific standard software solutions for surface inspection (Surface Vision), robot guidance (Robot Vision) and quality control (Quality Vision). ISRA has structured itself according to industry sectors in order to maintain a close dialog with the respective industry s global players, thus applying itself focus where it most benefits the customer. The company offers solutions for various process steps in the area of industrial automation for the automotive, food & packaging and general industries markets and offers surface inspection solutions for the float glass, automotive glass, display glass, plastics, films, nonwovens, print, paper and metals markets. ISRA VISION GROUP INDUSTRIAL AUTOMATION SURFACE VISION BU Automotive BU General Industries BU Food & Packaging BU Float Glass BU Display Glass BU Plastics BU Print BU Paper BU Metal ISRA VISION DIVISIONS AND BUSINESS UNITS (BU) 1.2. The ISRA Vision Group is geared towards the markets The ISRA Vision group is broken down into two business divisions and nine business units. In the 2006/2007 fiscal year, the Industrial Automation business division included the automotive, general industries and food & packaging units. The Surface Vision business division comprised of the Float Glass, FPD Display Glass, Plastics, Print, Paper and Metals units ISRA VISION AG takes on holding responsibilities ISRA VISION AG in Darmstadt is taking on the holding functions in the ISRA Group. The central departments of Finance, Research & Development, Marketing, Purchasing and Electrical Production are all concentrated at this location. The Industrial Automation division, with the automotive industry as its primary focus, will be managed from Darmstadt. A Food Inspection Unit has been established to support the expansion of the business in this direction. This unit will be managed from Darmstadt as will the Print Inspection Unit of the Surface Inspection Division Acquisition of Parsytec significantly expands the business On July 23, 2007, ISRA acquired the majority holding of its listed competitor, Parsytec AG, Aachen, Germany. At the end of September, ISRA held approximately 87% of the Parsytec shares. Parsytec is the world s market leader in the surface inspection of metals and one of the leading suppliers in the specialty paper sector. As of the end of the fiscal year, September 30, 2007, the integration of Parsytec had been proceeding according to schedule. Under the organizational leadership of Parsytec, the combined market presence of the ISRA and Parsytec brands will immediately boost them to the position of world leader in the Metals and the Specialty Paper sectors. Since July 23, 2007, the Parsytec figures have been consolidated into the ISRA Group s Concentration of the Surface Vision business in Herten The global business has been consolidated into the surface inspection division at ISRA SURFACE VISION GmbH, Herten. Sales, sector specific development, engineering and partial production are all concentrated here. The Glass, FPD Display Glass, Plastics and Specialty Paper markets are managed from Herten. Mechanical integration and production of all surface vision inspection systems are done at ISRA VISION LASOR GmbH, Oerlinghausen (Germany). The manufacture of laser scanners for the specialty paper and bank note markets is also accomplished at Oerlinghausen. This location also develops the basic software for all Surface Inspection systems with the collaboration of Darmstadt ISRA subsidiaries in the USA and the UK ISRA VISION SYSTEMS INC., Lansing (Michigan), USA, runs the entire North American automotive business of the Industrial Automation division. All Surface Vision activities in America were brought together at ISRA SURFACE VISION INC., Duluth (Georgia), USA. In the 2006/2007 business year, ISRA continued to expand its position as a global innovation and market leader in the glass sector. The

23 ISRA VISION Group Management Report 21 acquisition of the British company, Image Automation Ltd., offers a good base for growth in the UK and Ireland geographic markets. Its American affiliate, Image Automation Inc., Worthington (Ohio), USA, was also successfully integrated into the ISRA Group at the beginning of Expansion in Asia ISRA VISION (Shanghai) Co. LTD, Shanghai, China, is the production headquarters for the entire Asian market, and in particular for the strong growing Chinese market. The focus of activity in China at present is the Surface Inspection Division. ISRA VISION, Taiwan Activities in the Flat Panel Display sector were substantially enhanced by establishing a business presence in Taiwan. The sales and engineering team takes care of this business division s activities in Taiwan, Korea, Japan and China. The representative office in Hong Kong is attached organizationally to ISRA VISION Taiwan. Also by acquiring Parsytec, the ISRA Group has significantly broadened its market position in Asia. Parsytec has augmented the sales team with personnel that are well-established in the Japanese and Korean markets Machine Vision is a key technology Machine Vision technology constitutes a key technology for automation, production control and fully automated quality assurance. The Machine Vision market is characterized by a continually increasing degree of automation in industrial production, joined with continuous optimization of productivity and quality. The pattern of competition is characterized by fragmentary distribution since there are many suppliers with a relatively small shares of the market. In Europe and the US, there are only a few large companies with revenues in excess of 10 million Euros and more than 100 employees. The majority of companies are smaller niche-suppliers operating locally, with few employees. The larger suppliers such as ISRA focus on highly specialized system solutions for sectors and markets whose economic cycles remain largely unaffected by global economic influences. This fact makes them less dependent on global economic cycles In 2007, the global economy grew by approximately five percent for the fourth year in a row According to a statement from the Institut für Weltwirtschaft (IfW) in Kiel, the global economy grew by approximately 5 percent in 2007, just as in the previous 3 years. This far exceeded the expectations as of the beginning of According to information from the IfW, growth diminished by approximately two percent in the USA. The European countries grew by 2.6%. Japan is enjoying a period of moderate growth, as it has been for a number years. Their gross domestic product (GDP) grew by approximately two percent in The developing countries in South-East Asia once again provided the impetus for economic growth in the region. Specifically, the Chinese economy grew by 11.5% - according to official published information from December The South Korean economy grew at approximately 4.8 percent in Major growth potential in the market for Machine Vision The German image processing industry continues on a positive growth curve. According to estimates from the VDMA (German Trade Association for Mechanical and Plant Engineering), the German Machine Vision companies saw their sales increase by approximately six percent in The Vision Inspection industry in Germany by now has reached a volume of approximately 1.2 billion Euros. Despite the robust domestic growth, the total of the foreign markets remain the most important growth drivers, as observed by the VDMA. The German companies with image processing technology, therefore, earn almost 60 percent of their turnover abroad. The market for Machine Vision products is primarily concentrated on the highly developed industrial regions of North America, Europe, Japan and on rapidly developing Asian nations such as Taiwan, South Korea and China Corporate governance through value-oriented management The most important performance metrics are found in the EBITDA statement. This provides a view of the company s efficiency and profitability that is relevant to the industry. The most important components here are the gross margin (gross profit to total operating revenue) and the EBT margin (EBT to gross profit). Long-term targets are approximately 60 percent for the gross margin and 19 percent for the EBT margin. 2. The profit, financial and assets situation 2.1. An increase was observed for the tenth consecutive year Through its acquisition of Parsytec, ISRA has continued its dynamic growth of previous years. ISRA has been growing now non-stop for ten years. With a 49 percent equity capital ratio, the company has a sound financial basis. Considerable investments in the company s expansion have, however, prevented profits from increasing for the first time since the company went public. The revenue and earnings forecast, as revised at the end of August 2007, has been exceeded. In the 2006/2007 fiscal year, ISRA increased its revenues by eight percent to 51.3 million Euros. Capitalized development expenditure increased 26 percent to 7.3 million Euros, helping total operating revenue grow ten percent to 58.6 million Euros. The gross profit margin remained essentially the same. The EBITDA statement, which is the relevant measure for our industry, reached 58 percent (previous year:

24 22 ISRA VISION Group Management Report 59 percent) as a percentage of total operating revenue. The decrease in incoming orders at the beginning of the second half of the year brought about revenues lower than had been expected at the beginning of the year. Extensive investments in future growth and additional expenditures in connection with the acquisition of Parsytec placed a strain on the profit margin. At 19 percent of the total operating revenue (previous year: 28 percent), the EBITDA margin lagged behind the previous year s figure, as did the EBIT margin at ten percent (previous year: 18 percent) and the EBT margin at eleven percent (previous year: 19 percent). According to the IFRS cost-of-sales format, the EBIT margin settled at twelve percent (previous year: 20 percent) of the net sales; the EBT margin was twelve percent (previous year: 21 percent) of the net sales, and the net return on sales (net profit for the period, after minority interests) to ten percent (previous year: 13 percent). The cumulative profit of the completed mergers contributed to the consolidated net income after minority interests, before internal group charges and before offsetting internal exchanges of services, over two million Euros. The material costs climbed by 21 percent to 13.1 million Euros. The personnel costs for production increased by five percent, reaching 11.8 million Euros. The gross profit (total operating revenue minus production costs) improved by seven percent to 33.7 million Euros. Because the production costs (material plus personnel costs) grew at a slightly faster rate than the total operating revenue, the gross profit margin dropped by one percentage point to 58 percent. Total group operating revenue EBITDA/EBIT statement Oct. 1, 2006 to Oct. 1, 2005 to (in F thousand) Sept. 30, 2007 in percent Sept. 30, 2006 in percent Group net sales 51, % 47, % Capitalized developments 7, % 5, % Total operating revenue 58, % 53, % Material costs 13, % 10, % Personnel costs for production 11, % 11, % Production costs 24, % 22, % Gross Profit 33, % 31, % Research and development costs 9, % 7, % Marketing and sales 8, % 6, % Administration 4,454 8 % 2,953 6 % Sales and administration costs 13, % 9, % Other operational profit 94 0 % % EBITDA 10, % 14, % Depreciation and amortization 4,787 8 % 5, % Total costs 27, % 22, % EBIT 6,150 10% 9,723 18% Taxes % % EBT 6, % 9, % Taxes % 3,681 7 % Net profit for the period 5,539 9 % 6, % Minority interests % 0 0 % Net profit for the period after minority interests 5,121 9 % 6, % Research and development intensified In the 2006/2007 fiscal year, ISRA continued investing strongly in research and development (R&D). The R&D expenses increased by 25 percent to 9.6 million Euros, including the acquisition of Parsytec. Of this amount, 7.3 million Euros were invested in developing new products that were soon to be launched into the market (previous year: 5.8 million Euros). These expenditures were capitalized in accordance with IAS 38. At the same time 3.0 million Euros (previous year 3.5 million Euros) were written off for capitalized developments from previous years and from the reporting year. Other depreciation and amortization for software and licenses amounted to 1.3 million Euros (previous year: 1.1 million Euros). Application-oriented developments that can be brought into the market quickly are currently the focus of the R&D strategy, along with the reduction of the time-to-market. Sales and administration expenses (without depreciation and amortization) climbed to 13.1 million Euros (previous year: 9.5 million Euros). The sales and marketing costs rose from 6.5 million Euros in the previous year to 8.6 million Euros, and the administrative costs grew to 4.5 million Euros (previous year: 3.0 million Euros). The EBITDA (earnings before interest, taxes, depreciations and amortizations) dropped from 14.9 million Euros to 10.9 million Euros currently. Depreciation and amortization dropped by eight percent to 4.8 million Euros (previous year: 5.2 million Euros) and, following the unusual increase in the previous year, have returned to their normal levels. The depreciation and

25 ISRA VISION Group Management Report 23 amortization of capitalized developments account for 3.0 million Euros (previous year: 3.5 million Euros) of the above-stated figure. EBIT (earnings before interest and taxes) reached 6.1 million euros (previous year: 9.7 million euros). The extensive credit financing of the Parsytec acquisition, resulted in the financial results only dropping 0.2 million Euros. This allowed the company to achieve an EBT (earning before taxes) of 6.3 million Euros (previous year: 10.0 million Euros). The EBIT margin reached ten percent in relation to total operating revenue (previous year: 18 percent), and twelve percent in relation to turnover (previous year: 20 percent). In relation to the total operating revenue, the EBT margin dropped to eleven percent (previous year: 19 percent), and relative to the turnover reached 12 percent (previous year: 21 percent). ISRA profits from tax reform In the 2006/2007 fiscal year, ISRA had already started profiting from the tax reform that took effect in Germany as of January 1, According to the IFRS, the tax rates to be expected must be based on the calculation of the deferred tax assets and liabilities. The tax charges dropped from 3.7 million in the previous year to 0.8 million Euros. The tax revenue from the reassessment of the deferred taxes came to 2.2 million Euros. After minority interest, the group s net profit for the period reached 5.1 million Euros (previous year: 6.3 million Euros). This corresponds to a result of 1.18 Euro per share (previous year: 1.51 Euros), with the total shares numbering 4,337,940. Growth in the individual segments and markets In the largest division, Surface Vision, ISRA is one of the leading companies in the world. The total operating revenue for this segment rose by nine percent to 42.5 million Euros in the 2006/2007 fiscal year. ISRA has once more expanded its solid position in the market. The EBIT reached 3.9 million Euros (previous year: 7.3 million Euros). The Industrial Automation division succeeded in increasing its revenues by 11 percent to 16.1 million Euros. The EBIT reached 2.2 million Euros (previous year: 2.4 million Euros). In the past fiscal year, the strongest organic growth impulse came from the Industrial Automation business division. The Automotive business unit increased its European and North American business. Integrated Systems division saw strong growth in Europe. The new Food & Packaging unit realized good sales success in Europe and North America. The base business in the Glass and Plastics business units declined. There were a particularly large number of new orders received from Asia in the Specialty Paper sector. The European business stabilized at an acceptable level. The Paper and Metals sectors, which are now under the organizational management of Parsytec, contributed significantly to the growth in revenues.

26 24 ISRA VISION Group Management Report 2.2. Principles and objectives of the financial management Our financial management s top priority is to safeguard the company s liquidity, at all times. The liquidity reserves are set up so that all payment obligations can be met on time. The group is basically financed centrally through the parent company in Darmstadt, ISRA VISION AG. The liquidity is safeguarded through in-depth financial planning. The operational business is financed from the cash flow and the available liquid funds. The acquisition of Parsytec was, primarily, externally financed by a short-term, variable interest loan. Around five million Euros came from ISRA's internal funds from the increase in share capital in spring of ISRA aims to continually develop and optimize its financial management. These optimization efforts are particularly focused on reducing ISRA s working capital Fund assets grew by a solid 40 percent to 22.3 million Euros In the 2006/2007 fiscal year, the operational cash-flow reached 6.7 million Euros (previous year: 7.7 million Euros). As of September 30, 2007, the acquisition of Parsytec burdened the cash flow from investment activities with 17.9 million Euros. The cash flow from financing activities rose from 10.6 million in the previous year to 26.8 million Euros for 2006/2007, which was primarily due to a loan to finance the acquisition of Parsytec. The net cash flow reached 6.8 million Euros (previous year: 9.7 million Euros), which caused the fund assets to rise to 22.3 million Euros (previous year: 15.5 million Euros) at the end of the fiscal period. Cash in the amount of 2.1 million Euros was established as collateral Solid financing with a 49 percent equity capital ratio In the 2006/2007 fiscal year, the ISRA Group s total assets increased by 55.7 million to million Euros, particularly as a result of the Parsytec acquisition. For this reason, it is only possible, to a limited extent, to make comparisons with the previous year s figures. Liquid assets increased by 6.8 percent to 22.3 million Euros. This means that cash assets make up just under 16 percent of the total assets (previous year: 18 percent). The trade receivables grew by 8.1 million to 31.7 million Euros. A solid five million Euros of this total came from trade receivables from Parsytec million Euros (previous year: 13.1 million Euros) account for payables from construction contracts, as estimated using the "percentage of completion method. Current assets dropped to 52 percent of the total assets (previous year: 59 percent). At 48 percent (previous year: 41 percent) of the total assets, the fixed assets reached 68.5 million Euros (previous year: 35.4 million Euros). Due to M&A transactions, goodwill increased by 21.7 million to 34.6 million Euros. As of September 30, 2007, the tax losses carried forward for Parsytec AG came to 21.4 million Euros; 3.4 million Euros of deferred tax assets were established for this. The Executive Board has assessed the usability of the losses carried forward based on corporate planning for the years On the liabilities side of the balance sheet, equity capital rose to 70.0 million Euros (previous year: 63.8 million Euros). The equity capital ratio came to 49 percent because of the significant balance sheet extension. The short-term liabilities increased from 11.9 million Euros in the previous year to 56.7 million Euros. The bank liabilities (to finance the Parsytec acquisition) rose to 25.2 million Euros. The other liabilities rose to 22.1 million Euros, from 6.2 million in the previous year. 6.2 million Euros of this sum is from the expanded group of consolidated companies. Furthermore payables to a bank that had acquired Parsytec shares in the amount of 8.5 million Euros are included. This payable was settled shortly after the balance sheet review date. Under the long term liabilities, the bank liabilities increased to 4.2 million Euros (previous year: 1.2 million Euros) owed to the Baden- Württembergischen Bank. The money comes from the ERP Innovation Program of the Reconstruction Loan Corporation (Kreditanstalt für Wiederaufbau). 3. Non-financial performance indicators The success of the ISRA group depends to a considerable degree on its staff. The company is therefore continuing to invest in Human Resource Management in order to strategically strengthen the company including future succession planning activities. ISRA continues to place significant emphasis on educated, well trained employees as can be seen in the number of employees with experience and academic degrees.

27 ISRA VISION Group Management Report Employees In the fiscal year 2006/2007, the ISRA group employed an average of 300 people worldwide (previous year: 273). The increase came mostly at the end of the year as a result of the Parsytec acquisition. As of September 30, 2007, ISRA employed 387 people. The majority of employees work in Germany at the locations in Darmstadt (100 employees), Karlsruhe (16 employees), Herten (78 employees) and Oerlinghausen (33 employees). In the USA, there are 11 employees in Lansing (Michigan), 24 in Duluth (Georgia), and 4 in Columbus (Ohio). The location in Taiwan employs 5 people and 11 people work in Shanghai. The locations in London and Aachen newly acquired in the 2006/2007 fiscal year employ 6 and 99 personnel respectively. Of the employees world-wide, as of September 30, 2007, 46 percent work in production and engineering and approximately 17 percent in research and development. 19 percent of ISRA employees work in sales and marketing and 18 percent in administration. Employees by function Production and Engineering 46% Research and Development 17% Administration 18% Sales and Marketing 19% 5. Remuneration Report The structure of the remuneration system for the Executive Board is determined by the Supervisory Board. Criteria used to assess the appropriateness of the remuneration includes the responsibilities of the respective Executive Board member, their personal performance, the performance of the entire Executive Board, and the company's economic success both short and long term all in comparison to equivalent competitive positions. The remuneration for Executive Board members comprises short-term components and elements with long-term incentives. The non-performance based components involve fixed remuneration, payments in kind and other types of benefits. The shortterm components comprise of performance-based and non-performance based elements. The non-performance based fixed base remuneration is paid monthly as a salary and is reviewed on a yearly basis. The Executive Board members also receive other benefits, in particular allowances for a private pension plan, health insurance and long-term care insurance; they also receive benefits in kind such as use of a company automobile. The payments to the members of the Executive Board include performance-based, variable components which may, in individual cases, amount to up to 30% of the base pay. They are revised annually by the Supervisory Board based on objectives. As a publicly traded company, ISRA VISION AG has the singular opportunity to have its employees and the Executive Board participate directly in its success via a stock option program, a variable element of their remuneration in the form of a long-term incentive. Options may only be exercised after a lock-up period has expired. According to the stock option program, the options can be exercised for either cash or shares; however, ISRA VISION AG s internal practice has been to offer cash for exercised stock options. Options expire with termination of with the company or if they are a member of a statutory body of ISRA VISION AG or of a group company. Irrespective of this, options remain in force unchanged if the employment relationship ends due to the employee retiring or as a result of professional disability. Options cannot be inherited or transferred. In addition, option rights expire 5 years after the day they are issued. Options may only be exercised if at least one of the two predefined targets for success has been reached. These are based on the stock performance in relation to purchase price and time of exercise. The subscription price for a share is given by the arithmetic average of the closing prices in XETRA trading for the share in the period between the 15th and 5th stock market day (before the option is issued) multiplied by a factor of 1.1. The Supervisory Board is authorized to define the further details of the subscription conditions and of the issue and structure of the options for the Executive Board. In addition, the Supervisory Board is authorized to transfer for the Executive Board the shares needed to fulfill the option rights by issuing acquired treasury stocks or by issuing new shares through a capital increase. The members of the Supervisory Board receive remuneration for their membership on the Supervisory Board every full fiscal year. This remuneration is determined at the General Meeting and is payable after the end of the fiscal year. The Chairman receives double the amount and the vice chairman receives 1.5 times the amount. Supervisory Board members who have not belonged to the Board for a full fiscal year will be remunerated based on the duration of their membership on the Supervisory Board. The members of the Supervisory Board will be reimbursed for all expenses and for the income tax that they must pay on their remuneration and expenses. 6. Risks and opportunities of the company s future development All businesses have a certain degree of risk. A company s success is characterized by successful opportunities exceeding the downside risks in all important decisions. To compare risks against opportunities, ISRA uses a qualified risk management system. Using this risk management system, all major risks are analyzed before and after the decision is made. The system is built on an effective management infor-

28 26 ISRA VISION Group Management Report mation system, particularly the internal reporting structure. The system is continually re-adjusted in line with the insights gained from previous years and the new requirements of the German Stock Companies Act (Aktiengesetz) and the German Corporate Governance Code. ISRA endeavors to understand risks quickly. Due to the globalization of the company and the growing number of locations, prompt and detailed procurement, distribution and processing of information is becoming an increasingly important task. The risk situation in 2006/2007 did not change significantly in comparison with the previous year. ISRA is exposed to the general legal and economic risks in the countries where the group companies operate. In addition to this, the group s net sales and profit situation may also significantly influence the risks described in the following text. These are the risks that have been identified until now. This does not preclude the existence of other risks not yet recognized by the management, nor does it preclude the possibility of these risks are underestimated or negligible. Sufficient provisions were made for all likely risks. There have not been any risks identified which threaten the existence of the company. As a rule, ISRA bills customers in Euros. Only in the US are quotations made both in the local currency and in Euros. The Management regularly adjusts the sales calculations to match changes in the exchange rates. This prevents currency-based risks. There is only the risk of ISRA's competitive edge over local suppliers being reduced in the event that the dollar drops further. This risk is, however, limited because the administrative and sales costs in the USA are also in dollars. ISRA s core technology is Machine Vision technology for industry. The basis of this technology is the combination of specialized basic and application technology knowledge from the fields of robotics and vision, plus process knowledge, with software technology in marketable standard hardware and software components. Consequently, protecting intellectual property rights especially where know-how and software are concerned is particularly important to ISRA. These technologies are characterized by continuous development. ISRA s success depends on the capability to promptly develop, acquire and bring onto the market new or improved products that conform to changes in technology and meet customer requirements. ISRA s success so far shows that the company is characterized by a high level of innovation. In the last few years, ISRA has demonstrated its ability to put the necessary investment in research and development to highly focused use, to recognize risks promptly and start measures to innovate at a very early stage. The global Machine Vision market is highly fragmented. ISRA is therefore competing with a variety of suppliers both large and small. In order to maintain its success in the future, ISRA continues to work diligently on raising the barrier for competitors looking to enter the market both in R&D and in the fields of customer relationships and customer satisfaction. To achieve this, the company will, in the future, invest even more, in sales and customer support. Additionally, the anticipated dynamic global market growth is facilitating the ISRA group's excellent revenue and profit development. ISRA counteracts the dependency on economic fluctuations with a strategy of diversifying into various industries in different countries. Consequently, ISRA will continue to concentrate on products that guarantee the customer a high ROI (Return On Investment) enabling the customer make a faster decision to invest in vision technology. In all sectors of its business, ISRA has customer relationships with many large enterprises. These companies are chiefly multinationals from the automotive, glass, paper, print, plastics, metal and automation industries. None of these companies contributes more than ten percent of ISRA s turnover. Because ISRA products insure a high ROI, customers develop a partnership relationship with ISRA considering the very competitive nature of their own businesses. Nevertheless, it is ISRA s continuing objective to increase the number of customers through the "dual multi-segment strategy. Using new products, along with the acquisition of smaller, regionally based companies will enable ISRA to effectively expand its market position in the future. The majority of ISRA customers are multinational companies with high credit worthiness. Splitting the overall receivable into a number of smaller amounts (e.g. payable prior to work being conducted, during system construction and after initialization) works against an entire receivable not being paid. In the 2006/2007 fiscal year, the level of unpaid receivables was less than one percent of revenues and thus in line with the average of the past years. The company intends to continue its global expansion, not just through internal growth, but also by means of strategic alliances, consolidations and the acquisition of companies or parts of companies. With the acquisitions of the past few years, ISRA has demonstrated its ability to integrate large companies successfully, thus making a considerable contribution to the growth of both revenues and profit. ISRA recorded a short-term loan with a variable interest rate for the financing of its most recent acquisition. ISRA bears the risk of fluctuations in the interest rate. Because of the current situation in the capital markets and because of the expected cash flow, management considers this type of financing to be optimal at this time. There is, however, the possibility that Parsytec will intermittently not earn back the interest paid through its operating business. At this time, management estimates the probability to be minimal, which is supported by the positive market developments in the quarter from July 1 to September 30, The Management is working to counteract the risks involved in project business, with fixed prices for a defined scope of services and a fixed completion date, through intensive and rigorous controlling of proposals and project costs. To date, no major liability claims due to defective products or sub-standard services have been made against the companies of the ISRA group. Despite our taking the utmost care, we cannot exclude the possibility of this happening in the future. 7. Important occurrences after the balance sheet date In the first quarter of the new 2007/2008 fiscal year, ISRA VISION AG acquired Metronom Automation GmbH (Metronom), a company head-

29 ISRA VISION Group Management Report 27 quartered in Mainz, Germany. Metronom specializes in quality measurement technology and general image processing. With the control and automation of measurement procedures, the company has established a good market position for itself. This is also evident in Metronom s high profitability. The company's EBT margin has a profitability which ISRA strives to achieve in the long run. The purchase price for Metronom was 3 million Euros in cash and 800,000 Euros in ISRA shares. On December 14, 2007, in the extraordinary general meeting, Parsytec decided to delist the company from the stock exchange. The remaining shareholders were offered cash compensation of 5.65 Euro per share. ISRA VISION AG is expecting the delisting to provide ample opportunities to reduce costs by discontinuing listing costs and the publication of annual and quarterly financial reports, by ceasing general shareholders meetings and by eliminating other investor relations costs. There have been no other occurrences after the balance sheet date that could have a significant impact on ISRA s profit, financial and assets situation. 8. Forecast Report 8.1. Global economy: growth will slow down According to forecasts from the IfW, the global economy will slow down in 2008, but this will not bring an end to expansion. The IfW is counting on average global economic growth of 4.4 percent. After the crises on the financial markets abate, the IfW is expecting only minimal consequences for the actual economy. At plus 1.8 percent, the upswing in the US economy will level off for a sustained period of time. The experts are not any more confident about the Japanese economy. They are expecting a moderate amount of growth for Japan. The Euro Zone, on the other hand, is expected to increase by 2.2 percent. The most recent forecasts are not as optimistic, particularly those by government agencies. For China, the growth expected will once again be double-digit. According to the IfW forecast, the GDP is predicted to increase by 10.5 percent. The central assumption in all of these predictions is that the global economy will not suffer any lasting damage from the real estate crisis in the USA. In 2008, the VDMA is once more expecting growth of six percent for the German image processing industry. Industry experts are expecting an average annual global growth of between seven and ten percent for the Machine Vision industry in the next few years. Additionally, estimates suggest that only around a quarter of all potential applications have been realized so far, and that further areas will open up as technology continues to develop. As a result, the Machine Vision industry remains a global growth sector Growth will continue at an accelerated rate ISRA intends to continue its many years of growth at an accelerated rate in the next several years. The current order book, which totaled over 29 million as of December 17, 2007, is the first requirement to achieve this growth. In the 2007/2008 fiscal year, ISRA is expecting a growth in its revenues of approximately 30 percent. Its profitability will improve significantly in comparison to fiscal year 2006/2007. The management is expecting the EBT in the sector to increase by 50%. In the coming 2008/2009 fiscal year, management is counting on double digit percentage growth primarily organic in revenues. This should allow ISRA to once again achieve the profitability of previous years. 9. Supplementary information pursuant to 315 Para. 4 of the German Commercial Code (HGB) As of the balance sheet date, the company s share capital totaled 4,337,940 Euros. It is divided into 4,337,940 common stocks registered to holders with a nominal value of one Euro. Each share conveys one vote. It is forbidden to securitize the shares. EVWB GmbH & Co. KG, headquartered in Darmstadt, (majority shareholder and CEO Enis Ersü) holds a share in excess of 10% in ISRA VISION AG. The Supervisory Board consists of six members. Mr. Enis Ersü, Darmstadt, is entitled to appoint a member of the Supervisory Board as long as he holds his portion of the company s share capital. The remaining members are selected at the General Meeting. Pursuant to 84, 85 of the German Stock Corporation Law (AktG) in conjunction with 6 of the company s Articles of Association, the Executive Board is appointed and dismissed by the Supervisory Board. According to the legal provisions ( 179 ff AktG), changes to the Articles of Association must be decided upon by the annual General Meeting. The Supervisory Board of the company is furthermore only authorized to make modifications to the Articles of Association that concern their version date. In addition, the General Meeting held on March 20, 2007 resolved an amendment to the Articles of Association. This amendment authorizes the Executive Board to increase the Company s share capital through March 19, 2012 once or on multiple occasions by issuing new nopar value shares against cash or non-cash contributions, up to a maximum amount of 2,168, Euros (authorized capital). The Executive Board is authorized, with the agreement of the Supervisory Board, to exclude the statutory subscription rights of shareholders for residual amounts, to secure shares in return for contributions of fixed assets, in particular in the context of mergers with other companies or the purchase of other companies, parts of companies or of an interest in other companies. if the capital increase takes place by means of an equity contribution and the issued value is not, at the time of the final determination of the issued value by the Executive Board, and significantly less than the share price of the shares of a similar nature and scope which are already quoted on the stock markets, when judged in terms of the provisions of Section 203 Paragraphs 1 and 2,, Section 4 and Section 186 Paragraph 3 clause 4 of the German Stock Corporation Law (Aktiengesetz) and the amount of the capital stock attributable to the

30 28 ISRA VISION Group Management Report shares issued under exclusion of the statutory subscription rights does not exceed 433, Euros and 10% of the recorded capital stock at the time of the issue of the new shares. Realization of stocks have to be charged against this 10% limitation of capital stock if they come to effect due to authorization under shareholder exception from subscription according to section 71 paragraph 1 clause 8 (German Stock Corporation Law (Aktiengesetz-) in connection with section 186 paragraph 3 clause 4 of the German Stock Corporation Law (AktG). In addition, stocks issued to service bonds under option and/or conversion rights shall be charged to the 10% limitation of capital stock if the bonds were issued with the exclusion of subscription rights because an authorization applicable at the moment that this authorization takes effect takes the place of this, as found in section 186 paragraph 3 clause 4 of the German Stock Corporation Law (Aktiengesetz). On the basis of a resolution passed by the General Meeting on March 28, 2006, ISRA VISION AG may conditionally increase its capital by 250, Euros by issuing up to 250,000 no-par value bearer shares to implement an employee equity compensation plan (conditional capital). On the basis of a resolution passed by the General Meeting on March 20, 2007, the capital stock may conditionally be increased by up to 1,918, Euros no-par value bearer shares (conditional capital II). The conditional capital increase may only be carried out to the extent that the holder of convertible or negotiable option bonds, issued on the basis of the authorization given to the Executive Board by the general meeting on March 20, 2007, makes use of this conversion or option right, or to the extent that the holders obliged to make the conversion fulfill their obligation to undertake the conversion. Based on the decision of the General Meeting held on March 20, 2007, the Executive Board of ISRA VISION AG has been authorized to acquire its own shares through September 19, 2008, complying with the principle of equal treatment ( 53a of the German Stock Corporation Law) (Aktiengesetz-AktG). They are authorized to acquire up to 433,794 shares of the company, corresponding to 10% of the current share capital, under the provision that the shares which are purchased in accordance with this authorization, when added to the other shares in the company which the company has already purchased and still possesses, do not represent more than 10% of the capital stock of the company. This authorization may be implemented in full or in parts. Purchases may be undertaken within the period covered by the authorization up to the point where the maximum purchase volume has been reached or by partial purchases on various different purchasing dates. Purchases may also be undertaken by subsidiary enterprises of the company in the context of Section 17 of the German Stock Corporation Law (Aktiengesetz-AktG) or on its or their behalf by third parties. Darmstadt, December 28, 2007 The Executive Board

31 ISRA VISION Report of the Supervisory Board 29 Report of the Supervisory Board As in previous years, the Supervisory Board exercised its legal and statutory responsibilities by monitoring the management of the ISRA VISION group and by advising the Executive Board. The Supervisory Board was involved early on in all decisions of fundamental or strategic importance. Following thorough consultation, the Supervisory Board casted its vote, if necessary. The Executive Board regularly and comprehensively informed the Supervisory Board about business activities, corporate planning and events of great importance, both verbally and in writing. The Executive Board made thorough explanations when the business results deviated from Plan. The Supervisory Board conducted four face-to-face meetings with the Executive Board. In addition to this, the Chairman of the Supervisory Board remained in regular contact with the Chairman of the Executive Board. Together they thoroughly discussed current business developments. The Supervisory Board concentrated on matters concerning: Financial, sales, profitability, investments, risk management, and the expected growth of international markets for industrial image processing. Special focus was placed on the reasons for the drop in orders during the second half of the past fiscal year. Also analyzed were the risks faced by ISRA for expansion opportunities in Asia, Eastern Europe, and South America. The various acquisition targets were analyzed in depth and the integration of Parsytec was closely monitored. The Supervisory Board also evaluated the impact of new legal requirements, particularly with the increased disclosure rules of the IFRS international accounting standards, of the Takeover Directive Implementation Act, of the Transparency Directive Implementation Act and of the new Corporate Governance Code. After verifying that ISRA had complied in the completed fiscal year with the recommendations in the Declaration of Compliance, the Supervisory Board contributed to the drafting of said Declaration. At the same time, the Executive Board provided a report to the Supervisory Board concerning Corporate Governance at ISRA detailed in a separate section of this annual report. To increase its efficiency, the Supervisory Board formed two committees, the Main Committee and the Auditing Committee. The Main Committee, chaired by Professor Tolle, met to discuss Executive Board remuneration and the degree to which the performance-based components of the Executive Board s remuneration were fulfilled in 2005/2006, as well as to determine the performance-based components for 2006/2007. Professor Tolle reported to the entire Supervisory Board about the work of the Main Committee. The Auditing Committee, chaired by Dr.-Ing. h. c. Wiedenhues, made its own audit of the AG s and group s financial results and the consolidated financial statements and discussed them in detail with the auditors. The Committee was satisfied that there are no remaining risks or problems and it reported its findings to the Supervisory Board at the Meeting on Balance Sheet Review. The Supervisory Board saw the following changes in staffing during this past fiscal year: Professor Dr. e.m. Tolle assigned the position of Chairman of the Supervisory Board to Dr. ing. H.h. Wiedenhues. Mr. Riske resigned from the Supervisory Board on May 23, Mr. Müller has recently replaced him. Mr. Müller (63) is a Senior Consultant to the Board of Management of Kuka Roboter GmbH and president of the International Federation of Robotics (IFR), as well as being Chairman of EUnited Robotics and a member of the Main Board of the German Engineering Federation (VDMA). To honor his life s work, Mr. Müller was awarded the world-renowned Joseph F. Engler Robotics Award for Leadership in He is the second German ever to have received this coveted award. Dr. Weißgerber died unexpectedly on August 25, In October (after the end of the 2006/2007 fiscal year), Dr. Georg assumed Dr. Weißgerber s function. Dr. Georg (60) is the president of MCIC GmbH (Management Consulting International Cooperation GmbH). At last Dr. Georg was also employed as president and CEO of Instrumentation & Control Group, Power Generation, at Siemens AG. The Pannell Kerr Forster GmbH financial auditing company audited the annual financial statements and the management report, prepared by the Executive Board in accordance with the regulations of the German Commercial Code (HGB), for the fiscal year from October 1, 2006 to September 30, The chairman of the Supervisory Board commissioned the audit as decided at the General Meeting on March 20, The financial auditor has issued an unqualified opinion. The consolidated financial statements of ISRA VISION AG were prepared in accordance with 315a of the German Commercial Code (HGB), based on the IFRS international accounting standards. The financial auditor also granted an unqualified opinion to the consolidated financial statements and the group management report. The following focal points had been specified for the audit for the 2006/2007 fiscal year: Impairment test for goodwill pursuant to IAS 36, share acquisition and acquisition price allocation pursuant to IFRS 3; capitalization of development costs pursuant to IAS 38; inventory and evaluation of the inventories; trade receivables; accruals; period end accrual and revenue recognition, especially partial recognition in line with IAS 11 due to long term contracted work (percentage of completion); deferred taxes pursuant to IAS 12, in particular the effects of the 2008 corporate tax reform. In addition to this, the following points were especially chosen as the focus of the audit of the consolidated financial statement: Limitation of the group of consolidated companies; regulatory compliance of the annual and interim financial reports included in the consolidated financial statement; audit of the investment consolidations, particularly of the execution of the initial consolidation; audit of the proper execution of debt consolidation; audit of the expenditure and revenue consolidation; audit of the notes on the consolidated annual financial statement; audit of the consolidated management report. The reports about this and the other audit reports were sent to all Supervisory Board members on time, along with the financial statement documents. They were discussed in depth by the Auditing Committee and the Supervisory Board. The auditors took part in the consultation and reported the essential results from the audits. They were available to answer any questions from the Auditing Committee and the Supervisory Boards. The Supervisory Board addressed the information pursuant to 289 Para. 4 and 315 Para. 4 of the German Commercial Code (HGB). The Supervisory Board examined the corresponding explanations referred to in the management report.

32 30 ISRA VISION Report of the Supervisory Board After examining the annual financial statements, the consolidated financial statement, the management report and the group management report, the Supervisory Board accepted results of the audit from the auditor. In accordance with the recommendation from the Auditing Committee, the Supervisory Board approved the annual financial statements and the consolidated financial statements at the meeting held on January 23, The annual financial statements have thus been confirmed. The Supervisory Board has followed the Executive Board s suggestions concerning the application of the net profit for the fiscal year. The Supervisory Board extends its thanks to the Executive Board and all employees of ISRA and its subsidiaries for their personal efforts and successful work in the past 2006/2007 fiscal year. Darmstadt, January 23, 2008 Chairman of Supervisory Board

33 ISRA VISION Corporate Governance 31 Corporate Governance Report An essential factor for a company s success is its governance. ISRA has always placed great importance on responsible, value-oriented, effective corporate governance. This is why the implementation of the Corporate Governance Code at ISRA is examined every year by ISRA s Executive and Supervisory Boards and adjusted in relation to the revisions made to the Code by the government commission. ISRA conforms to the most recent recommendations, with only very few company-specific exceptions. Responsible governance is oriented towards value enhancement Pursuant to paragraph 3.10 of the German Corporate Governance Code, the Executive and Supervisory Boards report as follows on corporate governance at ISRA: ISRA is oriented to the standards of responsible corporate governance directed towards long-term added value. Through open information and transparent decision structures, the management aims to validate and further encourage the trust of its customers, employees, business partners, shareholders and the public. The company communicates information regularly in an open, proactive manner and specific Information relevant to stock prices is reported immediately to the financial community via ad hoc announcements. All obligatory announcements, corporate reports, essential notifications and press releases are promptly published on the IISRA internet home page. This assures equal dissemination of information to all shareholders. The Executive Board manages business transactions responsibly and with self reliance. At ISRA, good corporate governance means first and foremost constructive, trusting cooperation between the Executive Board and the Supervisory Board with the goal of corporate governance targeted towards value enhancement. The Executive Board develops the company s strategic orientation in conjunction with the Supervisory Board, leading the ISRA Group responsibly and self-reliantly. In writing and by word of mouth, they regularly report to the Supervisory Board on how business is progressing, the company s position, its corporate planning and its risk situation. The bylaws govern the allocation of rights and duties in the Executive Board and define transactions and procedures which the Supervisory board must follow. The Supervisory Board monitors and advises the Executive Board At ISRA, the Supervisory Board does not merely, diligently, fulfill its function as a supervisory body; it also advises and directs the Executive Board and its Chairman. To increase efficiency, the Supervisory Board has formed committees. The Bylaws Committee regulates all administrative and organizational matters. The Chairman of the Supervisory Board reports on this committee s work in a separate Supervisory Board report. Managing risk effectively Doing business as an entrepreneur means running risks. Effective management of these risks will determine the success of a company. ISRA s risk management system ensures that these risks will be handled in a responsible manner. It is especially designed to promptly recognize, evaluate and manage risks. The system is continuously being enhanced and re-adjusted to suit the changing circumstances. In the management report, the Executive Board reports, in detail, about risks and future trends. Appropriate Remuneration The members of the Executive and Supervisory Boards are remunerated in appropriate proportion to their tasks and the responsibilities placed upon them. Each member of the Supervisory Board will receive a fixed sum for the past 2006/2007 fiscal year. Supervisory Board members who did not occupy their position on the board for the whole year will receive remuneration corresponding to the duration of their membership. Performance based remuneration of Executive Board members reflects the corporate philosophy on management remuneration within the entire ISRA Group. Members of the Executive Board and other managers within the company receive remuneration consisting of both fixed and variable components. The variable components account for up to 30 percent of the base pay. The Executive Board reports on the remuneration system in the group management report. According to 15a of the German Securities Trade Act (WpHG), board members and persons with managerial functions must disclose to the company any purchase or sale of shares of ISRA VISION AG. In the 2006/2007 fiscal year, no purchase or sale transactions that are required to be declared in the Corporate Governance Report according to item 6.6 of the German Corporate Governance Code were reported to ISRA VISION AG. The stock portfolio of ISRA shares held by board members is detailed in the group management report. Declaration of Compliance pursuant to 161 of the German Stock Corporation Law (AktG). The Executive Board and the Supervisory Board of ISRA VISION AG hereby declare, in accordance with 161 of the German Stock Corporation Law (AktG), that the recommendations of the government commission on the "German Corporate Governance Code in the version dated June 14, 2007 have been and are fulfilled with the following exceptions: Until now, the company has not assisted shareholders in exercising their rights, nor has it appointed a personal representative to aid in doing so. As stipulated in 134 Para 3 Clause 2 of the Stock Corporation Law (AktG), written notification has been required until now to assign proxy voting rights for the General Meeting (Code Item 2.3.3). Except for the Chairman of the Executive Board, the D&O insurance policies do not provide for any personal liability on behalf of the mem-

34 32 ISRA VISION Corporate Governance bers of the executive bodies (Code Item 3.8). The remuneration of the Executive Board members is recorded in the company accounts. It is not itemized individually according to the various amounts, nor disclosed in a remuneration report. (Code Items and 4.2.5) Because of the low number of Supervisory Board members, it was deemed unnecessary to form a nomination committee. (Code Item ) There is no age limit for members of the Supervisory Board. (Code Item ) The remuneration of the Supervisory Board members relates to the positions of the Chairman and Vice Chairman of the Supervisory Board. There is no provision for additional remuneration for chairmanship or membership of committees, or for an additional success-based remuneration of the Supervisory Board members, nor is there any provision to publish individualized details concerning the remuneration of the Supervisory Board members. (Code Item ) The company complies with the current statutory requirements and publishes the annual financial statement within 120 days of the end of the fiscal year and interim reports within 60 days of the end of the reporting period. Code Item 7.1.2) The consolidated annual statement provides individual information on the shareholdings of members of the Executive Board and the Supervisory Board. There are no plans to provide more extensive information. (Code Item 7.1.5) Explanations for deviations from the recommendations of the German Corporate Governance Code In relation to Item In the past, the Company has not facilitated shareholders in personally exercising their voting rights, nor has it appointed a personal representative to exercise these rights according to their instructions because this seemed unnecessary to the Company, and it wished to avoid the associated expenditure. Similarly, shareholders have been required until now to submit a written note of proxy in order to facilitate verification by the Company. However, in the framework of the Transparency Directive Implementation Act (Transparenzrichtlinie- Umsetzungsgesetz, TUG) dated January 5, 2007, the Company will make it possible at the Annual General Meeting taking place on March 19, 2008 for the shareholders to empower a representative appointed by the Company to assimilate their votes and will also accept corresponding letters of proxy per fax or . These procedures will be in place going forward. Accordingly ISRA will now be in compliance with Item of the code. In relation to Item 3.8 A liability insurance policy has been put into effect by The Executive and Supervisory Boards to cover liability in the event of future financial losses. At present, with the exception of the Chairman of the Executive Board, there is no provision for the cost of the insurance to be shared. In the view of the Executive Board and the Supervisory Board of ISRA VISION AG, there is a risk that a policy involving cost sharing would conflict with ISRA VISION AG s aspirations to recruit highly qualified persons for the Executive Board and the Supervisory Board. In relation to Items and The Annual General Assembly decided in 2006 that rather than announcing the individual salaries of the members of the Executive Board, the total remuneration for all members of the Executive Board should be disclosed. The Executive Board and the Supervisory Board are of the opinion that this will properly and sufficiently fulfill the information requirements to which the shareholders are entitled. In relation to Item The Supervisory Board consists of six members. Because of the low number of Supervisory Board members and because of the board s composition, setting up a separate nomination committee will not increase the efficiency of the Supervisory Board. In relation to Item It is considered counter-productive to establish an upper age limit for members of the Supervisory Board. In relation to Item It is considered counter-productive to introduce a success-based remuneration system for members of the Supervisory Board on the basis of fixed and variable elements, in view of the size of the Company and the amount of the current remuneration of the Supervisory Board. In accordance with the statutes, the Supervisory Board members receive only a fixed remuneration, which is determined at the Annual General Meeting. In relation to Item Considering the size of the company, it would only be possible to regularly publish the annual financial statement and interim reports within the timeframe recommended by the Corporate Governance Code by increasing the size of the internal accounting structure, thus incurring significantly higher costs. This would not be compatible with the goal of maintaining lean management structures. In relation to Item ISRA complies with all accounting regulations. The Executive Board and the Supervisory Board are of the opinion that this will adequately and appropriately fulfill the information requirements to which the shareholders are entitled.

35 ISRA VISION Consolidated Financial Statements 33 Consolidated Financial Statements (IFRS) Darmstadt, September 30, 2007

36 34 Consolidated income statement (IFRS) Oct. 1, 2006 to Oct. 1, 2005 to (in F thousand) Explanation Sept. 30, 2007 Sept. 30, 2006 Net sales 51,289 47,696 Cost of sales 25,169 22,118 Gross operating result (gross profit) 26,120 25,579 Research and development 6,416 6,516 Total costs 9,598 7,691 Depreciation 9 4,140 4,649 Grants Capitalized development 9 7,298 5,783 Sales and marketing costs 8,865 6,734 Administration costs 4,570 3,178 Sales and administration costs 13,435 9,912 Other operational revenue Financial result EBT 6,325 9,964 Taxes on earnings ,681 Net profit for the period 5,539 6,283 Minority interests 418 Net profit after minority interests 5,121 6,283 Earnings per share in F (undiluted and diluted) Shares issued 4,337,940 4,147,226* * Weighted. Consolidated total operating revenue EBITDA-EBIT-pro forma account * Oct. 1, 2006 to Oct. 1, 2005 to (in F thousand) Explanation Sept. 30, 2007 Sept. 30, 2006 Net sales 51,289 47,696 Capitalized development expenditure 7,297 5,783 Total operating revenue 58,586 53,479 Cost of materials 13,096 10,846 Cost of labor excluding depreciation 11,766 11,207 Production Cost excluding depreciation 24,862 22,053 Gross Profit 33,723 31,426 Resarch and development costs total 9,598 7,691 Sales and marketing costs 8,640 6,504 Administration costs 4,454 2,953 Sales and administration costs excluding depreciation 13,094 9,457 Other operational revenue EBITDA 10,938 14,931 Depreciation 4,787 5,208 Total costs 27,479 22,356 EBIT 6,150 9,723 Financial result EBT 6,325 9,964 Taxes 786 3,681 Net profit for the period 5,539 6,283 Minority interests Net profit after minority interests 5,121 6,283 Earnings per share in F Shares issued 4,337,940 4,147,226** * This pro forma presentation is an additional presentation based on the comprehensive presentation given in previous years and therefore not part of the IFRS consolidated financial statements. ** Weighted.

37 35 Consolidated balance sheet (in F thousand) Explanation Sept. 30, 2007 Sept. 30, 2006 ASSETS Current Assets Cash and cash equivalents 22,292 15,515 Trade receivables 6 31,659 23,606 Inventories 7 15,939 10,908 Prepaid expenses Other assets 8 4,554 1,828 Total current assets 74,506 51,977 Fixed assets Goodwill 9 34,582 12,907 Other intangible assets 9 27,439 19,581 Tangible assets 10 2,773 2,681 Deferred tax assets 17 3, Total fixed assets 68,547 35,385 Total Assets 143,053 87,362 Equitiy and Liabilities Short-term liabilities Trade payables 12 6,023 4,039 Bank liabilities 11 25,200 0 Accruals 13 1, Tax accruals 14 1, Deferred income Other liabilities 16 22,127 6,178 Total short-term liabilities 56,687 11,910 Long-term liabilities Deferred tax liabilities 17 10,558 9,644 Bank liabilities 11 4,200 1,200 Accruals for obligations to employees 18 1, Total long-term liabilities 16,396 11,626 Total liabilities 73,083 23,536 Equity 19 Issued capital 4,338 4,338 Capital reserves 37,168 37,082 Minority interests 1,967 0 Currency exchange variations 1, Profit brought forward 22,528 16,896 Net profit for the period 5,121 6,283 Total equity 69,970 63,826 Total equity and liabilities 143,053 87,362

38 36 Consolidated cash flow statement Oct. 1, 2006 to Oct. 1, 2005 to (in F thousand) Explanation Sept. 30, 2007 Sept. 30, 2006 Consolidated net profit for the period 5,121 6,283 Taxes paid -1, Changes in the deferred tax assets and the accruals for deferred tax liabilities ,505 Changes in accruals -1, Depreciation 4,787 5,208 Changes in inventories -3,214-1,829 Changes in trade receivables, other assets, prepaid expenses -5,060-6,161 Changes in trade payables, other liabilities, deferred income 7,941 1,728 Changes in other accruals Cash flow from operating activities 6,699 7,706 Investments in tangible assets ,846 Investments in intangible assets -7,893-6,276 Investments in acquisitions 21-17, Cash-flow from investement activities -26,328-8,239 Deposits and withdrawals arising from silent investments Deposits arising from equity increase 0 9,109 Capital increase from subsidiaries 86 0 Deposits arising from financial liabilities 28,200 1,200 Repayment of financial liabilities -1,023 0 Interest paid Cash flow from financing activities 26,786 10,550 Changes in value resulting from exchange rate variations Changes in fund assets 6,778 9,651 Net cash flow Fund assets as per Oct. 1, ,514 5,863 Fund assets as per Sept. 30, ,292 15,514 Changes in fund assets 6,778 9,651

39 37 Consolidated statement of changes in equity for the period October 1, 2006 to September 30, 2007 Differences Profit Net profit Common Capital Minority from curren- brought for the (in F thousand) stock reserves interests cy variations forward period Equity Oct. 1, ,338 37, , ,826 Minority interests in Parsytec AG 1,967 1,967 Differences from currency variations Dividend Other changes* Net Profit 5,121 5,121 Sept. 30, ,338 37,168 1,967 1,152 22,528 5,121 69,970 * ISRA VISION AG s share of the increase in the capital reserves from the capital increase at Parsytec AG. ISRA VISION AG did not take part in this capital increase. Consolidated statement of changes in equity for the period October 1, 2005 to September 30, 2006 Differences Profit Net profit Common Capital Minority from curren- brought for the (in F thousand) stock reserves interests cy variations forward period Equity Oct. 1, ,948 28, , ,800 Equity increase 390 8,931 9,321 Cost of equity increase Differences from currency variations Net Profit 6,283 6,283 Sept. 30, ,338 37, ,896 6,283 63,826

40 38 Segment reporting by division (Primary segments) for selected positions of the consolidated income statement (in F thousand) Industrial Automation Surface Vision Oct. 1, 2006 to Oct. 1, 2005 to Oct. 1, 2006 to Oct. 1, 2005 to Sept. 30, 2007 Sept. 30, 2006 Sept. 30, 2007 Sept. 30, 2006 Total operating revenue 14,245 12,542 37,044 35,154 EBITDA 4,016 4,302 6,922 10,629 EBIT 2,244 2,450 3,907 7,273 There is no interdivisional revenue. POC sales figures (percentage of completion method) totaled F 2,245k in the Industrial Automation segment and F 14,248k in the Surface Vision segment. The sector definition is based on the corporate structure s focus on a market-oriented organization. The primary sectors reflect the business divisions which sell specific products in particular markets: INDUSTRIAL AUTOMATION The target markets of this division are primarily the automobile industry, machine tool manufacturers, the automation industry, general industry, machine and system manufacturers as well as the OEM markets in which ISRA products are integrated into customers products as OEM systems. In these cases, ISRA applies the entire range of its technologies, utilizing Surface Inspection products addition to the primary products of Robot Vision and Quality Vision. SURFACE VISION This sector of the company concentrates on surface inspection technology. This primarily concerns web materials which are checked for defects during the production process. The main focus is on the flat glass, foil, nonwovens, metal, paper and printing industries. Segment reporting by division (in F thousand) Industrial Automation Surface Vision undistributed Total as of Sept. as of Sept. as of Sept. as of Sept. as of Sept. as of Sept. as of Sept. as of Sept. 30, , , , , , , , 2006 ASSETS Assets Current assets 12,838 12,276 37,098 26,235 24,569 13,466 74,505 51,977 Fixed assets 8,458 8,196 56,337 26,973 3, ,548 35,385 Total assets 21,296 20,472 93,435 53,208 28,322 13, ,053 87,362 Equity and Liabilities Short-term liabilities 4,051 3,755 25,966 8,155 26, ,687 11,910 Long-term liabilities 0 0 1,638 1,982 14,758 9,644 16,396 11,626 Equity ,970 63,826 69,970 63,826 Total equity and liabilities 4,051 3,755 27,604 10, ,398 73, ,053 87,362 Investments in the reporting year 2,300 2,540 27,902 5, ,202 8,237 Goodwill book value 1,934 2,037 32,648 10, ,582 12,907 Depreciation Goodwill Other intangible assets 1,628 1,716 2,623 2, ,251 4,649 Tangible assets In the year under review, interest-bearing assets and liabilities were for the first time no longer allocated to the segments, a measure intended to improve the presentation of information; instead, they have been shown undistributed according to their presentation in connection with the segment results. The figures from the previous year were adjusted accordingly.

41 39 Segment reporting by region (Secondary segments) (in F thousand) Germany, Europe North America Asia, ROW* Oct. 1, 2006 to Oct. 1, 2005 to Oct. 1, 2006 to Oct. 1, 2005 to Oct. 1, 2006 to Oct. 1, 2005 to Sept. 30, 2007 Sept. 30, 2006 Sept. 30, 2007 Sept. 30, 2006 Sept. 30, 2007 Sept. 30, 2006 Net sales 28,027 23,092 10,869 11,580 12,393 13,024 * ROW = Rest of the world Segment reporting by region (in F thousand) Germany, Europe America/Asia undistributed Total as of Sept. as of Sept. as of Sept. as of Sept. as of Sept. as of Sept. as of Sept. as of Sept. 30, , , , , , , , 2006 ASSETS Assets Current assets 67,283 48,028 7,222 4, ,505 52,193 Fixed assets 66,539 33,592 2,009 1, ,548 35,169 Total assets 133,822 81,620 9,231 5, ,053 87,362 EQUITY AND LIABILITIES Short-term liabilities 54,064 9,805 2,623 2, ,687 11,910 Long-term liabilities 16,357 11, ,396 11,626 Equity ,970 63,826 69,970 63,826 Total equity and liabilities 70,421 21,431 2,662 2,105 69,970 63, ,053 87,362 Investments 29,678 6, , ,202 8,237

42 40 Notes to the Consolidated Financial Statements as of September 30, General information ISRA VISION AG, Darmstadt (hereinafter ISRA or Company ) was founded on September 23, 1997 and was registered in the commercial register of the Local Court of Darmstadt under the name ISRA VISION SYSTEMS AG and the registration number HRB 6820 on September 25, The ISRA share was first listed on the Frankfurt Stock Exchange on April 20, The change of name from ISRA VISION SYSTEMS AG to ISRA VISION AG was resolved at the Annual General Meeting on March 28, 2006 and registered in the commercial register on November 15, The Company s headquarters is located in Darmstadt. The fiscal year is from October 1 to September 30. The purpose of the Company is to develop, market, employ, distribute and sell products, systems, equipment, and services in the areas of machine vision, automation, software and robot technology. The Company s annual consolidated financial statements were prepared in line with the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB). In the year under review, the IFRS and SIC standards valid at the date of finalizing the accounts, and whose application is compulsory, were followed. The consolidated annual financial statement is prepared in euros. The group of consolidated companies has grown in comparison to the previous year. ISRA VISION AG holds directly or indirectly 100% of the shares in the majority of the group companies. The companies are fully consolidated in accordance with the shareholding relationship. The consolidated annual financial statement was released by the Supervisory Board for publication on January 23, Business combinations On November 10, 2006, ISRA acquired the British company Image Automation Ltd (now ISRA VISION Ltd.). The purchase costs totaled F 1,145k (including F 77k incidental purchase costs). The initial consolidation took place on October 1, 2006, the day on which ISRA assumed control over the company. With this acquisition carried out, ISRA expanded its position as a global innovation and market leader in the glass industry, broadening its presence in Ireland and the UK. On January 12, 2007, ISRA fully acquired Image Automation Inc., in Worthington, Ohio (USA) through its wholly owned subsidiary ISRA SURFACE VISION INC., Duluth, Georgia (USA). The purchase costs for the American affiliate of the previously acquired IAL ltd. totaled F 453k (including F 55k incidental purchase costs). The initial consolidation took place following takeover of the control of the company, on January 1, The purchase price was paid with ISRA shares, without raising capital. The shares were subject to a lock-up period. With this acquisition carried out, ISRA expanded its position as a global innovation and market leader in the glass industry, broadening its presence in the USA percent of Parsytec AG was acquired on July 23, The per-share purchase price was 5.65 Euros cash. All remaining shareholders were made a compulsory offer for the same price at 5.65 Euros per share. As of September 30, 2007, the purchase costs for the Aachen company totaled F 30,583k (including F 229k incidental purchase costs) for the % of the shares successively acquired to that point. The company was incorporated into the consolidated financial statement for the first time on July 23, Parsytec AG is a leading supplier of surface inspection systems for the production of sheet materials and is specialized in the metal and paper industries. Because of Image Automation Ltd. s and Image Automation Inc. s marginal total assets at the time of acquisition, the information provided below about their book values before the acquisition and about their amounts of assets and liabilities applied at the time of acquisition have been combined with Parsytec AG s figures at the time of the acquisition. Before the acquisition, the goodwill had a book value of F 870k; the fair value totaled F 21,750k. Under the heading of other intangible assets, the book value came to F 55k before the acquisition; the fair value came to F 4,238k. The tangible assets had a fair value of F 230k; the book value came to F 398k.Before the acquisition, the inventory had a book value of F 2,969k; the fair value totaled F 3,076k. The fair value of the trade accounts receivable totaled F 4,974k; the book value before the acquisition was F 5,430k. Before the acquisition, the other short-term assets had a book value of F 1,712k; their fair value totaled F 1,746k. The deferred tax assets have been assessed at a fair value of F 3,474k; their book value before the acquisition was F 3,115k. Before the acquisition, the provisions had a book value of F 2,797k; the fair value totaled F 4,725k. The liabilities had a fair value of F 5,697k; their fair value totaled F 5,144k before the acquisition. The cumulative profit of the completed mergers contributed to the consolidated net income after minority interests, before internal group charges and before offsetting internal exchanges of services, over two million Euros. If the completed corporate mergers had taken place at the beginning of the year, a reliable statement about the group s results and profit development would have been possible; however, because the acquired companies have differing fiscal years, there are no audited annual financial statements for the period ending September 30, 2006.

43 41 3. Accounting and valuation principles The Company prepares its consolidated financial statements in line with the International Financial Reporting Standards/International Accounting Standards (IFRS/IAS) of the International Accounting Standards Board (IASB). Unless otherwise indicated, all figures are based in thousands of Euros (F k). Previously, the company voluntarily presented its consolidated income statement according to the cost of sales-oriented total operating revenue-ebitda/ebit pro forma account method typical for the industry; the company is now also publishing its consolidated income statement according to the IFRS cost of sales method. The company decided not to use the less informative total cost (type of expenditure) method according to IFRS. The most significant consequences of the changes to the consolidated income statement are as follows: Profit margins increase because they now relate to the revenue and no longer to the total operating revenue (revenue plus capitalized development expenditure). Capitalized development expenditure no longer appears in the IFRS cost of sales method and is assigned to the R&D functional area. Depreciation and amortization is now spread over the relevant functional areas. (a) Fundamental principles of accounting and assessment Percentage of completion method (POC) for evaluation of work in progress according to IAS 11 According to IAS 11 and in connection with IAS 18, sales and corresponding profits may be realized according to the percentage of completion method insofar as the requisite conditions have been fulfilled. The percentage of completion is defined in line with the status of the work conducted by analyzing in detail the status of order processing in relation to current expenditure, compared with the currently assessed total order expenditure which is to be expected. Orders are listed under receivables from deliveries and services. If accumulated services (order cost and profit/loss) in exceptional cases exceed advance payments they will be listed in the form of activated product orders as future receivables from product orders accruing from deliveries and services provided. According to IAS 12, tax deferrals on losses carried forward must be capitalized as future tax reduction claims if it is probable that they will be utilized. Expenses for in-house product and software development according to IAS 38 According to IAS 38, expenditures on product development must be capitalized and depreciated over the standard useful life. The conditions for capitalization were examined and found to be fulfilled. Only development costs not comprising any research portion were capitalized. The capitalized developments in the reporting year are written off on a linear basis over the course of its useful life generally six years. The developments finished in the course of the year were depreciated in installments during the year. Non-completed development work is written off after completion. The corresponding depreciation is recorded as a cost under research and development in the consolidated income statement (see also Notes, part 9). The retention of the accounting value is ensured by a continuous process of monitoring and support of development projects. The capitalized accounting values annually undergo an impairment test to check their sustainability by determining their equivalent cash value. Unscheduled depreciation are undertaken as soon as the value of capitalized developments exceeds the equivalent cash value. Pension obligations in accordance with IAS 19 The evaluation of pension obligations in accordance with IAS 19 is done in line with the projected unit credit method under consideration of future increases to salary and pensions (IAS 19). Accounting of share-based remuneration transactions in line with IFRS 2 Stock-based remuneration from the stock option programs for employees which has been settled in cash after the end of the lock-up period has been booked as a liability. Personnel expenditures and the resultant liabilities must be entered in the balance sheet pursuant to IFRS 2. (b) Discretionary decisions When applying balance sheet and valuation methods, the corporate management made some discretionary decisions. When drawing up the balance sheet for the pension obligations, the company chose to apply the corridor method. If the company had chosen another calculation method, this might, under certain circumstances, have had an impact on the amount of pension accruals and on the amount of time and effort for personnel.

44 42 (c) Estimates The preparation of consolidated financial statements requires that assumptions or estimates be made which have an effect on the methods used in compiling the consolidated balance sheet and/or the consolidated income statement. The actual figures may deviate from these assumptions and estimates. Essentially, assumptions and estimates concern the valuation of accruals and inventories, the sustainability of the goodwill and the likelihood that the receivables or deferred tax assets will be realized. (d) Consolidation In addition to ISRA s individual financial statements, the consolidated financial statements include the individual financial statements of its subsidiaries, which were also prepared in line with the provisions of the IFRSs/IASs. As a rule, the date of initial consolidation is the date upon which ISRA gained the controlling interest. During initial consolidation, only the hidden reserves and charges attributable to ISRA s interest as the parent company are disclosed. An assets-side difference which cannot be attributed to individual assets is recorded as goodwill. In accordance with IFRS 3 (business combinations), goodwill is no longer written off on a scheduled basis Transactions between consolidated companies are eliminated during consolidation. The Industrial Automation and Surface Vision segments, as in the previous year, were defined as cash generating units. (e) Currency conversion The national currencies of the consolidated companies are their functional currencies. The Group currency is the euro. The functional currency of the Company s US subsidiaries is the US dollar. When preparing the consolidated financial statements, the individual financial statements are converted into Euro; balance sheet items are converted using the mean exchange rate on the balance sheet date, whereas the items of the consolidated income statement are converted at the average exchange rate. Currency differences from conversion are recorded as equity so that they will not affect the net profit for the period and are only realized when the relevant financial interest is sold. Foreign currency entries in the individual financial statements are converted during the year in which they occur into the functional currency of the consolidated companies. Currency-based gains or losses have been entered at the daily exchange rate and converted at the yearend exchange rate in the income statement. (f) Realization of sales and other revenue Sales are recorded at the point of time at which the goods are delivered or the services are provided. (g) Corporate and product-related advertising The costs of corporate and product-related advertising are recorded as expenses at the time they are incurred. (h) Research costs Research is the search for new insights that are intended for use in developing new products and processes as well as in improving existing ones. Costs arising in this context are carried as expenses at the time they are incurred. (i) Goodwill, impairment test, software and other intangible assets The goodwill derived from acquiring companies is calculated from the difference between the purchase price and the identifiable assets and equity. The sustainability of derivative goodwill and intangible assets with a limitless useful life are reviewed once a year in the context of the impairment test. Impairments tests are also conducted if there is any indication of a decrease in value. For the company divisions representing the primary segments, the value in use is determined using DCF models and then used as the basis for the impairment tests. The intangible assets identified when purchasing a company are subject to scheduled depreciation over their envisaged useful life or at most until the right expires. Software that has been acquired against payment is capitalized and written off over a normal useful life of four years. Other intangible assets that have been acquired against payment are carried at their acquisition cost and are subject to planned depreciation over their envisaged useful life or at most until the right or license expires. (j) Cash and cash equivalents The financial resources in the cash flow statement comprise checks, cash and credit balances at banks. (k) Trade receivables and other assets Trade receivables and other assets are carried at their recoverable amount. Possible bad debts are taken into account by way of individual allowances. Other assets include receivables from employee travel advances and other assets. Contracted work requiring expenditure on engineering, installation and start-up is evaluated by the percentage of completion method and recorded in the balance sheet as receivables from deliveries and services provided, in accordance with the rules of the IFRSs/IASs.

45 43 (l) Inventories The items are valued at purchase and production cost or at the lower market price on the balance sheet date. Elements of production expenses are material costs, direct production costs, overheads for materials and production and depreciation of equipment. Financing and sales and marketing costs are not included in the manufacturing costs. An averaging method is applied to calculate expenditure on the consumption of materials. (m) Tangible assets Technical equipment and office fittings are carried on the balance sheet at their acquisition or production cost less planned depreciation. The costs of borrowing are carried as an expense at the point in time at which they are incurred. This also applies to repair and maintenance costs. Planned depreciation is calculated using the straight-line method over the expected useful life of the respective assets. The useful life of the assets to be written down is shown in the following table: Expected useful life Technical equipment Office equipment/furnishings Buildings 4 years 3 10 years 40 years (n) Unscheduled depreciation/amortization Unscheduled depreciation/amortization is undertaken when the anticipated reimbursements from assets do not cover the residual net asset value. (o) Trade payables and other payables Trade account payables and other liabilities are carried at their cost of repayment. These are exclusively current items, so that discounting is not required. (p) Financial liabilities Financial liabilities arose in the reporting year to the Baden-Württembergische Bank AG. (q) Other accruals Accruals were made for liabilities recorded on the balance sheet date which are the result of past economic activities, in an amount which, it was felt after careful assessment, would cover the amount most likely to become payable. (r) Deferred taxes Taxes are deferred according to the balance sheet-oriented liabilities method. According to this method, differences existing on the balance sheet date between the valuation according to the IFRSs/IASs which follows the commercial law and the valuation according to tax law for assets and liabilities are to be taken into account by deferring tax assets or liabilities. This requires that the different valuation either decreases or increases the future taxable income. The period under review is not limited. In the case of deferred tax assets, the possibility of tax losses carried forward is also taken into account. The amount is capitalized to the extent to which realization of this amount is regarded as being realistic on the balance sheet date. The Company and its subsidiaries are legally independent units and their registered offices are not at the same location. This means that the parent company and its subsidiaries are subject to different fiscal jurisdictions. Generally, netting out of tax assets and liabilities is only possible within the same fiscal jurisdiction. (s) Other taxes Other taxes solely comprise motor vehicle tax this is shown under Other operating expenses. (t) Allocations from public authorities These grants are recorded according to plan upon reception as receipts to cover for arising expenses in the given field under Other operational revenue. In the event of grants being awarded for investments, the grant is accounted as a liability and amortized over the envisaged useful life of the capital goods. (u) Financial instruments Financial instruments are contractual commercial operations that imply a claim on money. Pursuant to IAS 32, this includes original financial instruments, primarily cash and cash equivalents, salable securities, trade receivables, trade payables and other receivables and payables, as well as loans. The recognition and evaluation criteria for these items have been disclosed in the respective appendices.

46 44 Financial instruments have been categorized as either debts or equity capital, in line with the content of the contractual agreement. Interest, dividends, earnings and losses affiliated with the financial instruments or with one of their components that can be classified as a financial liability have been recorded in the income statement as expenditures or earnings, respectively. As of the balance sheet date, there are no derivative financial instruments used to hedge against risks from changes in the exchange and interest rates. (v) Balancing the leasing contracts As of the balance sheet date, there are only leasing contracts in the form of operating leasing contracts since the primary financial risks and opportunities fall on the lessor. This means that the lessee does not have carry out any capitalization. The leasing installments have been expensed in the income statement as incurred linearly across duration of the leasing contract. There are no leased assets to be considered as asset purchases with long-term financing (financing leasing). Notes 1. Cost of materials with changes to inventory of goods Oct. 1, 2006 to Oct. 1, 2005 to (in F thousand) Sept. 30, 2007 Sept. 30, 2006 Expenditure on raw materials, ancillary materials and supplies 14,934 12,002 Expediture on purchase of services Changes to inventory of goods 2,210 1,293 Total 13,096-10, Total personnel costs Oct. 1, 2006 to Oct. 1, 2005 to (in F thousand) Sept. 30, 2007 Sept. 30, 2006 Salaries and wages 20,170 16,142 Social security contributions 2,291 2,171 Total 22,461 18, Total depreciation/amortization Oct. 1, 2006 to Oct. 1, 2005 to (in F thousand) Sept. 30, 2007 Sept. 30, 2006 Depreciation on intangible assets 4,252 4,649 Tangible assets Total according to inventory of assets 4,787 5,208 Of the depreciation/amortization of intangible assets, F 2,965k (previous year: F 3,527k) is accounted for by capitalized developments that have been depreciated over a period of six years after their completion. 4. Financial result Oct. 1, 2006 to Oct. 1, 2005 to (in F thousand) Sept. 30, 2007 Sept. 30, 2006 Interest income Interest expense Net interest income

47 45 5. Tax expenses The tax expenses shown in the income statement are attributable to Germany and foreign countries as well as to current tax expenses and deferred tax expenses as follows: Oct. 1, 2006 to Oct. 1, 2005 to (in F thousand) Sept. 30, 2007 Sept. 30, 2006 Taxes on current income Germany Other countries ,112 1,175 Deferred tax expenditure Germany 326 2,437 Other countries ,505 Total 786 3,681 The tax charges, based on the tax rate applicable to ISRA as a parent company, and the actual tax charges of the Group can be reconciled as follows: (in F thousand) Sept. 30, 2007 Sept. 30, 2006 Earnings before tax 6,325 9,963 Expected tax expenses on earnings based on the tax rate of the parent company (39,3 %) 2,486 3,915 Effect of tax rates appiled to earnings in other countries Consolidation effect and other effect 2, Recorded tax on earnings 786 3,681 In the year under review, the corporate tax rate totaled 25 %, plus the solidarity tax of 5.5 % of the corporate tax. This resulted in an effective corporate tax rate of 26.4 %. Taking into account the business taxes which came to 12.6 % after allowing for their tax deductibility this resulted in an overall tax rate of around 39.3 %. As a consequence of the corporate tax reform starting in 2008, this overall tax rate will be reduced to around %. The reduction of the tax rate had already been taken into account when calculating the deferred taxes for the German companies. This produced deferred tax revenues of F 2,157k. The deferred taxes in the individual financial statements for ISRA LLC, ISRA VISION SYSTEMS INC., INNOMESS Corp., NANOsystems LLC, ISRA SURFACE VISION Inc., ISRA Image Automation Inc. and ISRA VISION Ltd. (formerly Image Automation Ltd.) were calculated based on a tax rate of 30 %. For ISRA VISION (Shanghai) Co. Ltd. a 15 % tax rate of was applied. A uniform tax rate of % was applied for the German Parsytec group. 6. Trade receivables (in F thousand) Sept. 30, 2007 Sept. 30, 2006 Trade receivables of the parent company 4,146 3,609 Trade receivables of German subsidiaries 10,621 4,736 Trade receivables of subsidiaries based outside Germany 2,317 2,151 Receivables from unfinished contracts according to the percentage of completion method 14,575 13,111 Balance sheet value 31,659 23,606 The devaluations for receivables disclosed as other operating expenses were made exclusively on a case-by-case basis. The audit of the receivables disclosed on the balance sheet date did not result in any other recognizable risks for the Company s receivables. Advance payments already received in the amount of F 1,918k (previous year: F 2,024k) have been deducted from the receivables from unfinished orders evaluated on the percentage of completion basis.

48 46 7. Inventories The inventories include: (in F thousand) Sept. 30, 2007 Sept. 30, 2006 Raw materials and supplies 4,987 2,941 Work in progress 8,531 6,500 Finished products 2,420 1,466 Advance payments outgoing 1 0 Balance sheet value 15,939 10, Other assets The other assets comprise the following items: (in F thousand) Sept. 30, 2007 Sept. 30, 2006 Loans to employees and other receivables from employees Insurance claims (employer s pension liability insurance) Receivables from tax authorities 2, Rent deposits Other assets Balance sheet value 4,554 1, Intangible assets The intangible assets include: Software, Capitalized (in F thousand) Goodwill licenses developments Total Acquisition and production costs October 1, ,954 12,079 19,925 46,958 Additions 21, ,298 29,645 Additions from acquisitions 0 4, ,238 Disposals Transfers Currency differences September 30, ,600 16,889 27,197 80,686 Depreciation/Amortization October 1, ,047 3,973 8,450 14,470 Additions 0 1,287 2,965 4,252 Additions from acquisitions Disposals Transfers Unscheduled depreciation Appreciation Currency differences September 30, ,017 5,243 11,403 18,664 Balance sheet value intangible assets October 1, ,907 8,106 11,475 32,488 September 30, ,582 11,645 15,794 62,022 Under software and licenses, the purchased software, the license costs and the intangible assets purchased in the context of the acquisition, in so far as these were identifiable when the purchase price was allocated, are shown.

49 47 The cumulative depreciations on the capitalized developments come to a total of F 11,403k (previous year: F 8,450k); depreciations from the year under review account for F 2,965k (previous year: F 3,527k). The goodwill impairment test is conducted based on the cash generating units (CGU) by comparing the amount recoverable with the book value, in which case the amount recoverable is based on the value in use. The value in use has been calculated using a modified discounted cash flow method, which is subject to the following premises: The cash flows depend on the management s current planning For the periods going beyond the planning, growth rates of 2.5 % have been assumed. 7.6% is used as a base for the Weighted Average Cost of Capital (WACC). The impairment tests have not resulted in the need for a long-term asset impairment. ISRA VISION AG records the amortization expense for intangible assets in the positions of cost of sales (revenue), research and development, and sales and general administrative costs, according to the use of the intangible asset. As of September 30, 2007, there were no contractual obligations to acquire intangible assets. 10. Fixed assets Total fixed assets: Real estate, Technical Office Assets under (in F thousand) buildings equipment equipment construction Total Acquisition and production costs October 1, ,308 1,131 3, ,429 Additions Additions from aquisitions Disposals Transfers Currency differences September 30, ,255 1,313 4, ,816 Depreciation October 1, , ,748 Additions Additions from aquisitions Disposals Transfers Unscheduled depreciation Appreciation in value Currency differences September 30, , ,044 Balance sheet value intangible assets October 1, , , ,681 September 30, , , ,773 As of September 30, 2007, there were no contractual obligations to acquire fixed assets.

50 Liabilities to banks As of the balance sheet date, ISRA had long-term bank liabilities in the sum of F 4,200k to the Baden-Württembergische Bank for the financing of R&D expenses. The money comes from the ERP Innovation Program of the Reconstruction Loan Corporation (Kreditanstalt für Wiederaufbau). Furthermore, as of the balance sheet date, ISRA had short-term bank liabilities totaling F 25,200k to the Baden-Württembergische Bank to finance the acquisition of Parsytec shares. The shares were assigned to Parsytec AG as collateral. As of September 30, 2007, the weighted average interest rate for bank liabilities totaled 4.8 % (previous year: 3.4 %). 12. Trade payables Trade payables total F 6,023k (previous year: F 4,039k). The liabilities are paid off regularly, taking full advantage of discount terms offered. The liabilities are not subject to interest payments. 13. Other accruals Other accruals include the following items: Of which due within Sept. next fiscal (in F thousand) Oct. 1, 2006 Additions Utilizations Release 30, 2007 year Warranties 258 2,536 1, ,098 1,098 Employees industrial compensation society Contributions for severely handicapped persons/mutual Benefit Association for Pension Security Other accruals Balancd sheet value 373 3,121 2, ,402 1,402 In order to cover its warranty obligations ISRA VISION AG creates accruals of approx % of its sales revenues for sales subject to warranty obligations in any given fiscal year. 14. Tax accruals Accruals for tax charges have been accumulated to cover the taxable earnings recorded in the respective Company financial statements, in the amount of the expected tax charges. Of which due within Sept. next fiscal (in F thousand) Oct. 1, 2006 Additions Utilizations Release 30, 2007 year Tax accruals 854 1, ,471 1,471 Balance sheet value 854 1, ,471 1, Deferred income items In relation to advance payments from customers in association with maintenance contracts, an item for deferred income has been introduced to cover the remaining duration of the contracts. This deferred income item will be amortized over the remaining duration of the contracts. A grant has been awarded by a structure support program for innovative companies. The grant subsidizes jobs and the investments connected with them. Part of the grant went toward making investments. This part of the grant is included under deferred income item and is to be amortized over the envisaged useful life of the subsidized investments. The subsidy not yet amortized totaled F 120k (previous year: F 161k) as of September 30, 2007.

51 Other liabilities September 30, 2007 September 30, 2006 (in F thousand) short-term long-term short-term long-term Payables to banks 25,200 4, ,200 Wages & salaries, performance bonus payments as well as related social insurance contributions and remaining holiday entitlements 3, ,430 0 Turnover tax 1, Other liabilities 17, ,033 0 Balance sheet value 47,327 4,200 6,178 1,200 No accrued interest was deducted from these items, which are exclusively current in nature. The other liabilities concern amongst others a debt to the Clearstream Bank for the purchase of the stocks connected with the obligatory buy-back offer to the shareholders of Parsytec AG; they also have to do with additional other liabilities. 17. Deferred taxes The calculation of the deferred taxes is based on average profit tax rates of 30.9% for Germany and 30% for USA. The deferred tax assets result primarily from existing tax losses carried forward from the domestic (inside of Germany) subsidiaries. (in F thousand) September 30, 2007 September 30, 2006 Intangible assets 7,252 6,140 Inventories 2,272 2,574 Receivables, POC 5,263 5,948 Other items Deferred tax liabilities 10,558 9,644 Deferred tax assets 3, As of September 30, 2007, the tax losses carried forward for Parsytec AG came to 21.4m Euros; there were no deferred tax assets set aside for 10.4 million Euros of the tax losses carried forward. The Executive Board has assessed the usability of the losses carried forward based on corporate planning for the years Accruals for obligations to employees The accruals for obligations to employees in association with the company pensions plan, have been evaluated on the basis of the so-called projected unit credit method (current once-off premium payment procedure) in accordance with IAS 19. As part of this process, the values of the defined benefit obligation (DBO) and the current service cost are calculated precisely for each individual case. The pension obligations were calculated using the mortality tables published by Dr. Heubeck in The evaluation for ISRA VISION Lasor is based on the following premises: interest on borrowings 5.20 %, trend of salary increases 2.50 % p.a., trend of increase in pensions 1.75 % p.a. An employer's pension liability insurance has been taken out and is not regarded as part of the available assets for planning purposes. In the consolidated income statement, the interest costs of F 40k and amortization of F 6k have been taken into account, minus the pension payments already being paid, amounting to F 23k. For Parsytec, the calculations were based on the following premises: interest on borrowings 5.30 %, trend of salary increases 2.00 % p.a., trend of increase in pensions 1.75 % p.a. Interest costs of F 7k were taken into account in the consolidation income statement. Accruals for (in F thousand) obligations to employees Previous year October 1, Incoming Parsytec Service Cost 4 19 Interest Cost Amortizations 6 14 Pension payments September 30, ,

52 Equity a) Share capital The Company s share capital as of the balance sheet date totals F 4,337,940.00; divided into bearer shares of F 1.00 par value. Equity developed as follows during the current fiscal year: At the beginning of the fiscal year, the issued capital amounted to F 4,337, In addition, the General Meeting held on March 20, 2007 resolved an amendment to the Articles of Association. This amendment authorizes the Executive Board to increase the Company s share capital until March 19, 2012 once only or on multiple occasions by issuing new no-par value shares against cash or non-cash contributions, up to a maximum amount of F 2,168, (authorized capital). The Executive Board is authorized, with the agreement of the Supervisory Board, to exclude the statutory subscription rights of shareholders - for residual amounts, - to secure shares in return for contributions of fixed assets, in particular in the context of mergers with other companies or the purchase of other companies, parts of companies or of an interest in other companies. - if the capital increase takes place by means of an equity contribution and the issued value is not, at the time of the final determination of the issued value by the Executive Board, significantly less than the share price of the shares of a similar nature and scope which are already quoted on the stock markets, when judged in terms of the provisions of Clauses 203 Paragraphs 1 and 2 and 186 Paragraph 3 sentence 4 of the German Stock Corporation Law (Aktiengesetz) and the amount of the capital stock attributable to the shares issued under exclusion of the statutory subscription rights does not exceed F 433, and 10% of the recorded capital stock at the time of the issue of the new shares. Realization of stocks have to be charged against this 10% limitation of capital stock if they come to effect due to authorization under shareholder exception from subscription according to Section 71 paragraph 1 clause 8 (German Stock Corporation Law (Aktiengesetz-AktG) in connection with clause 186 paragraph 3 sentence 4 of the German Stock Corporation Law (Aktiengesetz-AktG). In addition, stocks issued to service bonds under option and/or conversion right shall be charged to the 10% limitation of capital stock if the bonds were issued with the exclusion of subscription rights because an authorization applicable at the moment the this authorization takes effect takes the place of this one, as found in section 186 paragraph 3 clause 4 of the German Stock Corporation Law (Aktiengesetz). The Executive Board is authorized, subject to agreement by the Supervisory Board, to determine the further details of implementing the increase in capital stock from the authorized capital. On the basis of a resolution passed by the General Meeting on March 28, 2006, ISRA VISION AG may conditionally increase its capital by F 250, by issuing up to 250,000 no-par value bearer shares to implement an employee equity compensation plan (conditional capital). On the basis of a resolution passed by the General Meeting on March 20, 2007, the capital stock may conditionally be increased by up to F 1,918, no-par value bearer shares (conditional capital II). The conditional capital increase may only be carried out to the extent that the holder of convertible or negotiable option bonds, issued on the basis of the authorization given to the Executive Board by the general meeting on March 20, 2007, makes use of this conversion or option right, or to the extent that the holders obliged to make the conversion fulfill their obligation to undertake the conversion. b) Capital reserves The capital reserves primarily contain share premiums from the initial public offering and capital increases; expenditures from corporate actions were also charged to the capital reserves. As of September 30, 2007, the capital reserves had increased to F 37,168k (previous year: F 37,082k). This change resulted from the joint combination of the capital reserves due to a capital increase executed at Parsytec AG in the course of securing shares from the employee stock option program in which ISRA was not going to participate. (c) Minority interests The minority interests in the equity capital comprise the portion of the equity capital, of the consolidated annual financial statement and of the currency exchange variations recognized directly in equity that is to be allocated to the minority shareholders of the group company Parsytec AG, which was acquired in the 2006/2007 fiscal year.

53 51 d) Currency exchange variations The currency exchange variations in the equity capital serve to record the differences that result from the conversion of the currency in the financial statements of foreign subsidiaries. The balancing items for currency exchange variations increased in the 2006/2007 fiscal year by F 379k to F 1,152k. In the 2006/2007 fiscal year, ISRA paid out dividends amounting to F 651k. This corresponds to a dividend on F 0.15 per share. 20. Other financial liabilities These liabilities relate to mid- and long-term leases of buildings and rentals of motor vehicles, the telephone system as well as of office fittings. The resulting liabilities (in F k) are as follows: Expenses during the years in F thousand 2007 to ,900 After Sept. 30, Expenses in the year under review 1,616 There were no liabilities from investment projects already started on the balance sheet date. There are compensation-related hypothetical liabilities to the Management in the amount of around F 755k. The leasing contract on the building for ISRA SURFACE VISION GmbH in Herten includes a purchasing right in favor of ISRA SURFACE VISION GmbH. Future minimum leasing payments due to operate-lease contracts that cannot be terminated in F thousand Up to one year 240 Longer than a year and up to five years 961 Longer than five years 801 The basis for the definition of the conditional leasing payments is the leasing of the building for its use as a production site and as the new SURFACE VISION headquarters in Herten. 2,407 m 2 of office space, a 924 m 2 production hall and parking spaces have been leased. The lease began on February 1, 2006 and expires after 10 years; an extension to the lease of a further seven years is possible. Measures that increase the costs of the lease or overheads may only be carried out with the approval of ISRA SURFACE VISION GmbH. The stipulated lease has increased because of the actual construction costs, which have exceeded the planned construction costs due to changes that ISRA made to the plans. Rent expenditures in the 2006/2007 fiscal year from the operate lease relationship totaled F 203k. 21. Observations on consolidated capital flow calculation The cash and cash equivalents comprise cash in hand and bank deposits available on short notice. An amount totaling F 1,680k and one totaling F 375k were deposited as security. The acquisition of companies in the reporting year resulted in a reduction of liquidity amounting to roughly F 17,878k (previous year: F 116k). Company Acquisition Acquisition Cash assets at time (in F thousand) coasts Funds flow of acquisition Type of payment Parsytec AG 30,593 22,047 4,509 to be paid in cash ISRA VISION Ltd, 1, to be paid in cash Image Automation Inc to be paid in shares The corporate acquisition of Image Automation Inc. was paid for in ISRA shares that were able to be attained on the market.

54 Transactions with associated companies or related parties In a lease dated August 12, 1998 the Company leased administration, storage, and development premises at the Company's registered office in Darmstadt from ISRA Bau-Mitarbeiter-Beteiligungsgesellschaft GbR, Darmstadt. The spouse of the Chairman of the Executive Board of ISRA VISION AG, Mrs. Ines Ersü, and a member of the Executive Board, are partners in this GbR (civil corporation). The lease has a fixed initial term of ten years it may not be terminated during this period. The rent totals F 9,714 per month plus a lump-sum charge for ancillary services of F 767. The terms and conditions of the lease correspond to those that would have been agreed with a third party. 23. Personnel On average during the fiscal year 2006/2007, the number of employees stood at 300 (previous year 273). In the reporting year In the previous year Employees Temporary personnel Total Stock option program As a publicly traded company, ISRA VISION AG has a singular opportunity to have its employees participate directly in its success via a stock option program. The conditions for option rights, according to the old stock option program, on shares of ISRA VISION AG were laid down on the basis of the authorization given by the General Meeting on March 16, 2000 and are as follows: Options may only be issued to members of the Executive Board, managers and employees of ISRA VISION AG and companies in the ISRA VISION AG Group. At the beginning of the reporting period, there were 45,319 options owing. No options were issued in the reporting period. 4,644 options were exercised at an average subscription price of F There were no stock option rights forfeited. No options expired in the reporting period. As of September 30, 2007, 40,675 options were owing, of which 40,675 are exercisable. The fair value of all options totaled F 233k (previous year: F 514k) as of September 30, To that effect, accounts payable as of September 30, 2007 were booked as liabilities, allowing reduced personnel costs to be accounted for. Options may only be exercised after a lock-up period has expired. According to the stock option program, the options can be exercised for either cash or shares; however, ISRA VISION AG s internal practice tends towards offering cash for stock options. An option holder s options expire if the option holder has terminated the employment relationship with the Company, or if they are a member of a statutory body of ISRA VISION AG or of a group company. Irrespective of this, options remain in force unchanged if the employment relationship ends due to the employee retiring or owing to professional disability. Options cannot be inherited or transferred. In addition, option rights expire 5 years after the day they are issued. Options may only be exercised if at least one of the two predefined targets for success has been reached. These align with the stock performance in relation to purchase price and time of exercise. The subscription price for a share is given by the arithmetic average of the closing prices in XETRA trading for the share in the period between the 15th and 5th stock market day (before the option is issued) multiplied by a factor of 1.1. The Executive Board is authorized to define the further details of the subscription conditions and of the issue and structure of the options. In addition, the Managing Board is authorized to transfer the shares needed to fulfill the option rights by issuing acquired treasury shares or via new shares by way of a capital increase which is to be implemented. Insofar as members of the Managing Board are affected, the further details will be defined by the Supervisory Board. 25. Subsequence events At the beginning of the 2007/2008 fiscal year, ISRA VISION AG took over the German company Metronom Automation GmbH. The Mainzbased company, who does business in the sensors, measurement technology and special software sectors, strengthens the Automotive business unit. The 14-people strong company with an EBT margin of an estimated 20 % was acquired for three million Euros and ISRA shares for the management valued at F 800k.

55 53 On December 14, 2007, the special general meeting of the subsidiary Parsytec decided to delist the company from the stock exchange. The remaining shareholders were offered cash compensation of F 5.65 per share. ISRA VISION AG is expecting the delisting to provide ample opportunities to reduce costs from the discontinuation of the listing on the stock exchange. 26. New IFRS standards to be voluntarily applied In addition to the aforementioned accounting and valuation principles whose use was mandatorily required for the first time in the 2006/2007 business year, the IASB published additional IFRS and IFRIC standards whose use will be mandatory at some point in the future. Companies have been expressly authorized and recommended to start applying these standards voluntarily beforehand. ISRA is, however, not making use of this option. IAS 1: IAS 1: Presentation of financial statements additional information about the capital of the company (compulsory for fiscal years starting January 1, 2007) Presentation of financial statements improvement of the analysis and comparability of annual financial statements for their users (compulsory for fiscal years starting January 1, 2009) IFRS 7: Financial instrument disclosures (compulsory for fiscal years starting January 1, 2007) IFRS 8: Operating segments (compulsory for fiscal years starting January 1, 2009) IFRIC 10: Interim financial reporting and impairment (compulsory for fiscal years starting November 1, 2006) IFRIC 11: Group and treasury share transactions pursuant to IFRS 2 (compulsory for fiscal years starting March 1, 2007) IFRIC 12: Service concessions (compulsory for fiscal years starting January 1, 2008) IFRIC 13: Customer loyalty programs (compulsory for fiscal years starting July 1, 2008) IFRIC 14: IAS 19 The limit of a defined benefit asset, minimum funding requirements and their interaction (compulsory for business years starting January 1, 2008). The Executive Board is not expecting the application of these standards to have any effects on the consolidation financial statements in future reporting periods. The following standards are relevant to the consolidated financial statement: IAS 1: IFRS 7: IFRS 8: The revised IAS 1 standard compulsory for fiscal years as of January 1, 2007 will require additional information from the company with regard to objectives, strategies and processes related to capital management. Furthermore, the company will have to provide quantitative data on the scope of the capital concept and information regarding the capital requirements. The new IFRS 7 standard combines the disclosure requirements for financial instruments. The standard requires the financial instruments to be separated into classes of similar instruments. Information must be disclosed at the level of these classes. Primarily, information must be provided about the significance of the financial instruments and the type and extent of the risks associated with the financial instruments, particularly quantitative and qualitative information about credit, liquidity and market risks. This standard will replace IAS 14, which has until now been the authoritative standard for segment reporting. Instead of a risk and reward approach, the new IFRS 8 standard takes a management approach to segment reporting. According to this, the segment definition is no longer geared towards product/services or customer groups, but instead towards the group s internal organizational/reporting structure. Thus, even sectors that are not on the external market can be recorded as potential segments. IFRS 8 furthermore requires the segment information to be aligned to the internally reported figures for the purposes of budgeting and performance review. To that effect, the foregoes defining the terms revenue, expenditure, asset and liability, instead requiring an explanation of these terms from the reporting company. 27. Earnings per share The earnings per share calculated according to IAS 33 is based on the division of the period result attributable to the parent company of F 5,121k (previous year: F 6,283k) by the 4,337,940 (previous year: 4,147,226) shares on average circulating during the fiscal year. There is no difference between the diluted and undiluted earnings per share because there was no dilution. The weighted average of the shares in circulation could not be established since the number of shares remained unchanged in the year under review. In the previous year, the weighted average of the shares in circulation totaled 4,147,226.

56 Notifications in accordance with Section 21 I and Ia of the German Securities Trading Act (WpHG) ISRA VISION AG has been informed of shareholdings in accordance with Section 21 paragraph 1 or paragraph 1a of the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG). The contents of the notifications are contained in the annex to the individual accounts. 29. Declaration on the Corporate Governance Code As the only publicly listed companies currently included in the consolidated annual financial statement, ISRA VISION AG and Parsytec AG have submitted the Declaration of Compliance prescribed by Section 161 of the German Stock Corporation Law (Aktiengesetz) and have made it accessible to shareholders. 30. Auditors fee (in F thousand) Reporting year Previous year Audit of annual accounts Other certification and evaluatory services 0 0 Tax advisory services 0 0 Other services Sum total Supervisory Board Dr.-Ing. h.c. Heribert J. Wiedenhues, Lahnstein Deputy Chairman of the Supervisory Board of MASA AG, Andernach; Deputy Chairman of the Supervisory Board of PM International AG, Speyer; member of the Administrative Board of PM International AG, Luxemburg; member of the Advisory Board of BERGROHR GmbH, Siegen; member of the Advisory Board of Capiton Piping GmbH, Essen; member (Chairman) of the Advisory Board of VITRULAN GmbH, Marktschorgast, Chairman of the Supervisory Board (since September 2007) Dr. Wolfgang Witz, attorney-at-law, Frankfurt, Deputy Chairman of the Supervisory Board, with additional Spervisory Board responsibilities within Troester GmbH & Co. KG, Hannover, and TET System Holding GmbH & Co. KG, Heidelberg, vice-chairman of the Supervisory Board Prof. Dr. rer. nat. Dipl.-Ing Henning Tolle, University Professor emeritus., Rossdorf, (former Chairman of the Supervisory Board from February 28, 2000 to September 2007) Dr. Dieter Willasch, Physicist, M.Sc., formerly Spokesman of Executive Board of Spectris AG Sensoren und Systeme, Eningen Stefan Müller, Königsbrunn, Senior Consultant to the Board of Management of KUKA Roboter GmbH (since July 12, 2007) Prof. Dr. Folker Weißgerber was appointed to the Board on October 5, 2006, as per the authorization of the municipal court. Prof. Dr. Folker Weissgerber was Adjunct Professor of Manufacturing Strategies in Automotive Engineering at the Technical University of Chemnitz and President of the Chemnitz Management Institute of Technology (C-MIT). (from October 5, 2006 to August 25, 2007) The following member of the Supervisory Board left the Board during the reporting period: Gordon Riske, Chairman of the Managing Board Deutz AG, Cologne; with additional Supervisory Board responsibility within Drägerwerk AG, just May 23, The following business relations exist between the members of the Supervisory Board and the Company: Dr. Wolfgang Witz is a partner of the law firm Allen & Overy, Frankfurt am Main. Allen & Overy provides the Company with advice with respect to stock and stock exchange law and corporate acquisitions. Executive Board Y. Enis Ersü, Darmstadt (Chairman) Hans Jürgen Christ, Ober-Ramstadt (Deputy Chairman) Werner Rothermel, Alsbach-Hähnlein Dr. Johannes Giet, Eggenstein

57 55 Payments to the members of Executive and Supervisory Board The payments to the members of the Executive Board include a variable compensation amounting to up to 30 % of the basic pay, in individual cases. They are annually revised by the Supervisory Board on the basis of targets. Payments to the executive board totaled F 725k in the fiscal year (previous year: F 660k). The total share options issued as of September 30, 2007 come to 4,579 stock options (previous year: 5,227). The fair value for these stock options totaled F 28,801 as of the balance sheet date (previous year: F 53,158). In the fiscal year, no new option rights were granted. The cost of the utilized options is included in the remuneration of the Executive Board. The payments to the members of the Supervisory Board for their activities totaled F 53k. Details of shares held by members of the Executive Board and of the Supervisory Board: No. of shares No. of shares Executive Board as per Sept. 30, 2007 Supervisory Board as per Sept. 30, 2007 E. Ersü* 1,002,794 Prof. Dr. H. Tolle 900 H.-J. Christ 60 * The number of shares held by Mr. Ersü corresponds to the proportion of shares held personally by Mr. Ersü in EVWB GmbH&Co KG. Darmstadt, January 23, 2008 ISRA VISION AG The Executive Board List of significant share ownership as of September 30, 2007 Indirekt Name and location of the company Share (percent) investment via no. Parent company ISRA VISON AG, Darmstadt, Germany Shares in associated companies 1. ISRA VISION LLC, Sterling Hights/Michigan, USA a), b) ISRA VISION SYSTEMS INC., Lansing/Michigan, USA ISRA SURFACE VISION GmbH, Herten, Germany INNOMESS Corp., Chicago/Illinois, USA b) ISRA VISION LASOR GmbH, Oerlinghausen, Germany ISRA SURFACE VISION INC., Duluth/Georgia, USA NANOsystems LLC, Gainsville/Georgia, USA b) , ISRA VISION GmbH, Darmstadt b) ISRA VISION (Shanghai) Co. LTD., Shanghai, China ISRA VISION SYSTEMS OF CANADA Inc., Windsor, Canada b), c) ISRA VISION Ltd., London, Great Britain Image Automation Inc., Columbus, USA Parsytec AG, Aachen, Germany Parsytec Computer GmbH, Aachen, Germany Parsytec Solutions GmbH, Erkelenz, Germany Parsytec Japan Co., Ltd., Tokio, Japan Parsytec Asia/Pacific Co., Ltd., Seoul, South Korea Parsytec Inc., Chicago, USA Parsytec Ltd., Hampshire, Great Britain a) Holding company b) Not operationally active c) Equity not paid in

58 56 Reproduction of the Auditor s Report We have audited the consolidated financial statements, comprising the consolidated balance sheet, the consolidated income statement, the consolidated cash flow statement and the consolidated statement of changes in equity, as well as the management report, prepared by ISRA VISION AG, Darmstadt, for the business year from October 1, 2006 to September 30, The preparation of the consolidated financial statements and the management report in accordance with IFRS, as to be applied in the EU, and supplementary according to the accounting principles of Clause 315a para. 1 of the German Commercial Code (HGB) are the responsibility of the company s legal representatives. Our responsibility is to express an opinion about the consolidated financial statements and the management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with Clause 317 of the German Commercial Code (HGB) and generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW). These standards and regulations require that we plan and perform the audit in such a manner, that inaccuracies and violations which have a material impact on the presentation of the status of the Group with respect to its assets and its financial and profit situation as given by the consolidated financial statements prepared under consideration of the principles of accounting to be applied can be detected with sufficient certainty. Knowledge of the business activities and the economic and legal environment of the Group and expectations concerning possible errors are taken into account in the determination of the audit procedures. The effectiveness of the internal system for the control of accounting principles, and the evidence supporting disclosures in the consolidated financial statements and the management report are mostly examined on a test basis within the framework of the audit. The audit includes the assessment of the annual financial statements of the companies incorporated in the consolidated statement, of the composition of the companies included in the consolidated statement, of the accounting principles used and of significant estimates made by the legal representatives, as well as an evaluation of the overall presentation of the consolidated financial statements and the management report. We believe that our audit provides a reasonable basis for our assessment. Our audit has not led to any reservations. Due to our assessment based on the results of our audit, the consolidated financial statements are in accordance with IFRS, as to be applied in the EU, and supplementary according to the accounting principles of Clause 315a para. 1 of the German Commercial Code (HGB), and, considering these rules, provides a suitable understanding of the Group s actual assets and its financial and profit situation. The management report complies with the Consolidated financial statements, gives a true and fair view of the Group s situation and describes chances and risks of its future development appropriately. Frankfurt am Main, January 23th, 2008 P K F P a n n e l l K e r r F o r s t e r G m b H Wi r t s c h a f t s p r ü f u n g s g e s e l l s c h a f t W. Hofmann R. Brinskelle Auditor Auditor

59 Locations Europe America Asia Germany - Aachen - Darmstadt (Headquarter) - Karlsruhe - Herten - Oerlinghausen Italy - Rovereto UK - London - Hampshire Belgium - Brussels Turkey - Istanbul USA - Atlanta - Lansing - Columbus - Chicago Brazil - Sao Paulo China - Beijing - Shanghai Japan - Tokyo Korea - Seoul Taiwan - Taoyuan Disclaimer Forward-looking statements This annual report contains forward-looking statements that reflect management s current views with respect to future events. Such statements are subject to risks and uncertainties that are beyond ISRA VISION AG s ability to control or estimate precisely, such as future market and economic conditions, the behavior of other market participants, the ability to successfully integrate acquired businesses and achieve anticipated synergies and the actions of government regulators. If any of these or other risks and uncertainties occur, or if the assumptions underlying any of these statements prove incorrect, then actual results may be materially different from those expressed or implied by such statements. ISRA VISION AG does not intend or assume any obligation to update any forward-looking statements to reflect events orcircumstances after the date of these materials. Variances for technical reasons For technical reasons (e.g. conversion of electronic formats) there may be variances between the accounting documents contained in this annual report and those submitted to the electronic Federal Gazette (Bundesanzeiger). In this case, the version submitted to the electronic Federal Gazette shall be binding. Both language versions of the annual report can be downloaded from the internet at An interactive online version of the annual report for the media is also available on our website in both languages. On request we would be pleased to send you further copies and additional information about the ISRA VISION AG free of charge. Telephone Fax or investor@isravision.com

60 ISRA VISION AG Industriestraße Darmstadt Germany Tel. : +49 (6151) Fax: +49 (6151) investor@isravision.com info@isravision.com