Press Centre

KEY POINTS :

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

The financial results for the year were:

• Turnover was £42.2m (2005: £42.8m);
• Adjusted profit before tax* was £7.9m (2005: £10.5m);
• Reported profit before tax was £6.9m (2005: £10.0m);
• Basic earnings per share were 7.9p (2005: 11.6p); and
• Net cash and cash equivalents at 31 December 2006 were £12.4m (2005: £14.4m).
• 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: £0.5m)

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.”

CHAIRMAN’S STATEMENT

Introduction

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.

China

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.

Outlook

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

Chairman

14 March 2007

REVIEW OF OPERATIONS

Introduction

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 opportunities.

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 products.

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 frequently.

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).

Operations

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 Sweden.

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.

People

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

FINANCIAL REVIEW

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 margin.

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.

Dividend

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.

Packaging

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.

Other

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.

Integrators

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

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

Consolidated balance sheet

as at 31 December 2006

Consolidated cash flow statement

for the year ended 31 December 2006

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.

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

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:

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:

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:

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:

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

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.