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INDEPENDENT AUDITORS' REPORT

VISONIC24

Kost Forer Gabbay & Kasierer3 Aminadav St.Tel-Aviv 67067, IsraelPhone: 972-3-6232525Fax: 972-3-5622555

INDEPENDENT AUDITORS' REPORT

To the shareholders of VISONIC LTD.

We have audited the accompanying consolidated balance sheets of Visonic Ltd. and its subsidiaries("the Group") as of 31 December 2004 and 2005, and the related consolidated statements ofincome, changes in equity and cash flows for each of the two years in the period ended 31 December 2005. These consolidated financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these consolidated financial statementsbased on our audits.

We did not audit the financial statements of certain subsidiaries, whose assets constituteapproximately 33.4 per cent and 24.1 per cent of total consolidated assets as of 31 December 2004and 2005, respectively, and whose revenues constitute approximately 56.3 per cent and 49.9 percent of total consolidated revenues for the years ended 31 December 2004 and 2005, respectively.Those statements were audited by other auditors whose reports have been furnished to us, and ouropinion, insofar as it relates to amounts included for these subsidiaries is based solely on the reportsof the other auditors.

We conducted our audits in accordance with International Standards on Auditing. Those Standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. An audit includes examining, ona test basis, evidence supporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. We believe that ouraudits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors, the consolidated financialstatements referred to above give a true and fair view of the consolidated financial position of theCompany, as of 31 December 2004 and 2005, and the consolidated results of its operations and itscash flows for each of the two years in the period ended 31 December 2005, in accordance withInternational Financial Reporting Standards.

Tel-Aviv, Israel KOST FORER GABBAY & KASIERER20 March 2006 A Member of Ernst & Young Global

Visonic_Final2 11/4/00 8:49 PM Page 2

CONSOLIDATED BALANCE SHEETS

2005 ANNUAL REPORT 25

As of 31 December

2004 2005

Note US$ '000 US$ '000

ASSETS

CURRENT ASSETS:

Cash and cash equivalents 5,844 7,021Short-term deposits 3a 6,500 8,100Available-for-sale financial assets 3b 751 1,196Held-to-maturity investments 7 - 3,517Trade receivables 4 12,970 14,336Other accounts receivable 5 2,494 2,396Inventories 6 7,845 9,315

Total current assets 36,404 45,881

NON-CURRENT ASSETS:

Long-term deposits 500 -Held-to-maturity investments 7 5,206 1,024Property and equipment, net 8 4,249 5,565Prepaid expenses 12 - 707Deferred tax assets 16a5 *) 1,622 1,293Intangible assets, net 9 1,384 1,767

Total non-current assets 12,961 10,356

Total assets 49,365 56,237

LIABILITIES AND EQUITY

CURRENT LIABILITIES:

Credit from banks and current maturities of long-term loans 10 2,583 6,452Trade payables 11 4,421 6,456Employees benefits 1,922 1,955Related company 805 51Other current liabilities 13 2,715 2,338

Total current liabilities 12,446 17,252

LONG-TERM LIABILITIES:

Bank loans 14 6,566 3,229Accrued severance pay liability 15 *) 367 86

Total long-term liabilities 6,933 3,315

EQUITY: 18

Equity attributable to equity holders of the company:Share capital 21 21Additional paid-in capital *) 22,110 22,740Net unrealized gains reserve *) 17 35Retained earnings *) 7,838 12,874

Total equity 29,986 35,670

Total liabilities and equity 49,365 56,237

*) Restated. See Note 2b and 2q.The accompanying notes are an integral part of the consolidated financial statements.

20 March 2006

Date of approval of the Yaacov Kotlicki Dr. Avigdor Sacharai Shmuel Korenfinancial statements Chairman of the Board Chief Executive Officer Chief Financial Officer

of Directors


CONSOLIDATED STATEMENTS OF INCOME

VISONIC26

Year ended 31 December

2004 2005

Note US$ '000 US$ '000

Sales 55,129 62,781Cost of sales 19a *) (29,406) (32,677)

Gross profit 25,723 30,104

Research and development costs, net 19b *) (4,996) (4,665)Selling and marketing expenses 19c *) (13,550) (14,118)General and administrative expenses 19d *) (3,510) (3,935)Share-based payments expense 18e *) (145) (156)

Total operating expenses (22,201) (22,874)

Operating profit 3,522 7,230Financial income (expenses), net 19e *) 828 (546)Other expenses, net 19f (159) (28)

Profit before taxes on income 4,191 6,656

Taxes on income 16 *) (979) (1,620)

Net profit *) 3,212 5,036

Attributable to:Equity holders of the Company 3,308 5,036Minority interests (96) -

3,212 5,036

Basic earnings per share (in cents) 20 8.9 12.4

Diluted earnings per share (in cents) 20 8.7 12.3

Weighted average number of shares used for computing basic earnings per share 20 37,151,584 40,629,711

Weighted average number of shares used for computing diluted earnings per share 20 38,017,880 40,904,097



STATEMENTS OF CHANGES IN EQUITY


Minority Total TotalAttributable to equity holders of the Company interest equity income

NetAdditional unrealized

Share paid-in gains Retainedcapital capital reserve earnings Total

US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000

At 1 Jan. 2004*) 16 6,362 - 4,530 10,908 96 11,004 -

Net gains on available-for-sale financial assets *) - - 17 - 17 - 17 17Issuance of shares, net 5 15,494 - - 15,499 - 15,499 -Exercise of options **) - 109 - - 109 - 109 -Share based payments expense *) - 145 - - 145 - 145 -Net profit *) - - - 3,308 3,308 (96) 3,212 3,212

At 31 Dec. 2004 21 22,110 17 7,838 29,986 - 29,986 3,229

Net gains on available-for-sale financial assets - - 18 - 18 - 18 18Issuance of shares, net **) - 232 - - 232 - 232 -Exercise of options **) - 242 - - 242 - 242 -Share based payments expense - 156 - - 156 - 156 -Net profit - - - 5,036 5,036 - 5,036 5,036

At 31 Dec. 2005 21 22,740 35 12,874 35,670 - 35,670 5,054

*) Restated. See Note 2b and 2q.**) Less than $ 1,000.The accompanying notes are an integral part of the consolidated financial statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS

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2004 2005

Note US$ '000 US$ '000

CASH FLOWS FROM OPERATING ACTIVITIES:

Net profit *) 3,212 5,036Adjustments to reconcile net profit to net cash provided by operating activities (a) (2,546) 280

Net cash provided by operating activities 666 5,316

CASH FLOWS FROM INVESTING ACTIVITIES:

Short-term deposits, net (6,500) (1,100)Purchase of long-term deposits (500) -Purchase of available-for-sale financial assets (734) (1,000)Proceeds from sale of available-for-sale financial assets - 573Purchase of held-to-maturity investments (5,332) -Proceeds from redemption of held-to-maturity investments - 500Acquisition of intangible assets (22) (377)Proceeds from sale of property and equipment 31 11Purchase of property and equipment (1,182) (2,769)

Net cash used in investing activities (14,239) (4,162)

CASH FLOWS FROM FINANCING ACTIVITIES:

Issuance of shares, net of expenses 15,045 -Exercise of options 109 242Increase (decrease) in balances with related party 62 (754)Receipt of long-term loans from banks 849 3,000Repayment of long-term loans from banks (687) (2,388)Repayment of convertible debentures to related party (617) -Short-term bank credit, net (906) (77)

Net cash provided by financing activities 13,855 23

Increase in cash and cash equivalents 282 1,177Cash and cash equivalents at the beginning of the year 5,562 5,844

Cash and cash equivalents at the end of the year 5,844 7,021

NON-CASH ACTIVITY:

Issuance of shares in exchange for minority interest in VS - 232



NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS



2004 2005

US$ '000 US$ '000

(a) Adjustments to reconcile net profit to net cash provided by operating activities:

INCOME AND EXPENSES NOT INVOLVING CASH FLOWS:

Depreciation and amortisation 1,542 1,642Deferred taxes, net *) 192 329Decrease in accrued severance pay liability *) (218) (281)Loss from sale of property and equipment, net 10 26Revaluation of bank loan 3 (3)Interest on held-to-maturity investments 126 165Share-based payments expense *) 145 156

CHANGES IN WORKING CAPITAL ITEMS:

Increase in trade receivables (2,932) (1,366)Decrease (increase) in other accounts receivable (828) 98Decrease (increase) in inventories 1,951 (1,470)Increase in long-term prepaid expenses - (707)Increase (decrease) in trade payables (395) 2,035Increase in employees benefits 9 33Decrease in other current liabilities (2,151) (377)

(2,546) 280

(b) Supplemental disclosure of cash flows information:

CASH PAID DURING THE YEAR FOR:

Interest 314 537

Income taxes 1,996 2,458



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

VISONIC30

NOTE 1 I GENERAL

A. COMPANY DESCRIPTION:

The Company was founded in 1973 under the laws of the State of Israel and it is engaged in thedesign, development, manufacture and marketing of security systems and components forinstitutional, commercial and residential customers for both personal and property protection.

The Company's products are marketed in Europe, Australia and the U.S. through its variouswholly-owned subsidiaries in each region and in Asia, through its 50 per cent owned joint-venturein Hong-Kong.

On 15 April 2004, the Company effected an IPO on the London Stock Exchange. The proceedsof the placing were approximately $15,499,000, net of issuance expenses in the amount of $1,798,000 (after the tax effect).

B. DEFINITIONS:

In these financial statements:

The Company - Visonic Ltd.

Subsidiaries - companies over which the Company exercises control (as defined in IAS 27) and whose accounts are consolidated with those of the Company.

Jointly controlled entity - company owned by various entities that have a contractual consentfor joint control, and whose accounts are consolidated with those of the Company using the proportionate consolidation method. Thejointly controlled entity in these financial statements is: Visonic Deson Limited - 50 per cent owned and controlled through Visonic Ltd. ("Visonic Deson")

Investees - subsidiaries and jointly controlled entity.

Related parties - as defined in IAS 24 "Related Party Disclosures".

C. THE FOLLOWING ACTIVE COMPANIES ARE CONSOLIDATED ANDPROPORTIONATE CONSOLIDATED AS OF 31 DECEMBER 2005:

Consolidated companies Share (per cent)

Visonic Solutions Ltd. ("VS") (formerly: Visonic Technologies Ltd.) (1) 100

Visonic Marketing (1988) Ltd. ("VM") (1) 100

Visonetix Ltd. ("Visonetix") (1) (2) 100

Visonic Technologies (1993) Ltd. ("Visonic Technologies") (formerly: Elpas Electro-Optic Systems Ltd.) (1) (2) 100

Visonic Inc. (3) (4) 100

Visonic Iberica de Seguridad S.L. ("Visonic Iberica") (4) (5) 100

Visonic Sicherheitstechnik GmbH ("Visonic GmbH") (4) (6) 100

Visonic Sp.Zo.O ("Visonic Sp") (4) (7) 100

Visonic Limited (4) (8) 100

Visonic Security Pty Limited ("Visonic Pty") (4) (9) 100

Visonic Technologies Americas Inc. ("VTA") (3) (11) 100

Visonic Technologies UK Limited ("VT UK") (8) (11) 100

Visonic Technologies Bulgaria Ltd. ("VTB") (10) (11) 100




Proportionate consolidation Share (per cent)

Visonic Deson Limited ("Visonic Deson") (4) (12) 50

(1) Operates in Israel.

(2) Owned through VS.

(3) Operates in the United States.

(4) Owned through VM.

(5) Operates in Spain.

(6) Operates in Germany.

(7) Operates in Poland.

(8) Operates in the United Kingdom.

(9) Operates in Australia.

(10) Operates in Bulgaria.

(11) Owned through Visonic Technologies.

(12) Proportionately consolidated - see Note 24.

Visonic and its subsidiary VM focus on residential security and provide global technical andmarketing support throughout the network of subsidiaries and distributors in over 70 countries.

VS focuses on location tracking systems in the institutional and commercial markets throughVisonic Technologies.

NOTE 2 | SIGNIFICANT ACCOUNTING POLICIES AND METHODS OF COMPUTATIONS

The significant accounting policies and methods of computations applied in the preparation of theconsolidated financial statements, on a consistent basis, are as follows:

A. BASIS OF PREPARATION:

These financial statements are prepared in accordance with International Financing ReportingStandards ("IFRS").

B. CHANGES IN ACCOUNTING POLICIES:

The accounting policies adopted are consistent with those of the previous financial year exceptthat the Company has adopted those new/revised standards mandatory for financial yearsbeginning on or after January 1, 2005.

The changes in accounting policies result from adoption of the following new or revisedstandards:

• IFRS 2 Share-based payment

• IFRS 3 Business Combinations and IAS 36 (revised) Impairment of Assets

• IAS 19 (revised) Employee Benefits

• IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement

The principal effects of these changes in policies are discussed below.



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NOTE 2 | SIGNIFICANT ACCOUNTING POLICIES (CONT.)

IFRS 2 'Share-based payment'

The Company has adopted IFRS 2, "Share-based Payment". IFRS 2 requires an expense to berecognized where the Company buys goods or services in exchange for shares or rights overshares ("equity-settled transactions"), or in exchange for other assets equivalent in value to agiven number of shares of rights over shares ("cash-settled transactions"). The main impact ofIFRS 2 on the Company is the expensing of employees' and directors' share options (equity-settled transactions) by using an option-pricing model.

The cost of equity-settled transactions is recognized, together with a corresponding increase inequity, over the period in which the performance conditions are fulfilled, ending on the date theoptions vest.

The effect of the adoption of IFRS 2 for the year ended 31 December 2005 was an increase inemployee benefits expense and a decrease in profit in the amount of $156,000, with acorresponding increase in equity (additional paid-in capital).

The effect of the initial adoption of IFRS 2 (retrospective application) for the year ended 31 December 2004 was an increase in employee benefits expenses and a decrease in profit inthe amount of $145,000.

IFRS 3 Business Combinations' and IAS 36 'Impairment of Assets'

The adoption of IFRS 3 and IAS 36 (revised) has resulted in the Company ceasing annual goodwillamortisation and commencing testing for impairment at the cash-generating unit level annually(unless an event occurs during the year which requires the goodwill to be tested more frequently)in accordance with IFRS 3, the carrying amount of goodwill as at 31 December 2004 had notbeen restated for the change in accounting policy, which has been applied prospectively.

IAS 19 'Employee Benefits'

As of 1 January 2005, the Company adopted IAS 19 (revised). As a result, additional disclosuresare made providing information about trends in the assets and liabilities in the defined benefitplans and the assumptions underlying the components of the defined benefit cost. This changein accounting policy has resulted in additional disclosures being included for the years ending 31December 2005 and. See also Note 2q.

IAS 32 Financial Instruments: Disclosure and Presentation, IAS 39 Financial Instruments:Recognition and Measurement

These standards replace IAS 32 (revised 2000) and supersede IAS 39 (revised 2000). The effect of the initial adoption of IAS 39 (retrospective application) for the year ended 31 December2004 was an increase in the Additional paid-in capital and a decrease in the profit in the amountof $17,000.

C. FOREIGN CURRENCY TRANSLATION:

The majority of the Group's sales are made outside of Israel in non Israeli currencies, mainly theUS dollar. A substantial portion of the Group's expenses, mainly selling and marketing expensesand service costs is incurred in US dollars. Accordingly, the US dollar is the currency of theprimary economic environment of the Company and its subsidiaries, and thus its functional andpresentation currency.

Transactions in non-US dollar currencies are translated into US dollars at the exchange rate onthe transaction date. Monetary assets and liabilities in non-US dollar currencies are translated intoUS dollars at the exchange rate on balance sheet date. All exchange rate differences arerecorded in the statement of income.




D. PRINCIPLES OF CONSOLIDATION:

Subsidiaries are consolidated from the date on which control is transferred to the Company andcease to be consolidated from the date on which control is transferred out of the Company (See Note 1c).

Intercompany balances and transactions including profits from inter-company sales not yetrealised outside the group, have been eliminated upon consolidation.

E. INTEREST IN JOINT VENTURE:

The Group's interest in a joint venture is accounted for by proportionate consolidation, whichinvolves recognising a proportionate share of the joint venture’s assets, liabilities, income andexpenses with similar items in the consolidated financial statements on a line-by-line basis.

F. CASH EQUIVALENTS:

The Company considers all highly liquid investments purchased with original maturities of threemonths or less to be cash equivalents.

G. TRADE RECEIVABLES:

Trade receivables are recognised and carried at original invoice amount less an allowance for anyuncollectible amounts. An estimate for doubtful debts is made when collection of the full amountis no longer probable. Bad debts are written-off as identified.

H. INVESTMENTS:

All investments are initially recognised at cost, being the fair value of the consideration given andincluding acquisition charges associated with the investment.

After initial recognition, investments which are classified as available-for-sale, are measured at fairvalue. Changes in fair value are presented in the statement of changes in equity.

Investments with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Company has the positive intention and ability to hold to maturity. Held-to-maturity investments are measured at amortised cost using the effective interest method.Amortised cost is calculated by taking into account any discount or premium on acquisition, overthe period to maturity.

I. INVENTORIES:

Inventories are presented at the lower of cost or net realisable value. Cost is determined as follows:

Raw materials - at weighted average cost.

Work in progress and finished goods - on the basis of weighted average costs of materials andother direct and indirect manufacturing costs.

J. PROPERTY AND EQUIPMENT:

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation iscalculated using the straight-line method over the estimated useful lives of the assets, at thefollowing annual rates:


VISONIC34



Per cent

Machinery and equipment 10 - 20 (mainly 10 per cent)

Computers and peripheral equipment 20 - 33 (mainly 33 per cent)

Office furniture and equipment 6 - 20 (mainly 7 per cent)

Motor vehicles 15

Leasehold improvements - over the term of the lease

The carrying values of property and equipment are reviewed for impairment when events orchanges in circumstances indicate the carrying value may not be recoverable. If any suchindication exists and where the carrying values exceed the estimated recoverable amount, theassets or cash-generating units are written down to their recoverable amount. The recoverableamount of property and equipment is the greater of net selling price and value in use. In assessingvalue in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and therisks specific to the asset. For an asset that does not generate largely independent cash inflows,the recoverable amount is determined for the cash-generating unit to which the asset belongs.

K. DEFERRED TAXES:

Deferred taxes are calculated using the liability method on temporary differences between the taxbase of assets and liabilities and their carrying amounts for financial reporting purposes. Adeferred tax asset has been recognised for tax loss carryforwards only to the extent that it isprobable that these will be utilised in the foreseeable future.

Deferred taxes are not recorded in respect of temporary differences associated with investmentsin subsidiaries and interests in joint ventures, as the timing of the reversal of the temporarydifferences can be controlled and it is probable that the temporary differences will not reverse inthe foreseeable future.

L. REVENUE RECOGNITION:

Revenues are recognised when the significant risks and rewards of ownership of the goods havepassed to the buyer and the amount of revenues can be measured reliably.

M. INTANGIBLE ASSETS:

Intangible assets acquired separately are measured on initial recognition at cost. The cost ofintangible assets acquired in a business combination is fair value as at date of acquisition.Following initial recognition, intangible assets are carried at cost less any accumulated amortisationand any accumulated impairment losses. Internally generated intangible assets, excludingcapitalised development costs, are not capitalised and expenditure is charged against profits inthe year in which the expenditure is incurred. The useful lives of intangible assets are assessed tobe finite. Intangible assets with finite lives are amortised over the useful economic life and assessedfor impairment whenever there is an indication that the intangible asset may be impaired.

GOODWILL:

Goodwill acquired in a business combination is initially measured at cost being the excess of thecost of the business combination over the Company’s interest in the net fair value of theidentifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill ismeasured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment,




annually or more frequently if events or changes in circumstances indicate that the carrying valuemay be impaired.

KNOW-HOW:

Know-how is amortised using the straight-line method over its useful economic life of 8 years.The amortisation is included in general and administrative expenses.

PRODUCT REGISTRATION COSTS:

Product registration costs are expenses which relate to electrical testing and approving of theCompany’s products standards according to the required standards in the regions which theCompany sells to. The product registration costs recognized as assets to the extent that it isexpected that such assets will generate future economic benefits.

RESEARCH AND DEVELOPMENT COSTS:

Research costs are expensed as incurred. Development costs in respect of individual projects arecapitalized only if future recoverability is reasonably assured and various other criteria as set forthin IAS 38 ("Intangible Assets") have been met otherwise these costs are expensed as incurred.

N. BASIC AND DILUTED EARNINGS PER SHARE:

Basic earnings per share are computed using the weighted average number of Ordinary sharesoutstanding during the period. Diluted earnings per share are computed based on the weightedaverage number of Ordinary shares outstanding during each period, adjusted for the effects ofdilutive options, outstanding during the period.

O. GOVERNMENT GRANTS:

Royalty-bearing grants from the Government of Israel (through the Chief Scientist) for fundingapproved research and development projects are recognised at the time the Company is entitledto such grants, on the basis of the costs incurred and included as a deduction of research anddevelopment costs.

The liability for these grants with a corresponding charge to profit and loss may need to berecorded in the future to the extent of the Group’s estimate of sales from products developed ofthese projects.

P. ACCRUED SEVERANCE PAY LIABILITY:

The Company operates a defined benefit plan for severance pay pursuant to the IsraeliSeverance Pay Law. Under the law, Israeli resident employees are entitled to receive severancepay upon involuntary termination of employment, or upon retirement, which is calculated basedon the most recent monthly salary at the time of termination, multiplied by the number of yearsof employment.

The Company funds its liability for severance pay by monthly payments to pension funds andinsurance companies ("plan assets").

The cost of providing severance pay is determined using the projected unit credit actuarial valuemethod. Actuarial gains and losses are recognized immediately in the period in which they occur.

The severance pay liability recognized in the balance sheet represents the present value of thedefined benefit obligation reduced by the fair value of plan assets. Any asset resulting from thiscalculation is limited to past service cost, plus the present value of available refunds andreductions in future contributions to the plan.


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Q. RESTATEMENT:

In 2005, the Company revaluated the accounting treatment of the severance pay liability basedon IAS 19, "Employees benefits" from the termination benefits attitude to the post-employmentbenefits attitude.

Accordingly, the financial statements of the Company as of 31 December 2004 and for the yearthen ended have been restated to reflect the change in accounting treatment.

The effect of the above changes on the financial statements, are as follows:

BALANCE SHEET:As of 31 December 2004

As Increasereported (decrease) Restated

US$ '000 US$ '000 US$ '000

Deferred tax assets 1,771 (149) 1,622Severance pay liability 946 (579) 367Retained earnings 7,408 430 7,838

STATEMENT OF INCOME:Year ended 31 December 2004

As Increasereported (decrease) Restated

US$ '000 US$ '000 US$ '000

Cost of sales 29,454 (48) 29,406Research and development costs, net 5,068 (72) 4,996Selling and marketing expenses 13,598 (48) 13,550General and administrative expenses 3,582 (72) 3,510Taxes on income 952 27 979Net profit 2,999 213 3,212




NOTE 3 | SHORT-TERM INVESTMENTSAs of 31 December

2004 2005

US$ '000 US$ '000

(a) Short-term deposits 6,500 8,100

The deposits bear interest at annual rates ranging between 4.20 per cent to 4.65 per cent.(b) Available-for-sale financial assets:

Trust Funds - listed 751 1,196

The bonds are traded in Israel and U.S.A.

NOTE 4 | TRADE RECEIVABLESAs of 31 December

2004 2005

US$ '000 US$ '000

Trade receivables 13,115 14,279Checks receivable 357 450

13,472 14,729Allowance for doubtful accounts (502) (393)

12,970 14,336

NOTE 5 | OTHER ACCOUNTS RECEIVABLEAs of 31 December

2004 2005

US$ '000 US$ '000

Government authorities 853 1,200Prepaid expenses 573 (1) 552Income receivable 322 212Employees 83 84Advances to suppliers 176 134Other 487 214

2,494 2,396

(1) Including $115,000 from related company.

NOTE 6 | INVENTORIESAs of 31 December

2004 2005

US$ '000 US$ '000

Raw materials 3,885 5,627Work in progress 1,198 1,504Finished goods 2,762 2,184

7,845 9,315


VISONIC38


NOTE 7 | HELD-TO-MATURITY INVESTMENTSAs of 31 December

2004 2005

US$ '000 US$ '000

CURRENT ASSETS:

Held-to-maturity investments (1) - 3,517

NON-CURRENT ASSETS:

Held-to-maturity investments (2) 5,206 1,024

(1) Marketable bonds which will mature through 2006. The bonds bear annual fixed interest at ratesof between 5.8 per cent and 8.2 per cent (effective interest rates ranging from 2.6 per cent to 3.7 per cent).The market value of these bonds at 31 December 2005 amounted to $3,519,000.

(2) Marketable bonds which will mature through April 2007. The bonds bear annual fixed interest atrates of between 5.8 per cent and 6.5 per cent (effective interest rates ranging from 3.2 per centto 3.7 per cent).The market value of these bonds at 31 December 2005 amounted to $989,000.

NOTE 8 | PROPERTY AND EQUIPMENT

Computers OfficeMachinery and furniture

and peripheral and Motor Leaseholdequipment equipment equipment vehicles improvements Total

US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000

COST:

Balance as of 1 Jan. 2004 8,092 3,758 2,315 405 1,424 15,994Additions during the year 545 478 71 35 53 1,182Disposals during the year - - (24) (59) - (83)

Balance as of 31 Dec. 2004 8,637 4,236 2,362 381 1,477 17,093

Additions during the year 1,417 1,248 71 26 10 2,772Disposals during the year - (237) (151) (20) (1) (409)

Balance as of 31 Dec. 2005 10,054 5,247 2,282 387 1,486 19,456

ACCUMULATED DEPRECIATION:

Balance as of 1 Jan. 2004 6,219 3,061 1,332 204 783 11,599Additions during the year 569 364 185 37 132 1,287Disposals during the year - - (5) (37) - (42)

Balance as of 31 Dec. 2004 6,788 3,425 1,512 204 915 12,844

Additions during the year 618 436 191 44 127 1,416Disposals during the year - (219) (133) (16) (1) (369)

Balance as of 31 Dec. 2005 7,406 3,642 1,570 232 1,041 13,891

Depreciated cost as of 31 December 2005 2,648 1,605 712 155 445 5,565

Depreciated cost as of 31 December 2004 1,849 811 850 177 562 4,249




NOTE 9 | INTANGIBLE ASSETS

Productregistration Development Issuance

Know-how costs Goodwill (1) costs expenses Total

US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000

Balance as of 1 Jan.2004 net of accumulated amortisation 1,409 - 202 - 6 1,617

Acquisition of know-how - - - 22 - 22Amortisation charge for the year (223) - (26) - (6) (255)

Balance as of 31 Dec. 2004 net of accumulated amortisation 1,186 - 176 22 - 1,384

Additions - 168 - 209 - 377Know-how arising on acquisition of a minority interest in subsidiary (2) 232 - - - - 232Amortisation charge for the year (211) (15) - - - (226)

Balance as of 31 Dec. 2005 net of accumulated amortisation 1,207 153 176 231 - 1,767

(1) Goodwill derives from the acquisition of Visonic Sp, a Polish company, in April 2002 by VM.(2) See Note 18(b).

NOTE 10 | CREDIT FROM BANKS AND CURRENT MATURITIES OF LONG-TERM LOANS

Weighted average interest rate As of 31 December

31.12.05 2004 2005

Per cent US$ '000 US$ '000

Credit from banks in NIS 282 -Current maturities of long-term bank loans (1) 5.33 2,301 6,229Short-term loan 4.02 - 223

2,583 6,452

(1) The bank credit is secured by a floating charge over certain of the Company’s assets.


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NOTE 11 | TRADE PAYABLES As of 31 December

2004 2005

US$ '000 US$ '000

Open accounts 4,383 6,436Checks payable 38 20

4,421 6,456

NOTE 12 | PREPAID EXPENSESThe balance represents prepaid expenses paid to S.M.D., a company under the control of theCompany's controlling shareholders for installation made in the manufacturing facility the Companyis leasing (See Note 17b).

NOTE 13 | OTHER CURRENT LIABILITIES As of 31 December

2004 2005

US$ '000 US$ '000

Accrued expenses 1,393 2,041Income taxes payable 739 -Customer advances 43 88Related party (1) 99 28Other 441 181

2,715 2,338

(1) The balance is linked to the Israeli CPI.

NOTE 14 | BANK LOANS

A. COMPOSITION: Weighted average interest rate As of 31 December

31.12.05 2004 2005

Per cent US$ '000 US$ '000

Denominated in dollar 5.31 8,705 9,458Denominated in NIS 162 -Less - current maturities 2,301 6,229

6,566 3,229

B. AS FOR CHARGES, SEE NOTE 17C.




NOTE 15 | ACCRUED SEVERANCE PAY LIABILITY

A. THE AMOUNT INCLUDED IN THE BALANCE SHEET ARISING FROM OBLIGATIONS IN RESPECTOF THE DEFINED BENEFIT PLAN FOR SEVERANCE PAY IS COMPRISED AS FOLLOWS:

As of 31 December

2004 2005

US$ '000 US$ '000

Net liability as of January 1 585 367Expense recognized in the statement of income 506 469Contributions paid (91) (697)Benefits not paid from assets (633) (53)

Net liability as of December 31 367 86

B. AMOUNTS RECOGNIZED IN THE STATEMENT OF INCOME IN RESPECT OF THE DEFINEDBENEFIT PLAN ARE AS FOLLOWS:


2004 2005

US$ '000 US$ '000

Current service cost 415 441Interest cost 143 136Expected return on plan assets (52) (108)

Total expense included in statement of income 506 469

C. THE ACTUARIAL ASSUMPTIONS USED ARE AS FOLLOWS:As of 31 December

2004 2005

Discount rate 6.75% 6.4%Future salary increases 5.5% 5.5%Earnings rate on assets 4.7% 5.9%

NOTE 16 | TAXES ON INCOME

A. ISRAELI INCOME TAXES:

1. Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the Law"):

A) THE COMPANY:

Four expansion programs of the Company have been granted "Approved Enterprise" status,under the Law. For these expansion programs, the Company has elected alternative benefits,waiving grants in return for tax exemptions. Pursuant thereto, the income of the Companyderived from the following "Approved Enterprise" expansion programs is tax-exempt for theperiods stated below and will be eligible for reduced tax rates thereafter, as described below.

1. The Company received special approval regarding four of the expansion programs describedhenceforth. The special approval determines a specific ratio in respect of allocating theincome deriving from the Approved Enterprise between income deriving from the plant in thecentre of Israel (Development Region C) and income deriving from the plant in Kiryat Gat(Development Region A). The Company's management estimates that most of the incomederiving from those programs will be attributed to the plant in Development Region A.


VISONIC42


NOTE 16 | TAXES ON INCOME (CONT.)

2. The first program that commenced in 1999 and is to expire in 2007 was an expansion of S.M.D.

Income deriving from the first program and attributed to the plant in Development RegionA will be tax-exempt for the six-year period ending 31 December 2007. Income derivingfrom the first program and attributed to the plant in Development Region C is not entitledto benefits and is liable to tax at the regular rate. See Note 16e.

3. Income deriving from the second program, which commenced in 2002 and is to expire in2011, entitles the Company to a tax exemption for the 10-year period ending 31 December 2011 in respect of income attributed to the plant in Development RegionA. Income attributed to the plant in Development Region C is liable to tax at the regularrate. See Note 16e.

4. Income deriving from the third program, which commenced in 2002 and is to expire in2011, entitles the Company to a tax exemption for the 10-year period ending 31December 2011 in respect of income attributed to the plant in Development Region A.Income attributed to the plant in Development Region C is liable to tax at the regular rate.See Note 16e.

5. In February 2004, the Company received approval for an additional expansion. TheCentre of Investment approved an investment plan in property and equipment to becarried out until 15 February 2006, in the amount of $2,400,000.

The entitlement to the above benefits is conditional upon the fulfilment of the conditions stipulatedby the above law, regulations published thereunder and the letter of approval for the investmentsin the Approved Enterprises. In the event of failure to comply with these conditions, the benefitsmay be cancelled and the Company may be required to refund the amount of the benefits, inwhole or in part, including interest.

Management of the Company believes that the Company has complied with all the conditionsdescribed above.

Any income derived from sources other than Approved Enterprise is subject to the regularcorporate tax rate. See Note 16e.

In the event of distributions of dividends out of income deriving from an Approved Enterprise,which is entitled to tax exemptions, the distributing company shall be liable to pay tax at the rateof 25 per cent on the distributed earnings.

Dividend distributions derived from an approved enterprise are subject to 15 per cent withholding tax.

The Company may distribute dividends from earnings that do not derive from tax exempt incomeby virtue of the Approved Enterprise status.

B) VISONIC NETWORKS ("VN"):

VN was granted Approved Enterprise status according to the Law under a letter of approval,which VN received during May 2000.

On 30 November 2003, VN's operations were acquired by Visonic Technologies. In October2003, VN filed an application to the Investment Centre to transfer its status as ApprovedEnterprise to Visonic Technologies.




On 22 December 2004, VN received temporary approval from the Centre of Investment,regarding the transfer of its status as an "Approved Enterprise" to Visonic Technologies. Theapproval will become effective only if Visonic Technologies will finance 30 per cent of theinvestment in property and equipment which was purchased by VN according to VN’s ApprovedEnterprise by a share issuance. If the abovementioned condition remains unfulfilled 60 days from22 December 2004, then the temporary approval will expire.

In January and February 2005, Visonic Technologies complied with the abovementioned condition.

Income deriving from this program entitles VN to a tax exemption for a period of over 10 years.

The benefit period in respect of the investment program has not yet commenced and it is limiteduntil the end of 2013.

The entitlement to the above benefits is conditional upon the fulfilment of the conditions stipulatedby the above law, regulations published thereunder and the letter of approval for the investmentsin the Approved Enterprises. In the event of failure to comply with these conditions, the benefitsmay be cancelled and the Company may be required to refund the amount of the benefits, inwhole or in part, including interest.

The management of VN believes that VN has complied with all the conditions stipulated above.

In the event of distributions of dividends out of income deriving from an Approved Enterprise,which is entitled to tax exemptions, the distributing company shall be liable to pay tax at the rateof 25 per cent on the distributed earnings.



C) VISONETIX:

According to the Law, Visonetix is entitled to various tax benefits by virtue of the ApprovedEnterprise status that was granted to its plant.

Income deriving from this program, which commenced in 2001 and is to expire in 2005, entitlesVisonetix to a tax exemption for a period of four years ending 31 December 2005 and to areduced tax rate of 25 per cent for an additional one year ending 31 December 2005.

The entitlement to the above benefits is conditional upon the fulfilment of the conditions stipulatedby the above Law, regulations published thereunder and the letter of approval for the investmentsin the Approved Enterprises. In the event of failure to comply with these conditions, the benefitsmay be cancelled and the Company may be required to refund the amount of the benefits, inwhole or in part, including interest.

The management of Visonetix believes that Visonetix has complied with all the conditionsstipulated above.

In the event of a distribution of dividends out of income deriving from an Approved Enterprisewhich is entitled to a tax exemption, the distributing company shall be liable to pay tax at the rateof 25 per cent on the distributed earnings.


VISONIC44





D) VISONIC TECHNOLOGIES:

Visonic Technologies' production facilities in Development Area C have been granted the statusof an Approved Enterprise under the above Law. Pursuant to the provisions of the Law, VisonicTechnologies' undistributed income will be tax-exempt for a period of two years commencingwith the year it first realises taxable income. In the remaining five years of benefits, VisonicTechnologies will be subject to corporate tax at a reduced rate of 25 per cent.

The period of tax benefits, described above, is subject to limits of the earlier of 12 years from thecommencement of production, or 14 years from the approval date, whichever is earlier.

If a dividend is distributed out of such tax-exempt profits deriving from the Approved Enterprise,Visonic Technologies will be liable to corporate tax at the rate of 25 per cent.



The entitlement to the abovementioned benefits is conditional upon Visonic Technologies fulfillingthe terms stipulated by the Law, regulations published thereunder and letters of approval for thespecific investments in the Approved Enterprises. In the event of failure to comply with theseconditions, the benefits may be cancelled and the Visonic Technologies may be required torefund the amount of the benefits, in whole or in part, including interest.

The management of Visonic Technologies believes that Visonic Technologies has complied withall the conditions stipulated above.

2. The provisions of the Income Tax (Inflationary Adjustments) Law, 1985 apply to the Company andcertain of its Israeli investees. According to the law, the results for tax purposes are measuredbased on changes in the Israeli CPI.

3. Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:

The Company and certain investees are "industrial companies", as defined by this law and, assuch, are entitled to certain tax benefits, mainly accelerated depreciation of machinery andequipment, as prescribed by regulations published under the Inflationary Adjustments Law, andthe right to claim public issuance expenses and amortisation of patents and other intangibleproperty rights as a deduction for tax purposes.

4. Subsidiaries which were incorporated outside Israel are taxed according to their countries ofresidence.

5. Deferred taxes:

The deferred tax assets reported in the balance sheet are based on the following temporarydifferences. The deferred taxes were determined using tax rates in Israel ranging between 18 percent to 32 per cent.




Significant components of the Company's deferred tax assets are as follows:

Accruedvacation Allowance

Property Accrued and Tax loss forand severance recreation carry- doubtful Issuance

equipment Inventories pay pay forward accounts expenses Total

US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000

Balance as of 1 Jan. 2004 (25) 486 *) 176 168 475 80 - *) 1,360

Amounts charged to additional paid-in capital - - - - - - 454 454

Amounts charged to statement of income 79 (40) *) (66) (28) - (15) (122) *) (192)

Balance as of 31 Dec. 2004 54 446 *) 110 140 475 65 332 *) 1,622

Amounts charged to statement of income (153) 104 (89) 37 - (30) (198) (329)

Balance as of 31 Dec. 2005 (99) 550 21 177 475 35 134 1,293

*) Restated. See Note 2q.

B. THEORETICAL TAX:Year ended 31 December

2004 2005

US$ '000 US$ '000

Profit before taxes on income, as reported 4,191 6,656

Provision at statutory rate - 2004 - 35 per cent, 2005 - 34 per cent 1,467 2,263Effect of benefits to approved enterprises (517) (1,150)Adjustment of the tax rates in the computation of deferred taxes (114) (22)Non-deductible expenses 152 56Increase in losses for which deferred taxes were not provided 639 94Difference between measurement basis of income for tax purposes and for reporting purposes, net (514) 485Other (134) (106)

979 1,620

Per cent

Effective tax rate 23.36 24.34


VISONIC46



C. TAXES ON INCOME CONSIST OF THE FOLLOWING:Year ended 31 December

2004 2005

US$ '000 US$ '000

Current 787 1,291Deferred 192 329

979 1,620

D. LOSS CARRYFORWARDS:

Certain subsidiaries have tax loss carryforwards in the amount of $14,592,000 in respect ofwhich deferred taxes in the amount of $3,014,000 were not provided.

E. UNTIL DECEMBER 31, 2003:The regular tax rate applicable to income of companies (which are not entitled to benefits due to "approved enterprise", as described above) was 36 per cent. In June 2004, an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision), 2004 was passed by the "Knesset" (Israeli parliament) and on July 25, 2005, another law was passed, the amendmentto the Income Tax Ordinance (No. 147) 2005, according to which the corporate tax rate is to be progressively reduced to the following tax rates: 2004 - 35 per cent, 2005 - 34 per cent, 2006 - 31 per cent , 2007 - 29 per cent , 2008 - 27 per cent , 2009 - 26 per cent , 2010 andthereafter - 25 per cent.

F. TAX ASSESSMENTS:

In December 2005, the Company received a tax assessment from the Israeli income taxauthorities with respect to 2000 - 2003 tax years, pursuant to which the tax authorities assertthat the Company owes additional tax on its annual revenues for approximately $400,000. TheCompany rejects the claims of the tax authorities which serve as the basis for the demands.Accordingly, the Company filed an objection to this assessment and did not record a provision inits financial statements for the taxes demanded.

The Company and the subsidiaries have received final assessments or assessments consideredas final as detailed below:

Up to and including tax year

The Company 1999

Visonic Technologies 2000

Visonetix 1999

Visonic GmbH 2002

Visonic Pty 2003

The other subsidiaries have not yet been assessed since their inception.




NOTE 17 | COMMITMENTS AND CONTINGENT LIABILITIES

A. ROYALTIES:

The Company and a subsidiary received from the Government of Israel grants for participation in research and development and, in return, it is committed to pay royalties at the rate of 2 percent - 3.5 per cent on sales proceeds of the financed research and development in an amountnot to exceed 100 per cent of the total amount of the grants received. As of 31 December 2005,total grants received amounted to approximately $4,112,000 and total royalties paid and accruedamounted to approximately $1,317,000. As of 31 December 2005, total commitments amountedto $2,795,000.

B. LEASE AGREEMENTS:

1. Lease agreements with related parties:

The Company and certain of its subsidiaries rent their facilities under various operating leaseagreements, which expire on various dates, the latest of which is in 2015.

The minimum rental payments under non-cancellable operating leases are as follows:

31 December

US$ '000

2006 951

2007 796

2008 687

2009 689

2010 - 2015 3,446

6,569

Total rental expense for the years ended 31 December 2004 and 2005 were approximately $873,000 and $910,000, respectively.

2. Other lease agreements:

The minimum rental payments under non-cancellable operating leases are as follows:

31 December

US$ '000

2006 203

2007 31

234

Total rental expenses for the years ended 31 December 2004 and 2005 were approximately$328,000 and $260,000, respectively.

C. CHARGES:

As collateral for a bank loan in the amount of $9,458,000 at 31 December 2005, an unlimited firstpriority fixed charge was recorded on all the past and future notes of the Company, on the unpaidshare capital and on the goodwill, and a first priority floating charge was recorded on the plantand equipment in favour of the bank.


VISONIC48


NOTE 17 | COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

D. A LETTER OF CREDIT:

Pursuant to a letter of credit dated 25 December 2003, Bank Leumi Le-Israel B.M. ("Bank Leumi"or the "Bank") makes available credit facilities to the Company. The letter provides for a totalcredit facility for an amount not exceeding $12,700,000 ("the Loan Facility") available for a periodof three years from the date of the letter. In addition, the letter specifies that Bank Leumi willprovide bank guarantees ("the guarantee Facility") for a total amount not exceeding $200,000 fora period of one year from the date of the letter. As at 31 December 2005, $9,458,000 of the LoanFacility had been utilised.

On 30 June 2005, the Bank canceled several undertakings and covenants pursuant to a letter ofcredit dated 25 December 2003.

The undertakings and covenants of Visonic shall also be treated by the Bank as covenants by Elpas.

The updated covenants are as follows:

1. The Tangible Equity (as defined in the agreement) of the Company shall not, at any time, beless than 40 per cent (29 per cent in the former covenant) of its total assets as set forth in itsbalance sheet on a consolidated basis in the semi-annual and annual financial statements. Inaddition, said tangible equity of the Company shall not, at any time, be less than NIS65,000,000 ($14,121,000) (NIS45,000,000 ($9,776,000) in the former covenant) linked tothe Israeli Consumer Price Index known on the date of signature thereof; and all such datashall appear in the semi-annual and annual financial statements of the Company on aconsolidated basis.

2. At all times, the EBITDA of the Company shall be not less than one-fourth of the total amountof the Company’s loans, which the Company has undertaken with the addition of all of theCompany's financing costs. The EBITDA is based on the previous 2 semi-annual calendarperiods which end on the date of the last financial reports.

According to the former covenant, the EBITDA of the Company shall be not less than the totalamount of current maturities of long-term loans.

3. The Company shall deliver the Bank annual and semi-annual financial reports instead ofdelivering quarterly financial reports.

4. Yaacov Kotlicki’s beneficial holdings in the Company shall not at any time decrease to lessthan 51 per cent of the issued and outstanding share capital of the Company.

As of 31 December 2005, the Company is complying with the abovementioned terms.




E. CLAIMS:

1. On 17 March 2004, the Company received notice of a claim filed in US courts by VersusTechnology, Inc. ("Versus") against several subsidiaries of a Group customer, Hill-Rom, Inc.and naming two of the Group’s subsidiaries, Visonic Solutions Limited and Visonic, Inc. asco-defendants. The two Group subsidiaries are named in only two out of the eight counts ofthe claim alleging, inter alia, that the Hill-Rom defendants and the Visonic defendants haveinfringed at least one of four of Versus' patents. The remedies claimed against the two Groupcompanies are an injunction to prevent further infringement and damages for pastinfringement arising from sales of certain products by the Group companies. Hill-Rom hasalso indicated that it intends to defend the claim vigorously.

The Company strongly denies the allegations made against its two subsidiaries and the claimwill be vigorously defended. The Company has obtained preliminary legal advice from its UScounsel and firmly believes that Versus will not be successful in its claim against theCompany's two subsidiaries.

The Michigan court decided to move the lawsuit to North Carolina. Since the complaint wasfiled, Versus has amended its complaint twice. The present amendment names the Groupsubsidiaries defendants as VS, VTA and Visonic Technologies. Furthermore, Versus amendedthe complaint to include also products sold by VTA to other customers (and not only thoseproducts sold to Hill-Rom).

Furthermore, the Company received from its US legal counsels a legal opinion, according towhich Hill-Rom is obligated to indemnify VTA and Visonic Technologies for liabilities, cost andlegal fees actually incurred by VTA and Visonic Technologies in relation to the Versus litigation.

On January 5, 2005, VS filed a counter claim against Versus alleging an infringement of a VSpatent by Versus.

Group sales of the relevant products in the financial year ended 31 December 2005 representless than 3 per cent of 2005 Group sales. The Company does not consider that the claim,even if upheld, would have a significant effect on the Group’s financial position.

2. The former CEO of VS, whose employment was terminated, raised a claim against VS andagainst Visonic Technologies for additional severance payment in a sum of approximately $43,000, for the period of 5 years when he worked at Visonic Technologies, prior to thesigning of an employment agreement with VS.

In addition, he raised a claim for 3.36 per cent of VS's stock at the value of approximately $57,000 (after the forced acquisition that was carried out on those stocks by the Company).

The former CEO of VS alleges that he was entitled to stock options whose exercise price wasset at zero, whereas VS alleges that the exercise price of the stock options was based on a$0.07 per share, which should have been paid by him, as it is set in the standard terms ofthe stock options agreement.

After receiving legal consultation stating there is an apparent possibility, that both claims, iffiled, will not be accepted by the courts, the Company rejected both demands.


VISONIC50


NOTE 18 | SHARE CAPITAL A. On 15 April 2004, the Company effected an IPO in the London Stock Exchange. The proceeds of

the Placing were approximately $15,499,000, net of issuance expenses in the amount of $1,798,000 (after the tax effect). The Company issued 10,864,885 Ordinary shares representingapproximately 27 per cent of the issued and outstanding Ordinary shares. The shares were listedon the London Stock Exchange under the symbol VSC.L and trade commenced on 15 April 2004.

B. In August 2005, the Company completed a tender offer to acquire the remaining 15 per cent ofthe share capital of its subsidiary, VS. Minority shareholders in VS received 1 Ordinary share ofVisonic for every 15 shares of VS they owned, representing issuance of 179,998 Ordinary sharesof Visonic.

C. SHARE CAPITAL:Year ended 31 December

2004 2005

1. Authorised:Ordinary shares of NIS 0.002 par value 500,000,000 500,000,000

2. Issued and outstanding:Ordinary shares of NIS 0.002 par value 40,400,815 40,897,563

D. STOCK OPTION PLAN:

1. THE COMPANY

a) The Company has three Stock Option Plans authorised in 2001; Israeli Stock Option Plan2001, Global Stock Option Plan 2001 and US Stock Option Plan 2001. Under theCompany's three Stock Option Plans, the Company may issue up to 1,843,500 stockoptions exercisable into Ordinary shares.

The options expire within 10 years from the date of grant. The options were equallygranted throughout four vesting periods over four consecutive years, with the first vestingperiod scheduled 12 months after the date of grant. The exercise prices of the optionsgranted under the plans range between $0.68 - $1.70 per share.

b) In December 2003, the Company authorised three new stock option plans to theemployees of the Company and to services providers; Israeli Stock Option Plan 2003,Global Stock Option Plan 2003 and US Stock Option Plan 2003. The plan addressed taxreforms enacted since the 2001 Stock Option Plan. As a result, most of the non-vestedoptions from the former plan were cancelled and were re-granted under the new plan,under the same terms as the former plan. In April 2005, the Company granted 132,000options to its employees. According to the plan, as of 31 December 2005, the Companymay issue up to 123,750 options exercisable into Ordinary shares. Any options under theIsraeli Stock Option Plan 2001 that will be forfeited will be reissued under the Israeli StockOption Plan 2003.

The total pool option balance of the six stock option plans as of 31 December 2005 is2,522,750 options.

The options to the employees in Israel were granted under section 102 to Israel's IncomeTax Ordinance and the options to the Israeli service providers were granted under section3(i) to the Income Tax Ordinance.

A summary of the Company's stock options activities in 2004 and 2005 is as follows:




Options outstanding

WeightedAverage

Number exercise priceof options per share

US$

Balance as of 1 January 2004 1,843,500 0.70Options granted 1,120,750 1.70Options forfeited (88,000) 0.85Options exercised (160,500) 0.68

Balance as of 31 December 2004 2,715,750 1.11

Options granted 132,000 1.01Options forfeited (132,000) 1.38Options exercised (316,750) 0.76

Balance as of 31 December 2005 2,399,000 1.05

The options outstanding as of 31 December 2005 have been separated into ranges of exercise priceas follows:

WeightedOptions Weighted Options average

outstanding average Weighted exercisable exerciseas of remaining average as of price of

Exercise 31 December contractual exercise 31 December optionsprice 2005 life (years) price 2005 exercisable

US$ US$ US$

0.68 1,248,750 6.72 0.68 1,189,750 0.681.08 22,000 5.72 1.08 - 1.081.52 996,250 8.13 1.52 249,073 1.520.90 88,000 8.88 0.90 - 0.901.25 44,000 9.05 1.25 - 1.25

2,399,000 1,438,823

2. VS:

In December 2003, VS authorised three stock option plans to its employees and to serviceproviders; Israeli Stock Option Plan 2003, Global Stock Option Plan 2003 and US Stock OptionPlan 2003. According to the plan, VS reserved 2,300,000 options exercisable into VS shares.The options expire within 10 years from the date of grant. As of 31 December 2005, the VSoptions balance includes 855,000 options of VS’s employees and 54,000 options of VS’sservice providers.

The exercise price of the options granted under the plan is $0.07 per share.

E. SHARE-BASED PAYMENTS EXPENSE:

The cost of equity settled transactions is measured by reference to the fair value at the date atwhich they were granted. The weighted average fair value of options granted by the Company in2004 was estimated based on the following data and assumptions: weighted average share price- £0.88 ($1.57); exercise price - £0.88 ($1.57); expected volatility - 31.9 per cent; risk-free interestrate 3.5 per cent, and expected average life of options - 6.5 years.


VISONIC52


NOTE 19 | SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF INCOME


2004 2005

US$ ‘000 US$ ‘000

A. COST OF SALES:

Materials consumed 16,524 20,307Salary and related benefits *) 6,783 7,288Subcontractors 1,809 780Depreciation 1,047 1,093Other manufacturing costs 2,833 2,937Decrease (increase) in inventory of work in progress 147 (306)Decrease in inventory of finished goods 263 578

29,406 32,677

B. RESEARCH AND DEVELOPMENT COSTS:

Salary and related benefits *) 3,579 3,296Purchase of materials 188 247Subcontractors 753 501Travelling and accommodation 161 117Maintenance of vehicles 333 309Other expenses 399 449

Research and development costs, gross 5,413 4,919Less - participation of the Chief Scientist (417) (254)

Research and development costs, net 4,996 4,665

C. SELLING AND MARKETING EXPENSES:

Salary and related benefits *) 6,737 6,752Lease of offices and maintenance 777 844Advertising and marketing expenses 1,748 2,387Depreciation 147 170Professional fees 360 184Travelling and accommodation 1,100 1,038Delivery, export and insurance 826 1,273Other 1,855 1,470

13,550 14,118

D. GENERAL AND ADMINISTRATIVE EXPENSES:

Salary and related benefits *) 1,491 1,833Maintenance of offices 205 222Professional fees 600 967Depreciation and amortisation 348 291Bad debts, net 255 51Other 611 571

3,510 3,935

*) Restated. See Note 2q.





2004 2005

US$ ‘000 US$ ‘000

E. FINANCIAL INCOME (EXPENSES), NET:

Income from deposits and investments 240 569Interest expenses on bank loans (437) (709)Exchange rate differences, net 1,025 (406)

828 (546)

F. OTHER EXPENSES, NET:

Capital loss from sale of property and equipment (10) (19)Other (149) (9)

(159) (28)

NOTE 20 | EARNINGS PER SHARE The following reflects the income and share data used in the basic and diluted earnings per sharecomputations:


2004 2005

Net profit attributable to Ordinary equity holders of the Company for basic and diluted earnings per share 3,308 5,036

Weighted average number of Ordinary shares for basic earnings per share 37,151,584 40,629,711Effect of dilution:Share options 866,296 274,386

Adjusted weighted average number of Ordinary shares for diluted earnings per share 38,017,880 40,904,097

NOTE 21 | FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS:

The following methods and assumptions are used by the Company and its investees in estimatingthe fair value of their financial instruments:

The carrying amounts of cash and cash equivalents, short-term deposits, trade receivables, otheraccounts receivable, credit from banks, employees and payroll accruals, trade payables and othercurrent liabilities, approximate their fair value due to the short-term maturity of such instruments.

The carrying amount of the Company’s long-term bank loans approximates their fair value based onthe Company's incremental borrowing rates for similar type of borrowing arrangements.


VISONIC54


NOTE 21 | FINANCIAL INSTRUMENTS (CONT.)

CONCENTRATION OF CREDIT RISK:

Financial instruments that potentially subject the Company and its subsidiaries to concentration ofcredit risk consist principally of cash and cash equivalents, short and long-term deposits, held tomaturity securities and trade receivables.

Cash and cash equivalents are invested in major banks in Israel, Europe and the United States. Suchdeposits in the United States and Europe may be in excess of insured limits and are not insured inother jurisdictions. Management believes that the financial institutions that hold the Company'sinvestments are financially sound and, accordingly, minimal credit risk exists with respect to theseinvestments.

The Company's trade receivables are mainly derived from sales to customers in Europe, NorthAmerica and the Far East.

The Company performs ongoing credit evaluations of its customers and to date has not experiencedany material losses. An allowance for doubtful accounts is determined with respect to those amountsthat the Company has determined to be doubtful of collection.

FOREIGN CURRENCY RISK:

The Company sells its products in several countries and, as a result, is exposed to movements inforeign currency exchange rates. The primary purpose of the Company’s foreign currency hedgingactivities is to protect against the volatility associated with foreign currency created in the normalcourse of business. The Company primarily utilises forward exchange contracts with maturities ofless than 12 months and foreign currency options to hedge foreign-currency-denominated firmfinancial commitments. Any gains or losses arising from changes in the fair value of the hedged itemand the hedging instruments are carried directly to the net profit and loss for the period.

The Company does not use foreign currency forward exchange contracts or purchased currencyoptions for trading purposes.

When possible, it is the Company's policy to negotiate the terms of the hedged derivatives to matchthe terms of the hedged item to maximise hedge effectiveness.

As of 31 December 2005, the Company has no forward exchange contracts and no foreign currency options.

The total gain resulting from derivative financial instruments for the year ended 31 December 2005was $11,760.




NOTE 22 | BALANCES AND TRANSACTIONS WITH RELATED PARTIES

A. BALANCES WITH RELATED PARTIES: As of 31 December

2004 2005

Linkage basis US$ '000 US$ '000

CURRENT ASSETS:

Trade receivables - related company US dollar 107 96Related company - 115

NON-CURRENT ASSETS:

Related company - 707

CURRENT LIABILITIES:

Related company CPI 99 51

Related party CPI 805 28

B. TRANSACTIONS WITH RELATED PARTIES: Year ended 31 December

2004 2005

US$ '000 US$ '000

REVENUES:

Sales to investees (1) 292 184

EXPENSES:

Salary bonus and other benefits to related party employed by the Company 760 1,089Non executive directors fee 64 73Rental fees payable to related party (2) 873 1,024

(1) The amount shown represents sales to Visonic Deson, a jointly controlled entity.(2) See Note 17b (1).


VISONIC56


NOTE 23 | DIRECTORS REMUNERATIONA. In April 2004, the Board of Directors of the Company ("the Board") resolved to enter into new

employment agreements with each of Yaacov Kotlicki (see (1) below), Avigdor Shachrai (see (2)below) and Shmuel Koren (see (3) below) and to appoint Mr. Walter Goldsmith and Mr. AnthonyMcCann as non-executive directors of the Company. (See (4) below). In March 2005, the Boardapproved an updating of these employment agreements.

(1) Yaacov Kotlicki’s annual salary under the agreement is NIS360,000 (equivalent to $79,000)(linked to the Israeli Consumer Price Index) and the agreement also entitles him to socialbenefits and a bonus of 2.5 per cent of the annual operating profit of the Group and, inaddition, a bonus of up to 50 per cent of his annual salary depending upon the success andprofitability of the Group and a company car. The agreement is terminable by either party onthree months’ prior written notice to the other.

(2) Avigdor Shachrai’s annual salary under the agreement is NIS900,000 (equivalent to $197,000) and the agreement also entitles him to social benefits and a bonus of up to 25 percent of his annual salary in the event the Company achieves its annual targets and up to 50per cent of his annual salary in the event the Company significantly exceeds its annual targetsand a company car. The agreement is terminable by either party on six months’ prior writtennotice to the other.

(3) Shmuel Koren’s annual salary under the agreement was NIS516,000 (equivalent to $113,000), Commencing April 2005 his salary has been raised to NIS552,000 (equivalent to$120,000) on annual basis. The agreement also entitles him to social benefits and a bonusof up to 50 per cent of his annual salary in the event the Company significantly exceeds itsannual targets and a company car. The agreement is terminable by either party on sixmonths’ prior written notice to the other.

(4) According to the agreements, the appointment of Mr. Walter Goldsmith and Mr. AnthonyMcCann as non-executive directors of the Company shall be for an initial period of 12 monthfrom the appointment date but it may be terminable by either party upon three months priorwritten notice to the other party. The non-executive directors annual fee under the agreementis £20,000 each (equivalent to $38,000 each).

B. DIRECTORS:Year ended 31 December

2004 2005

US$ '000 US$ '000

Salary (1) 343 (1) 402Fee (2) 64 (2) 73Bonus 160 385Other benefits 192 229

Total 759 1,089

(1) Includes three directors.(2) Includes two directors.




C. DIRECTORS SHAREHOLDINGS IN THE COMPANY:

Per cent of issue Shareholder Ordinary shares share capital

Yaacov Kotlicki 25,829,000 63.16

Batia Kotlicki 500 *) -

Akiva Laxer (held in trust for Yaacov Kotlicki) 1,828,620 4.47

S.M.D. Advanced Technologies Limited (1) 1,828,620 4.47

Avi Shachrai 20,000 0.05

Shmuel Koren 1,000 *) -

Walter Goldsmith 30,000 0.07

Anthony McCann 6,000 0.01

Total 29,543,740 72.23

(1) A company wholly owned by Yaacov Kotlicki.*) Less than 0.01 per cent.

D. Yaacov Kotlicki and S.M.D. rent properties to the Company. The rental fee is mentioned inNote 22(b) and Note 17(b)(1).

NOTE 24 | INTEREST IN JOINT VENTUREThe Company has a 50 per cent interest in the assets, liabilities, expenses and output of Visonic Deson Limited, which is involved in the marketing and support of electronic security andalarm systems.

The Company's share of the assets, liabilities, revenue and expenses of the joint venture, which areincluded in the consolidated financial statements, were as follows:

As of 31 December

2004 2005

US$ '000 US$ '000

BALANCE SHEET ITEMS:

Current assets 173 189

Current liabilities 140 241


2004 2005

US$ '000 US$ '000

STATEMENT OF OPERATIONS ITEMS:

Revenue 315 246

Cost of revenues 265 191

Operating expenses 68 138

Net loss (18) (86)


VISONIC58


NOTE 25 | SEGMENTS REPORTING

A. GENERAL:

1. The Group companies operate in two principal business segments: location tracking systemsand security and home management.

2. The segment's assets include all the operating assets which are used by the segment andare composed mainly of cash and cash equivalents, checks receivable, trade receivables,equipment and other assets. Most of the assets are attributed to a specific segment. Theamounts for certain assets that are used together by two or more segments are attributed tothe segments on a reasonable basis.

3. The segment's liabilities include all the operating liabilities that derive from the operatingactivities of the segment and are composed mainly of trade payables and other accountspayable. The segment's assets and liabilities do not include taxes on income.

B. THE FOLLOWING DATA IS PRESENTED IN ACCORDANCE WITH IAS 14:Year ended 31 December 2004

Security and Locationhome tracking Total

management systems Adjustments consolidated

US$ '000 US$ '000 US$ '000 US$ '000

Total revenues 49,231 5,898 - 55,129Segment operating profit (loss) 4,604 (1,322) - *) 3,522

Unallocated financial income, net *) 828Other expenses, net (159)Taxes on income *) (979)

Net profit *) 3,212

ADDITIONAL INFORMATION:

Assets of the segment 47,378 4,085 (3,720) 47,743Unallocated joint assets *) 1,622Total assets in consolidation 49,365

Liabilities of the segment 9,533 4,417 (3,720) 10,230Joint unallocated liabilities 9,149

Total liabilities in consolidation 19,379

Capital investments 1,103 101 - 1,204

Depreciation and amortisation 1,259 283 - 1,542

*) Restated. See Note 2b and 2q.




Year ended 31 December 2005

Security and Locationhome tracking Total

management systems Adjustments consolidated

US$ '000 US$ '000 US$ '000 US$ '000

Total revenues 55,568 7,213 - 62,781

Segment operating profit 7,194 36 - 7,230

Unallocated financial expenses, net (546)Other expenses, net (28)Taxes on income 1,620

Net profit 5,036

ADDITIONAL INFORMATION:

Assets of the segment 52,417 4,893 (2,366) 54,944Unallocated joint assets 1,293

Total assets in consolidation 56,237

Liabilities of the segment 10,500 2,752 (2,366) 10,886Joint unallocated liabilities 9,681

Total liabilities in consolidation 20,567

Capital investments 3,010 136 - 3,146

Depreciation and amortisation 1,368 274 - 1,642

C. GEOGRAPHICAL SPLIT OF SALES:

Below are the consolidated sales of the Group according to geographic markets without taking intoaccount the location where the product was manufactured.


2004 2005

US$ '000 US$ '000

Mainland Europe 27,783 34,457North America 11,783 12,371U.K. 7,411 5,778Israel 2,807 2,955Far East and Pacific 1,902 2,631Other 3,443 4,589

55,129 62,781

NOTE 26 | EVENTS SUBSEQUENT TO THE BALANCE SHEET

On 26 February 2006, the Company closed an agreement with TMT Telemedicine - Web MedicalCenter LLC ("TMT") and its controlling shareholders (as defined in the agreement) to invest EUR711,366 through issuance of shares in TMT which reflects holdings of 12.15 per cent, on a fullydiluted basis of the outstanding capital stock of TMT.

TMT was founded in 2003 in Lyon, France. TMT develops service solutions for home care, based ontelemedicine technologies.



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