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Xaar PLC (XAR)

  Print      Mail a friend       Annual reports

Thursday 15 March, 2007

Xaar PLC

Final Results

Xaar PLC
15 March 2007

FOR IMMEDIATE RELEASE                                           15 March 2007

                                    Xaar plc


Xaar plc ('Xaar'), the inkjet printing technology group headquartered in
Cambridge, announces its audited results for the year ended 31 December 2006.


• Results reflect temporary setback in China during mid-year and
  subsequent full recovery.

• The financial results for the year were:

  o  Turnover was £42.2m (2005: £42.8m);

  o  Adjusted profit before tax* was £7.9m (2005: £10.5m);

  o  Reported profit before tax was £6.9m (2005: £10.0m);

  o  Basic earnings per share were 7.9p (2005: 11.6p); and

  o  Net cash and cash equivalents at 31 December 2006 were £12.4m (2005:

• Investment in capital equipment, including the new manufacturing plant
  in Huntingdon, Cambridgeshire, was £7.3m during the year. The Huntingdon
  plant commenced production in January 2007, on time and on budget.

• Following a takeover approach from Danaher Corporation announced in
  November 2006, discussions were ended in February 2007.

• Proposed annual dividend per share increased 33% to 2.0p (2005: 1.5p).

  * stated before non-recurring costs associated with the approach from Danaher
    Corporation of £0.3m (2005: £nil) and cost of share options of £0.7m (2005:

On outlook, Chairman, Arie Rosenfeld stated :

'We continue to see industrial inkjet as a key enabling technology in both
printing and industrial markets and, as a market leader, we intend to remain at
the forefront of that development and growth.

'The actions we have taken during the past year have created a robust platform
for future growth for your company. Sales of our established products provide
Xaar with a sound and profitable base on which to build incremental sales of
Platform 2 and Platform 3 products in the years to come.'

For further information, please contact:

Xaar plc:
Ian Dinwoodie, Chief Executive; or today: 020-7367-8888
Nigel Berry, Group Finance Director and Deputy Chief Executive thereafter:

Bankside Consultants:
Steve Liebmann or Andy Harris 020-7367-8883 / 07802-888159



I am pleased to report on a year with two significant achievements for Xaar: we
commissioned a new factory on time and on budget and we saw a strong recovery in
sales in the closing months following a setback in China in the middle of the
year (see below). With volume sales of our new Platform 2 and Platform 3
products (the Xaar 760 and Xaar 1001 printheads) to look forward to, we go into
2007 confident about our prospects for the future.

Results and finance

Revenues for the year were marginally below those for 2005 at £42.2m (2005:
£42.8m). Product sales remained in line with the prior year at £39.9m (2005:
£39.9m), royalty revenues increased to £1.5m (2005: £1.3m) but development fees
were reduced to £0.8m (2005: £1.6m) as a result of a reduction in fees from
Agfa, following the successful launch of the co-developed Xaar 760 product, and
the sale of Vivid Print Innovations Inc. in March of 2006.

Adjusted profit before tax for the year was in line with expectations at £7.9m
(2005: £10.5m). This is stated before accounting for the cost of share options
and non-recurring costs relating to the approach by Danaher Corporation. After
providing for the cost of share options of £0.7m (2005: £0.5m) and non-recurring
costs of £0.3m (2005: £nil), the profit before tax was £6.9m (2005: £10.0m) and
earnings per share were 7.9p (2005: 11.6p).

Cash balances at the end of the year were £12.4m, a reduction of £2.0m from the
previous year end. This reflects the investment of £7.3m made in the year in
capital equipment, including the company's newest manufacturing plant in
Huntingdon, UK.

Dividend policy and dividend

With the major investment in the new plant in Huntingdon mostly complete and
having been funded from our own resources, the board is able to recognise the
importance of dividend payments to shareholders. Going forward, while taking
care to maintain a reasonable level of dividend cover in order to retain cash
for future investment in the business, there is now scope to increase the
proposed level of payment.

Accordingly, the board is pleased to recommend payment of an annual dividend for
2006 of 2.0p, an increase of 33% over the payment for 2005.


As highlighted in previous statements, trading in China during the third quarter
was affected adversely by the Chinese customs authorities' investigation into
three of Xaar's customers for alleged non-payment of import duties. Within
China, the impact of the investigation spread beyond those directly involved,
causing a general reduction in order levels leading to lower sales in the second
half of the year. At no time was Xaar itself implicated in the investigation.

We reacted swiftly to the situation by implementing new logistics arrangements
for the China market. Sterling pricing has also been introduced in this market,
significantly reducing Xaar's currency exposure to the US dollar. These new
arrangements have now been working well for some months and are detailed in the
Financial review. I am pleased to say that since the nadir in sales in July, we
have seen a sustained recovery and that we do not believe that we have lost
market share as a result of the issues, nor that the long term prospects for the
China market have diminished. We believe the end user markets for printing
equipment incorporating Xaar printheads remain robust.

Approach for the company

In October, whilst the company's share price was recovering from the issues
referred to above, we received an unsolicited approach from Danaher Corporation
of the USA with a possible offer for the company in the range of 200-220p per
share. After due consideration, the board rejected this approach as being
opportunistic and significantly undervaluing the company, its prospects and its
technology. After further discussions, Danaher outlined a second, informal,
offer which the board decided was not sufficiently different from the earlier
offer for it to be worthwhile continuing discussions. Accordingly, on 14
February 2007 the company announced that talks had been ended. Both of Danaher's
offers were highly preliminary and subject to certain conditions, including due
diligence. As a result of the approach, we incurred professional fees of £0.3m
which have been reported as a non-recurring item.

Market trends

Momentum continues to grow in digital printing applications in general and in
industrial inkjet in particular. The interest of large global companies in the
industrial inkjet market (as opposed to the desktop market, already dominated by
multinational businesses) intensified with Fuji Photo Film, of Japan, acquiring
Dimatix Inc., one of Xaar's competitors, and EFI Inc., of the US, acquiring both
Vutek - a manufacturer of large format graphics printers - and Jetrion Inc., a
smaller integrator using Xaar technology for the packaging market.

In the coming months and years, Xaar's growth will come from our latest
technology Platform 2 and Platform 3 printheads. These will significantly
broaden the number of end market applications which we address and strengthen
our overall competitiveness in the industry. Although some inkjet technologies
are now becoming proprietary, particularly for the desktop, overall the
commercial printing and industrial inkjet markets are still in their infancy. As
these expand and diversify, system developers will look increasingly to
dedicated inkjet suppliers for their key technologies and solution components.
We therefore continue to work with a number of partners to enable entry into
these new markets.

Second manufacturing plant

I am pleased to report that Xaar's second manufacturing plant, based in
Huntingdon, UK has been completed on schedule and on budget. Production
commenced in January as planned, with volumes expected to grow through 2007 and
into 2008. Initially this plant will produce the Platform 3 product, Xaar 1001.

Senior management

Andrew Taylor, currently Company Secretary and Group Financial Controller, has
been appointed Deputy Finance Director to allow Nigel Berry, Finance Director,
to devote more of his time to business and corporate development.


We continue to see industrial inkjet as a key enabling technology in both
printing and industrial markets and, as a market leader, we intend to remain at
the forefront of that development and growth.

The actions we have taken during the past year have created a robust platform
for future growth for your company. Sales of our established products provide
Xaar with a sound and profitable base on which to build incremental sales of
Platform 2 and Platform 3 products in the years to come.

Arie Rosenfeld
14 March 2007



After a strong year in 2005, progress in the current year was interrupted by the
events described in the Chairman's statement. We are confident that these
problems are behind us; sales in China have recovered fully and we can now look
forward to resumed growth in this market.

Our underlying business continues to develop well with three discrete platforms
of products, each targeted at a different end market. Whilst Platform 1,
particularly the Xaar 128, continues to dominate current sales, we expect
significant incremental business to be generated over the coming years by both
Platform 2 and Platform 3 products. These products will bring with them a
broader spread of business and will expand both market and geographic

As referred to in the Chairman's statement, during the year our second
manufacturing plant in Huntingdon, UK was completed on time and on budget;
production began as planned in January 2007 and, although production volumes
will begin modestly, we expect volumes to increase as we go through the year.

Product sales

Printheads and inks were once again the largest part of our business,
representing 95% of total group sales. Within this, our established Platform 1
products continue to represent the majority of revenues, with new and updated
versions of existing printheads gaining strong acceptance in the market.
Solvent-based inkjet printing for external advertising, digital UV printing for
sign-making and oil-based printing of outer case coding for packaging all
continue to develop and to establish themselves as mainstream printing
processes. Future revenues from Platform 2 and Platform 3 products are dependent
upon customers launching machines incorporating these printheads; we look
forward to such launches over the next one to two years.

Xaar's ink business continues to contribute positively to the group's results,
albeit modestly. To date, the largest market for the company's printhead sales
has been Asia and, in particular, China where its printheads are used for
printing solvent-based inks onto vinyl for the outdoor advertising market.
Solvent inks in Asia have now become commodity items, with prices falling
significantly over the last few years. As a result, our ability to generate
profitable revenue from ink in these circumstances is limited. As UV ink
applications become more widespread and customers launch higher resolution UV
printers for these markets - based on the Xaar 760 and Xaar 1001 printheads -
the opportunity to generate sustainable ink revenues from these applications
should increase.

Royalties and development fees

As expected, royalty receipts from our licensees continue to increase steadily.
Toshiba TEC, Konica Minolta and Seiko Printek are each growing their piezo
inkjet businesses, based on Xaar's technology. During the year these licensees
won a number of new supply contracts, increasing the volume of heads they
produce and, consequently, the royalties payable to Xaar. On the other hand,
development fees reduced in the year for two reasons; firstly, the Xaar 760
product successfully moved into production and hence the co-development fees
from Agfa for this initial stage of the project ended; secondly, Vivid Print
Innovations Inc., whose sales have previously been reported under development
fees, was sold to Xennia Technology Ltd, one of our integration partners, in
March 2006.

Geographic markets

The geographic split of sales reflects sales to our customers who are equipment
manufacturers. It does not detail where that equipment is finally sold and used.

For that reason, Asia remains our largest market, generating 57% of turnover.
Asia is now the world's leading centre for the manufacture of wide format
printing equipment. It is also a major end market for such equipment, but
increasing numbers of machines are now exported from Asia into other regions. In
the current year, due to the issues in China referred to above, sales to Asia
were down 6% compared to sales in 2005; we believe this to be only a temporary
downturn and expect growth to resume in 2007.

Europe and the Middle East is our second largest regional market, accounting for
35% of turnover in 2006 and recording growth of 7% over 2005. Growth was
tempered by one of our customers transferring production from Europe to the USA
during the year.

Sales to the Americas were flat year-on-year, despite the transfer of production
by one of our customers, referred to above. This is due to revenue of £0.5m
included in the 2005 comparative figure relating to Vivid Print Innovations
Inc., which was sold in early 2006. Excluding sales by Vivid, revenue from the
Americas grew by 18%. This figure includes good growth from South America, where
our office in Brazil has successfully enabled a number of South American
manufacturers to enter the wide and grand format printer market during 2006.

Looking forward, we expect growth in 2007 in all regions; Asian manufacturers
are likely to continue to gain market share in the existing grand format market
(served by our Platform 1 products), whilst in Europe and the Americas growth
will come from new printing applications based on Platform 2 and Platform 3

End user markets

The graphic arts market was again the largest market for Xaar's technology
during 2006. Sales to the graphics market represented 74% of total revenues.
Grand format digital printing, particularly for external advertising, continues
to grow. Faster turnover of advertising campaigns has become economically viable
due to the proliferation of lower cost solvent inks, especially in Asia. With
lower costs per square metre of print, campaigns are being changed more

Outer case coding accounted for 18% of sales, with growth of 21% in the year.
Industrial markets, where revenues are at an early stage, accounted for £1.1m,
or 3%, of total sales, up 22% over the previous year.

With Platform 2 and Platform 3 products now available, we expect to see
incremental revenues being generated in 2007 and 2008 from the high resolution
wide format market (posters and internal advertising), the narrow format web and
sheet fed market (labels and primary packaging) and from functional printing
(including printed electronics and 3D modelling).


Investment in research and development during the year totalled £5.4m or 13% of
revenue. Our spending on research and development covers all three product
platforms, as well as peripheral products and an ongoing level of pure research
into our core technology.

A major focus in the year has been the second manufacturing plant in Huntingdon,
UK. The first Platform 3 product, the Xaar 1001, was produced by the new plant
in January 2007 and volumes will be increased during the year as demand from
development partners and equipment launches begins to build. In addition to the
plant being delivered and commissioned on time, it was also accredited the
international quality systems standard BS EN ISO9001:2000 during January 2007.

Volume sales of the Xaar 760 to Agfa also began during the year. Although these
sales generate a lower gross margin than sales of other products, it should be
remembered that Agfa funded the development of the Xaar 760 and has also paid
for some of the production equipment used in its manufacture at our plant in

Overall, sales of Platform 1 and Platform 2 products, both of which are produced
in Sweden, grew during the year, but not by as much as we had initially planned
due to the issues in China. This resulted in a lower level of overhead recovery
than planned which, when combined with the commencement of lower margin sales to
Agfa, resulted in a lower gross margin for the year of 57% compared to 62% in
the previous year.

Priorities for the future

We have renewed confidence in the ongoing potential for our Platform 1 business.
Our newer Platform 2 and Platform 3 products provide the gateway to additional
markets and better geographic diversity. We now have a range of products which
allow us to develop a broader base to the business; our priority now is to
convert this potential into solid financial returns. We will be working closely
with our customers and development partners to achieve this and look forward to
seeing them launch printing equipment incorporating our new products during 2007
and 2008.


A special note of thanks to all our staff who, once again, have shown skill,
dedication and flexibility throughout a year which has at times been difficult.

Ian Dinwoodie
Chief Executive
14 March 2007


Trading for 2006

After a good start to the year, with sales in the first half up 12% over the
first half of 2005, sales in the second half of the year were affected adversely
by the investigation in China referred to in the Chairman's statement, although
at no time was Xaar itself implicated in the investigation. As a result of the
customs investigation, other customers in China took the opportunity to review
their own importation procedures and the level of orders from China fell whilst
these reviews were being undertaken. The impact of this slowdown was to reduce
sales in the second half of the year by 13% when compared to the second half of
2005. For the year as a whole, sales of printheads were flat compared to the
prior year, but the reduction in development fees referred to in the Chairman's
statement left total revenue down marginally at £42.2m (2005: £42.8m).

Sales to China have now recovered fully and the new trading arrangements
introduced towards the end of the year will reduce the likelihood of the same
issue occurring again in the future. Under these new arrangements, customers in
China now have two methods of purchasing from Xaar; they can buy direct and,
after payment of all applicable duties, collect their shipments from a bonded
warehouse in Shanghai run by an international logistics company; or, again after
payment of all appropriate duties, they can purchase products within China from
a provincial government backed distribution company based in Nanjing. Both these
new methods of supply are working well. As part of the new arrangements, Xaar
has implemented Sterling invoicing for sales to China and in the first half of
the year also moved customers for direct sales back to cash trading terms. The
effect of these actions has been to reduce the company's exposure to the US
dollar and to improve working capital.

Gross margin for the year was lower than the prior year at 57% (2005: 62%). This
was due largely to reduced production levels and correspondingly lower overhead
recovery, together with the commencement of lower margin shipments to Agfa.
Increased volumes of production in future periods should recover this situation.
However, with effect from January 2007 we will begin to incur costs for the new
plant in Huntingdon; the annual fixed cost of the plant is £2.5m. For the year
ahead, this cost will be only partially covered by sales of the Xaar 1001 in
what will be its first year of commercial release. These costs will be reported
in 'cost of sales' which in the short term will hold back recovery in gross

Overheads, excluding the cost of share options and non-recurring items,
increased by 5% during the year to £16.5m (2005: £15.7m). Adjusted profit before
tax for the year (before the cost of share options and non-recurring items), was
£7.9m (2005: £10.5m). After providing for the cost of share options of £0.7m
(2005: £0.5m), and for non-recurring items of £0.3m (2005: £nil), profit before
tax was £6.9m (2005: £10.0m). The inter-company loan between the UK and Sweden
was fully repaid during the year with no material impact on profit (2005: loss
of £1.0m) and no effect on cash.

Taxation for the year was £2.1m (30%) (2005: £3.0m, 30%), resulting in earnings
per share for the year of 7.9p (2005: 11.6p).

Foreign currency

The move away from US dollar invoicing for sales to China has removed the
majority of the group's exposure to the US dollar, although some exposure
remains on sales to the US. The group has an exposure to the Swedish kronor due
to the need to fund its production operations in Sweden. The company hedges this
exposure using forward exchange contracts, usually on a rolling twelve month
basis; these contracts are fully IFRS compliant.

Cash and capital expenditure

Cash at the end of the year was £12.4m (2005: £14.4m). Cash is stated after
higher than usual capital expenditure on assets and investments of £11.1m (2005:
£5.2m). The major part of the capital expenditure in the year related to the
group's new manufacturing plant in Huntingdon, in which an investment of £4.7m
has been made. The total value of capitalised research and development costs on
the balance sheet at the end of the year was £6.5m. This balance will be
amortised over the next five years.

Additional financing in the year of £1.0m was taken out relating to certain
equipment in the new Huntingdon plant, bringing the outstanding balance on
equipment financing at the end of the year to £1.8m (2005: £1.2m). This
represents the group's only debt.

Working capital improved by £1.2m during the year due largely to the return to
cash trading terms for direct sales to China.


The board is recommending an increased annual dividend for the year of 2.0p per
share (2005: 1.5p), an increase of 33%. The payment is covered four times,
against eight times for the prior year. Subject to the approval of shareholders
at the Annual General Meeting (AGM), the annual dividend will be paid on 15 June
2007 to shareholders on the register at the close of business on 16 May 2007.

Business development

We continue to develop new markets for Xaar's technology. Some are already
generating early commercial revenues, but will only ramp significantly once the
Xaar 1001 solution becomes widely available. Whilst early feasibility testing
has used other Xaar printheads, the Xaar 1001 will provide the performance which
our development partners in sheet and web fed applications require to progress
further. With the 1001 now beginning commercial shipments, we expect to see
several of these projects come to fruition over the next twelve months.


Interest in inkjet from the packaging printing market is initially focused on
labelling and the short run requirements for cans, aerosols and other rigid
packages. We have active projects in all these areas involving both
multinational brand owners, web and sheet fed equipment suppliers and,
increasingly, the major analogue ink companies. This latter group are keen to
find digital inkjet equipment to distribute, bundled together with their new
digital inks. Xaar's integration partners are playing an increasing role in this
area and now have distribution agreements in place with ink companies covering
web-based label printing systems and CD printers. We look forward to their
continued success in the year to come.

Interest in the use of Radio Frequency Identification (RFID) for packaging
applications remains strong, and one company already offering a digital RFID
printing system is Conductive Inkjet Technology Ltd. (CIT), based in Cambridge.
CIT offers a commercial roll-to-roll direct write system for printing conductive
metals onto non-porous substrates.

Printed electronics

Inkjet has already made inroads into this market in the area of coatings and
colour filters for LCD production, and the early stage printing of OLED
materials. In addition, inkjet manufactured printed circuit boards (PCBs) are
moving closer to commercial reality but the exact timing of adoption by the PCB
industry, however, remains unclear.


In North America, PAT Technology Systems Inc. has become the first company to
launch a Xaar 1001-based piece of equipment with its range of UV coating
machines for pre-printed sheet or web fed substrates. This unique equipment
offers a commercial printer the opportunity to apply a variety of
print-enhancing finishes to pre-printed matter from any printing process - be it
traditional analogue, inkjet or toner-based electro-photography. We are also
aware that at least one European country has begun to produce its passports on
an inkjet printer supplied by another of our integrator partners, utilising the
greyscale Xaar 318 printhead.


We continue to work closely with a range of integrators of inkjet technology and
can offer potential Xaar customers a global network of integration partners with
whom to discuss their equipment requirements, whether that requirement is for a
bespoke system or a standard off-the-shelf product.

Nigel Berry
Finance Director and Deputy Chief Executive
14 March 2007

Consolidated income statement
for the year ended 31 December 2006

                                                       2006        2005
                                                      £'000       £'000
Continuing operations
Revenue                                              42,207      42,772
Cost of sales                                       (18,096)    (16,123)
Gross profit                                         24,111      26,649
Distribution costs                                   (4,108)     (4,038)
Administrative expenses                             (13,426)    (12,132)
Operating profit                                      6,577      10,479
Investment income                                       451         576
Finance costs                                          (116)        (63)
Foreign exchange loss on inter-company loan               -        (977)
Profit before tax before abortive deal costs and      7,921      10,517
share-based payments
Abortive deal costs                                    (298)          -
Share-based payments                                   (711)       (502)
Profit before tax                                     6,912      10,015
Tax                                                  (2,068)     (2,966)
Profit for the year attributable to shareholders      4,844       7,049
Earnings per share from continuing operations
Basic                                                  7.9p        11.6p
Diluted                                                7.6p        11.1p

Dividends paid in the year amounted to £903,000, 1.5p per share (2005: £604,000,
1.0p per share).

Consolidated statement of recognised income and expense
for the year ended 31 December 2006

                                                      2006        2005
                                                     £'000       £'000
Exchange differences on translation of foreign        (113)        842
Gains/(losses) on cash flow hedges taken to equity   1,197      (2,545)
Tax on items taken directly to equity                 (415)      1,690
Net income/(loss) recognised directly in equity        669         (13)
Profit for the year                                  4,844       7,049
Total recognised income and expense for the year     5,513       7,036

Consolidated balance sheet
as at 31 December 2006

                                                       2006       2005
                                                      £'000      £'000
Non-current assets
Property, plant and equipment                        11,990      6,436
Goodwill                                                720        720
Other intangible assets                               7,030      3,773
Investments                                           1,931      1,377
Deferred tax asset                                    1,383      2,916
                                                     23,054     15,222
Current assets
Inventories                                           3,690      2,835
Trade and other receivables                           6,135      9,142
Cash and cash equivalents                            12,438     14,395
                                                     22,263     26,372
Assets held for sale                                      -        265
Total assets                                         45,317     41,859
Current liabilities
Trade and other payables                             (7,928)    (7,875)
Other financial liabilities                            (185)         -
Current tax liabilities                                (507)    (2,916)
Obligations under finance leases                       (468)      (556)
Provisions                                             (209)      (120)
Derivative financial instruments                          -     (1,197)
Liabilities directly associated with assets               -        (15)
classified as held for sale
                                                     (9,297)   (12,679)
Net current assets                                   12,966     13,693
Non-current liabilities
Deferred tax liabilities                             (1,635)      (946)
Other financial liabilities                            (865)         -
Obligations under finance leases                       (267)      (681)
                                                     (2,767)    (1,627)
Total liabilities                                   (12,064)   (14,306)
Net assets                                           33,253     27,553
Share capital                                         6,201      6,115
Share premium                                         9,669      9,376
Own shares                                           (3,420)    (3,420)
Other reserves                                        3,097      2,386
Hedging and translation reserves                        593       (131)
Retained earnings                                    17,113     13,227
Equity attributable to shareholders                  33,253     27,553
Total equity                                         33,253     27,553

Consolidated cash flow statement
for the year ended 31 December 2006

                                                       2006        2005
                                                      £'000       £'000
Net cash from operating activities                    8,692       7,862
Investing activities
Interest received                                       450         577
Purchases of property, plant and equipment           (7,274)     (2,579)
Proceeds on disposal of property, plant and               5           1
Purchases of trading investments                       (427)     (1,377)
Expenditure on capitalised product development       (3,420)     (1,220)
Net cash used in investing activities               (10,666)     (4,598)
Financing activities
Dividends paid                                         (903)       (604)
Proceeds from issue of ordinary share capital           384         754
New borrowings                                        1,050           -
Repayments of obligations under finance leases         (520)       (553)
Purchase of own shares                                    -      (3,400)
Net cash inflow/(outflow) from financing activities      11      (3,803)
Net decrease in cash and cash equivalents            (1,963)       (539)
Effect of foreign exchange rate changes                   6        (382)
Cash and cash equivalents at beginning of year       14,395      15,316
Cash and cash equivalents at end of year             12,438      14,395

Notes to the consolidated financial statements
for the year ended 31 December 2006

1.Basis of preparation

Information in this final announcement does not constitute statutory accounts of
the group within the meaning of Section 240 of the Companies Act 1985. The
financial information for the year ended 31 December 2006 and the year ended 31
December 2005, presented in this final announcement is extracted from, and is
consistent with, that in the group's audited financial statements for the year
ended 31 December 2006. The financial statements were approved by the board of
directors on 14 March 2007; the auditors' report on these accounts was
unqualified. The financial statements will be delivered to the Registrar of
Companies following the company's Annual General Meeting. Statutory accounts for
the year ended 31 December 2005, which were prepared under International
Financial Reporting Standards, have been filed with the Registrar of Companies.
The auditors' report on those accounts was unqualified and did not contain any
statement under Section 237 of the Companies Act 1985.

2. Business and geographical segments

Business segments

For management reporting purposes, the group's operations are currently analysed
according to product type. These product groups are the basis on which the group
reports its primary segment information.

Principal product groups are as follows:

Printheads and related products
Development fees
Licence fees and royalties

Segment information about these product types is presented below.

                                                        2006         2005
                                                       £'000        £'000
Printheads and related products                       39,918       39,872
Development fees                                         748        1,587
Licence fees and royalties                             1,541        1,313
Total revenue                                         42,207       42,772

                                                        2006         2005
                                                       £'000        £'000
Printheads and related products                       16,198       20,062
Development fees                                        (442)         464
Licence fees and royalties                             1,247        1,049
Total segment results                                 17,003       21,575
Unallocated corporate expenses                       (10,426)     (11,096)
Profit from operations                                 6,577       10,479
Investment income                                        451          576
Finance costs                                           (116)         (63)
Foreign exchange loss on inter-company loan                -         (977)
Profit before tax                                      6,912       10,015
Tax                                                   (2,068)      (2,966)
Profit after tax                                       4,844        7,049

Unallocated corporate expenses relate to administrative expenses which cannot be
directly attributed to any of the principal product groups.

2. Business and geographical segments (continued)

Other information

2006                       Printheads                Licence fees
                           and related  Development  and 
                           products     fees         royalties    Consolidated
                             2006         2006         2006         2006
                            £'000        £'000        £'000        £'000

Capital additions          11,147            -            -       11,147
Depreciation and            1,531          616           59        2,206
Balance sheet
Segment assets             24,440        1,378          635       26,453
Unallocated corporate                                             18,864
Consolidated total assets                                         45,317
Segment liabilities        (5,781)      (1,162)         (82)      (7,025)
Unallocated corporate                                             (5,039)
Consolidated total                                               (12,064)

2005                       Printheads                Licence fees
                           and related  Development  and
                           products     fees         royalties    Consolidated
                            2005         2005         2005         2005
                           £'000        £'000        £'000        £'000
Capital additions          3,913           46            -        3,959
Depreciation and           1,454          273           57        1,784
Balance sheet
Segment assets             17,209       2,274          525       20,008
Unallocated corporate                                            20,905
Consolidated total assets                                        40,913
Segment liabilities        (4,934)     (1,549)         (69)      (6,552)
Unallocated corporate                                            (6,808)
Consolidated total                                              (13,360)

The capital additions and segment assets disclosures for 2005 have been amended
since the prior year financial statements in order to provide a more accurate
reflection of the assets attributed to the Printheads and related products and
Development fees business segments.

Geographical segments

The group's operations are located in Europe, Asia and North and South America.
The following table provides an analysis of the group's sales by geographical
market, which is considered to be the group's secondary segment, irrespective of
the origin of the goods:

                                                              2006         2005
                                                             £'000        £'000
Europe and Middle East                                      14,997       14,025
Asia                                                        23,937       25,440
Americas                                                     3,273        3,307
                                                            42,207       42,772

Substantially, all assets and additions to property, plant and equipment and
intangible assets are located in Europe and the Middle East.

3. Earnings per ordinary share - basic and diluted

The calculation of basic and diluted earnings per share is based on the
following data:

                                                              2006         2005
                                                             £'000        £'000
Earnings for the purposes of basic earnings per share
being net profit attributable to equity holders of
the parent                                                   4,844        7,049
Number of shares                                            Number       Number
Weighted average number of ordinary shares for the
purposes of basic earnings per share
                                                        61,447,492   60,578,422
Effect of dilutive potential ordinary shares:
Share options                                            2,221,595    2,921,181
Weighted average number of ordinary shares for the
purposes of diluted earnings per share
                                                        63,669,087   63,499,603

Adjusted earnings per share

The calculation of earnings per share excluding abortive deal costs, share-based
payments and foreign exchange loss on the inter-company loan is based on
earnings of:

                                                       2006         2005
                                                      £'000        £'000
Earnings for the purposes of basic earnings per share
being net profit attributable to equity holders of
the parent                                            4,844        7,049
Abortive deal costs                                     298            -
Share-based payments                                    711          502
Foreign exchange loss on the inter-company loan           -          977
Tax effect of adjusting items                          (303)        (444)
Profit after tax excluding abortive deal costs,
share-based payments and foreign exchange loss on the
inter-company loan                                    5,550        8,084

The denominators used are the same as those detailed above for both basic and
diluted earnings per share.

Earnings per share excluding abortive deal costs, share-based payments and
foreign exchange loss on the inter-company loan:

                                                              2006         2005
                                                             £'000        £'000
Basic                                                         9.0p        13.3p
Diluted                                                       8.7p        12.7p

This adjusted earnings per share information is considered to provide a fairer
representation of the group's trading performance year on year.

4 Notes to the cash flow statement

                                                       2006         2005
                                                      £'000        £'000
Operating profit                                      6,577       10,479
Adjustments for:
Share-based payments                                    711          502
Depreciation of property, plant and equipment         1,998        1,936
Amortisation of intangible assets                       785          404
Loss on disposal of property, plant and equipment        15          103
Increase in provisions                                   89           66
Operating cash flows before movements in working     10,175       13,490
Increase in inventories                                (814)        (556)
Decrease/(increase) in receivables                    1,944       (4,867)
Increase in payables                                     77          681
Cash generated by operations                         11,382        8,748
Income taxes paid                                    (2,576)        (823)
Interest paid                                          (114)         (63)
Net cash from operating activities                    8,692        7,862

Cash and cash equivalents (which are presented as a single class of asset on the
face of the balance sheet) comprise cash at bank and other short term highly
liquid investments with a maturity of three months or less.

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