29 March Unless otherwise indicated, the data in this report are valid as at 31 December 2007.

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1 Corporate Governance General This report complies with the SWX Swiss Exchange corporate governance guidelines of 17 April 2002 and 29 March Unless otherwise indicated, the data in this report are valid as at 31 December Corporate structure and shareholders 1.1 Group structure Operational Group structure As of 31 December 2007, the Group s operational structure comprised five divisions Heating Technology and Sanitary Equipment, Kitchens and Refrigeration, Windows and Doors, Steel Technology and Surface Technology in addition to the Finance, Controlling and Reporting function and the Corporate Center (cf. organisation chart on page 15). The company reports in line with IFRS on the basis of this structure. Pages 33 to 61 of this report contain descriptions of the divisions. Basis of consolidation The companies that make up the basis of consolidation of AFG Arbonia-Forster-Holding AG, based in Arbon (Canton Thurgau), are listed in the financial section on page of this report. The interests held in the Group companies by the Group are detailed also on these pages. The bearer shares of AFG Arbonia-Forster-Holding AG are listed on the SWX Swiss Exchange under valor number /ISIN CH Information about market capitalisation can be found in the information for investors also on page 152. The registered shares of AFG Arbonia- Forster-Holding AG are not listed on the stock exchange. Besides AFG Arbonia-Forster-Holding AG, none of the other companies that make up the basis of consolidation are listed on a stock exchange in Switzerland or abroad. 1.2 Major shareholders in % 31/12/ /12/2006 Voting share Capital share Voting share Capital share Edgar Oehler There were no disclosures as per Swiss stock exchange law during the year under review. AFG Arbonia-Forster-Holding AG is aware that Dr. Edgar Oehler, Balgach (Canton St. Gallen), holds 61.1 % of the votes and 26.9 % of the capital of the company. As far as the company is aware, there are no pooling agreements involving major shareholders. 1.3 Cross-participations AFG Arbonia-Forster-Holding AG does not hold more than 5 % of the votes or the equity of any other Group company and vice versa.

2 Capital structure 2.1 Capital The ordinary and the authorised capital of AFG Arbonia-Forster-Holding AG is detailed in provision 47 of the notes to the consolidated financial statements on page 128. AFG Arbonia-Forster-Holding AG has no conditional capital / Category Voting share in % Number Nominal value in CHF Share capital in CHF Voting share in % Number Nominal value in CHF Share capital in CHF Registered shares Bearer shares Total Details of authorised capital The Annual General Meeting held on 20 April 2007 authorised the Board of Directors to increase the share capital of AFG Arbonia-Forster-Holding AG by 20 April 2009 by a maximum of CHF 1,890, through the issue of up to 315,015 fully paid-up bearer shares with a par value of CHF 4.20 each, and up to 675,000 fully paid-up registered shares with a par value of CHF 0.84 each. On the basis of this authorisation, on 3 May 2007 the share capital of AFG Arbonia-Forster-Holding AG was increased by CHF 945, through the issue of 157,507 bearer shares with a par value of CHF 4.20 each and 337,500 registered shares with a par value of CHF 0.84 each (cf. 2.3 below) and the authorised capital was adjusted accordingly. On this basis, the Board of Directors is still authorised to increase the share capital of AFG Arbonia-Forster-Holding AG by 20 April 2009 by a maximum of CHF 945, through the issue of up to 157,508 fully paid-up bearer shares with a par value of CHF 4.20 each and up to 337,500 fully paid-up registered shares with a par value of CHF 0.84 each. Within the defined maximum, the increase may be carried out in one or more tranches. The Board of Directors is authorised to fix the issue price, the time at which shareholders become eligible for payment of dividends, and the type of deposits. Shareholders are entitled to subscribe, although the Board of Directors may issue new shares via the bank or a consortium in conjunction with an offering to the existing shareholders. The Board of Directors shall decide on any allocation of unexercised rights in the interests of the company. The acquisition and transfer of the new registered shares is restricted as per Article 5 of the articles of association. 2.3 Changes in capital On the basis of the 20 April 2007 provision of the articles of association on the increase in authorised capital, on 3 May 2007 AFG Arbonia-Forster-Holding AG issued 157,507 bearer shares with a par value of CHF 4.20 each and 337,500 registered shares with a par value of CHF 0.84 each, thus increasing the capital by CHF 945, The authorised capital declined by the same amount (cf. 2.2 above). Otherwise there has been no further change in the company s capital in the last three reporting years ( ).

3 2.4 Shares and participation certificates The company has issued 3,037,500 registered shares and 1,417,567 bearer shares. The registered shares have a par value of CHF 0.84 and the bearer shares a par value of CHF A holder of registered shares has five times the votes of holders of bearer shares for any given share of the capital. The company has not issued participation certificates. 2.5 Profit-sharing certificates The company has not issued profit-sharing certificates. 2.6 Limitation on the transfer of registered shares and registration of shareholders The transfer of registered shares requires the consent of the Board of Directors. The Board of Directors may refuse consent provided AFG offers to acquire the shares for itself or for another shareholder or third party at their actual value at the time of the request. Consent may also be refused if the purchaser does not submit a declaration that he/she is purchasing the registered shares in his/her own name and for his/her own account. Registered shares acquired by a trust or a domiciliary company will only be entered in the ledger if the identity of the beneficial owner is made known to the company. If the shares were acquired through inheritance, distribution of an estate, a matrimonial regime, compulsory enforcement or merger, the company can only deny the application for approval if it offers to buy the shares from the acquirer at their actual value. No exceptions were granted to these principles in the year under review. The rules on the transferability of registered shares can only be changed by a resolution of the Annual General Meeting, approved by at least two thirds of the voting shares represented and the absolute majority of the nominal share value represented. There is no restriction on the transferability of listed bearer shares. There are no percentage or Group clauses. Accordingly there are no rules on the registration of nominees either. 2.7 Convertible bonds and options There are no convertible bonds or options issued by AFG Arbonia-Forster-Holding AG outstanding.

4 Board of Directors of AFG Arbonia-Forster-Holding AG 3.1 Members of the Board of Directors The Board of Directors of AFG Arbonia-Forster-Holding AG consists of the following members: Edgar Oehler (1942, Swiss citizen, resident in Balgach, Canton St. Gallen), Ph.D. (PR), executive member, Chairman of the Board of Directors and CEO since 13 October 2003 (for details of powers see 3.5 below) Member of the Swiss National Council; member of several parliamentary committees; Editor-in-Chief of the daily newspaper Die Ostschweiz ; General Manager of AFG Arbonia-Forster-Holding AG; Chairman of the Swiss Cigarette Industry Federation, CISC FR; owner, and since 1998 Chairman and Managing Director of STI Surface Technologies International Holding AG, Steinach (Canton St. Gallen); since 2003 Chairman of the Board of Directors and CEO of AFG Arbonia-Forster-Holding AG. Ernst Buob (1946, Swiss citizen, resident in Rorschacherberg, Canton St. Gallen), Ph.D. (Law), attorney-at-law, nonexecutive member of the Board of Directors since 13 October Partner in the law firm Bratschi Wiederkehr & Buob, St. Gallen. Dr. Ernst Buob has never been part of the executive management of AFG Arbonia-Forster-Holding AG or its affiliated companies. However, material business relationships with the company exist through the work of the law firm Bratschi Wiederkehr & Buob for AFG Arbonia-Forster-Holding AG and its affiliated companies. Arthur Loepfe (1942, Swiss citizen, resident in Appenzell, Canton Appenzell Innerrhoden), Ph.D. (Econ.), non-executive member of the Board of Directors since partner and employee of BSG Business Consulting St. Gallen; economic director of the Canton of Appenzell Innerrhoden; since 1999 member of the Swiss National Council. Dr. Arthur Loepfe has never been part of the executive management of AFG Arbonia-Forster-Holding AG or its affiliated companies. He has no material business relationships with AFG Arbonia-Forster-Holding AG or its affiliated companies. Andreas Gühring (1963, German citizen, resident in Saarbrücken, Germany), degree in engineering, since 2005 nonexecutive member of the Board of Directors representing holders of bearer shares Head of Industrial Engineering at Hydac GmbH; CEO of Valeo GmbH; CEO (Technology) of ThyssenKrupp Federn GmbH; CEO of Brose Fahrzeugteile GmbH & Co. KG; CEO of ThyssenKrupp Drauz Nothelfer GmbH in Heilbronn CEO of ThyssenKrupp Drauz Nothelfer GmbH in Heilbronn; since 2007 CEO of Knorr-Bremse Systeme für Nutzfahrzeuge GmbH, Munich. Andreas Gühring has never been part of the executive management of AFG Arbonia- Forster-Holding AG or its affiliated companies. He has no material business relationships with AFG Arbonia-Forster-Holding AG or its affiliated companies. Paul Witschi (1943, Swiss citizen, resident in Rüschlikon, Canton Zurich), degree in engineering, since 2006 nonexecutive member of the Board of Directors Head of Exports and Divisional Head at Luwa AG, Uster (Canton Zurich); Head of Group Marketing and member of the Management Board of Luwa AG; Head of International Sales and Marketing and member of Group Management of the Geberit Group, Rapperswil-Jona (Canton St. Gallen). Paul Witschi has never been part of the executive management of AFG Arbonia-Forster-Holding AG or its affiliated companies. He has no material business relationships with AFG Arbonia-Forster-Holding AG or its affiliated companies.

5 3.2 Other activities and interests Edgar Oehler Member of the Board of Directors of Bank für Tirol und Vorarlberg Aktiengesellschaft, Innsbruck, Austria; member of various boards of companies and foundations in Switzerland and abroad. Ernst Buob Chairman of the Board of Directors of Moser Holding AG, Innsbruck; member of the Board of Directors of Hälg Holding AG, St. Gallen, and Media Punkt AG, Zurich; member of various boards of companies and foundations in Switzerland and abroad. Arthur Loepfe Member of the Board of Directors of Appenzeller Alpenbitter AG, Appenzell (Canton Appenzell Innerrhoden), Brauerei Locher AG, Appenzell (Canton Appenzell Innerrhoden), Gressel AG, Aadorf (Canton Thurgau), and Blumer-Lehmann AG/Holzwerk Lehmann AG, Gossau (Canton St. Gallen); member of various boards of companies and foundations in Switzerland. Andreas Gühring Member of the Board of Directors of Hasse & Wrede CVS Dalian, China Ltd. Dalian, China. Paul Witschi Member of the Board of Trustees of Avenir Suisse; member of the Board of Directors of Reichle & De- Massari AG, Wetzikon (Canton Zurich); member of the Board of Directors of WMH Walter Meier Holding AG, Stäfa (Canton Zurich); member of various boards of companies abroad. 3.3 Election and term of office The members of the Board of Directors are generally elected by the ordinary general meeting for a period of three years. The first term of a member of the Board of Directors equals the remaining mandate of the member he/she has replaced, if applicable. The members of the Board of Directors may be re-elected an indefinite number of times. At the 2006 Annual General Meeting, Dr. Edgar Oehler, Dr. Ernst Buob and Dr. Arthur Loepfe were all re-elected to the Board of Directors. At an extraordinary general meeting of the holders of bearer shares, Andreas Gühring was appointed as the Board representative of the holders of bearer shares, and was subsequently elected at the Annual General Meeting. Paul Witschi was elected to the Board of Directors for the first time at the 2006 Annual General Meeting. The terms of office of the current members are as follows: First elected Term expires Edgar Oehler Ernst Buob Arthur Loepfe Andreas Gühring Paul Witschi

6 Internal organisation Division of duties within the Board of Directors The Board of Directors is presided by its Chairman, Dr. Edgar Oehler, who is also Managing Director and Chief Executive Officer. Vice-Chairman of the Board of Directors is Dr. Ernst Buob. The Board of Directors is supported by an Audit Committee and a Remuneration and Nominations Committee Board committees Each committee has a written charter, approved by the Board of Directors, laying down its powers and responsibilities and working procedures. The Board of Directors appoints the members and chairs of the committees Audit Committee The Audit Committee meets at the invitation of the Chairman as often as business requires. The Audit Committee is composed of three independent members, all of whom have experience in finance and accounting. The Audit Committee reviews the effectiveness of the external and internal auditors, reviews the internal control system, reviews the financial reports and the performance, fees and independence of the external auditors. The Audit Committee has comprehensive rights of inspection and information in carrying out these duties. The Audit Committee can order investigations and consult external advisors. Otherwise the Audit Committee s duties consist in monitoring and controlling, preparing individual items and putting motions before the full Board of Directors for its decision. Since the 2006 Annual General Meeting the Audit Committee has comprised the following members: Arthur Loepfe, Chairman Paul Witschi, Deputy Chairman Andreas Gühring, member The Audit Committee met twice during the year under review. The members of the Board of Directors who are not members of the Audit Committee attended both meetings, which lasted around two hours on average, in an advisory capacity. Each meeting heard the Chief Financial Officer (CFO) and brought in the external auditor to discuss specific items. The Secretary General took responsibility for the minutes Remuneration and Nominations Committee The Remuneration and Nominations Committee meets at the invitation of the Chairman as often as business requires. In accordance with the Swiss Code of Best Practice for Corporate Governance valid as of 1 January 2007, during the year under review most of the members of the Remuneration and Nominations Committee were independent. The Remuneration and Nominations Committee approves the Group s remuneration policy and lays down compensation for members of Group and top management. Its other duties consist in drawing up the basis for decisions by the full Board of Directors and proposing the corresponding motions. The Remuneration and Nominations Committee determines principles for selecting candidates for election to the Board of Directors and Group Management, identifies suitable candidates for the Board of Directors, and conducts the selection procedure. The full Board of Directors decides on the appointment and dismissal of members of Group Management; the Annual General Meeting decides on the appointment and dismissal of members of the Board of Directors.

7 During the year under review the Remuneration and Nominations Committee comprised the following members: Edgar Oehler, Chairman Andreas Gühring, Deputy Chairman Paul Witschi, member In line with the Swiss Code of Best Practice for Corporate Governance valid as of 1 January 2008, with effect from the 2008 financial year the Remuneration and Nominations Committee will comprise only independent members, namely: Paul Witschi, Chairman Andreas Gühring, member The Remuneration and Nominations Committee met twice during the year under review. The members of the Board of Directors who are not members of the Remuneration and Nominations Committee attended both meetings in an advisory capacity. The CFO and the Secretary General attended the meetings on a case-by-case basis Working procedures of the Board of Directors The Board of Directors meets at the invitation of the Chairman as often as business requires, and at least three times a year. During the year under review the full Board of Directors met for seven ordinary meetings and one extraordinary meeting. During the year under review most of the duties of the Board of Directors were carried out by the full Board of Directors (see and above for details of the working procedures of the committees of the Board of Directors). Before their meetings, members of the Board of Directors receive documentation enabling them to prepare properly to deal with the items on the agenda. As a rule the ordinary meetings of the Board of Directors last one day. Members of Group Management, Executive Management and other employees, and representatives of the external auditors and external consultants are invited as necessary to deal with specific issues. 3.5 Division of powers The Board of Directors is responsible for guiding, supervising and monitoring the Executive Management of the company. It is responsible for approving and regularly reviewing company strategy, enacting the necessary rules, instructions and guidelines, and establishing the organisation and risk policy of AFG Arbonia-Forster-Holding AG. It is also responsible for supervising and monitoring the persons entrusted with running the company. The Board of Directors has designated Dr. Edgar Oehler as Managing Director; he simultaneously heads Group Management as Chief Executive Officer (CEO). The division of powers between the Board of Directors, Group Management and Divisional Management is set out in detail in the articles of association, by-laws and division of powers and responsibilities of AFG Arbonia-Forster-Holding AG. Within the framework of the law and the articles of association, and based on the by-laws and division of powers and responsibilities, the Board of Directors has delegated the management of the Group to Group Management. Group Management has limited powers to decide on its own affairs and on applications from the divisions.

8 Group Management information and control instruments The Board of Directors is kept regularly informed about the activities of Executive Management and the divisions via a number of different channels: The management information system (MIS) provides the members of the Board of Directors with fundamental information about the financial, income and risk situation of the Group on a monthly basis. The external auditors provide the Board of Directors with written and spoken information on the main findings of the audit. The CEO oversees the members of Group Management who report to him and ensures compliance with the law, the articles of association and regulations throughout the Group. He reports to the Board of Directors on a regular basis, and immediately in the event of extraordinary developments. The members of Group Management are regularly involved in the meetings of the Board of Directors. Added to this, the CFO is heard at all meetings of the Audit Committee. The members of the Board of Directors may demand any additional information they need to carry out their tasks. 4 Group Management 4.1 Members of Group Management The Group Management of AFG Arbonia-Forster-Holding AG comprises the following members: Edgar Oehler (1942, Swiss citizen), Ph.D. (PR), Chairman of the Board of Directors and Managing Director and CEO at the Head of Group Management since 13 October Felix Bodmer (1955, Swiss citizen), lic. oec. HSG, Chief Financial Officer (CFO) since 1 June 2003; various positions at Hilti Group in finance and controlling, latterly Head of Finance and Controlling at a German subsidiary; ABB/Alstom, Commercial Director/CFO of group companies, latterly CFO/Head of Shared Services at Alstom Power (Schweiz) AG; CFO of Steiner Group. Knut Bartsch (1968, German citizen), degree in industrial engineering, Divisional Spokesman of Heating Technology and Sanitary Equipment Division since 1 May 2004; Assistant Corporate Manager at Preussag AG/TUI AG; with Kermi GmbH since 1997, Director since Thomas Gerosa (1949, Swiss citizen), business economist, Director of Windows and Doors Division since 1 May 2004; since 1972 various positions at EgoKiefer AG, Director from 1987 to 2004, and from 1 May 2004 Managing Director and CEO. 4.2 Other activities and interests Thomas Gerosa since 2000 Chairman of the Board of Directors of Alpha Rheintal Bank, Heerbrugg (Municipality of Balgach, Canton St. Gallen). 4.3 Management agreements AFG Arbonia-Forster-Holding AG has not signed any management agreements with companies or natural persons outside the Group.

9 5 Compensation, shareholdings and loans 5.1 Procedure for establishing and setting compensation and share-based payment programmes The compensation of the members of the Board of Directors is not tied to their performance, and is determined by the Board of Directors itself in accordance with the articles of association. The members of the Board of Directors receive a fixed (and no variable) fee for all the work they do for the Board of Directors. This covers all preparations for and attendance at ordinary and extraordinary meetings of the Board of Directors, the Audit Committee and the Remuneration and Nominations Committee. There are no share-based payment programmes for the members of the Board of Directors. The Remuneration and Nominations Committee is responsible for defining the Group s remuneration policy and setting the salaries of members of Group Management. The committee reviews the salaries of members of Group Management every year to ensure they are appropriate. The remuneration of members of Group Management (excluding the CEO) consists of a base salary and a performancerelated component. In principle, 75 % of the salary of members of Group Management consists of a fixed component and 25 % of a variable component. The amount of the variable component depends on the achievement of targets defined by the Board of Directors. If a member of Group Management meets his or her targets fully, he or she receives a variable payment (nominal bonus) laid down in an individual agreement. In the best case the variable payment corresponds to double the nominal bonus, and in the worst case no variable component is paid at all. The targets are calculated on the basis of the following components: the EBIT of the division headed by the member of Group Management in question (50%), the EBIT of the Group (30%) and the achievement of personal objectives (20%). These personal objectives primarily concern soft skills such as management and social skills, staff motivation and coaching, conflict management, etc. The amount of this performance-related payment is set by the Remuneration and Nominations Committee at the request of the CEO on the basis of the bonus regulations. There are no share-based payment programmes for members of Group Management (excluding the CEO). The remuneration of the CEO consists of a base salary and a performance-related component. The amount of the performance-related component is set by the Remuneration and Nominations Committee in the absence of the person concerned. In 2007 the Board of Directors approved the introduction of a share-based payment plan for the CEO. 45,500 registered shares of AFG Arbonia-Forster-Holding AG have been allotted under this plan, whose aim is to bind the CEO to the company and thus assure shareholder continuity in the coming years. In principle the employment contracts of members of Group Management do not contain severance pay or change in control clauses. There are no unusually long periods of notice, nor are employment contracts concluded for an excessively long fixed term. One member of Group Management was assured severance pay as part of a takeover on the condition that he stay with the company for a defined minimum period of time; this was done to ensure that this person stays with the company for the long term. Another member of Group Management has been granted in line with local practice an employment contract running until mid-2010 at the minimum, which is then subject to a nine-month period of notice. Apart from these exceptions, no member of Group Management has a period of notice of more than six months or entitlement to either remuneration in the event of a change in control ( golden parachute ) or severance pay. More information on compensation practice within AFG Arbonia-Forster-Holding AG can be found in the remuneration report on page 81.

10 Participatory rights of shareholders 6.1 Voting rights and voting by proxy The articles of association of AFG Arbonia-Forster-Holding AG contain no regulations that deviate from the law, and in particular no percentage limit on voting rights. Every share entitles the bearer to one vote. Every shareholder is entitled to be represented at the Annual General Meeting by a proxy furnishing written power of attorney. 6.2 Statutory quorum Under Article 13 (3) of the articles of association of AFG Arbonia-Forster-Holding AG, the rules on the transferability of registered shares can only be eased by a resolution of the Annual General Meeting, approved by at least two thirds of the voting shares represented and the absolute majority of the nominal share value represented. Otherwise, the articles of association of AFG Arbonia-Forster-Holding AG contain no regulations that deviate from the law. 6.3 Calling of Annual General Meeting The articles of association of AFG Arbonia-Forster-Holding AG contain no regulations that deviate from the law. 6.4 Requests for items to be put on the agenda Shareholders who hold at least CHF 1 million of nominal share capital have the right to request that an item be put on the agenda. Requests for items to be put on the agenda must be submitted to the Board of Directors in writing, specifying proposals, at least 40 days before the date of the Annual General Meeting. 6.5 Registration in share ledger Holders of registered shares whose names are entered in the share ledger of AFG Arbonia-Forster-Holding AG 30 days before the date of the Annual General Meeting receive direct invitations to the Annual General Meeting together with the list of proposals from the Board of Directors and admission tickets. 7 Change in control and protective mechanisms 7.1 Obligation to make a tender offer Article 6 of the articles of association of AFG Arbonia-Forster-Holding AG exempts the purchasers of shares from the obligation to make a tender offer as stipulated by sections 32 and 52 of the Swiss Stock Market Act (opting-out clause). 7.2 Change in control clauses AFG Arbonia-Forster-Holding AG has no arrangements or plans in favour of members of the Board of Directors and/or Group Management or other members of upper management that would constitute change in control clauses.

11 8 Auditors 8.1 Length of mandate and term of the auditor in charge PricewaterhouseCoopers AG, St. Gallen, has acted as the statutory auditor and Group auditor of AFG Arbonia-Forster-Holding AG since the 2006 financial year. Lorenz Lipp has held the position of the auditor in charge since Audit fees The various auditors billed a total of CHF 1,002,000 for auditing the 2007 statutory accounts and consolidated financial statements of AFG Arbonia-Forster-Holding AG and the financial statements of its affiliated companies. Of this amount, CHF 679,000 was paid to PricewaterhouseCoopers. 8.3 Additional fees In 2007, CHF 257,000 was billed for additional services by PricewaterhouseCoopers, the statutory and Group auditor, and other auditors of affiliated companies throughout the Group. Of this amount, CHF 212,000 was paid to PricewaterhouseCoopers. 8.4 Audit supervision and control instruments The Audit Committee monitors the professional qualifications, independence and performance of the external auditors on behalf of the Board of Directors, and reports to the Board of Directors on its findings. In the year under review, additional measures taken by the Audit Committee to oversee the activities of the external auditors included having the reports (statutory accounts, consolidated financial statements and management letters) explained directly by the external auditor. 9 Information policy AFG Arbonia-Forster-Holding AG pursues an open information policy with respect to the public and financial markets, based on the principles set out in SWX Swiss Exchange s listing rules and directives and in the Swiss Code of Best Practice for Corporate Governance. The annual report of AFG Arbonia-Forster-Holding AG provides information about the business, organisation and strategy of the Group. An integral part of the annual report is the report on remuneration on page 81. AFG s semi-annual report contains the profit and loss account, balance sheet and cash flow statement for the first six months of the financial year. In addition to this, AFG Arbonia-Forster-Holding AG gives comprehensive reports on its business at its annual press and analysts conference and at the Annual General Meeting. AFG s regularly updated website at and press releases on important events, provide additional information. AFG Arbonia-Forster- Holding AG also fosters dialogue with investors and the media at special events and roadshows.