**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**

**(Mark One)**

**x**                                 AnnualReport Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934

**Forthe fiscal year ended September 30, 2006**

**or**

**o**                                   TransitionReport pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934

**Forthe transition periodfrom                      to                      **

**Commissionfile number 000-22673**

**Sirona DentalSystems, Inc.**

(Exact name of registrantas specified in charter)

| **Delaware**                                                     |   | ** ** |   | **11-3374812**                        |
|------------------------------------------------------------------|--------|------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   |       |   | (I.R.S. Employer  Identification No.) |
| **30-00 47th Avenue, Long Island City,  New York**               |   | **11101**  |   | **(718) 937-5765**                    |
| (Address of  principal executive offices)                        |   | (Zip Code) |   | (Telephone No.)                       |

 

Securities RegisteredPursuant to Section 12(b) of the Act:

| **Title of each class**                  |   | **Name of each exchange on which registered** |
|------------------------------------------|--------|-----------------------------------------------|
| Common stock, par  value $0.01 per share |   | NASDAQ                                        |

 

Securities Registered Pursuant toSection 12(g) of the Act:

**None**

**(Titleof class)**

**Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.**

**Yes **o No  x

**Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.**

**Yes **o No x

**Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.**

**Yes**x No o

**Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. **x

**Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):**
| **Large accelerated filer ****o** | **Accelerated  filer****x** | **Non-accelerated  filer ****o** |
|----------------------------------------|-----------------------------|---------------------------------------|

** **

**Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Act).**

**Yes **o No x

The aggregate market valueof Common Stock held by non-affiliates of the registrant as of March 31,2006 the last business day of the registrant’s most recently completed secondfiscal quarter was approximately $581,650,418. Such aggregate market value iscomputed by reference to the closing sale price of the Common Stock on suchdate.

As of December 4,2006, the number of shares outstanding of the Registrant’s Common Stock, parvalue $.01 per share, was 54,624,602.

**DOCUMENTSINCORPORATED BY REFERENCE:**

Portionsof the registrant’s definitive proxy statement for its 2007 annual meeting ofstockholders, which is expected to be filed with the Securities and ExchangeCommission not later than January 28, 2007 are incorporated by referenceinto Part III of this report on Form 10-K. In the event suchproxy statement is not filed by January 28, 2007 the required informationwill be filed as an amendment to this report on Form 10-K no laterthan that date.

 

----

**FORWARD-LOOKINGSTATEMENTS**

This Form 10-K Annual Report containsforward-looking statements that involve risk and uncertainties. All statements,other than statements of historical facts, included in this Annual Reportregarding the Company, its financial position, products, business strategy andplans and objectives of management of the Company for future operations, areforward-looking statements. When used in this Annual Report, words such as“anticipate,” “believe,” “estimate,” “expect,” “intend,” “objectives,” “plans”and similar expressions, or the negatives thereof or variations thereon orcomparable terminology as they relate to the Company, its products or itsmanagement, identify forward-looking statements. Such forward-lookingstatements are based on the beliefs of the Company’s management, as well asassumptions made by and information currently available to the Company’smanagement. Actual results could differ materially from those contemplated bythe forward-looking statements as a result of various factors, including, butnot limited to, those contained in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in Item 7 of this Annual Reportand the “Risk Factors” set forth in Item 1A of this Annual Report. All forwardlooking statements speak only as of the date of this Annual Report and areexpressly qualified in their entirely by the cautionary statements included inthis report. We undertake no obligation to update or revise forward-lookingstatements which maybe made to reflect events or circumstances that arise afterthe date made or to reflect the occurrence of unanticipated events other thanrequired by law.

2

----

**Tableof Contents**

|                              | ** ** | **Page**                                                                                                            | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ***Item of Form 10-K*** | ** ** | ** **                                                                                                          | ** ** |
| Part I                  |       |                                                                                                                |       |   |
|                         | Item 1.    | Business                                                                                                            |       | 4 |   |
|                         | Item 1A.   | Risk  Factors                                                                                                       |       | 12 |   |
|                         | Item 1B.   | Unresolved  Staff Comments                                                                                          |       | 20 |   |
|                         | Item 2.    | Properties                                                                                                          |       | 20 |   |
|                         | Item 3.    | Legal Proceedings                                                                                                   |       | 21 |   |
|                         | Item 4.    | Submission  of Matters to a Vote of Security Holders                                                                |       | 21 |   |
| Part II                 |       |                                                                                                                |       |   |
|                         | Item 5.    | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       | 22 |   |
|                         | Item 6.    | Selected  Financial Data                                                                                            |       | 23 |   |
|                         | Item 7.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 27 |   |
|                         | Item 7A.   | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 45 |   |
|                         | Item 8.    | Financial  Statements and Supplementary Data                                                                        |       | 46 |   |
|                         | Item 9.    | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               |       | 46 |   |
|                         | Item 9A.   | Controls and  Procedures                                                                                            |       | 46 |   |
|                         | Item 9B.   | Other Information                                                                                                   |       | 48 |   |
| Part III                |       |                                                                                                                |       |   |
|                         | Item 10.   | Directors  and Executive Officers of the Registrant                                                                 |       | 49 |   |
|                         | Item 11.   | Executive Compensation                                                                                              |       | 49 |   |
|                         | Item 12.   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       | 49 |   |
|                         | Item 13.   | Certain  Relationships and Related Transactions                                                                     |       | 49 |   |
|                         | Item 14.   | Principal  Accountant Fees and Services                                                                             |       | 49 |   |
| Part IV                 |       |                                                                                                                |       |   |
|                         | Item 15.   | Exhibits  and Financial Statements                                                                                  |       | 50 |   |

 

3

----

**PART I**

**ITEM 1.**                BUSINESS

***Overview***

Sirona DentalSystems, Inc. (“Sirona” or the “Company”) is a leading manufacturer ofhigh-tech dental equipment. Sirona focuses on developing innovative systems andsolutions for dentists globally. Sirona provides a broad range of advancedproducts in each of the four primary areas:

·       Dental CAD/CAM Systems;

·       Imaging Systems;

·       Treatment Centers; and

·       Instruments.

Sirona distributes its products globally to dentalpractices, clinics and laboratories through an international network ofdistributors. The distributors typically cover both dental equipment andconsumables, and, therefore, have regular contact with the ultimate end-users.

Sirona’s revenue for theyear ended September 30, 2006 was $520.6 million. Sirona sells itsproducts globally, with the U.S. market contributing 30% of revenue, or $156.7million, and the rest of the world contributing 70% of revenue, or $363.9million.

***History***

The history of Sirona dates back to the establishmentof Reiniger, Gebbert & Schall, which introduced the first electricaldrill machine in 1882. In 1925, the company became part of Siemens &Halske Group and in 1934 launched the smallest x-ray in the world, enablingdental x-rays for the first time. In 1956, Siemens introduced the Sirona brandfor a treatment center and in 1958 the group developed the first ball-bearingturbine for dental drills.

In 1997, funds advised by the financial sponsor,Permira, acquired the dental business (Sirona) from Siemens in a leveragedbuy-out transaction. Following the transaction, Sirona substantially increasedits international sales and intensified its focus on product innovations. InNovember 2003, Permira sold Sirona to the Scandinavian financial sponsorEQT and management in a leveraged buy-out transaction that closed onFebruary 16, 2004. On April 30, 2005, funds managed by MadisonDearborn Partners, a private equity firm, and Sirona’s management entered intoan agreement to acquire Sirona in a leveraged buy-out transaction that closedon June 30, 2005.

On September 25, 2005, SchickTechnologies, Inc. (“Schick”) entered into an Exchange Agreement withSirona Holdings Luxco S.C.A. (“Luxco”) and Sirona Holding GmbH (“SironaHolding”) providing for the issuance of 36,972,480 shares of Schick commonstock to Luxco in exchange for Luxco’s entire economic interest in SironaHolding, which consisted of all of the issued and outstanding share capital ofSirona Holding and the existing indebtedness of Sirona Holding owed to Luxco inthe principal amount of €151.0 million ($182.0million) plus accrued interest (the “Exchange”). On June 20, 2006, theExchange closed and Schick, a Delaware Corporation formed in 1997, was renamedSirona Dental Systems, Inc. Even though Sirona Holding became a subsidiaryof Schick upon the completion of the Exchange, Sirona Holding was deemed theacquiring corporation for accounting purposes because Luxco received acontrolling ownership interest in the Company, Sirona Holding’s designeesconstitute a majority of the members of the Company’s board of directors andSirona Holding’s senior management represent a majority of the seniormanagement of the Company.

4

----

Schick’s business wasfounded in 1992 and it completed an initial public offering of its common stockon July 1, 1997. Our common stock is currently traded publicly on theNASDAQ Global Select Market. In connection with the Exchange, we changed ourtrading symbol to “SIRO” from “SCHK”. Previously, from September 16, 1999through December 20, 2005, Schick’s common stock was traded on theOver-the-Counter (“OTC”) Bulletin Board under the trading symbol “SCHK”.

**Industry/Products**

***Overview***

The global dental market encompasses the diagnosis,treatment and prevention of disease and ailments of the teeth, gums andsupporting bone. This market has enjoyed steady growth over the past few years,driven by a number of factors, including an increased desire for aesthetics, ademographic shift towards an aging population coupled with a desire to retaintooth structure later in life, growth in disposable income, a desire for moreconvenience on the part of both dentists and patients, a shift towards privatepay, a greater need for dental preventative care and technological innovation.

The global dental market has been impacted bytechnological developments that allow a dentist to increase productivity. Thisis particularly important in markets where demand for dental services isincreasing and the supply of dentists remains fixed. In addition, technologicaldevelopments allow dentists to offer higher quality treatment to patients. Webelieve that the high-tech end of the dental market is growing at a faster pacethan the overall dental market and that this trend will continue over time.

Recent technological advancements in the dentalequipment industry include digital radiography, CAD/CAM technology, intra oralcameras and periodontic instruments.

Dental equipment comprises the whole workingenvironment of a dentist or dental technician, including the dentist’s chair,lights, imaging systems, computer imaging systems and dental CAD/CAM systems,instruments, as well as practice furniture and other dental or laboratoryequipment. Investments in dental equipment are capital intensive and theaverage product life cycle ranges between 10–20 years (shorter forinstruments), depending on the nature and quality of the dental equipment.

Dental consumablescomprise all materials and consumables utilized by the dental technician, oralsurgeon, orthodontist or dentist in their daily work. These include preciousmetal alloys or ceramics and orthodontics as well as other filling andimpression materials.

***Products***

Our principal products can be generally classifiedinto the following categories: Dental CAD/CAM Systems, Imaging Systems,Treatment Centers and Instruments.

Set forth below is a briefdescription of each of our segments. See Note 23 to our consolidated financialstatements for revenues and gross profit by segment as well as assets bysegment for the last three and two fiscal years, respectively.

***Dental CAD/CAM Systems***

Dental CAD/CAM Systems address the worldwide marketfor dental restorations, which includes several types of restorations, such asinlays, onlays, veneers, crowns, bridges, copings and bridge frameworks madefrom ceramic, metal or composite blocks. The global market for dentalrestorations can be divided into two sub-segments: hand-made in-mouth filingsand out-of-mouth pre-shaped restorations. CAD/CAM-produced ceramic restorationsrepresent a small but growing part of the out-of-mouth restoration market.Although the number of out-of-mouth restorations prepared with CAD/CAM systemshas increased over the last three years, the number of dental practitioners anddental laboratories using 

5

----

CAD/CAM technologyworldwide is still low. For example, Sirona estimates that market penetrationin the United States is approximately 6% and in Germany approximately 10%.

Sirona pioneered the application of high-tech CAD/CAMtechniques to the traditional lab-based restoration process with thecommercialization of the CEramic REConstruction, or CEREC, method. Sirona’sCEREC system is an in-office application which enables the dentist to producehigh quality restorations from ceramic material and insert them into thepatient’s mouth during a single appointment. CEREC represents an advantageoussubstitute for the traditional out-of-mouth pre-shaped restoration method,which requires a dentist to send a model of the damaged tooth to a dentallaboratory, and therefore multiple patient visits. The system consists of animaging and a milling unit. The imaging unit scans the damaged area, capturesthe image of the tooth or teeth requiring restoration and proposes thespecifications for the restoration. The milling unit then mills the ceramicrestoration to the required specifications based upon the captured image. Theresult is a biocompatible, non-metallic, natural-looking restoration made ofdurable, high-quality ceramic materials, in a single treatment session.Independent studies indicate that CEREC ceramic restorations, in addition tothe benefit of appearing natural-looking, are as durable as gold and canreplace conventional restoration materials for most procedures. In fiscal year2003, Sirona launched its current CEREC product, which has been periodicallyupdated, including enhanced software applications, such as ‘‘CEREC Crown’’, andreducing the duration of the milling process by 40%. Additionally, Sironaoffers a service contract on its CEREC product which includes software updatesand upgrades on a when-and-if-available basis and maintenance onsoftware-related hardware.

In addition to CEREC, Sirona also offers the productsinLab and inEos for dental laboratories. These products are designed to improveefficiency and reduce costs for the dental lab. Inlab scans the model receivedfrom the dentist and mills the ceramic restoration, such as crown copings,bridge frameworks from ceramic or composite blocks, to the specifications ofthe captured image. The inEos scanner, which was launched in 2005, is a high speedscanner which produces 3D digital images from a single tooth up to a jaw,directly from the plaster model. The inEos product has scanning times of lessthan 10 seconds, a significant factor which enhances productivity.

In 2004, Sirona started its central restorationservice business for copings and bridge-frameworks in Germany and expandedservice to the United States in 2006. This service allows dental labs to scan aplaster model received from the dentist and transmit the digital image directlyto Sirona via the internet, where the bridge or coping is created at a centralmanufacturing site, with the final product shipped directly to the lab in amore efficient manner.

The Dental CAD/CAM Systemssegment contributed 35%, 37% and 31% to Sirona’s revenue for the year endedSeptember 30, 2006 and for the aggregated years ended September 30,2005 and 2004, respectively, making this segment the largest contributor toSirona’s revenue.

***Imaging Systems***

Imaging Systems comprise a broad range of equipmentfor diagnostic imaging in the dental practice, using both film-based anddigital technologies. Sirona has developed a comprehensive range of imagingsystems for panoramic and intra-oral applications. This allows the dentist toaccommodate the patient in a more efficient manner.

Intra-oral x-ray equipment uses image-capture devices(film or sensor), which are inserted into the mouth behind the diagnostic area,and typically take images of one or two teeth. Panoramic x-ray equipmentproduces images of the entire jaw structure by means of an x-ray tube and animage capture device, which rotates around the head.

6

----

In July 2004, Sirona introduced its nextgeneration of digital panoramic ray systems, the Orthophos XG line. Theflagship model, the Orthophos XG Plus, provides specialists, orthodontists,oral surgeons and implantologists with over 30 programs and a wide variety ofdiagnostic possibilities. Other models of the family include the Orthophos XG 5which is designed for general dental practitioners, and the basic modelOrthophos XG 3.

As a result of the Exchange, we have expanded ourimaging system product line to include Schick’s CDR (computed digitalradiography) system, which is the leading intra-oral digital imaging system inthe United States based on CMOS technology and the Schick Pan, a digitalpanoramic unit.

The Imaging Systemssegment contributed 26%, 22% and 21% to Sirona’s revenue for the year endedSeptember 30, 2006 and for the aggregated years ended September 30,2005 and 2004, respectively.

***Treatment Centers***

Treatment Centers comprise a broad range of productsfrom basic dentist chairs to sophisticated chair-based treatment centers withintegrated diagnostic, hygiene and ergonomic functionalities, as well asspecialist centers used in preventative treatment and for training purposes.Sirona offers specifically configured products to meet the preferences ofdentists within each region in which it operates. Sirona’s treatment centerconfigurations and system integration are designed to enhance productivity bycreating a seamless workflow within the dental practice. Sirona’s centerstherefore allow the dentist to both improve productivity and increase patientsatisfaction, significant factors in adding value to his or her practice. InOctober 2004, Sirona acquired one of the leading Chinese manufacturers ofbasic treatment centers, located in Foshan (South China). These basic productswill be manufactured both for the domestic Chinese market and for exportmarkets.

The Treatment Centerssegment contributed 25%, 28% and 32% to Sirona’s revenue for the year endedSeptember 30, 2006 and for the aggregated years ended September 30,2005 and 2004, respectively.

***Instruments***

Sirona offers awide range of instruments, including handheld and power-operated handpieces forcavity preparation, endodontics, periodontology and prophylaxis. Theinstruments are supplemented by multi-function tips, supply and suction hoses,as well as care and hygiene systems for instrument preparation. Sirona’sinstruments are often sold as packages in combination with treatment centers.In 2005, Sirona introduced several new products, including:

·       SIROLaser, a versatile,compact, handy diode laser that can be used in endodontics, periodontology andoral surgery;

·       PerioScan, an all-in-oneultrasonic scaling unit, enabling both diagnosis and treatment of dentalcalculus with a single device; and

·       SIROEndo, a root canalpreparation unit that can be attached to any treatment center.

Sirona intends to continue to strengthen the positionof its Instruments segment as a diversified supplier of high-quality, reliable,user-friendly and cost-efficient dental instruments.

The Instruments segmentcontributed 14%, 14% and 16% to Sirona’s revenue for the year ended September 30,2006 and for the aggregated years ended September 30, 2005 and 2004,respectively.

7

----

***Manufacturingand Suppliers***

Our main manufacturing and assembly activities arelocated in Bensheim, approximately 60 kilometers south of Frankfurt am Main,Germany. We also operate smaller manufacturing sites in New York, Italy,Denmark and China. All of our facilities are in good condition.

Our New York and Bensheim facilities have establishedand maintain a Quality Management System that is registered to ISO 9001:2000and IS 13485:2003, and also maintain a Device Establishment Registration withthe United States Food and Drug Administration.

Manufacturing consists primarily of assembly, systemsintegration and testing. We generally outsource manufacturing of parts andcomponents used in the assembly of our products but own the design and toolsused by our key component suppliers. We do, however, manufacture most of theprecision parts used for our instruments and we also operate an ElectronicCenter, for the supply of electronic boards and components.

We purchase variouscomponents for our products from a number of outside suppliers. We currentlyhave established relationships with approximately 1,300 suppliers, of which weview approximately 390 as “key suppliers”. Each supplier is selected accordingto stringent quality criteria, which are reviewed regularly. In general, we donot believe we are dependent on one or a small group of suppliers and believewe could locate alternative suppliers if needed. Some of our suppliers,however, are single source in order to allow for enhanced quality assurance andpotential for joint product development. The need to replace one of our singlesource suppliers could cause a disruption in our ability to timely delivercertain of our products. See “ITEM 1A—Risk Factors’’—The Company is dependentupon a limited number of suppliers for critical components. If these suppliersdelay or discontinue the manufacture of these components, the Company mayexperience delays in shipments, increased costs and cancellation of orders forits products.”

**Sales and Marketing**

Our sales and marketingefforts are directed through regional managers who oversee our salesprofessionals. These professionals work closely with our distribution partnersto maximize the efficiency and productivity of their sales efforts. Ourmarketing initiatives are focused on highlighting its leading role as a high-tech systems provider and industry innovator. In order to promote our brand andincrease client loyalty, our distribution partners are supported through wideranging advertising activities. In addition, we are a key presenter at allmajor dental exhibitions, which are critical forums for raising brand awarenessand new product introductions. Lastly, our product information is actively madeavailable to business publications, dentists, journals, professionalorganizations and dental schools and our website (www.Sirona.com) is animportant interactive platform for end-users as well as for distributors.

**Distribution**

Sirona distributes its products globally to dentalpractices, clinics and laboratories through an international network of morethan 300 distributors. See Note 23 to our consolidated financial statements fora description of our net sales and long lived assets by geographic region forthe last three fiscal years. Because distributors typically cover both dentalequipment and consumables, they have regular contact with the dentist and aretherefore optimally positioned to identify new equipment sale opportunities.Sirona’s primary distributors in the United States are Patterson Companies andHenry Schein, two of the world’s largest dental distributors. Outside of theUnited States, Henry Schein is the company’s largest distributor, and, alongwith Pluradent, primarily distributes for Sirona in Europe. Patterson Companiesand Henry Schein accounted for 28% and 17%, respectively (33% and 15%,respectively, on a pro forma basis), of Sirona’s revenue for the twelve monthsended September 30, 2006. Sirona distributes elsewhere through a welldeveloped network of independent regional players. Sirona works closely withits distributors by training their technicians and sale representatives withrespect to its products. With over 

8

----

3,600 sales and serviceprofessionals trained each year, Sirona is able to ensure high standards ofquality in after-sale service and the best marketing of its products. Thesuccess of Sirona’s products is evidenced by their importance to its distributionpartners, which in many cases are among their best selling offerings.

On April 27, 1998, Sirona and Patterson Companiesentered into an exclusive distribution agreement (the ‘‘DistributionAgreement’’) pursuant to which Patterson was appointed as the exclusivedistributor of Sirona’s CEREC CAD/CAM products within the United States andCanada. Under the terms of the Distribution Agreement, Patterson’s exclusivitywas to terminate on September 30, 2007. On June 30, 2005, Sirona andPatterson entered into an amendment of the Distribution Agreement whichextended Patterson’s exclusivity from October 1, 2007 throughSeptember 30, 2017. As consideration for the extension of its exclusivity,Patterson agreed to make a one-time payment to Sirona in the amount of $100million (the ‘‘Exclusivity Fee’’). In July 2005, Patterson paid theExclusivity Fee, in its entirety, to Sirona. The full amount of the ExclusivityFee was recorded as deferred revenue and will be recognized on a straight-linebasis commencing on October 1, 2007. In the event of termination of theDistribution Agreement (a) due to force majeure, (b) by Patterson dueto Sirona’s insolvency, or (c) by Sirona as a result of a failure byPatterson to meet its performance obligations, Sirona would be required torefund to Patterson a portion of the Exclusivity Fee as liquidated damages. Theamount of the Exclusivity Fee required to be refunded declines by $15 millionper year in each of fiscal 2008 through 2012 and by $5 million per yearthereafter. In the event of termination by Patterson due to a breach by Sironaof its exclusivity obligations, the unearned portion of the Exclusivity Fee (asdetermined on a straight line basis beginning in fiscal 2008) must be refundedto Patterson as liquidated damages. The extension did not modify or alter theunderlying provisions of the companies’ agreement through 2007, including theperformance criteria necessary to maintain the exclusivity. The performancecriteria are benchmark thresholds which afford Sirona the opportunity toabandon the exclusivity or to terminate the agreement with Patterson, but donot create minimum purchase obligations under a take-or-pay arrangement.

In April 2000, Schickand Patterson entered into an exclusive distribution agreement covering theUnited States and Canada; and as of May 1, 2000, Schick began marketingand selling its CDR dental products in the United States and Canada throughPatterson. This contract was amended in July 2005 and is due to expire onDecember 31, 2007 but provides that the parties will meet beforeexpiration of the term to discuss additional renewals of three years.

**Competition**

Competition in the globaldental market is fragmented by both geography and products. We compete with avariety of companies, including large international companies as well assmaller companies that compete regionally or on a more narrow product line.Sirona competes on the basis of its comprehensive and innovative product lineand its global distribution network.

**Research andDevelopment**

Sirona commits significantresources to research and development, with a particular focus on developingproducts that offer new diagnostic and treatment options, while increasing usercomfort and streamlining process efficiency. In recent years, Sirona hasconsistently spent more than 6% of its total revenue per year on research anddevelopment. In particular, Sirona spent approximately $25 million in 2004, $30million in 2005 and $33 million in 2006. Sirona employs 166 people in itsglobal research and development departments. Sirona also cooperates in itsresearch efforts with partners in research facilities and dental practicesaround the world.

9

----

**Patents, TradeSecrets and Proprietary Rights**

We seek to protect ourintellectual property through a combination of patent, trademark and tradesecret protection. We believe that our future success will depend in part onour ability to obtain and enforce patents for our products and processes,preserve our trade secrets and operate without infringing the proprietaryrights of others.

***Patents***

We have an activecorporate patent program, the goal of which is to secure patent protection forour technology. Sirona owns and maintains more than 1,000 patents throughoutthe world. The patents expire at various dates beginning in 2007 and ending in2025. We also license or sublicense some of the technology used in our productsfrom third parties.

***Trademarks***

We generally attempt tobuild brand awareness of our products through the use of trademarkregistrations. “Sirona”, “CEREC”, “Orthophos”, “Heliodent”, “inLab” and “CDR”are some of our key registered trademarks. In addition, we have common lawtrademark rights in several other names we use commercially in connection withour products.

***Trade Secrets***

In addition to patentprotection, we own trade secrets and proprietary know-how, which we seek toprotect, in part, through appropriate agreements with employees, and, to alimited degree, employment agreements with appropriate individuals. Theseagreements generally provide that all confidential information developed by ormade known to the individual by the Company during the course of theindividual’s relationship with the Company is the property of the Company, andis to be kept confidential and not disclosed to third parties, except inspecific limited circumstances. The agreements also generally provide that allinventions conceived by the individual in the course of rendering services tothe Company shall be the exclusive property of the Company. However, there canbe no assurances that these agreements will not be breached, that the Companywould have adequate remedies available for any breach or that the Company’s tradesecrets will not otherwise become known to, or independently developed by, itscompetitors.

**Regulation**

***Medical Devices***

Most of our products require certain forms ofgovernmental clearance, including, but not limited to, marketing clearance bythe United States Food and Drug Administration (the “FDA”) in accordance withthe Federal Food, Drug and Cosmetic Act, as amended (the “FD&C Act”) and byour Notified Body in accordance with the European Union’s Medical DeviceDirective 93/42/EEC (“MDD”).

The FDA and MDD review process typically requiresextended proceedings pertaining to product safety and efficacy. We believe thatour future success will depend to a large degree upon commercial sales ofimproved versions of our current products and sales of new products; we willnot be able to market such products in the U. S. or in the European Unionwithout FDA or MDD marketing clearance, respectively. There can be no assurancethat any products developed by us in the future will be given clearance byapplicable governmental authorities or that additional regulations will not beadopted or current regulations amended in such a manner as to adversely affectus.

Pursuant to the FD&C Act, the FDA regulates theintroduction, manufacture, advertising, labeling, packaging, marketing anddistribution of, and record-keeping for dental devices. The FDA classifies 

10

----

medical devices intendedfor human use into three classes: Class I, Class II, andClass III. The Company’s products are classified by the FDA intoClass I or II that renders them subject only to general controls thatapply to all medical devices, in particular regulations regarding alteration,misbranding, notification, record-keeping and good manufacturing practices.

The FD&C Act further provides that, unless exemptedby regulation, medical devices may not be commercially distributed in the U. S.unless they have been cleared by the FDA. There are two review procedures bywhich medical devices can receive such clearance. Some products may qualify forclearance under a Section 510(k) procedure, in which the manufacturersubmits to the FDA a pre-market notification that it intends to begin marketingthe product, and shows that the product is substantially equivalent to anotherlegally marketed product (i.e., that it has the same intended use and that itis as safe and effective as a legally marketed device, and does not raisedifferent questions of safety and effectiveness than does a legally marketeddevice). Certain Class I devices are exempt from the 510(k) pre-marketnotification requirement and manufacturers of such products may proceed tomarket without any submission to the FDA. In some cases, the510(k) notification must include data from human clinical studies.

Marketing in the U. S. may commence once the FDA issuesa clearance letter finding such substantial equivalence. According to FDAregulations, the agency has 90 days in which to respond to a510(k) notification. There can be no assurance, however, that the FDA willprovide a timely response, or that it will reach a finding of substantialequivalence.

If a product does not qualify for the510(k) procedure (either because it is not substantially equivalent to alegally marketed device or because it is a Class III device), the FDA mustapprove a Pre-Market Approval  (“PMA”)application before marketing can begin. PMA applications must demonstrate,among other things, that the medical device is safe and effective. A PMAapplication is typically a complex submission that includes the results ofclinical studies. Preparation of such an application is a detailed andtime-consuming process. Once a PMA application has been submitted, the FDA’sreview process may be lengthy and include requests for additional data. Bystatute and regulation, the FDA may take 180 days to review a PMA application,although such time may be extended. Furthermore, there can be no assurance thatthe FDA will approve a PMA application.

The products that we distribute in the European Unionbear the “CE Mark,” a European Union symbol of compliance with qualityassurance standards and with the MDD. In order to market our products in themember countries of the European Union, it is necessary that those productsconform to these standards and the MDD. Our Bensheim facility which is engagedin the manufacturing of Class IIa and Class IIb medical devices asdefined by the MDD is ISO 13485 certified. It is also necessary that ourproducts comply with any revisions which may be made to these standards or theMDD.

Medical devices are subject to ongoing regulatoryoversight by the FDA and our Notified Body. The FD&C Act and the MDDrequire that all medical device manufacturers and distributors register withthe FDA and the relevant Notified Body annually and provide the FDA and theNotified Body with a list of those medical devices which they distributecommercially. The FD&C Act and the MDD also requires that all manufacturersof medical devices comply with labeling requirements and manufacture theirproducts and maintain their documents in a prescribed manner with respect tomanufacturing, testing, and quality control activities. The FDA’s MedicalDevice Reporting regulation and the MDD subject medical devices to post-marketreporting requirements for death or serious injury, and for certain malfunctionsthat would be likely to cause or contribute to a death or serious injury ifmalfunction were to recur. In addition, the FDA and the MDD prohibit a devicewhich has received marketing clearance from being marketed for applications forwhich marketing clearance has not been obtained. Furthermore, the FDA generallyrequires that medical devices not cleared for marketing in the U.S. receive FDAmarketing clearance 

11

----

before they are exported,unless an export certification has been granted. The FDA and our ISO NotifiedBodies regularly inspect our registered and/or certified facilities.

Failure to comply withapplicable regulatory requirements can, among other consequences, result infines, injunctions, civil penalties, suspensions or loss of regulatoryapprovals, product recalls, seizure of products, operating restrictions andcriminal prosecution. In addition, governmental regulations may be establishedthat could prevent or delay regulatory clearance of our products. Delays inreceipt of clearance, failure to receive clearance or the loss of previouslyreceived clearance would have a material adverse effect on our business,financial condition and results of operations.

***Environmental,Health and Safety Matters***

In addition to laws andregulations discussed above, we are subject to government regulationsapplicable to all businesses, including, among others, regulations related tooccupational health and safety, workers’ benefits and environmental protection.The extent of government regulation that might result from any futurelegislation or administrative action cannot be accurately predicted. Failure tocomply with regulatory requirements could have a material adverse effect on ourbusiness, financial condition and results of operations.

**Employees**

As of September 30,2006, the Company had 1,978 employees. The Company believes that its relationswith its employees are good. No Company employees are represented by laborunions or are subject to a collective bargaining agreement in the UnitedStates. Approximately 350 of our German employees are members of IG Metallunion. We have not experienced any work stoppages due to labor disputes.

**Executive Officers**

See Part III, Item 10of this 10-K Report for information about Executive Officers of theRegistrant.

**Available Information**

Information about theCompany’s products and services, stockholder information, press releases, andfilings with the Securities and Exchange Commission (“SEC”) can be found on theCompany’s Internet website at **http://www.Sirona.com**.The information contained on our website is for informational purposes only andis not incorporated by reference into this Annual Report. The Company’s annualreports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form8-K, and other SEC filings, and any amendments to such reports and filings, areavailable free of charge at the Investor Relations section of the Company’swebsite as soon as reasonably practical after the company’s material is filedwith, or furnished to, the SEC.

**ITEM1A.**        RISK FACTORS

These risk factors may beimportant to understanding any statement in this Annual Report on Form 10-Kor elsewhere. The following information should be read in conjunction withManagement’s Discussion and Analysis (MD&A), and the consolidated financialstatements and related notes incorporated by reference in this report.

Our businesses routinelyencounter and address risks, some of which will cause our future results to bedifferent—sometimes materially different—than we presently anticipate.Discussion about the material operational risks that our businesses encountercan be found in Management’s Discussion and Analysis (MD&A), in thebusiness descriptions in Item 1. of this Form 10-K and in previousSEC Filings. Below, we have described our present view of the materialrisks facing our business. Our reactions to material 

12

----

futuredevelopments as well as our competitors’ reactions to those developments willdetermine our future results.

***We must develop new products and enhancements toexisting products to remain competitive.***

We are currentlydeveloping new products and enhancements to existing products. We cannot assureyou that we will initiate, continue with and/or succeed in our efforts todevelop or enhance such products. It is expected that we will file510(k) applications with the Food and Drug Administration, or FDA, andsimilar filings with governmental authorities in other countries in connectionwith our future products and certain of our future product enhancements. Therecan be no assurance that we will file applications for or obtain regulatoryapproval from the FDA, either in the form of a pre-market clearance or a 510(k)clearance, for any of our future products, or that in order to obtain FDAclearance, we will not be required to submit additional data or meet additionalFDA requirements that may substantially delay the application process andresult in substantial additional expense. In addition, such pre-marketingclearance, if obtained, may be subject to conditions on marketing or manufacturingwhich could impede our ability to manufacture and/or market our products. Therecan be no assurance that any new products will be developed by us, or ifdeveloped, will be approved by, or receive marketing clearance from, applicabledomestic and/or international governmental or regulatory authorities. If we areunable to develop, obtain regulatory approval for and market new products andenhancements to existing products, our business and results of operations couldbe harmed.

***Our business may benegatively affected if we do not continue to adapt to rapid technologicalchange, evolving industry standards and new product introductions.***

The market for ourproducts is characterized by rapid and significant technological change,evolving industry standards and new product introductions. Our products requiresignificant planning, design, development and testing which requiressignificant capital commitments and investment by us. There can be no assurancethat our products or proprietary technologies will not become noncompetitive orobsolete as a result of technological change, evolving industry standards ornew product introductions or that we will be able to generate any economicreturn on our investment in product development. If our products or technologiesbecome noncompetitive or obsolete, our business could be negatively affected.

***We are dependentupon a limited number of distributors for significant portion of our revenueand loss of these key distributors could result in a loss of a significantamount of our revenue.***

Historically, asubstantial portion of our revenue has come from a limited number ofdistributors. For example, Patterson Dental Company, Inc. accounted for28% of revenue for the fiscal year ended September 30, 2006. In addition,17% of our revenue for fiscal year ended September 30, 2006 wasattributable to sales to Henry Schein. It is anticipated that Patterson andHenry Schein will continue to be the largest contributors to our revenue forthe foreseeable future. There can be no assurance that Patterson and HenrySchein will purchase any specified minimum quantity of products from us or thatthey will continue to purchase any products at all. If Patterson or HenrySchein cease to purchase a significant volume of products from us, it couldhave a material adverse effect on our results of operations and financialcondition.

***Competition in the markets for our products is intenseand we may not be able to compete effectively.***

Competition relating toour current products is intense and includes various companies, both within andoutside of the United States. We anticipate that competition for our futureproducts will also be intense and include various companies, both within andoutside of the United States and Europe. Our competitors and potentialcompetitors include large companies with substantially greater financial, salesand marketing, and technical resources, larger and more experienced researchand development staffs, 

13

----

moreextensive physical facilities and substantially greater experience in obtainingregulatory approvals and in marketing products than we have. In addition, wecannot assure you that our competitors are not currently developing, or willnot attempt to develop, technologies and products that are more effective thanthose being developed by us or that would otherwise render our existing and newtechnology and products obsolete or noncompetitive. We may not be able tocompete successfully and may lose market share to our competitors.

***Our failure toobtain issued patents and, consequently, to protect our proprietary technology,could hurt its competitive position.***

Our success willdepend in part on our ability to obtain and enforce claims in our patentsdirected to our products, technologies and processes, both in the United Statesand in other countries. Risks and uncertainties that we will face with respectto our patents and patent applications include the following:

·       thepending patent applications that we have filed, or to which we have exclusiverights, may not result in issued patents or may take longer than we expect toresult in issued patents;

·       theallowed claims of any patents that issue may not provide meaningful protection;

·       wemay be unable to develop additional proprietary technologies that arepatentable;

·       thepatents licensed or issued to us may not provide a competitive advantage;

·       othercompanies may challenge patents licensed or issued to us;

·       disputesmay arise regarding inventions and corresponding ownership rights in inventionsand know-how resulting from the joint creation or use of intellectual propertyby us and our respective licensors; and

·       other companies may designaround the technologies patented by us.

***If we cannot obtain or maintain approval fromgovernment agencies, we will not be able to sell our products.***

We must obtain certain approvals by, and marketingclearances from, governmental authorities, including the FDA and similar healthauthorities in foreign countries to market and sell our products in thosecountries. These regulatory agencies regulate the marketing, manufacturing,labeling, packaging, advertising, sale and distribution of medical devices. TheFDA enforces additional regulations regarding the safety of X-ray emittingdevices. Our products are currently regulated by such authorities and certainof our new products will require approval by, or marketing clearance from,various governmental authorities, including the FDA. Various states also imposesimilar regulations.

The FDA review process typically requires extendedproceedings pertaining to the safety and efficacy of new products. A510(k) application is required in order to market a new or modifiedmedical device. If specifically required by the FDA, a pre-marketapproval, or PMA, may be necessary. Such proceedings, which must be completedprior to marketing a new medical device, are potentially expensive and timeconsuming. They may delay or hinder a product’s timely entry into themarketplace. Moreover, there can be no assurance that the review or approvalprocess for these products by the FDA or any other applicable governmentalauthority will occur in a timely fashion, if at all, or that additionalregulations will not be adopted or current regulations amended in such a manneras will adversely affect us. The FDA also oversees the content of advertisingand marketing materials relating to medical devices which have received FDAclearance. Failure to comply with the FDA’s advertising guidelines may resultin the imposition of penalties.

We will also be subject to other federal, state andlocal laws, regulations and recommendations relating to safe workingconditions, laboratory and manufacturing practices. The extent of government 

14

----

regulation that mightresult from any future legislation or administrative action cannot be accuratelypredicted. Failure to comply with regulatory requirements could have a materialadverse effect on our business.

Similar to the FDA reviewprocess, the EU review process typically requires extended proceedingspertaining to the safety and efficacy of new products. Such proceedings, whichmust be completed prior to marketing a new medical device, are potentiallyexpensive and time consuming and may delay or prevent a product’s entry intothe marketplace.

***Our revenue and operating results are likely to fluctuate.***

Our quarterlyoperating results have varied in the past and our operating results are likelyto continue to fluctuate in the future. These variations result from a numberof factors, many of which are substantially outside of our control, including:

·       thetiming of new product introductions by us and our competitors;

·       timingof industry tradeshows;

·       changesin relationships with distributors;

·       developmentsin government reimbursement policies;

·       changesin product mix;

·       ourability to supply products to meet customer demand;

·       fluctuationsin manufacturing costs; and

·       income tax incentives.

***Our financial results may be adversely affected byfluctuations in foreign currency exchange rates.***

We will be exposed tocurrency exchange risk with respect to the U.S. dollar in relation to theEuro, because a large portion of our revenue and expenses will be denominatedin Euros. This exposure may increase if we expand our operations in Europe.While we enter into hedging arrangements to protect our business againstcertain currency fluctuations, these hedging arrangements from time to time donot provide comprehensive protection. We will monitor changes in our exposureto exchange rate risk that result from changes in our situation. If we do notenter into effective hedging arrangements in the future, our results ofoperations and prospects could be materially and adversely affected.

***Our substantialindebtedness could have a material adverse consequences for our business, cashflow, financial condition and results of operations.***

We are a highlyleveraged company, with total indebtedness to unrelated parties ofapproximately $500 million as of November 22, 2006, the date of therefinancing of our Senior Credit Facility. This substantial level ofindebtedness, combined with our other financial obligations and contractualcommitments, could have important consequences to our business. For example, itcould:

·       increasethe risk that we would be unable to generate cash sufficient to pay amounts dueon our indebtedness;

15

----

·       makeus more vulnerable to adverse changes in general economic, industry andcompetitive conditions and to adverse changes in government regulation;

·       requireus to dedicate a substantial portion of our cash flow from operations topayments on our indebtedness, including any indebtedness we may incur in thefuture, thereby reducing the availability of our cash flows to fund workingcapital, capital expenditures, research and development, acquisitions and othergeneral corporate purposes;

·       limitour flexibility in planning for, or reacting to, changes in our business andthe industry in which we operated;

·       placeus at a competitive disadvantage compared to our competitors that have lessdebt; and

·       limitour ability to borrow additional amounts or to sell capital stock for workingcapital, capital expenditures, research and development, acquisitions, debtservice requirements or other general corporate purposes.

Any of these factors couldhave a material adverse effect on us.

***Restrictivecovenants and conditions contained in our new senior credit agreement imposesignificant operating and financial restrictions on our business.***

Our new senior creditagreement contains a number of restrictive covenants and conditions that imposesignificant operating and financial restrictions on our business, includingrestrictions on our ability to take actions that may be in the best interest ofthe business. These restrictions and conditions include a mandatory prepaymenton a change in control or sale of all or substantially all assets, as well assignificant restrictions on mergers and on any business acquisition. Othercovenants limit changes to our business, lending activities, investmentsincluding joint ventures, further indebtedness, and the payment of dividends andcapital share redemptions. The financial covenants require that we maintain adebt coverage ratio of consolidated total net debt to consolidated adjustedEBITDA of no more than 4.00 to 1.00, declining gradually to 3.50 to 1.00, and acash interest coverage ratio of consolidated adjusted EBITDA to cash interestcosts of 4.00 to 1.00 or greater. Failure to comply with these covenants willresult in a default under the terms of our senior credit agreement and couldresult in acceleration of this indebtedness.

***If we lose our keymanagement personnel or are unable to attract and retain qualified personnel,it could adversely affect our results of operations or delay or hurt ourresearch and product development efforts.***

Our success is dependent,in part, upon our ability to hire and retain management, sales, technical,research and other personnel who are in high demand and are often subject tocompeting employment opportunities. It is possible that the loss of theservices of one or a combination of our senior executives or key managers couldhave an adverse effect on our operations.

***We may experience difficulties managing our growth,which could adversely affect our results of operations.***

It is expected thatwe will grow in certain areas of our operations as we develop and, assumingreceipt of the necessary regulatory approvals, market our products. We willtherefore need to recruit personnel, particularly sales and marketingpersonnel, and expand our capabilities, which may strain our managerial,operational, financial and other resources. To compete effectively and manageour growth, we must:

·       train,manage, motivate and retain a growing employee base;

·       accuratelyforecast demand for, and revenue from, our product candidates; and

·       expandexisting operational, financial and management information systems to supportour development and planned commercialization activities and the multiplelocations of our offices.

16

----

Our failure to managethese challenges effectively could materially harm our business.

***Since we will operate in markets outside of the UnitedStates and Europe, we are subject to additional risks.***

We anticipate thatsales outside of the United States and Europe will continue to account for asignificant percentage of our revenue. Such revenue is subject to a number ofuncertainties, including but not limited to the following:

·       economicand political instability;

·       importor export licensing requirements;

·       traderestrictions;

·       longerpayment cycles;

·       unexpectedchanges in regulatory requirements and tariffs;

·       fluctuationsin currency exchange rates;

·       potentiallyadverse tax consequences; and

·       potentiallyweak protection of intellectual property rights.

These risks may impair ourability to generate revenue from our sales efforts. In addition, many countriesoutside of the United States and Europe have their own regulatory approvalrequirements for the sale of products. As a result, the introduction of newproducts, and our continued sale of existing products, into these markets couldbe prevented and/or costly and/or time-consuming, and we cannot assure you thatwe will be able to obtain the required regulatory approvals on a timely basis,if at all.

***We may be a partyto legal actions that are not covered by insurance.***

We may be a party to avariety of legal actions, such as employment and employmentdiscrimination-related suits, employee benefit claims, breach of contractactions, tort claims, stockholder suits, including securities fraud,governmental investigations and intellectual property related litigation. Inaddition, because of the nature of our business, we are subject to a variety oflegal actions relating to our business operations. Recent court decisions andlegislative activity in the United States may increase our exposure for any ofthese types of claims. In some cases, substantial punitive damages may besought. Although we have maintained insurance coverage for some of thesepotential liabilities, we cannot assure you that such insurance coverage willcontinue to be available or, if available, that it can be obtained insufficient amounts or at reasonable cost or that it will be sufficient to coverany claims that may arise. Other potential liabilities may not be covered byinsurance, insurers may dispute coverage, or the amount of insurance may not besufficient to cover the damages awarded. In addition, certain types of damages,such as punitive damages, may not be covered by insurance and/or insurancecoverage for all or certain forms of liability may become unavailable orprohibitively expensive in the future.

***We are dependentupon a limited number of suppliers for critical components. If these suppliersdelay or discontinue the manufacture of these components, we may experiencedelays in shipments, increased costs and cancellation of orders for ourproducts.***

We rely on key suppliers for various criticalcomponents and procure certain components from outside sources which are solesuppliers. The availability and prices of these components may be subject tochange due to interruptions in production, changing market conditions and otherevents. Any delays in delivery of or shortages in these components couldinterrupt and delay manufacturing of our products and result in thecancellation of orders for our products. In addition, these suppliers coulddiscontinue the manufacture or supply of these components at any time. We maynot be able to identify and integrate 

17

----

alternative sources ofsupply in a timely fashion or at all. Any transition to alternate suppliers mayresult in delays in shipment and increased expenses and may limit our abilityto deliver products to our customers. If we are unable to developreasonably-priced alternative sources in a timely manner, or if we encounterdelays or other difficulties in the supply of such products and other materialsfrom third parties, our business and results of operations may be harmed. Inpast years, semiconductors have been subject to significant price fluctuations.

While we have, in thepast, attempted to mitigate the effects of such potential fluctuations, wecannot assure you that we will continue to do so or that we will be able tosuccessfully mitigate the effect of future price increases on our results ofoperations and financial condition.

***Our profitability could suffer if third parties infringeupon our proprietary technology.***

Our profitability couldsuffer if third parties infringe upon our intellectual property rights ormisappropriate our technologies and trademarks for their own businesses. Toprotect our rights to our intellectual property, we will rely on a combinationof patent and trademark law, trade secret protection, confidentialityagreements and contractual arrangements with our employees, strategic partnersand others. We cannot assure you that any of our patents, any of the patents ofwhich we are a licensee or any patents which may be issued to us or which wemay license in the future, will provide us with a competitive advantage orafford us protection against infringement by others, or that the patents willnot be successfully challenged or circumvented by third parties, including ourcompetitors. The protective steps we have taken may be inadequate to determisappropriation of our proprietary information. We may be unable to detect theunauthorized use of, or take appropriate steps to enforce, our intellectualproperty rights. Effective patent, trademark and trade secret protection maynot be available in every country in which we will offer, or intend to offer,our products. Any failure to adequately protect our intellectual property coulddevalue our proprietary content and impair our ability to compete effectively.Further, defending our intellectual property rights could result in theexpenditure of significant financial and managerial resources.

***Our products may infringe on the intellectual propertyrights of others.***

Litigation may be necessary to enforce our patents orto defend against any claims of infringement of patents owned by third partiesthat are asserted against us. In addition, we may have to participate in one ormore interference proceedings declared by the United States Patent andTrademark Office, the European Patent Office or other foreign patent governingauthorities, to determine the priority of inventions, which could result insubstantial costs.

If we become involved in litigation or interferenceproceedings, we may incur substantial expense, and the proceedings may divertthe attention of our technical and management personnel, even if we ultimatelyprevail. An adverse determination in proceedings of this type could subject usto significant liabilities, allow our competitors to market competitiveproducts without obtaining a license from us, prohibit us from marketing ourproducts or require us to seek licenses from third parties that may not beavailable on commercially reasonable terms, if at all. If we cannot obtain suchlicenses, we may be restricted or prevented from commercializing our products.

The enforcement,defense and prosecution of intellectual property rights, including the UnitedStates Patent and Trademark Office’s, the European Patent Office’s and otherforeign patent offices’ interference proceedings, and related legal andadministrative proceedings in the United States and elsewhere, involve complexlegal and factual questions. As a result, these proceedings are costly andtime-consuming, and their outcome is uncertain. Litigation may be necessary to:

·       assertagainst others or defend us against claims of infringement;

18

----

·       enforcepatents owned by, or licensed to us from another party;

·       protectour trade secrets or know-how; or

·       determine theenforceability, scope and validity of our proprietary rights or the proprietaryrights of others.

***Healthcare reform could cause a decrease in demand forour products.***

There are currentlylegislative efforts to control healthcare costs in the United States andabroad, which we expect will continue in the future. At this time, we areunable to determine whether and to what extent these changes will apply to ourproducts and business. Similar legislative efforts in the future couldnegatively impact demand for our products.

***Product liability claims exposure could besignificant.***

We may face exposure toproduct liability claims and recalls for unforeseen reasons from consumers,distributors or others. We may experience material product liability losses inthe future and we may incur significant costs to defend these claims. Inaddition, if any of our products are or are alleged to be defective, we may berequired to participate in a recall involving those products. End-users of ourproducts may look to us for contribution when faced with product recalls orproduct liability claims. Although we have maintained insurance coveragerelated to product liability claims, we cannot assure you that product liabilityinsurance coverage will continue to be available or, if available, that it canbe obtained in sufficient amounts or at reasonable cost or that it will besufficient to cover any claims that may arise. We may not maintain anyinsurance relating to potential recalls of our products. A successful productliability claim brought against us in excess of available insurance coverage ora requirement to participate in any product recall could reduce our profitsand/or impair our financial condition, and damage our reputation.

***Product warranty claims exposure could be significant.***

We will generally warranteach of our products against defects in materials and workmanship for a periodof one year from the date of shipment plus any extended warranty periodpurchased by the customer. The future costs associated with providing productwarranties could be material. A successful warranty claim brought against uscould reduce our profits and/or impair our financial condition, and damage ourreputation.

***Adverse publicityregarding the safety of our technology or products could negatively impact usand cause the price of our common stock to fall.***

Despite any favorablesafety tests that may be completed with respect to our products, adversepublicity regarding application of X-ray products or other products beingdeveloped or marketed by others could negatively affect us. If otherresearchers’ studies raise or substantiate concerns over the safety of ourtechnology approach or product development efforts generally, our reputationcould be harmed, which would adversely impact our business and could cause theprice of our common stock to fall.

***Inadequate levelsof reimbursement from governmental or other third-party payers for proceduresusing our products may cause our revenue to decline.***

Third-party payers,including government health administration authorities, private health careinsurers and other organizations regulate the reimbursement of fees related tocertain diagnostic procedures or medical treatments. Third-party payers areincreasingly challenging the price and cost-effectiveness of medical productsand services. While we cannot predict what effect the policies of 

19

----

governmententities and other third-party payers will have on future sales of ourproducts, there can be no assurance that such policies would not cause ourrevenue to decline.

***If we are unable tosuccessfully integrate our employees into our corporate and employee culture,synergies related to the Exchange could be lost or diminished.***

We will face challenges inherentin merging distinct employee and corporate cultures into an integrated whole.The inability to successfully integrate employee and corporate cultures, or anysignificant delay in achieving a successful integration, could adversely affectour ability to retain and attract personnel, and could result in the loss ordecrease of efficiency and/or the synergies expected to be achieved as a resultof the Exchange. As a result, this could have a material adverse effect on usand the market price of our common stock.

***We have developed and must continue to maintaininternal controls.***

Effective internalcontrols are necessary for us to provide assurance with respect to ourfinancial reports and to effectively prevent fraud. If we cannot providereasonable assurance with respect to our financial reports and effectivelyprevent fraud, our operating results could be harmed. Sarbanes-Oxley Act of2002 requires us to furnish a report by management on internal control overfinancial reporting, including managements’ assessment of the effectiveness ofsuch control. Internal control over financial reporting may not prevent ordetect misstatements because of its certain limitations, including thepossibility of human error, the circumvention or overriding of controls, orfraud. As a result, even effective internal controls may not provide reasonableassurances with respect to the preparation and presentation of financialstatements. In addition, projections of any evaluation of effectiveness ofinternal control over financial reporting to future periods are subject to therisk that the control may become either obsolete or inadequate as a result ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate. If we fail to maintain adequate internal controls,including any failure to implement required new or improved controls, or if weexperience difficulties in implementing new or revised controls, our businessand operating results could be harmed, we could fail to meet our reportingobligations, and there could be a material adverse effect on our stock price.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

None.

**ITEM 2.**                PROPERTIES

The Company has its headquarters in Long Island City,New York. The Company leases space in Long Island City, New York. The leaseexpires in June 2007. It is our intent to extend the term of the lease.The leased space houses executive offices, sales and marketing, research anddevelopment laboratories and production and shipping facilities.

The Company has its largest facility in Bensheim,Germany. It is composed of a number of buildings housing the Company’s primarymanufacturing and assembly facility. It also houses executive offices, salesand marketing, research and development laboratories and production andshipping facilities. In 2005, Sirona entered into a sale and leasebackagreement to construct another building to house additional offices and itsDental Academy. That building will be ready for occupancy in fiscal 2007.

The Company also maintains manufacturing facilities inChina, Italy and Denmark and certain sales and service offices worldwide.

20

----

The Company believes thatits properties and facilities will be adequate for its needs for theforeseeable future and that, if such space proves to be inadequate, it will beable to procure additional or replacement space that will be adequate for itsneeds.

**ITEM 3.**                LEGALPROCEEDINGS

There currently are nomaterial pending legal proceedings, other than routine litigation incidental tothe Company’s business, to which the Company is a party or of which any of itsproperty is the subject.

**ITEM 4.**                SUBMISSIONOF MATTERS TO VOTE OF SECURITY HOLDERS

**No matters were submitted to a voteof security holders during the quarter ended September 30, 2006.**

21

----

**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is currently traded publicly on theNASDAQ Global Select Market. In connection with the Exchange, we changed ourtrading symbol to “SIRO” from “SCHK”. Previously, from September 16, 1999through December 20, 2005, Schick’s common stock was traded on theOver-the-Counter (“OTC”) Bulletin Board under the trading symbol “SCHK”.

Thefollowing table presents quarterly information on the price range of our commonstock. This information indicates the high and low sale prices, as quoted inthe OTC Bulletin Board through December 19, 2005, and on NASDAQ commencingDecember 20, 2005. These prices do not include retail markups, mardowns orcommissions.

| **Fiscal Year  Ended September 30, 2006** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
|                                           |       |       |       |     |       |
| First Quarter                                  |       | $          | 35.50      |     | $          | 24.10   |       |
| Second Quarter                                 |       | $          | 50.25      |     | $          | 30.56   |       |
| Third Quarter(1)                               |       | $          | 51.43      |     | $          | 36.22   |       |
| Fourth Quarter                                 |       | $          | 40.26      |     | $          | 22.42   |       |

 

| **Fiscal Year  Ended September 30, 2005** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
|                                           |       |       |       |     |       |
| First Quarter                                  |       | $          | 16.50      |     | $          | 9.50    |       |
| Second Quarter                                 |       | $          | 19.20      |     | $          | 14.90   |       |
| Third Quarter                                  |       | $          | 22.80      |     | $          | 16.85   |       |
| Fourth Quarter                                 |       | $          | 27.20      |     | $          | 21.00   |       |

----

(1)          The Exchange wascompleted on June 20, 2006.

On December 4, 2006 there were approximately 115holders of record of the Company’s common stock. However, the Company believesthat the number of beneficial owners of such stock is substantially higher.

In connection with theExchange, Schick declared a $2.50 per share dividend to stockholders of recordas of the close of business on June 19, 2006. Since the Exchange, Sironahas not paid any dividends to holders of its common stock. The Company mayconsider paying dividends in the future, but currently has no plans to do so.The payment of dividends is within the discretion of the Board of Directors andwill depend upon the Company’s earnings, its capital requirements, financialcondition and other relevant factors. The payment of dividends is restricted bythe terms of our new Senior Credit Facility. See Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”.

22

----

**Equity CompensationPlan Information**

Thefollowing table sets forth the following information, as of September 30,2006, with respect to compensation plans (including individual compensationarrangements) under which equity securities of the Company are authorized forissuance: the number of securities to be issued upon the exercise ofoutstanding options, warrants and rights; the weighted-average exercise priceof such options, warrants and rights; and, other than the securities to beissued upon the exercise of such options, warrants and rights, the number ofsecurities remaining available for future issuance under the plan:

| **Plan category**                                      | ** ** | ** ** | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options,  warrants and  rights** | ** ** | **Weighted-average  exercise price  of outstanding  options,  warrants and  rights** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding  securities reflected  in column (a)** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | ** ** | **(a)**    | ** **                                                                                                                           | ** ** | ** **                                                                                          | **(b)**    | ** **                                                                                                                                                                                              | ** ** | ** ** | **(c)** | ** ** | ** ** |
| Equity  compensation plans approved by security holders     |       |       | 2,859,678  | ** **                                                                                                                           |       |                                                                                                | 19.13      | ** **                                                                                                                                                                                              |       |   | 7,000 | ** ** |   |
| Equity  compensation plans not approved by security holders |       |       | —     | ** **                                                                                                                           |       |                                                                                                | —     | ** **                                                                                                                                                                                              |       |   | — | ** ** |   |
| Total                                                       |       |       | 2,859,678  | ** **                                                                                                                           |       |                                                                                                | 19.13      | ** **                                                                                                                                                                                              |       |   | 7,000 | ** ** |   |

 

**Therewere no repurchases of our common stock by the Company in the quarter endedSeptember 30, 2006.**

**ITEM 6.**                SELECTEDFINANCIAL DATA

On September 25, 2005, Schick, a DelawareCorporation, which on June 20, 2006 was renamed Sirona DentalSystems, Inc. (“Sirona” or the “Company”), entered into an ExchangeAgreement with Sirona Holdings Luxco S.C.A. (“Luxco”) and Sirona Holding GmbH(“Sirona Holding”) providing for the issuance of 36,972,480 shares of Schickcommon stock to Luxco in exchange for Luxco’s entire economic interest inSirona Holding, which consists of all of the issued and outstanding sharecapital of Sirona Holding and the existing indebtedness of Sirona Holding owedto Luxco in the principal amount of €151.0 million plus accruedinterest (the “Exchange”). The Exchange closed on June 20, 2006. Foraccounting purposes, the Exchange is accounted as a reverse acquisition ofSchick by Sirona Holding. The historical financial statements of Sirona Holdingand its predecessors and the historical financial statements of the Company,and the acquisition by Sirona Holding of the assets and liabilities of Schickis accounted for under the purchase method of accounting. Results of operationsof Schick and its wholly owned subsidiary have been included in financialstatements from June 20, 2006, the effective date of the Exchange (seeNote 4 to the consolidated financial statements contained elsewhere in thisdocument).

On June 30, 2005, Luxco, a Luxembourg-based holdingentity owned by funds managed by Madison Dearborn Partners, Beecken PettyO’Keefe and management and employees of Sirona obtained control over the Sironabusiness. The transaction was effected by using new legal entities, SironaHolding GmbH and its wholly owned subsidiary Sirona Dental Services GmbH toacquire 100% of the interest in Sirona Dental Systems Beteiligungs- undVerwaltungs GmbH, the former parent of the Sirona business, through a leveragedbuy-out transaction (the ‘‘MDP Transaction’’).

The MDP Transaction was accounted for in accordancewith Emerging Issues Task Force Issue 88-16, Basis in Leveraged BuyoutTransactions (‘‘EITF 88-16’’), in a manner similar to a businesscombination under Statement of Financial Accounting Standard No. 141, BusinessCombinations (‘‘SFAS 141’’). Certain members of Sirona management who weredeemed to be in the control group held equity interests in the Sirona groupprior to and subsequent to the MDP Transaction (the ‘‘ContinuingShareholders’’). 

23

----

The interests of theContinuing Shareholders have been reflected at the predecessor basis, resultingin 9.15% of each asset and liability acquired being valued at historical costat June 30, 2005. The remaining 90.85% interest in each asset andliability was recognized at fair value at June 30, 2005.

On February 16, 2004, funds managed by EQTNorthern European Private Equity Funds (‘‘EQT’’) and management and employeesof Sirona obtained control over the Sirona business. The transaction waseffected by using four new legal entities headed by Sirona Dental SystemsBeteiligungs- und Verwaltungs GmbH to acquire 100% of the interest in SironaBeteiligungs- und Verwaltungs GmbH, the former parent of the Sirona business,through a leveraged buy-out transaction (the ‘‘EQT Transaction’’). The EQTTransaction resulted in a change in control of the Sirona business and has,therefore, been accounted for as a business combination under SFAS 141. Thecarrying values of the assets and liabilities were adjusted to their fair valueon February 16, 2004, and the difference between the purchase price andthe fair value of the net assets and liabilities was recorded as goodwill.

For further information regarding the MDP Transactionand the EQT Transaction, see Note 5 to the consolidated financial statementscontained elsewhere in this document.

Sirona Beteiligungs- und Verwaltungsgesellschaft mbHis referred to as ‘‘Predecessor 1’’ for the periods from October 1, 2003to February 16, 2004. Sirona Dental Systems Beteiligungs- und VerwaltungsGmbH is referred to as ‘‘Predecessor 2’’ for the periods from February 17,2004 to September 30, 2004 and from October 1, 2004 to June 30,2005. Sirona Dental Systems, Inc (now the parent of Sirona Holding GmbH) isreferred to as ‘‘Successor’’ as of September 30, 2005 and 2006 and forperiods from July 1, 2005 to September 30, 2005 and for the yearended September 30, 2006.

24

----

Theselected historical consolidated financial data of Sirona included below andelsewhere in this document are not necessarily indicative of futureperformance. This information is only a summary and should be read inconjunction with the sections entitled ‘‘Management’s Discussion and Analysisof Financial Condition and Results of Operations’’ and the consolidatedfinancial statements and accompanying notes contained elsewhere in thisdocument.

| ** **                                               | ** ** | **Successor**                                  | ** ** | **Predecessor 2** | ** ** | **Predecessor 1** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **Fiscal 2006**                           | ** ** | **Fiscal 2005**   | ** ** | **Fiscal 2004**   | ** ** | **Fiscal 2003** | ** ** | **Fiscal 2002** | ** ** |
| ** **                                               | ** ** | ** **                                     | ** ** | **July 1,**       | ** ** | **October 1,**    | ** ** | **February 17,** | ** ** | **October 1,** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **Year ended**                            | ** ** | **2005 to**       | ** ** | **2004 to**       | ** ** | **2004 to** | ** ** | **2003 to** | ** ** | **Year ended** | ** ** | **Year ended** | ** ** |
| ** **                                               | ** ** | **September 30,**                         | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **September 30,** | ** ** | **February 16,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                               | ** ** | **2006**                                       | ** ** | **2005**               | ** ** | **2005**               | ** ** | **2004** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                               | ** ** | **$’000s (except for per share amounts)** | ** ** |
| **Statement  of Operations Data:**                       | ** ** |                                           | ** ** | ** **             |       |                   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Revenue                                                  |       |                                           | $          | 520,604                | ** ** |                   |       | $ | 105,071 |   |   |   | $ | 358,285 |   |   |   | $ | 229,216 |   |   |   | $ | 158,601 | ** ** |   |   | $ | 306,190 |   |   |   | $ | 268,871 | ** ** |   |
| Cost of sales                                            |       |                                           | 278,685    | ** **             |       |                   | 71,614     |   |   |   | 199,463 |   |   |   | 152,938 |   |   |   | 76,947 | ** ** |   |   | 165,073 |   |   |   | 146,032 | ** ** |   |
| Gross profit                                             |       |                                           | 241,919    | ** **             |       |                   | 33,457     |   |   |   | 158,822 |   |   |   | 76,278 |   |   |   | 81,654 | ** ** |   |   | 141,117 |   |   |   | 122,839 | ** ** |   |
| Operating expenses  (income):                            |       |                                           |       | ** **             |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   | ** ** |   |
| Selling, general and administrative expense              |       |                                           | 148,715    | ** **             |       |                   | 34,544     |   |   |   | 93,236 |   |   |   | 65,424 |   |   |   | 33,454 | ** ** |   |   | 65,787 |   |   |   | 52,903 | ** ** |   |
| Research and development                                 |       |                                           | 33,107     | ** **             |       |                   | 7,863      |   |   |   | 21,700 |   |   |   | 16,594 |   |   |   | 8,575 | ** ** |   |   | 19,832 |   |   |   | 18,180 | ** ** |   |
| Provision for doubtful accounts and notes receivable     |       |                                           | 348        | ** **             |       |                   | (192       | ) |   |   | (127 | ) |   |   | (846 | ) |   |   | 368 | ** ** |   |   | (387 | ) |   |   | 588 | ** ** |   |
| Write off of in-process research and development         |       |                                           | 6,000      | ** **             |       |                   | 33,796     |   |   |   | — |   |   |   | 20,217 |   |   |   | — | ** ** |   |   | — |   |   |   | — | ** ** |   |
| Other operating expense (income),  net                   |       |                                           | 1,733      | ** **             |       |                   | (723       | ) |   |   | (384 | ) |   |   | 955 |   |   |   | 82 | ** ** |   |   | 1,702 |   |   |   | 11,104 | ** ** |   |
| Operating  income/(loss)                                 |       |                                           | 52,016     | ** **             |       |                   | (41,831    | ) |   |   | 44,397 |   |   |   | (26,066 | ) |   |   | 39,175 | ** ** |   |   | 54,183 |   |   |   | 40,064 | ** ** |   |
| Non-operating expense, net                               |       |                                           | 43,683     | ** **             |       |                   | 10,006     |   |   |   | 27,777 |   |   |   | 20,040 |   |   |   | 5,425 | ** ** |   |   | 14,277 |   |   |   | 9,819 | ** ** |   |
| Income/(loss) before income taxes and minority  interest |       |                                           | 8,333      | ** **             |       |                   | (51,837    | ) |   |   | 16,620 |   |   |   | (46,106 | ) |   |   | 33,750 | ** ** |   |   | 39,906 |   |   |   | 30,245 | ** ** |   |
| Income tax provision/(benefit)                           |       |                                           | 7,360      | ** **             |       |                   | (5,796     | ) |   |   | 5,444 |   |   |   | (11,748 | ) |   |   | 13,181 | ** ** |   |   | 15,330 |   |   |   | 13,521 | ** ** |   |
| Minority interest                                        |       |                                           | 218        | ** **             |       |                   | (6         | ) |   |   | 50 |   |   |   | — |   |   |   | — | ** ** |   |   | — |   |   |   | — | ** ** |   |
| Net income/(loss)                                        | ** ** |                                           | **$**      | **755**                | ** ** |                   |       | **$** | **(46,035** | **)** |   |   | **$** | **11,126** | ** ** |   |   | **$** | **(34,358** | **)** |   |   | **$** | **20,569** | ** ** |   |   | **$** | **24,576** | ** ** |   |   | **$** | **16,724** | ** ** |   |
| Net income/(loss)  per share                             |       |                                           |       | ** **             |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   | ** ** |   |
| —basic                                              |       |                                           | $          | 0.02                   | ** ** |                   |       | N/A |   |   |   | N/A |   |   |   | N/A |   |   |   | N/A | ** ** |   |   | N/A |   |   |   | N/A | ** ** |   |
| —diluted                                            |       |                                           | $          | 0.02                   | ** ** |                   |       | N/A |   |   |   | N/A |   |   |   | N/A |   |   |   | N/A | ** ** |   |   | N/A |   |   |   | N/A | ** ** |   |

 

25

----

 

| ** **                                  | ** ** | **Successor**          | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** ** | **Predecessor 1** | ** ** | **Predecessor 1** | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **As of**         | ** ** | **As of**         | ** ** | **As of**         | ** ** | **As of**         | ** ** | **As of**         | ** ** |
| ** **                                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                  | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2002**               | ** ** |
| ** **                                  | ** ** | **$’000s**        | ** ** |
| **Balance  Sheet Data (at end of period):** | ** ** |                   | ** ** | ** **             |       |                   | ** ** | ** **             |       |                   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash and cash  equivalents                  |       |                   | $          | 80,560                 |       |                   |       | $                      | 65,941     |                   |       |   | $ | 38,877 |   |   |   | $ | 51,052 | ** ** |   |   | $ | 26,711 |   |   |
| Working  capital(1)                         |       |                   | 101,765    |                   |       |                   | 98,646     |                   |       |                   | 41,776     |   |   |   | 74,955 | ** ** |   |   | 46,396 |   |   |
| Total assets                                |       |                   | 1,541,004  |                   |       |                   | 1,238,675  |                   |       |                   | 762,985    |   |   |   | 346,498 | ** ** |   |   | 278,884 |   |   |
| Long-term  obligations                      |       |                   | 929,009    |                   |       |                   | 1,111,158  |                   |       |                   | 631,846    |   |   |   | 182,507 | ** ** |   |   | 155,129 |   |   |
| Total liabilities                           |       |                   | 1,052,895  |                   |       |                   | 1,211,941  |                   |       |                   | 745,709    |   |   |   | 258,403 | ** ** |   |   | 226,740 |   |   |
| Accumulated  deficit and earnings           |       |                   | (47,406    | )                      |       |                   | (48,161    | )                      |       |                   | (34,358    | ) |   |   | 16,694 | ** ** |   |   | (7,882 | ) |   |
| Shareholder ́s equity                   |       |                   | 487,846    |                   |       |                   | 26,692     |                   |       |                   | 17,276     |   |   |   | 88,095 | ** ** |   |   | 52,144 |   |   |
|                                             |            |                        |            |                        |            |                        |            |                        |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Working capital isdefined as current assets less current liabilities.

26

----

**ITEM7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussionshould be read in conjunction with the Consolidated Financial Statementsincluded elsewhere in this Report. This discussion contains forward-lookingstatements based on current expectations that involve risks and uncertainties.Actual results and the timing of certain events may differ significantly fromthose projected in such forward-looking statements due to a number of factors,including those set forth in “Results of Operations” in this Item and elsewherein this Report. See “ITEM 1A—Risk Factors—Forward-Looking Statements.” Exceptas otherwise disclosed all amounts are reported in US dollar ($).

**Overview**

Sirona is a leadingmanufacturer of high-tech dental equipment. Sirona focuses on developinginnovative systems and solutions for dentists globally. Sirona has servedequipment dealers and dentists worldwide for almost 125 years. The Company hasits headquarters in Long Island City, New York and in addition the Company hasa primary facility in Bensheim, Germany. Sirona manages its business on both aproduct and geographic basis and has four reporting segments: Dental CAD/CAMSystems, Imaging Systems, Treatment Centers and Instruments. Products from eachcategory are marketed in all geographical sales regions.

**Significant FactorsThat Affect Sirona’s Results of Operations**

***Increased Focus on Sirona’s Position in the U.S.Dental Market***

From October 1, 2003 to September 30, 2006,Sirona experienced strong sales growth, with U.S. dollar revenue increasing onaverage by 31% annually. Several products that have been launched during thatperiod have generated significant interest in the U.S. market, including, butnot limited to, CEREC, inLab, inEos, the ORTHOPHOS XG line, C8 + and electricalhandpieces.

Sirona works together withlarge distributors in the U.S. market, including Patterson Dental and HenrySchein. The relationship with Henry Schein was expanded beyond the Europeanmarkets to the United States in January 2005. Patterson Dental made apayment of $100 million to Sirona in July 2005 in exchange for theexclusive distribution right for CEREC CAD/CAM products in the United Statesand Canada until 2017. The amount Sirona received was recorded as deferredrevenue and will be recognized on a straight-line basis commencing at thebeginning of the extension of the exclusivity period in fiscal 2008. See ‘‘Business—Distribution.’’

***Focus on Further Global Expansion***

In addition to increasedU.S. market penetration, Sirona has pursued expansion in the rest of the world.Over the last three years, sales in the rest of the world grew on average by15% annually. To support this growth, Sirona expanded its local presence anddistribution channels by establishing new sales and service locations in Spain,France and the United Kingdom in 2004, in Japan and Australia in 2005 and inChina in 2006. This expansion resulted in increased sales, gross profit andSG&A expense.

***Changes in Ownership of Sirona***

The MDP Transaction of June 30, 2005, as well asthe EQT transaction of February 14, 2004, resulted in a change ofownership that was accounted for in a manner similar to a business combinationunder U.S. GAAP.

The results of operations of Sirona and its legal, taxand financing structure have changed substantially as a result of the MDPTransaction and the EQT Transaction. Sirona’s business was acquired 

27

----

by newly-formed entitiesand Sirona incurred substantial fees and expenses not related to its ongoingoperations. The assets and liabilities acquired were partially stepped up tofair value and a related deferred tax liability was recorded. The excess of thetotal purchase price over the fair value of the net assets acquired, includingIPR&D projects which were expensed at the date of closing, was allocated togoodwill and is subject to periodic impairment testing.

Sirona’s cost of goodssold, research and development, selling, general and administrative expense andoperating results have been and will continue to be materially affected byhigher depreciation and amortization costs resulting from the step-up to fairvalue of Sirona’s assets and liabilities. Taxes, interest and net income havealso been and will continue to be substantially impacted by the structuralchanges resulting from the MDP Transaction and the EQT Transaction.

***Acquisition of Schick Technologies Inc.***

On June 20, 2006, the Exchange with SchickTechnologies Inc. was completed (see Note 4 to the consolidated  financial statements). The results ofoperations and the cash flows for the year ended September 30, 2006, aswell as the balance sheet as of September 30, 2006 have been affected bythis reverse acquisition. The Schick assets and liabilities acquired werestepped up to their fair values and a related deferred tax liability wasrecorded. The excess of the total purchase price over the fair value of the netassets acquired, including IPR&D projects which were expensed at theacquisition date, was allocated to goodwill and is subject to periodicimpairment testing.

Sirona’s cost of goodssold, research and development, selling, general and administrative expense andoperating results will be materially affected by higher depreciation andamortization costs resulting from the inclusion of Schick in its consolidatedaccounts. Taxes, interest and net income will also be impacted by thestructural changes resulting from the Exchange. The acquisition is expected togenerate operating synergies of $5.0 to $7.0 million per year, within 12 to 24months after June 20, 2006.

***Fluctuations in U.S. Dollar/Euro Exchange Rate***

Although the U.S. dollar is Sirona’s reportingcurrency, its functional currency varies depending on the country of operation.For the fiscal year ended September 30, 2006, approximately 57% ofSirona’s revenue and approximately 83% of its expenses were in Euros. Duringthe periods under review, the U.S. dollar/Euro exchange rate hasfluctuated significantly, thereby impacting Sirona’s financial results. BetweenSeptember 30, 2003 and September 30, 2006, the U.S. dollar/Euroexchange rate used to calculate items included in Sirona’s financial statementsvaried from a low of 1.1416 to a high of 1.3637. To manage this variability inits operating results, Sirona has entered into foreign exchange forwardcontracts. As of September 30, 2006, these contracts had notional amountstotalling $26.1 million.

Because these agreementsare relatively short-term (generally six months), continued fluctuation in theU.S. dollar could materially affect Sirona’s results of operations. A portionof Sirona’s senior credit facility, Tranche A, is denominated in U.S. dollars.This loan is subject to revaluation into Euro, the functional currency of theapplicable Sirona entity at each reporting date. See “—Liquidity and CapitalReserves” for a discussion of our new senior credit facility entered intoNovember 22, 2006. Fluctuations in currency exchange rates are reflectedwithin Sirona’s statement of operations. These fluctuations may be significantin any period due to changes in the exchange rates between the Euro and theU.S. dollar.

***Fluctuations in Quarterly Operating Results***

Sirona’s quarterlyoperating results have varied in the past and are likely to vary in the future.These variations result from a number of factors, many of which aresubstantially outside its control, including:

·       the timing of new productintroductions by Sirona or its competitors;

28

----

·       the timing of industrytrade shows;

·       developments in governmentreimbursement policies;

·       changes in product mix;

·       Sirona’s ability to supplyproducts to meet customer demand;

·       fluctuations inmanufacturing costs;

·       income tax incentives; and

·       currency fluctuation.

Due to the variationswhich Sirona has experienced in its quarterly operating results, it does notbelieve that period-to-period comparisons of results of operations of Sironaare necessarily meaningful or reliable as indicators of future performance.

**Taxes**

The German tax authorityis currently examining the Company’s tax returns for the years 2001 to 2004.The Company does not believe the results of the examination will have anadverse material effect on the Company’s financial position, results of operationsor liquidity.

**Results ofOperations**

Because both theEQT Transaction and the MDP Transaction materially changed the carrying valuesof Sirona’s assets and liabilities recorded in its consolidated balance sheet,the following naming convention has been used in this ‘‘Management’s Discussionand Analysis of Financial Condition and Results of Operations’’ to distinguishbetween periods for which the consolidated financial statements are notprepared on a comparable basis:

·       **Sirona Beteiligungs- und Verwaltungsgesellschaft mbH—Predecessor 1**October 1, 2003—February 16, 2004 (Portion of Fiscal 2004)

·       **Sirona Dental Systems Beteiligungs- und Verwaltungs GmbH—Predecessor 2**February 17, 2004—September 30, 2004 (Portion of Fiscal2004)****October 1, 2004—June 30, 2005 (Portion of Fiscal 2005)

·       **Sirona Dental Systems, Inc. (now parent to Sirona Holding GmbH)—Successor**July 1, 2005—September 30, 2005 (Portion of Fiscal 2005)****October 1, 2005—September 30, 2006

The results of operations presented for the year endedSeptember 30, 2005 represent an aggregation of the results of operationsfor the Predecessor 2 period from October 1, 2004 to June 30, 2005when Predecessor 2 was under the ownership of EQT, and the results ofoperations for the Successor period from July 1, 2005 toSeptember 30, 2005, being the period following the MDP Transaction. Theresults have been aggregated to provide readers with 2005 data for a fullfiscal year period and to provide a basis for comparing results of operationsto prior periods. Results of operations for the Successor period include theeffect of purchase accounting related to the MDP Transaction and, therefore,are not directly comparable to data for the prior periods.

The results of operations presented for the year endedSeptember 30, 2004 represent an aggregation of the results of operationsfor the Predecessor 1 period from October 1, 2003 to February 16,2004 when Sirona was under the ownership of Permira, and the results ofoperations for the Predecessor 2 period from February 17, 2004 toSeptember 30, 2004, being the period following the EQT Transaction. Theresults have been aggregated to provide readers with 2004 data for a fullfiscal year period. Results of 

29

----

operations for thePredecessor 2 period include the effect of purchase accounting related to theEQT Transaction and, therefore, are not directly comparable to data for theprior periods.

Thetable below sets forth Sirona’s results of operations for the fiscal periodspresented:

| ** **                                               | ** ** | **Year ended**                            | ** ** | **Year ended**    | ** ** | **Year ended**    | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **September 30,**                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                               | ** ** | **2006**                                       | ** ** | **2005**               | ** ** | **2004**               | ** ** |
| ** **                                               | ** ** | ** **                                     | ** ** | **(aggregated)**       | ** ** | **(aggregated)**       | ** ** |
| ** **                                               | ** ** | ** **                                     | ** ** | **(unaudited)**        | ** ** | **(unaudited)**        | ** ** |
| ** **                                               | ** ** | **$’000s (except for per share amounts)** | ** ** |
| Revenue                                                  |       |                                           | $          | 520,604                |       |                   |       | $ | 463,356 |   |   |   | $ | 387,817 |   |   |
| Cost of sales                                            |       |                                           | 278,685    |                   |       |                   | 271,077    |   |   |   | 229,885 |   |   |
| Gross profit/                                            |       |                                           | 241,919    |                   |       |                   | 192,279    |   |   |   | 157,932 |   |   |
| Operating  expenses/(income):                            |       |                                           |       |                   |       |                   |       |   |   |   |   |   |   |
| Selling, general and administrative expense              |       |                                           | 148,715    |                   |       |                   | 127,780    |   |   |   | 98,878 |   |   |
| Research and development                                 |       |                                           | 33,107     |                   |       |                   | 29,563     |   |   |   | 25,169 |   |   |
| Provision for doubtful accounts and notes receivable     |       |                                           | 348        |                   |       |                   | (319       | ) |   |   | (478 | ) |   |
| Write off in-process research and development            |       |                                           | 6,000      |                   |       |                   | 33,796     |   |   |   | 20,217 |   |   |
| Net other operating expenses/(income)                    |       |                                           | 1,733      |                   |       |                   | (1,107     | ) |   |   | 1,037 |   |   |
| Operating income                                         |       |                                           | 52,016     |                   |       |                   | 2,566      |   |   |   | 13,109 |   |   |
| Foreign currency  transaction (gain)/loss                |       |                                           | (9,873     | )                      |       |                   | 1,350      |   |   |   | 5,620 |   |   |
| Gain/loss on  derivative instruments                     |       |                                           | (719       | )                      |       |                   | 2,701      |   |   |   | 140 |   |   |
| Interest expense,  net                                   |       |                                           | 54,275     |                   |       |                   | 33,861     |   |   |   | 19,705 |   |   |
| Other (income)                                           |       |                                           | —     |                   |       |                   | (129       | ) |   |   | — |   |   |
| Income/(loss)  before income taxes and minority interest |       |                                           | 8,333      |                   |       |                   | (35,217    | ) |   |   | (12,356 | ) |   |
| Income tax  provision/(benefit)                          |       |                                           | 7,360      |                   |       |                   | (352       | ) |   |   | 1,433 |   |   |
| Minority  intererst                                      |       |                                           | 218        |                   |       |                   | 44         |   |   |   | — |   |   |
| Net income/(loss)                                        |       |                                           | $          | 755                    |       |                   |       | $ | (34,909 | ) |   |   | $ | (13,789 | ) |   |
| Net income/(loss) per share                              |       |                                           |       |                   |       |                   |       |   |   |   |   |   |   |
| —basic                                              |       |                                           | $          | 0.02                   |       |                   |       | N/A |   |   |   | N/A |   |   |
| —diluted                                            |       |                                           | $          | 0.02                   |       |                   |       | N/A |   |   |   | N/A |   |   |

 

 

30

----

Areconciliation of the aggregate period results shown above to the consolidatedstatements of operations prepared in accordance with U.S. GAAP has beenincluded in the table below:

| ** **                                               | ** ** | ** **                 | ** ** | ** **          | ** ** | ** **             | ** ** | ** **             | ** ** | ** **            | ** ** | ** **             | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|---------------------|------------|------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **July 1, 2005** | ** ** | **October 1,** | ** ** | ** **             | ** ** | **February 17,**  | ** ** | **October 1,**   | ** ** | ** **             | ** ** |
| ** **                                               | ** ** | **to**                     | ** ** | **2004 to**    | ** ** | **Year ended**    | ** ** | **2004 to**       | ** ** | **2003 to**      | ** ** | **Year ended**    | ** ** |
| ** **                                               | ** ** | **September 30,**     | ** ** | **June 30,**   | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **February 16,** | ** ** | **September 30,** | ** ** |
| ** **                                               | ** ** | **2005**                   | ** ** | **2005**            | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2004**              | ** ** | **2004**               | ** ** |
| ** **                                               | ** ** | ** **                 | ** ** | ** **          | ** ** | **(aggregated)**       | ** ** | ** **             | ** ** | ** **            | ** ** | **(aggregated)**       | ** ** |
| ** **                                               | ** ** | ** **                 | ** ** | ** **          | ** ** | **(unaudited)**        | ** ** | ** **             | ** ** | ** **            | ** ** | **(unaudited)**        | ** ** |
| ** **                                               | ** ** | **$’000s**            | ** ** |
| Revenue                                                  |       |                       | $          | 105,071             |       |                   | $          | 358,285                |       |                  | $          | 463,356                |       |   |   | $ | 229,216 |   |   |   | $ | 158,601 |   |   |   | $ | 387,817 |   |   |
| Cost of sales                                            |       |                       | 71,614     |                |       | 199,463                |       |                   | 271,077    |                  |       |                   | 152,938    |   |   |   | 76,947 |   |   |   | 229,885 |   |   |
| Gross profit                                             |       |                       | 33,457     |                |       | 158,822                |       |                   | 192,279    |                  |       |                   | 76,278     |   |   |   | 81,654 |   |   |   | 157,932 |   |   |
| Operating  expenses/(income):                            |       |                       |       |                |       |                   |       |                   |       |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative expense              |       |                       | 34,544     |                |       | 93,236                 |       |                   | 127,780    |                  |       |                   | 65,424     |   |   |   | 33,454 |   |   |   | 98,878 |   |   |
| Research and development                                 |       |                       | 7,863      |                |       | 21,700                 |       |                   | 29,563     |                  |       |                   | 16,594     |   |   |   | 8,575 |   |   |   | 25,169 |   |   |
| Provision for doubtful accounts and notes receivable     |       |                       | (192       | )                   |       | (127                   | )          |                   | (319       | )                     |       |                   | (846       | ) |   |   | 368 |   |   |   | (478 | ) |   |
| Write off in-process research and development            |       |                       | 33,796     |                |       | —                 |       |                   | 33,796     |                  |       |                   | 20,217     |   |   |   | — |   |   |   | 20,217 |   |   |
| Net other operating (income)/expenses                    |       |                       | (723       | )                   |       | (384                   | )          |                   | (1,107     | )                     |       |                   | 955        |   |   |   | 82 |   |   |   | 1,037 |   |   |
| Operating  (loss)/income                                 |       |                       | (41,831    | )                   |       | 44,397                 |       |                   | 2,566      |                  |       |                   | (26,066    | ) |   |   | 39,175 |   |   |   | 13,109 |   |   |
| Foreign currency  transaction loss/(gain)                |       |                       | 601        |                |       | 749                    |       |                   | 1,350      |                  |       |                   | 4,129      |   |   |   | 1,491 |   |   |   | 5,620 |   |   |
| Loss/(gain) on  derivative instruments                   |       |                       | (1,682     | )                   |       | 4,383                  |       |                   | 2,701      |                  |       |                   | 1,498      |   |   |   | (1,358 | ) |   |   | 140 |   |   |
| Interest expense,  net                                   |       |                       | 11,087     |                |       | 22,774                 |       |                   | 33,861     |                  |       |                   | 14,413     |   |   |   | 5,292 |   |   |   | 19,705 |   |   |
| Other (income)                                           |       |                       | —     |                |       | (129                   | )          |                   | (129       | )                     |       |                   | —     |   |   |   | — |   |   |   | — |   |   |
| (Loss)/income  before income taxes and minority interest |       |                       | (51,837    | )                   |       | 16,620                 |       |                   | (35,217    | )                     |       |                   | (46,106    | ) |   |   | 33,750 |   |   |   | (12,356 | ) |   |
| Income tax  (benefit)/provision                          |       |                       | (5,796     | )                   |       | 5,444                  |       |                   | (352       | )                     |       |                   | (11,748    | ) |   |   | 13,181 |   |   |   | 1,433 |   |   |
| Minority  intererst                                      |       |                       | (6         | )                   |       | 50                     |       |                   | 44         |                  |       |                   | —     |   |   |   | — |   |   |   | — |   |   |
| Net (loss)/income                                        |       |                       | $          | (46,035             | )          |                   | $          | 11,126                 |       |                  | $          | (34,909                | )          |   |   | $ | (34,358 | ) |   |   | $ | 20,569 |   |   |   | $ | (13,789 | ) |   |

 

The aggregation of theresults of operations data for fiscal 2005 and fiscal 2004 is not in accordancewith U.S. GAAP, and the periods presented are not comparable due to the changein basis of assets that resulted from the application of the purchase method ofaccounting in connection with the MDP Transaction and the EQT Transaction.Because Predecessor 1, Predecessor 2 and Successor are different reportingentities for accounting purposes, the aggregated information should beconsidered as supplemental information only.

***Fiscal Year Ended September 30, 2006 compared toAggregated Fiscal Year Ended September 30, 2005***

Revenue for the year ended September 30, 2006 was$520.6 million, an increase of $57.3 million, or 12.4%, as compared with theyear ended September 30, 2005. On a constant currency basis, adjusting forthe fluctuations in the U. S.$/Euro rate, total revenue increased by 15%, whichincluded growth rates for the Imaging Systems segments of 36%, the Instrumentssegments of 17%, the Dental CAD/CAM Systems of 11%, and the Treatment Centersegment of 4%. The Imaging Systems segment was driven by the trend 

31

----

towards increasingdigitalization of dental practices, the success of the new panoramic productline ORTHOPHOS XG and the inclusion beginning June 20, 2006 of the Schickoperations. The Instrument segment revenue increase was driven by new products,such as the Sirolaser and SIROpure instruments. The Dental CAD/CAM systemsrevenue benefited from the key trends in the dental industry, such as increasedemphasis on efficiency and productivity, and patients growing emphasis onaesthetics.

Revenue in the UnitedStates for the year ended September 30, 2006 increased by 26% from theprior period. All segments contributed to this development. Of theyear-over-year growth in the United States 59% was attributable to the ImagingSystems segment, 21% to the Dental CAD/CAM Systems segment, 11% to theInstruments segment and 9% to the Treatment Center segment. Revenue growth inthe rest of the world was 7%. On a constant currency basis, revenue in the restof the world increased by 11%. The revenue growth in the rest of the world wasprimarily due to Sirona’s expanded presence in Spain, Australia, China andCanada. Sirona launched new sales and service operations in Australia in May 2005and in China in July 2006.

***Cost of Sales***

Cost of sales for the yearended September 30, 2006 was $278.7 million, an increase of $7.6 million,or 2.8%, as compared with the year ended September 30, 2005. Cost ofsales included amortization and depreciation expense resulting from the step-upto fair values of inventories and tangible and intangible assets, which were$53.1 million for the year ended September 30, 2006, compared with $52.3million for the year ended September 30, 2005. Excluding these amounts,costs of sales as a percentage of revenue decreased to 43.3% for the year endedSeptember 30, 2006 compared with 47.2% for the year ended September 30,2005, and gross profit as a percentage of revenue increased by 3.9% from 52.8%to 56.7%. This increase in gross profit was primarily due to aperiod-over-period increase in gross-profit margins in all of the segments. Theimprovement was attributable to economies of scale resulting from volume increases,which have in turn led to fixed cost leverage. In addition, the improved costposition of the new panoramic product line over the predecessor product and theSchick product lines, were the main drivers of the improved gross profit marginin the Imaging Systems segment.

***Selling, General and Administrative***

For the year ended September 30,2006, SG&A expense was $148.7 million, an increase of $20.9 million,or 16.4%, as compared with the year ended September 30, 2005. SG&Aexpense included amortization and depreciation resulting from the step-up tofair values of tangible and intangible assets as well as non-cash optionexpense in the amount of $5.5 million for the year ended September 30,2006, compared with $1.7 million for the year ended September 30, 2005.The year-over-year increase in amortization and depreciation expense resultedfrom the step-up to fair values of Sirona’s net assets and liabilities relatedto the Exchange. Excluding these amounts, as a percentage of revenue SG&Aexpense increased to 27.5% for the year ended September 30, 2006, ascompared with 27.2% for the year ended September 30, 2005. The increasewas primarily due to increased costs associated with the growth in revenue andwith costs associated with Sirona’s expanded presence in various markets,including the United States, Japan, Australia and China. Cost for the initial SarbanesOxley implementation in the amount of $2.8 million have been included inother operating expenses.

***Research and Development***

R&D expense for theyear ended September 30, 2006 was $33.1 million, an increase of $3.5million, or 11.8%, as compared with the year ended September 30, 2005. Asa percentage of revenue, R&D remained relatively constant at 6.4% for theyears ended September 30, 2006 and September 30, 2005, respectively.The increase in R&D reflects new product developments or productenhancements in all segments, with particular focus on Galileos, a 3D panoramicimaging unit, which will be launched in fiscal year 2007.

32

----

***Write-off of In-process Research and Development***

Write-off of IPR&D forthe year ended September 30, 2006 was $6.0 million, compared to$33.8 million for the year ended September 30, 2005. Thecapitalization and immediate write-off were recorded as a result of the allocationof the acquisition purchase price in connection with the Exchange and the MDPTransaction. These charges will not have a continued impact on Sirona’s futureoperating results.

***Gain and Loss on Foreign Currency Transactions***

Gain on foreign currencytransactions for the year ended September 30, 2006 amounted to $9.9 millioncompared to a loss of $1.3 million for the year ended September 30, 2005.These gains and losses included an unrealized foreign currency gain and (loss)on U.S. dollar denominated bank debt of $6.0 million and ($2.9) million for theyears ended September 30, 2006 and 2005, respectively. An unrealizedforeign currency gain of $5.0 million on the U.S. dollar denominateddeferred income, resulting from the exclusivity payment, is also included inthe year ended September 30, 2006. This foreign currency gain or lossresulted from translation adjustments to the carrying value of Tranche A ofSirona’s U.S. dollar denominated bank debt and deferred income due to currencyfluctuations which did not affect cash flow.

***Interest Expense***

Net interest expense forthe year ended September 30, 2006 was $54.3 million, compared to $ 33.9 millionfor the year ended September 30, 2005. This increase was primarily due tohigher average debt balances following the MDP Transaction and includes $6.2and $2.7 million of amortization of capitalized financing fees for the yearended September 30, 2006 and 2005, respectively.

***Provision/(Benefit) for Income Taxes***

For the year ended September 30,2006 and 2005, Sirona realized a profit and (loss) before income taxes andminority interest of $8.3 million and ($35.2) million, respectively. Theaverage actual tax rate for these years was 35% and 36.9%, which would resultin a provision and a (benefit) of $2.9 million and ($13.0) million,respectively. The tax provision for income taxes for the year ended September 30,2006 was $7.4 million and the tax benefit for the year ended September 30,2005 was $0.4 million. The tax provision for the year ended September 30,2006 was adversely impacted by foreign income for which no foreign tax creditwas available and the non-tax deductible charge related to the write off ofIPR&D related to the Exchange. The tax benefit for the year ended September 30,2005 was primarily impacted by non-tax deductible expense related to the writeoff of IPR&D related to the MDP Transaction.

***Net Income / (Loss)***

Sirona’s net income forthe year ended September 30, 2006 was $0.8 million, an increase of$35.7 million, as compared with the year ended September 30, 2005. Asdescribed above, Sirona’s net income was significantly impacted by the MDPTransaction, the related financing and the Exchange. For the year ended September 30,2006, amortization and depreciation expense resulting from the step-up of fairvalues of intangible and tangible assets related to the Exchange and the MDPTransaction was $35.3 million (net of a tax impact of $ 19.0 million). Write-offof IPR&D was $6.0 million (with no tax impact). In addition, the unrealizedgains on the Tranche A U.S. dollar denominated bank debt as well as thedeferred income from the exclusivity payment was $7.1 million (net of a taximpact of $3.9 million) and option expenses were $2.3 million (net of a taximpact of $1.2 million). Excluding these items in both periods, net incomeincreased due to higher revenue and improved gross margins, partially offset byhigher SG&A, R&D and interest expense.

33

----

**Aggregated Fiscal Year Ended September 30, 2005Compared to Aggregated Fiscal Year Ended September 30, 2004**

***Revenue***

Revenue for the year ended September 30, 2005 was$463.4 million, an increase of $75.5 million, or 19.5%, as compared with theyear ended September 30, 2004. On a constant currency basis, adjusting forthe fluctuations in the U.S.$/Euro rate, total revenue increased 16%, whichincluded growth rates for the Dental CAD/CAM Systems and the Imaging Systemssegments of 36% and 22%, respectively; whereas revenue for the TreatmentCenters and the Instruments segments remained essentially unchanged. The DentalCAD/CAM Systems segment continued to experience strong demand for its productline. The increase in Imaging Systems segment revenue was led by the strongdemand for the new panoramic imaging line, ORTHOPHOS XG. All revenue increaseswere volume driven, while prices remained stable.

Revenue in the UnitedStates for the year ended September 30, 2005 increased by 41% from theprior period, due to strong demand for products in the Dental CAD/CAM Systemssegment and the introduction of the new panoramic imaging line. Seventy-threepercent of the year-over-year growth in the United States was attributable tothe Dental CAD/CAM Systems segment and 25% was driven by the new panoramicproduct line, ORTHOPHOS XG. The addition of Henry Schein as a distributor forImaging Systems, Treatment Centers and Instruments in the United States in January 2005also contributed to this growth. Revenue growth in the rest of the world was13%. On a constant currency basis, revenue in the rest of the world increasedby 9%. The revenue growth in the rest of the world was particularly due toSirona’s expanded presence in Germany, the United Kingdom, Japan and SouthKorea. Sirona launched new sales and service operations in Japan in October 2004and in Australia in May 2005.

***Cost of Sales***

Cost of sales for the yearended September 30, 2005 was $271.1 million, an increase of $41.2 million,or 17.9%, as compared with the year ended September 30, 2004. Cost ofsales included amortization and depreciation expense resulting from the step-upto fair values of inventories and tangible and intangible assets, which were$52.3 million for the year ended September 30, 2005, compared with $33.4million for the year ended September 30, 2004. The year-over-year increasein amortization and depreciation expense resulted from the fair valueadjustments related to the MDP Transaction. Excluding these amounts, costs ofsales as a percentage of revenue decreased to 47.2% for the year ended December 31,2005 compared with 50.7% for the year ended September 30, 2004, and grossprofit as a percentage of revenue increased by 3.5% from 49.3% to 52.8%. Thisincrease in gross profit was primarily due to a change in regional and productmix. As a percentage of total sales, sales of products in the Dental CAD/CAMSystems and the Imaging Systems segments increased by approximately 6%. Thesehigher margin sales in the Dental CAD/ CAM Systems and the Imaging Segmentscontributed approximately 70% and 18%, respectively, to the increase in grossprofit.

***Selling, General and Administrative***

For the year ended September 30, 2005, SG&Aexpense was $127.8 million, an increase of $28.9 million, or 29.2%, ascompared with the year ended September 30, 2004. SG&A expense includedamortization and depreciation resulting from the step-up to fair values oftangible and intangible assets in the amount of $1.7 million for the year endedSeptember 30, 2005, compared with $1.2 million for the year ended September 30,2004. The year-over-year increase in amortization and depreciation expenseresulted from the step-up to fair values of Sirona’s net assets and liabilitiesrelated to the MDP Transaction. Excluding these amounts, SG&A expenseincreased for the year ended September 30, 2005 by $28.4 million, or29.0%, as compared with the year ended September 30, 2004. As a percentageof 

34

----

revenue, SG&Aexpense increased to 27.2% for the year ended September 30, 2005 ascompared with 25.2% for the year ended September 30, 2004.

The increase was primarilydue to increased costs associated with the growth in revenue and with costsassociated with Sirona’s expanded presence in various markets in 2005,including the United States, Japan and Australia, which accounted forapproximately 70% of the increase in SG&A expense.

***Research and Development***

R&D expense for theyear ended September 30, 2005 was $29.6 million, an increase of $4.4million, or 17.5%, as compared with the year ended September 30, 2004. Asa percentage of revenue, R&D remained relatively constant at 6.4% and 6.5%for the year ended September 30, 2005 and the year ended September 30,2004, respectively. The increase in R&D reflected the large number of newproducts launched in the year ended September 30, 2005.

***Write-off of In-process Research and Development***

Write-off of IPR&D forthe year ended September 30, 2005 was $33.8 million, compared to$20.2 million for the year ended September 30, 2004. Thecapitalization and related write-off were recorded as a result of theallocation of the acquisition purchase price of the EQT and the MDPTransactions. This was a one-time charge that will not have a continued impacton Sirona’s future results.

***Loss on Foreign Currency Transactions***

The loss on foreigncurrency transactions for the year ended September 30, 2005 amounted to$1.3 million compared to a loss of $5.6 million for the year ended September 30,2004. These losses included an unrealized foreign currency loss on U.S. dollardenominated bank debt of $2.9 million and $5.9 million for the years endedSeptember 30, 2005 and 2004, respectively. This foreign currencyunrealized loss resulted from translation adjustments to the carrying value ofSirona’s Tranche A U.S. dollar denominated bank debt due to currencyfluctuations. This unrealized loss did not affect Sirona’s cash flow.

***Interest Expense***

Net interest expense forthe year ended September 30, 2005 was $33.9 million, compared to$19.7 million for the year ended September 30, 2004. This increasewas primarily due to higher average debt balances following the MDPTransaction.

***Benefit (Provision) for Income Taxes***

For the year ended September 30, 2005 and 2004,Sirona realized a loss before income taxes and minority interest of $35.2million and $12.4 million, respectively. The German tax rate for these yearswas 36.9%, which would result in a benefit of $13.0 million and $4.6 million,respectively. The tax benefit for income taxes for the year ended September 30,2005 was $0.4 million and the tax provision for the year ended September 30,2004 was $1.4 million. The tax benefit for the year ended September 30,2005 was primarily impacted by non-tax deductible expense related to the writeoff of IPR&D. The tax provision for the year ended September 30, 2004was primarily impacted by non-tax deductible expense related to the write offof IPR&D and a portion of the interest expense for purposes of the localtrade tax.

35

----

***NetIncome (Loss)***

Sirona’s net loss for theyear ended September 30, 2005 was $34.9 million, an increase of $21.1million, as compared with the year ended September 30, 2004. As describedabove, the MDP Transaction and the EQT Transaction and the related financingshad a significant impact on Sirona’s net income. For the year endedSeptember 30, 2005, amortization and depreciation expense resulting fromthe step-up of fair values of intangible and tangible assets related to the MDPTransaction and the EQT Transaction was $34.1 million (net of a tax impactof $ 19.9 million). Write-off of IPR&D was $33.7 million (with no taximpact) and the unrealized loss on the Tranche A U.S. dollar denominated bankdebt was $1.8 million (net of a tax impact of $1.1 million). Excluding theseitems in both periods, net income increased due to higher revenue and improvedgross margins, partially offset by higher SG&A, R&D and interestexpense.

**Liquidity andCapital Resources**

Historically,Sirona’s principal uses of cash, apart from operating requirements, includingresearch and development expenses, have been for interest payments, debtrepayment and acquisitions. Operating capital expenditures are approximatelyequal to operating depreciation (excluding any effects from the increasedamortization and depreciation expense resulting from the step-up to fair valuesof Sirona’s and Schick’s assets and liabilities required under purchaseaccounting). Sirona’s management believes that Sirona’s working capital issufficient for its present requirements.

| ** **                                            | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** ** | **Predecessor 1** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | ** **             | ** ** | **July 1,**       | ** ** | **October 1,**    | ** ** | ** ** | ** ** | **February 17,** | ** ** | **October 1,** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Year ended**    | ** ** | **2005 to**       | ** ** | **2004 to**       | ** ** | **Year ended** | ** ** | **2004 to** | ** ** | **2003 to** | ** ** | **Year ended** | ** ** |
| ** **                                            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **February 16,** | ** ** | **September 30,** | ** ** |
| **$’000s**                                       | ** ** | ** **             | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** | **2004** | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | **(aggregated)** | ** ** | ** ** | ** ** | ** ** | ** ** | **(aggregated)** | ** ** |
| ** **                                            | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | **(unaudited)** | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** |
| Net cash provided by operating activities             |       |                   | $          | 96,714                 |       |                   |       | $ | 137,403 |   |   |   | $ | 54,806 |   |   |   | $ | 192,209 |   |   |   | $ | 37,456 |   |   |   | $ | 28,258 |   |   |   | $ | 65,714 |   |   |
| Net cash used in investing activities                 |       |                   | (6,317     | )                      |       |                   | (559,998   | ) |   |   | (37,408 | ) |   |   | (597,406 | ) |   |   | (374,425 | ) |   |   | (4,598 | ) |   |   | (379,023 | ) |   |
| Net cash / provided by (used in) financing activities |       |                   | (78,493    | )                      |       |                   | 448,847    |   |   |   | (14,624 | ) |   |   | 434,223 |   |   |   | 310,633 |   |   |   | (11,588 | ) |   |   | 299,045 |   |   |
| Increase /  (decrease) in cash during the  period     |       |                   | $          | 11,904                 |       |                   |       | $ | 26,252 |   |   |   | $ | 2,774 |   |   |   | $ | 29,026 |   |   |   | $ | (26,336 | ) |   |   | $ | 12,072 |   |   |   | $ | (14,264 | ) |   |
|                                                       |            |                        |            |                        |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Net Cash Provided by Operating Activities***

Net cash provided by operating activities representsnet cash from operations, returns on investments, interest and taxation.

Net cash provided byoperating activities was $96.7 million for the year ended September 30,2006 compared to $192.2 million for the fiscal year ended September 30,2005. In 2005 Sirona received a one-time payment of $100 million for anexclusivity agreement for Dental CAD/CAM systems with Sirona’s distributionpartner, Patterson Dental Inc., for sales in the United States and Canada.Excluding this amount the cash provided by operating activities in fiscal years2006 and 2005 remained nearly unchanged. Compared to the year endedSeptember 30, 2004 cash provided by operating activities increased by$26.5 million, or 40%, in the year ended September 30, 2005.

***Net Cash Used in Investing Activities***

Net cash used in investing activities represents cashused for capital expenditures, financial investments, acquisitions anddisposals.

36

----

Net cash used in investingactivities was $6.3 million for the year ended September 30, 2006,compared to $597.4 million for the year ended September 30, 2005 and$379.0 million for the year ended September 30, 2004. The primarycontributors to the investing cash outflow in fiscal 2006 were (1) capitalexpenditures of $22.5 million and (2) a cash inflow from the Exchange of$14.6 million. The primary contributors to the investing cash outflow in fiscal2005 were (1) the MDP Transaction of $556.3 million, (2) the deferredpurchase price payment in December 2004 of $25.7 million related to theEQT Transaction, and (3) capital expenditures of $15.7 million. Theprimary contributors to the investing cash outflow in Fiscal 2004 were(1) the EQT Transaction of $359.5 million, (2) $5.8 million for theacquisition of businesses and (3) $13.8 million for capital expenditures.

***Net Cash Provided by (Used In) Financing Activities***

Net cash used in financing activities was $78.5million for the year ended September 30, 2006 compared to net cashprovided by financing activities of $434.2 million for the year endedSeptember 30, 2005 and net cash provided by financing activities of $299.0million for the year ended September 20, 2004. The cash used in financingactivities in fiscal 2006 comprised unscheduled prepayments of the Mezzanineloan (€15.0million or $17.4) as well as Tranche C (€15.0 million or $17.4) andunscheduled and scheduled prepayments of Tranche A ($43.9 million) of theSenior Facility Loan. The cash provided by financing activities in fiscal 2005reflected the refinancing of Sirona’s debt to effect the MDP Transaction. Thisrefinancing resulted in full repayment of Sirona’s existing bank debt andshareholder loans and proceeds generated from new debt. As a result of the MDPTransaction, Sirona’s debt substantially increased. The cash provided byfinancing activities in fiscal 2004 reflected the refinancing of Sirona’s debtto effect the EQT Transaction. This refinancing resulted in full repayment ofSirona’s existing bank debt and shareholder loans and proceeds generated from newdebt. As a result of the EQT Transaction, Sirona’s debt substantiallyincreased. See below for a discussion of long-term debt for further details.

Sirona believes that itsoperating cash flows and available cash (including restricted cash), togetherwith its long-term debt borrowings, will be sufficient to fund its workingcapital needs, research and development expenses (including but not limited tothe acquired in-process research and development) anticipated capitalexpenditure and debt service requirements.

***Other FinancialData***[unaudited]:

| ** **                              | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** ** | **Predecessor 1** | ** ** |
|-----------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                              | ** ** | ** **             | ** ** | **July 1,**       | ** ** | **October 1,**    | ** ** | **February 17,** | ** ** | **October 1,** | ** ** |
| ** **                              | ** ** | **Year ended**    | ** ** | **2005 to**       | ** ** | **2004 to**       | ** ** | **2004 to** | ** ** | **2003 to** | ** ** |
| ** **                              | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **September 30,** | ** ** | **February 16,** | ** ** |
| ** **                              | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005**               | ** ** | **2004** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **$’000s**        | ** ** |
| Net income /  (loss)                    |       |                   | $          | 755                    |       |                   |       | $ | (46,035 | ) |   |   | $ | 11,126 |   |   |   | $ | (34,358 | ) |   |   | $ | 20,569 |   |   |
| Net interest  expense                   |       |                   | 54,275     |                   |       |                   | 11,087     |   |   |   | 22,774 |   |   |   | 14,413 |   |   |   | 5,292 |   |   |
| Provision /  (benefit) for income taxes |       |                   | 7,360      |                   |       |                   | (5,796     | ) |   |   | 5,444 |   |   |   | (11,748 | ) |   |   | 13,181 |   |   |
| Depreciation                            |       |                   | 12,543     |                   |       |                   | 3,454      |   |   |   | 12,738 |   |   |   | 9,393 |   |   |   | 4,501 |   |   |
| Amortization                            |       |                   | 54,311     |                   |       |                   | 11,938     |   |   |   | 31,417 |   |   |   | 23,310 |   |   |   | 2,029 |   |   |
| EBITDA                                  |       |                   | $          | 129,244                |       |                   |       | $ | (25,352 | ) |   |   | $ | 83,499 |   |   |   | $ | 1,010 |   |   |   | $ | 45,572 |   |   |

 

EBITDA is definedas net income (loss) before interest, taxes, depreciation and amortization.Sirona believes that EBITDA is useful to investors because it is frequentlyused by securities analysts, investors and other interested parties to evaluatecompanies in its industry. EBITDA is not a recognized term under U.S. GAAP,should not be viewed in isolation and does not purport to be an alternative tonet income (loss) as an indicator of operating performance or an alternative tocash flows from operating activities as a 

37

----

measure ofliquidity. There are material limitations associated with making theadjustments to Sirona’s earnings to calculate EBITDA and using this non-U.S.GAAP financial measure as compared to the most directly comparable U.S. GAAPfinancial measure. For instance, EBITDA does not include:

·       interest expense, andbecause Sirona has borrowed money in order to finance its operations, interestexpense is a necessary element of its costs and ability to generate revenue;

·       depreciation andamortization expense, and because Sirona uses capital assets, depreciation andamortization expense is a necessary element of its costs and ability togenerate revenue; and

·       tax expense, and becausethe payment of taxes is part of Sirona’s operations, tax expense is a necessaryelement of costs and impacts Sirona’s ability to operate.

Additionally, EBITDA isnot intended to be a measure of cash flow for Sirona’s discretionary use, as itdoes not consider certain cash requirements, such as capital expenditures,contractual commitments, interest payments, tax payments and debt servicerequirements. Sirona compensates for these limitations by relying primarily onits GAAP results and using EBITDA only supplementally. Because not allcompanies use identical calculations, this presentation of EBITDA may not becomparable to other similarly titled measures for other companies.

Transactionrelated costs and non-cash charges for Sirona are further detailed in thefollowing table:

| ** **                    | ** ** | **Successor**          | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** ** | **Predecessor 2** | ** ** | **Predecessor 1** | ** ** |
|-------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                    | ** ** | ** **             | ** ** | **July 1,**       | ** ** | **October 1,**    | ** ** | **February 17,**  | ** ** | **October 1,**    | ** ** |
| ** **                    | ** ** | **Year ended**    | ** ** | **2005 to**       | ** ** | **2004 to**       | ** ** | **2004 to**       | ** ** | **2003 to**       | ** ** |
| ** **                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **September 30,** | ** ** | **February 16,**  | ** ** |
| ** **                    | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2004**               | ** ** |
| ** **                    | ** ** | **$’000s**        | ** ** |
| Transaction  related costs(a) |       |                   | $          | —                 |       |                   |       | $                      | 1,592      |                   |       |   | $ | 35 |   |   |   | $ | 182 |   |   |   | $ | 91 |   |   |
| Non-cash  charges(b)          |       |                   | (707       | )                      |       |                   | 43,605     |                   |       |                   | 3,843      |   |   |   | 37,146 |   |   |   | — |   |   |
| Total                         |       |                   | $          | (707                   | )          |                   |       | $                      | 45,197     |                   |       |   | $ | 3,878 |   |   |   | $ | 37,328 |   |   |   | $ | 91 |   |   |

 

----

(a)           Transaction relatedcosts were incurred in connection with the EQT Transaction and the MDPTransaction.

(b)          Represents(1) the amounts related to the fair value increases in inventory andin-process research and development resulting from the EQT Transaction, the MDPTransaction and the Exchange, (2) the foreign exchange (gain) loss on bankdebt resulting from transaction adjustments to the carrying value of a portionof Sirona’s U.S. dollar denominated debt due to currency fluctuations,(3) the foreign exchange (gain) loss resulting from transactionadjustments to the carrying value of the U.S. dollar denominated exclusivitypayment due to currency fluctuations and (4) share-based compensationexpense under SFAS No. 123R.

**Long-term debt**

***Shareholder loan***

Luxco granted Sirona Holding a loan of €151.0 millionin connection with the MDP Transaction. The loan accrues interest at 7.5% perannum. In connection with the Exchange Sirona Dental Systems, Inc. tookover the shareholder loan from Luxco. Effective June 20, 2006 (closing ofthe transaction) the shareholder loan is eliminated on consolidation. Theinterest is being accumulated until the end of the loan term on June 30,2015, when the loan and the interest is required to be repaid. FromOctober 1, 2005 through June 20, 2006 interest of €8.3million ($10.1 million) has been accreted.

38

----

***Bank loans***

Bank loans outstanding at September 30, 2006included senior ranking loans and accreted interest of $531.5 million, dividedinto three tranches and a mezzanine loan plus an acquisition facility and anoverdraft facility. As discussed below, the company entered into a new SeniorCredit Facility on November 22, 2006 and used the proceeds to refinanceits outstanding senior bank loans and mezzanine loan.

Tranche A was a U.S. Dollar denominated loan and hadan original principal amount of $162.7 million and was repayable insemi-annual installments through June 30, 2012. As of September 30,2006 the loan including accrued interest amounted to $118.0 million as theCompany made an unscheduled repayment of $38.4 million, which reduced theregular repayments pro rata and a scheduled repayment of $5.5 million. TrancheA had an interest rate of LIBOR plus a margin of 1.5% to 2.25% per annum.Interest was payable on a monthly, quarterly, or semi-annual basis, at thediscretion of the Company. Two step up swaps were established for 70% of theinterest for the next three years ending March 31, 2007 andSeptember 30, 2008, respectively. The interest rate swaps fix the LIBORelement of interest payable on 70% of the principal amounted of the loan fordefined twelve month periods over the three years ending March 31, 2007and September 30, 2008, respectively. The defined interest rates fixed foreach twelve month period range from 1.75% to 4.71%. Settlement of the swaps wasrequired on a quarterly basis.

Tranche B was a €denominated loan in the principle amount of €125.0 million and wasrepayable in a single amount of €125.0 million onJune 30, 2013. Including accrued interest the loan amounted to €125.0 millionplus accrued interest of €0.2 million ($158.6 million) as ofSeptember 30, 2006. Tranche B had an interest rate of EURIBOR plus amargin of 2.25% to 2.75% per annum. Interest was paid on a monthly, quarterlyor semi-annual basis at the discretion of the Company. The Company entered intofour cap floor collars for 51% of the interest for the next three years. Underthe terms of the collars the floor interest rates are 1.595% and 1.85% and thecap interest rates are 5% and 4.10%. Settlement of the contracts was requiredon a quarterly basis.

Tranche C was a €denominated loan and had a principle amount of €125.0 million and wasrepayable on June 30, 2014. As at September 30, 2006 the loanamounted to €110.0 million plus accreted interest of € 0.2 million ($139.6million) as the Company made an unscheduled repayment of €15.0million during the year. Tranche C had an interest rate of EURIBOR plus amargin of 3.25% per annum. Interest was payable on a monthly, quarterly or semiannual basis at the discretion of the Company. The Company entered into twocap/floor collars for 51% of the EURIBOR element of the interest for the nextthree years. Under the terms of the collars the floor interest rates were1.595% and 1.85% and the cap interest rates were 5% and 4.10%. Settlement ofthe contracts was required on a quarterly basis.

At inception, the mezzanine loan had a principalamount of €165.0 million ($198.8 million), and under theterms of the loan, the full amount was repayable at the end of the loan term,in June 2015. The Company repaid €65.0 million of themezzanine debt in the quarter ended to September 30, 2005 and €15.0million in fiscal year 2006. The mezzanine loan had an interest rate of EURIBORplus a margin of 9.5% per annum. The 9.5% margin was divided into twocomponents: 4.5% per annum was payable on an on-going basis, and the remaining5% per annum will accrete until the end of the loan term. The remaining loanoutstanding as of September 30, 2006 including accreted interest amountsto €91.0million ($115.3 million). The Company entered into two cap/floor collarsfor 51% of the EURIBOR portion of the interest for the next three years. Underthe terms of the collars the floor interest rates are 1.68% and 1.85% and thecap interest rates are 5% and 4.02%. Settlement of the contract was required ona quarterly basis.

The mezzanine loan was subordinated to the seniorranking loans, and the shareholder loans were subordinated to both the seniorranking loans and the mezzanine loan.

39

----

The margins of tranches A and B and the acquisitionfacility were fixed for one year and thereafter will be calculated based on aratio of net debt to EBITDA for the previous reporting period, all derived fromthe consolidated financial statements prepared in accordance with German GAAP,starting in fiscal year 2007.

The bank loans were secured by the pledge of theequity interests in certain Sirona subsidiaries. In addition, all receivables,bank accounts, tangible assets, inventories, patents, trademarks and otherproperty rights of Sirona Dental Systems GmbH and Sirona Dental Services GmbHwere also pledged as security for the loans.

In addition, as at September 30, 2006 the companyhad available an overdraft facility of €40.0million ($50.7 million) and acquisition facility of €50.0 million ($63.3million), neither of which was drawn down as of September 30, 2006.

On November 22, 2006, the Company entered into anew senior credit facility, which includes: (1) a term loan A1 in anaggregate principal amount of $150.0 million (the “tranche A1 term loan”)available to our subsidiary, Schick Technologies, Inc., as borrower,(2) a term loan A2 in an aggregate principal amount of €275.0 million (the “tranche A2 term loan”) available to our subsidiary, SironaDental Services GmbH, as borrower, and (3) a $150.0 million revolvingcredit facility available to Sirona Dental Systems GmbH, SchickTechnologies, Inc. and Sirona Dental Services GmbH, as initial borrowers.The revolving credit facility is available for borrowing in Euro, $, Yen or anyother freely available currency agreed to by the facility agent. Each of thefacilities has a five-year maturity. The facilities are made available on anunsecured basis. Subject to certain limitations, each European guarantorguarantees the performance of each European borrower, except itself, and eachU.S. guarantor guarantees the performance of each U.S. borrower, except itself.

Under the current financial ratios, the facilitiesbears interest at a margin of 75 basis points plus, in the case ofEuro-denominated loans, EURIBOR and, in the case of other loans, LIBOR. Amargin ratchet has been agreed, which is subject to a certain ratio withrespect to net debt and a defined earnings measure and becomes effective 12months after the initial drawdown of the facility.

Our new senior creditfacility contains restrictive covenants that limit our ability to make loans,make investments, including in joint ventures, incur additional indebtedness,make acquisitions or pay dividends, subject to agreed upon exceptions. The newsenior credit agreement also requires us to maintain certain specifiedfinancial ratios, including (1) a ratio of consolidated adjusted EBITDA tocash interest costs for the preceding twelve months of no less than 4:00 to1:00 and (2) a ratio of consolidated total net debt to consolidatedadjusted EBITDA for the preceding twelve months for periods endingMarch 2007 and September 2007 of 4:00: 1:00 and thereafter of 3.50:1:00. These covenants are measured semi-annually on March 31 andSeptember 30. Sirona’sability to meet those covenants will depend on its results of operations, whichmay be affected by factors outside of its control. See Item 1A ‘‘Risk Factors—Restrictivecovenants and conditions contained in our new senior credit agreement imposesignificant operating and financial restrictions on our business.” If Sironabreaches any of the covenants, Sirona will default under the terms of the loanagreement, and the bank loans can be accelerated and become due on demand.

40

----

**ContractualObligations and Commercial Commitments**

Thefollowing table summarizes contractual obligations and commercial commitmentsas of September 30, 2006:

| ** **                   | ** ** | **Payments due by period** | ** ** |
|------------------------------|------------|-------------------------------------------|------------|
| ** **                   | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **                   | ** ** | **Total**                                 | ** ** | **1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **5 years** | ** ** |
| ** **                   | ** ** | **$’000s**                           | ** ** |
| Long-term debt               |       | $                                         | 533,372    |   |   | $ | 14,738 |   |   | $ | 36,796 |   | $ | 43,236 |   | $ | 438,602 |   |
| Operating lease  obligations |       | 39,142                                    |       |   | 4,669 |   |   | 7,687 |   | 5,469 |   | 21,317 |   |
| Pension                      |       | 19,188                                    |       |   | 1,023 |   |   | 2,889 |   | 3,872 |   | 11,404 |   |
| Purchase  commitments        |       | 43,820                                    |       |   | 40,099 |   |   | 3,469 |   | 252 |   | — |   |
| Total                        |       | $                                         | 635,522    |   |   | $ | 60,529 |   |   | $ | 50,841 |   | $ | 52,829 |   | $ | 471,323 |   |

 

The amounts disclosedabove  include interest of $0.005 millionon long-term debt.

**Off-Balance SheetArrangements**

Customers can finance their purchases of Sironaproducts from their respective dealer through financial institutions. Prior toMarch 2003, Sirona offered to guarantee up to 10% of the total liabilitydue to the financial institution from the customer in the event the customerdefaulted on their payments. However, the contracts negotiated with thedealers, who sold the products to the third-party customers, granted Sirona aright of recourse against the dealer in such event. Sirona ceased issuing theseguarantees after March 2003. The arrangements were generally provided fora five-year period and therefore the related guarantees issued by Sirona areexpected to expire by 2008.

At September 30, 2006 and 2005, the maximumpotential amount of future undiscounted payments that could be required to bemade was $5.8 million and $5.8 million, respectively. However, these amountsmay be recovered from dealers pursuant to the recourse arrangements describedabove. No related asset or liability has been recorded in Sirona’s consolidatedfinancial statements as of September 30, 2006 or 2005.

In July 2005, Sirona entered into a sale andleaseback agreement regarding unused land on the Bensheim site of Sirona inGermany. The land was sold for $1.1 million to an unrelated propertydevelopment company, who will construct an office building based on Sirona’sspecifications on the site. Sirona will lease the building from the propertydevelopment company through an 18-year lease. Under the terms of thelease, rent is fixed at €1.2 million ($1.5 millionat the €/$exchange rate of September 30, 2006) per annum until 2013. After 2013,rent is subject to adjustment according to an inflation index. Rental paymentswill commence once the building is ready for occupancy, which is currentlyanticipated to be in April 2007. The land remains an asset of Sirona’sbalance sheet and the building will be accounted for as an operating lease.

Sirona has no otheroff-balance sheet financing arrangements.

**Critical AccountingPolicies**

The preparation offinancial statements in conformity with U.S. GAAP requires Sirona to makeestimates and assumptions that affect amounts reported in its consolidatedfinancial statements and accompanying notes. These estimates and assumptionsare evaluated on an ongoing basis based on historical developments, marketconditions, industry trends and other information Sirona believes to bereasonable under the circumstances. There can be no assurance that actualresults will conform to Sirona’s estimates and assumptions, and that reportedresults of operations will not be materially adversely affected by the need tomake accounting adjustments to reflect changes in its estimates and assumptionsfrom time 

41

----

to time.The following accounting policies are those that Sirona believes to be the mostsensitive to its estimates and assumptions.

***Pensions and 401(k) Plan***

Sirona has both defined benefit and definedcontribution pension plans, as well as an early retirement plan.

Sirona accounts for its defined benefit pension plansusing Statement of Financial Accounting Standard No. 87, Employer’sAccounting for Pensions (“SFAS 87”) and the disclosure requirements underStatement of Financial Accounting Standards No. 132, Employer’s Disclosureabout Pensions and Other Post-Retirement Benefits (Revised “SFAS 132”), anamendment of FASB Statements No. 87, 88 and 106. Under SFAS 87, pensionexpense is recognized on an accrual basis over the employee’s approximateservice periods. SFAS 87 requires the use of an actuarial method fordetermining defined benefit pension costs and provides for the deferral ofactuarial gains and losses (in excess of a specified corridor) that result fromchanges in assumptions or actual experience differing from that assumed. SFAS87 also provides for the prospective amortization of costs relating to changesin the benefit plan, as well as the obligation resulting from the transition.In applying purchase accounting, a pension liability was recognized for theprojected benefit obligation in excess of plan assets.

The key assumption used in the actuarial calculationsfor the defined benefit pension plans is the selection of the appropriatediscount rate. The discount rate has been selected by reference to marketinterest rates. The discount rate used reflects the rates available on highquality fixed income investment of appropriate duration at the measurementdates of each year. Fluctuations in market interest rates could impact theamount of pension expense recorded for these plans. The discount rateassumption changed from 4.25% at September 30, 2005 to 4.50% atSeptember 30, 2006 thereby affecting the amount of pension expenserecorded during each period.

Plan assets consist of contributions made by Sirona toa pension support fund of an insurance company, the custodian, which in turninvests these contributions. The insurance company guarantees the employees theinvestments will generate a minimum return of 2.75% to 3.25%. The plan assetsare invested in equity securities (34.8%), fixed income securities (52.0%) andother assets (13.2%).

Deferred losses were significant at the end of thePredecessor 2 period at June 30, 2005. However, as part of the fair valueadjustments due to purchase accounting for the MDP Transaction, these deferredlosses no longer remained at September 30, 2005 and will not impact futureperiods. There were no significant deferred gains or losses for any otherperiods.

Contributions made to the defined contribution pensionplans and the 401(k) savings plan for U.S. employees are accrued based onthe contributions required by the plan.

Sirona also has an earlyretirement plan, Altersteilzeit (“ATZ”) which allows certain German employeeswho have been accepted into the plan to retire at 60 rather than at the legalretirement age of 65. Eligible employees are those who have attained theage of 55 or who will attain the age of 55 by calendar year 2009 and have beenaccepted to participate in the ATZ plan. The ATZ plan can cover a periodbetween the ages of 58 to 63 of the participating employees and is split intoan active service period, where the employees work full time for Sirona, and aninactive service period, where the employees do not work for the Company.During the active service period, the employees receive 50% of their salary andthe remaining 50% of their salary, plus a bonus payment equal to 35% of theirsalary is paid during the inactive service period. Sirona recognizes the salarycomponent of the ATZ plan over the period from the beginning of the ATZ periodto the end of the active service period. Sirona recognizes the bonus componentover the period from the point at which the employee signs the ATZ contractuntil the end of the active service period.

42

----

***Income taxes***

Sirona recognizes deferredtax assets and liabilities based on the differences between the financialstatement carrying amounts and the tax basis of assets and liabilities. Sironaregularly reviews its deferred tax assets for recoverability and establishes avaluation allowance, as necessary, based on historical taxable income,projected future taxable income, the expected timing of the reversals ofexisting temporary differences and the implementation of tax-planningstrategies. If Sirona is unable to generate sufficient future taxable income incertain tax jurisdictions, or if there is a material change in the actualeffective tax rates or time period within which the underlying temporarydifferences become taxable or deductible, it could be required to increase itsvaluation allowance against its deferred tax assets resulting in an increase inits effective tax rate and an adverse impact on operating results. As ofSeptember 30, 2006, Sirona had recorded valuation allowances against itsdeferred tax assets in the amount of $3,208. Further information on incometaxes is provided in Note 13 to the consolidated financial statements appearingelsewhere in this report.

***Impairment of Long-Lived and Finite-Lived Assets***

Sirona assesses all itslong lived assets for impairment whenever events or circumstances indicatetheir carrying value may not be recoverable. Sirona’s management assesseswhether there has been an impairment by comparing anticipated undiscountedfuture cash flows from operating activities with the carrying value of theasset. The factors considered by Sirona’s management in this assessment includeoperating results, trends and prospects, as well as the effects ofobsolescence, demand, competition and other economic factors. If an impairmentis deemed to exist, management records an impairment charge equal to the excessof the carrying value over the fair value of the impaired assets. This couldresult in a material charge to earnings.

***Impairment of Indefinite-Lived Assets***

Sirona tests goodwill for impairment on an annualbasis by comparing the fair value of its reporting units to their carryingvalues. Key assumptions in determining fair value are the assessment of futurecash flows and the appropriate discount rate. Additionally, goodwill is testedfor impairment between annual tests if an event occurs or circumstances changethat would more likely than not reduce the fair value of an entity below itscarrying value. These events or circumstances would include a significantchange in the business climate, legal factors, operating performanceindicators, competition, sale or disposition of a significant portion of thebusiness or other factors. If the carrying amount of a reporting unit exceedsits fair value, goodwill impairment loss is measured as the excess of thecarrying amount of goodwill over its implied fair value. The implied fair valuerequires a fair value exercise similar to a business combination where theindividual assets and liabilities are valued at fair value with the differencebetween the fair value of the reporting unit being the implied fair value ofgoodwill.

Sirona evaluatestrademarks, which are considered indefinite-lived intangible assets, forimpairment at least annually or whenever events or circumstances indicate theircarrying value might be impaired. In performing this assessment, Sirona’smanagement considers operating results, trends and prospects, as well as theeffects of obsolescence, demand, competition and other economic factors. Thecarrying value of trademarks is considered impaired when their carrying valueexceeds their fair market value. In such an event, an impairment loss isrecognized equal to the amount of that excess. Key assumptions in determiningfair value include using the projected cash flows discounted at a ratecommensurate with the risk involved.

43

----

***Purchase Accounting***

Sirona has recorded a change in basis of the assetsand liabilities acquired in the Exchange, the MDP Transaction and EQTTransaction. These transactions required the assets and liabilities to berecorded either at partial fair value or fair value as described in Notes 4 and5 to Sirona’s consolidated financial statements contained elsewhere in thisdocument. In determining the fair value of assets and liabilities, Sirona isrequired to make certain key assumptions that could materially impact the valueof the assets or liabilities recorded.

In valuing the intangible assets, the key assumptionsinclude the valuation method selected, the cash flow projections, the riskbased discount rate, the replacement costs and/or the applicable royalty rates.Sirona used its historical experience, budgets and similar assumptions used inthe medical devices industry in formulating these assumptions.

In valuing property, plant and equipment, the fairvalues were derived from posted values for comparable assets and replacementvalues.

Fair value of liabilitieswas determined to be equivalent to the predecessors’ carrying value or acquiredcompany’s fair value except for pension obligations, which were valued at theproject benefit obligation measured in accordance with Statement of FinancialAccounting Standard No. 87, Employer’s Accounting for Pensions.

**Recent AccountingPronouncements Not Yet Adopted**

In May 2005, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154,“Accounting Changes and Error Corrections (a replacement of APB OpinionNo. 20 and FASB Statement No. 3).” SFAS 154 requires that changes inaccounting principles be given retrospective application to prior periods’ financialstatements. Previously most changes in accounting principle were recognized byincluding in net income of the period of the change the cumulative effect ofthe change. SFAS 154 is effective for fiscal years beginning afterDecember 15, 2005. The Company is still determining the effect SFAS 154 willhave on its consolidated financial statements, but it currently does not expectthe effect to be material.

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements.” Among other requirements, SFAS 157defines fair value and establishes a framework for measuring fair value andalso expands disclosure about the use of fair value to measure assets andliabilities. SFAS 157 prescribes a single definition of fair value as the pricethat would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date. SFAS 157is effective beginning the first fiscal year that begins afterNovember 15, 2007. The Company is still determining the effect SFAS 157 willhave on its consolidated financial statements, but it currently does not expectthe effect to be material.

In September 2006, the FASB issued SFASNo. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and132(R)”. SFAS 158 requires an employer to: (a) recognize in itsstatement of financial position an asset for a plan’s overfunded status or aliability for a plan’s underfunded status; (b) measure a plan’s assets andits obligations that determine its funded status as of the end of theemployer’s fiscal year (with limited exceptions); (c) recognize changes inthe funded status of a defined benefit postretirement plan in the year in whichthe changes occur. Those changes will be reported in comprehensive income of abusiness entity and in changes in net assets of a not-for-profitorganization. The requirement to recognize the funded status of a benefitplan and the disclosure requirements are effective for the Company for thefiscal year ending on September 30, 2007. The Company alreadymeasures plan assets and benefit obligations as of 

44

----

the date of fiscalyear-end. The Company is still determining the effect FAS 158 will have onits consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation(“FIN”) No. 48, *“Accounting forUncertainty in Income Taxes”* which is an interpretation of FASBStatement 109, *“Accounting for IncomeTaxes.”* FIN 48 requires management to perform a two-step evaluationof all tax positions, ensuring that these tax return positions meet the“more-likely than not” recognition threshold and can be measured withsufficient precision to determine the benefit recognized in the financialstatements. These evaluations provide management with a comprehensive model forhow a company should recognize, measure, present, and disclose in its financialstatements certain tax positions that the Company has taken or expects to takeon income tax returns. FIN 48 is effective for the Company’s fiscal year endingSeptember 30, 2008. The Company is still determining the effect FIN 48will have on its consolidated financial statements.

In September 2006,the Securities and Exchange Commission issued Staff Accounting BulletinNo. 108, “Considering the Effects of Prior Year Misstatements WhenQuantifying Misstatements in Current Year Financial Statements” (“SAB 108”),which provides interpretive guidance on how the effects of the carryover orreversal of prior year misstatements should be considered in quantifying acurrent year misstatement. The guidance is applicable for fiscal years endingafter November 15, 2006. The Company is still determining the effectSAB 108 will have on its consolidated financial statements.

**ITEM7A.**        QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

Sirona’s primary market risk exposure is interest raterisk associated with short and long-term bank loans bearing variableinterest rates. To manage this interest rate risk exposure, Sirona enters intointerest rate swap and collar agreements. Sirona is also exposed to foreigncurrency risk, which can adversely affect our sales and operating profits. Tomanage this risk, Sirona enters into forward exchange contracts.

The following discussionshould be read in conjunction with Notes 2 and 15 to Sirona’s auditedconsolidated financial appearing elsewhere in this Report, which providefurther information on Sirona’s derivative instruments.

***Interest Rate Sensitivity***

To reduce the exposure associated with Sirona’svariable rate debt, Sirona has entered into interest rate swap and collaragreements that limit the variable rate for portions of the bank loans. See “Management’sDiscussion and Analysis of Financial Conditions and Results of Operations—Long-Termdebt” for further details.

As of September 30,2006, the interest rate swaps and collars had notional amounts of$337.4 million and a fair value of $1.8 million. The variable benchmarkinterest rates associated with these instruments ranged from 1.595% to 5%. Ahypothetical, instantaneous increase of one percentage point in the interestrates applicable to the variable interest rate debt would have increased theinterest expense for the year ended September 30, 2006 by approximately$4.5 million.

***Exchange Rate Sensitivity***

The Euro is the functional currency for the majorityof Sirona’s subsidiaries, including its German operations, which are theprimary sales and manufacturing operations of Sirona. Sales from other Sironaoperations are denominated in various foreign currencies. Sales in Euro, U.S.dollar and other currencies represented 57%, 35% and 8%, respectively, of totalsales for fiscal 2006. In order to hedge portions of the transactional exposureto fluctuations in exchange rates between the U.S. dollar and the Euro, basedon forecasted and firmly committed cash flows, Sirona enters into forwardforeign currency (different from functional currency) contracts. These forwardforeign currency contracts are intended to protect Sirona 

45

----

against the short-termeffects of changes in the exchange rates. Sirona does not apply hedgeaccounting to these forward foreign currency contracts.

Thetable below provides information as of September 30, 2006, aboutreceivables and derivative financial instruments by functional currency andpresents such information in U.S. dollars, which is Sirona’s reportingcurrency. The table summarizes information on instruments and transactions thatare sensitive to foreign currency exchange rates. The estimated fair value ofreceivables is considered to approximate their carrying value becausereceivables have a short maturity. For foreign currency forward exchangeagreements, the table presents the notional amounts and weighted averageexchange rates by expected (contractual) maturity dates. These notional amountsgenerally are used to calculate the contractual payments to be exchanged underthe contract.

| ** **                                       | ** ** | **Expected Maturity Date** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                                       | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Beyond** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| **As of September 30, 2006** | ** ** | ** **                           | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2011** | ** ** | **Total** | ** ** | **Value** | ** ** |
| ** **                                       | ** ** | **$’000s**                      | ** ** |
| *Receivables:*                                   | * *   | * *                             | * *   |       | * *   | * *   |       |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   | * * | * * | * * | * * |
| U.S. Dollar                                      |       | $                                    | 25,864     |       |       | $          | —     | * * |   |   | — | * * |   |   | — | * * |   |   | — | * * |   |   | — | * * |   | $ | 25,864 |   | $ | 25,864 |   |
| Japanese Yen                                     |       | 2,876                                |       |       | —     | * *   |       |   | — | * * |   |   | — | * * |   |   | — | * * |   |   | — | * * |   | 2,876 |   | 2,876 |   |
| Australian Dollar                                |       | 2,552                                |       |       | —     | * *   |       |   | — | * * |   |   | — | * * |   |   | — | * * |   |   | — | * * |   | 2,552 |   | 2,552 |   |
| Danish Krone                                     |       | 1,024                                |       |       | —     | * *   |       |   | — | * * |   |   | — | * * |   |   | — | * * |   |   | — | * * |   | 1,024 |   | 1,024 |   |
| Chinese Yuan  Renminbi                           |       | 408                                  |       |       | 31         | * *   |       |   | — | * * |   |   | — | * * |   |   | — | * * |   |   | — | * * |   | 439 |   | 439 |   |
| UK Sterling                                      |       | 455                                  |       |       | —     | * *   |       |   |   | * * |   |   | — | * * |   |   | — | * * |   |   | — | * * |   | 455 |   | 455 |   |
| Swiss Francs                                     |       | 154                                  |       |       | —     | * *   |       |   | — | * * |   |   | — | * * |   |   | — | * * |   |   | — | * * |   | 154 |   | 154 |   |
| ** **                                       | ** ** | **$**                                | **33,333** | ** ** | ** ** | **$**      | **31**     | * * | ** ** | ** ** | **—** | * * | ** ** | ** ** | **—** | * * | ** ** | ** ** | **—** | * * | ** ** | ** ** | **—** | * * | ** ** | **$** | **33,364** | ** ** | **$** | **33,364** | ** ** |
| *Forward Exchange Contracts:*                    | * *   | * *                             | * *   |       | * *   | * *   |       |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   | * * | * * | * * | * * |
| U.S. dollar  notional amount                     |       | $                                    | 26,150     |       |       | —     | * *   |   |   | — | * * |   |   | — | * * |   |   | — | * * |   |   | — | * * |   | — |   | $ | (107 | ) |
| Average contract  exchange rate                  |       | $                                    | 1.277      |       |       | —     | * *   |   |   | — | * * |   |   | — | * * |   |   | — | * * |   |   | — | * * |   | — |   | — |   |
|                                                  |            |                                      |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**ITEM8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

The response to this itemis included as a separate section of this Annual Report on Form 10-K,beginning on page F-1.

**ITEM9.**                CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM9A.**        CONTROLS AND PROCEDURES

**Evaluation ofDisclosure Controls and Procedures**

Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934), as of September 30, 2006. Based uponthis evaluation, our chief executive officer and chief financial officerconcluded that, as of September 30, 2006, the Company’s disclosurecontrols and procedures are effective. Our disclosure controls and proceduresare designed to ensure that information relating to the Company, including ourconsolidated subsidiaries, that is required to be disclosed in the reports wefile or submit under the Securities Exchange Act of 1934 are recorded,processed, summarized and reported within the time periods specified in Commission’srules and forms.

46

----

**Management’s AnnualReport on Internal Control Over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over the Company’s financial reporting(as defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act). Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of theCompany’s internal control over financial reporting as of September 30,2006. In making this assessment, our management used the criteria set forth bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control Integrated Framework. Based on our assessment, managementbelieves that, as of September 30, 2006, our internal control overfinancial reporting is effective based on those criteria.

The independent registeredpublic accounting firm which audited the Company’s financial statementsincluded in this Form 10-K has issued an attestation report onmanagement’s assessment of the Company’s internal control over financialreporting. Please see attestation report on page F-5.

47

----

**Changesin Internal Control over Financial Reporting**

No change in our internalcontrol over financial reporting (as defined in rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the quarter endedSeptember 30, 2006 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

**ITEM9B.**       OTHER INFORMATION

None.

48

----

**PART III**

**ITEM10.**         DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT

There is herebyincorporated herein by reference the information appearing under the captionElection of Directors in the proxy statement of our 2007 Annual Meeting ofstockholders to be filed with the Securities and Exchange Commission on orbefore January 28, 2007.

**ITEM11.**         EXECUTIVE COMPENSATION

There is herebyincorporated herein by reference the information appearing under the captionExecutive Compensation in the proxy statement of our 2007 Annual Meeting ofstockholders to be filed with the Securities and Exchange Commission on orbefore January 28, 2007.

**ITEM12.**         SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

There is hereby incorporatedherein by reference the information appearing under the caption SecurityOwnership of Certain Beneficial Owners and Management in the proxy statement ofour 2007 Annual Meeting of stockholders to be filed with the Securities andExchange Commission on or before January 28, 2007.

**ITEM13.**         CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS

There is herebyincorporated herein by reference the information appearing under the captionCertain Relationships and Related Transactions in the proxy statement of our2007 Annual Meeting of stockholders to be filed with the Securities andExchange Commission on or before January 28, 2007.

**ITEM14.**         PRINCIPAL ACCOUNTING FEESAND SERVICES

There is hereby incorporated herein by reference theinformation appearing under the caption Ratification of the Selection ofIndependent Accountants—Aduitor’s Fees in the proxy statement of our 2007Annual Meeting of stockholders to be filed with the Securities and Exchange Commissionon or before January 28, 2007.

49

----

**PART IV**

**ITEM15.**         EXHIBITS, FINANCIALSTATEMENT SCHEDULES

(a)          (1) FinancialStatements, See Index to Financial Statements on Page F-1

(b)         Thefollowing Exhibits are included in this report:
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                | ** ** | **Item Title** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|
| 2.1              |       | Exchange  Agreement, by and among Sirona Holdings Luxco S.C.A, Blitz 05-118 GmbH  and Schick Technologies, Inc., dated September 25, 2005  (incorporated by reference to Exhibit 99.1 to Form 8-K, filed on  September 26, 2005)                      |
| 2.2              |       | Amendment No. 1 to Exchange Agreement, dated  May 11, 2006 (incorporated by reference to Exhibit 99.1 to  Form 8-K, filed on May 16, 2006)                                                                                                       |
| 3.1              |       | Amended and Restated Certificate of Incorporation of  the Company (incorporated by reference to Exhibit 3.1 to the Company’s  Registration Statement on Form S-1, File No. 333-33731,  filed on June 30, 1997)                                   |
| 3.2              |       | Certificate of Amendment to Amended and Restated  Certificate of Incorporation of the Company (incorporated by reference to  Exhibit 3.2 to Form 8-K filed on June 20, 2006)                                                                               |
| 3.3              |       | Bylaws of the Company effective as of  November 1, 2005 (incorporated by reference to Exhibit 3.2 to  Form 8-K, filed on March 8, 2006)                                                                                                               |
| 4.1              |       | Form of Common Stock certificate of the Company  (incorporated by reference to Exhibit 4.1 to the Company’s Registration  Statement on Form S-1, File No. 333-33731, filed on  June 30, 1997)                                               |
| 10.1             |       | 1996 Employee Stock Option Plan, as amended  (incorporated by reference to Exhibit 10.1 to the Company’s Annual  Report on Form 10-K, filed on July 13, 2001)†                                                                                   |
| 10.2             |       | Amendment to 1996 Employee Stock Option Plan  (incorporated by reference to the Company’s definitive proxy statement on  Schedule 14A, filed on May 16, 2006)                                                                                                   |
| 10.3             |       | 1997 Stock Option Plan for Non-Employee Directors,  as amended (incorporated by reference to Exhibit 10.2 to the Company’s  Annual Report on Form 10-K, filed on June 18, 2003)†                                                                 |
| 10.4             |       | Distributorship Agreement, dated April 6, 2000,  by and between Schick Technologies, Inc. and Patterson Dental Company  (incorporated by reference to Exhibit 10.34 to the Company’s Annual  Report on Form 10-K, filed on June 29, 2000)** |
| 10.5             |       | Amendment No. 1 to Distributorship Agreement,  dated July 1, 2005 by and between Schick Technologies, Inc. and  Patterson Dental Company (incorporated by reference to Exhibit 10.1 to  Form 10-Q/A, filed on March 24, 2006)**             |
| 10.6             |       | Consulting and Non-Competition Agreement between  Schick Technologies, Inc. and David B. Schick, dated May 7, 2004  (incorporated by reference to Exhibit 10.33 to the Company’s Annual  Report on Form 10-K, filed on June 25, 2004)       |
| 10.7             |       | Transaction Services Agreement by and between Blitz  F04-506 GmbH, Sirona Dental Services GmbH & Co KG, Sirona  Dental Systems GmbH, MDP IV Offshore GP, LP and Harry M. Jansen  Kraemer, Jr., dated July 6, 2005.*                                    |
| 10.8             |       | Registration Agreement between the Company and  Luxco, dated as of June 20, 2006 (incorporated by reference to  Form 8-K filed on June 20, 2006)                                                                                                           |
| 10.9             |       | Employment Agreement between the Company and Jeffrey  T. Slovin, dated as of June 20, 2006 (incorporated by reference to  Form 8-K filed on June 20, 2006)†                                                                                           |
| 10.10            |       | Employment Agreement between the Company and Michael  Stone, dated as of June 20, 2006 (incorporated by reference to  Form 8-K filed on June 20, 2006)†                                                                                               |

50

----

 
| 10.11 |   | Transition and Severance Agreement between the  Company and Zvi Raskin, dated as of June 14, 2006 (incorporated by  reference to Form 8-K filed on June 20, 2006)†                                                                                                                                                                          |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12 |   | Employment Agreement between Sirona Beteiligungs-  und Verwaltungsgesellschaft mbH (represented by its shareholder Sirona Dental  Systems SARL) and Jost Fischer, dated as of January 25, 2002  (incorporated by reference to Exhibit 10.5 to Form 10-Q,  filed on August 9, 2006)†                                                    |
| 10.13 |   | Employment Agreement between Sirona Beteiligungs-  und Verwaltungsgesellschaft mbH (represented by its shareholder Sirona Dental  Systems SARL) and Simone Blank, dated as of June 27, 2001 (incorporated  by reference to Exhibit 10.6 to Form 10-Q, filed on  August 9, 2006)†                                                       |
| 10.14 |   | Employment Agreement between Sirona Beteiligungs-  und Verwaltungsgesellschaft mbH (represented by its shareholder Sirona Dental  Systems SARL) and Theo Haar, dated as of June 27, 2001 (incorporated by  reference to Exhibit 10.7 to Form 10-Q, filed on  August 9, 2006)†                                                          |
| 10.15 |   | Consolidated and Restated Amendment to  Distributorship Agreement between Sirona Dental Systems GmbH and Patterson  Companies, Inc. (incorporated by reference to Exhibit 10.8 to  Form 10-Q, filed on August 9, 2006)**                                                                                                                    |
| 10.16 |   | Senior Facilities Agreement among Sirona Dental  Systems, Inc., Schick Technologies, Inc., Sirona Dental Systems  GmbH, Sirona Dental Services GmbH, Sirona Dental Systems LLC, Sirona Holding  GmbH, Sirona Immobilien GmbH, J.P. Morgan PLC, UBS Limited, JPMorgan Chase  Bank, N.A., and J.P. Morgan Europe Limited, dated November 22, 2006* |
| 10.17 |   | Amendment Letter to the Senior Facilities Agreement  from Sirona Dental Systems, Inc. as Obligors’ Agent under the Senior  Facilities Agreement to J.P. Morgan Europe Limited as Facility Agent under  the Senior Facilities Agreement, dated December 5, 2006.*                                                                                 |
| 14.1  |   | Code of Ethics (incorporated by reference to  Exhibit 14.1 to the Company’s Annual Report on Form 10-K,  filed on June 25, 2004)                                                                                                                                                                                                            |
| 16.1  |   | Letter from Grant Thornton LLP to the Securities and  Exchange Commission confirming statements made about it by Company in  connection with changes to the Company’s certifying accountant (incorporated  by reference to Exhibit 16.1 to Form 8-K, filed June 26,  2006)                                                                  |
| 21.1  |   | List of Subsidiaries of Company*                                                                                                                                                                                                                                                                                                                                |
| 23.1  |   | Consent of Independent Registered Public Accounting  Firm*                                                                                                                                                                                                                                                                                                      |
| 31.1  |   | Certification of Principal Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                                                                   |
| 31.2  |   | Certification of Principal Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                                                                   |
| 32.1  |   | Section 1350 Certification of Chief Executive  Officer*                                                                                                                                                                                                                                                                                                    |
| 32.2  |   | Section 1350 Certification of Chief Financial  Officer*                                                                                                                                                                                                                                                                                                    |

----

†                    Compensatoryplan or arrangement

*                    Filed herewith

**             Certain informationin this exhibit has been omitted and filed separately with the Securities andExchange Commission pursuant to a confidential treatment request underRule 24b-2 promulgated under the Securities Exchange Act of 1934, asamended.

51

----

 

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
| December 8, 2006 |     | SIRONA  DENTAL SYSTEMS, INC. |
|-----------------------|----------|------------------------------|
|                  | * * | By:                          | /s/  JOST FISCHER |
|                  |     |                         | Jost Fischer |
|                  | * * | * *                     | *Chairman,  President and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
|                                        | **SIGNATURE** | ** **                                       | ** ** | ** **             | **TITLE** | ** ** | ** ** | ** ** | **DATE** | ** ** |
|----------------------------------------|---------------|--------------------------------------------------|------------|------------------------|-----------|------------|------------|------------|----------|------------|
| /s/  JOST FISCHER                      |          | Chairman of the Board  and Director, President   |       | December 8,  2006 |
| Jost Fischer                           |          | and Chief Executive Officer (Principal Executive |       |                   |
|                                   |          | Officer)                                         |       |                   |
| /s/  SIMONE BLANK                      |          | Executive Vice  President, Chief Financial       |       | December 8,  2006 |
| Simone Blank                           |          | Officer and Director (Principal Financial and    |       |                   |
|                                   |          | Accounting Officer)                              |       |                   |
| /s/  NICHOLAS W. ALEXOS                |          | Director                                         |       | December 8,  2006 |
| Nicholas W.  Alexos                    |          |                                             |       |                   |
| /s/  DAVID BEECKEN                     |          | Director                                         |       | December 8,  2006 |
| David Beecken                          |          |                                             |       |                   |
| /s/  WILLIAM K. HOOD                   |          | Director                                         |       | December 8,  2006 |
| William K. Hood                        |          |                                             |       |                   |
| /s/  ARTHUR D. KOWALOFF                |          | Director                                         |       | December 8,  2006 |
| Arthur D. Kowaloff                     |          |                                             |       |                   |
| /s/  HARRY M. JANSEN KRAEMER, JR. |          | Director                                         |       | December 8,  2006 |
| Harry M. Jansen  Kraemer, Jr.     |          |                                             |       |                   |

52

----

 
| /s/ TIMOTHY  D. SHEEHAN  |   | Director |   | December 8, 2006 |
|--------------------------|--------|----------|--------|-----------------------|
| Timothy  D. Sheehan      |   |     |   |                  |
| /s/ JEFFREY  T. SLOVIN   |   | Director |   | December 8, 2006 |
| Jeffrey  T. Slovin       |   |     |   |                  |
| /s/ TIMOTHY  P. SULLIVAN |   | Director |   | December 8, 2006 |
| Timothy P.  Sullivan     |   |     |   |                  |

 

 

 

 

53

----

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS OFSIRONA DENTAL SYSTEMS, INC AND SUBSIDIARIES**
| REPORTS OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTANT FIRM                                                                                                                                                                                                                                                                                                                                                    |   | F-3  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|
| CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2006  AND SEPTEMBER 30, 2005                                                                                                                                                                                                                                                                                    |   | F-7  |
| CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR  ENDED SEPTEMBER 30, 2006, AND FOR THE PERIOD FROM JULY 1, 2005 TO  SEPTEMBER 30, 2005 (SUCCESSOR), OCTOBER 1, 2004 TO JUNE 30, 2005  AND FEBRUARY 17, 2004 TO SEPTEMBER 30, 2004 (PREDECESSOR 2), AND  OCTOBER 1, 2003 TO FEBRUARY 16, 2004 (PREDECESSOR 1)                                                                               |   | F-8  |
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND  COMPREHENSIVE INCOME (LOSS) FOR THE YEAR ENDED SEPTEMBER 30, 2006, AND  FOR THE PERIOD FROM JULY 1, 2005 TO SEPTEMBER 30, 2005 (SUCCESSOR), OCTOBER  1, 2004 TO JUNE 30, 2005 AND FEBRUARY 17, 2004 TO SEPTEMBER 30,  2004 (PREDECESSOR 2), AND OCTOBER 1, 2003 TO FEBRUARY 16, 2004  (PREDECESSOR 1)      |   | F-9  |
| CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR  ENDED SEPTEMBER 30, 2006, AND FOR THE PERIOD FROM JULY 1, 2005 TO  SEPTEMBER 30, 2005 (SUCCESSOR), OCTOBER 1, 2004 TO JUNE 30, 2005  AND FEBRUARY 17, 2004 TO SEPTEMBER 30, 2004 (PREDECESSOR 2), AND  OCTOBER 1, 2003 TO FEBRUARY 15, 2004 (PREDECESSOR 1)                                                                               |   | F-10 |
| NOTES TO  THE CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                              |   | F-12 |

 

 

F-1

----

**SIRONADENTAL SYSTEMS, INC AND SUBSIDIARIES**

**CONSOLIDATEDFINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006**

**AND SEPTEMBER 30,2005**

**AND**

**FOR THE YEAR ENDEDSEPTEMBER 30, 2006**

**AND FOR THE PERIODFROM**

**JULY 1, 2005 TOSEPTEMBER 30, 2005 (SUCCESSOR)**

**AND FOR THE PERIODFROM**

**OCTOBER 1, 2004 TOJUNE 30, 2005**

**AND FEBRUARY 17,2004 TO SEPTEMBER 30, 2004 (PREDECESSOR 2)**

**AND OCTOBER 1, 2003TO FEBRUARY 16, 2004 (PREDECESSOR 1)**

F-2

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT FIRM**

TheBoard of Directors

Sirona Dental Systems, Inc.:

We have audited the accompanying consolidated balancesheets of Sirona Dental Systems, Inc. and subsidiaries (Successor) as ofSeptember 30, 2006 and 2005, and the related consolidated statements ofoperations, shareholders’ equity and comprehensive income (loss), and cashflows for the periods from October 1, 2005 to September 30, 2006 andfrom July 1, 2005 to September 30, 2005 (Successor periods), and theconsolidated statements of operations, shareholders’ equity and comprehensiveincome (loss), and cash flows of Sirona Dental Systems Beteiligungs- undVerwaltungs GmbH and subsidiaries (Predecessor 2) for the periods fromOctober 1, 2004 to June 30, 2005 and from February 17, 2004 toSeptember 30, 2004 (Predecessor 2 periods), and the consolidatedstatements of operations, shareholders’ equity and comprehensive income (loss),and cash flows of Sirona Beteiligungs- und Verwaltungsgesellschaft mbH andsubsidiaries (Predecessor 1) for the period from October 1, 2003 toFebruary 16, 2004 (Predecessor 1 period). These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these consolidated financial statementsbased on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the aforementioned Successor consolidatedfinancial statements present fairly, in all material respects, the financialposition of Sirona Dental Systems, Inc. and subsidiaries as ofSeptember 30, 2006 and 2005, and the results of their operations and theircash flows for the Successor periods, in conformity with U.S. generallyaccepted accounting principles. Also, in our opinion, the aforementionedPredecessor 2 consolidated financial statements present fairly, in all materialrespects, the results of operations and cash flows for Sirona Dental SystemsBeteiligungs- und Verwaltungs GmbH and subsidiaries for the Predecessor 2periods, in conformity with U.S. generally accepted accounting principles.Also, in our opinion, the aforementioned Predecessor 1 consolidated financialstatements present fairly, in all material respects, the results of operationsand cash flows for Sirona Beteiligungs- und Verwaltungsgesellschaft mbH andsubsidiaries for the Predecessor 1 period, in conformity with U.S. generallyaccepted accounting principles.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of Sirona Dental Systems, Inc.’s internal control overfinancial reporting as of September 30, 2006, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO), and our report dated December 8, 2006 expressed an unqualified opinion on management’sassessment of, and the effective operation of, internal control over financialreporting.

F-3

----

As discussed in Notes 2 and 5 to the consolidatedfinancial statements, effective June 30, 2005, the Sirona Dental ServicesGmbH acquired all of the outstanding stock of Sirona Dental SystemsBeteiligungs- und Verwaltungs GmbH in a business combination accounted for as apurchase. Further, as discussed in Notes 2 and 5 to the consolidated financialstatements, effective February 16, 2004, Sirona Dental SystemsBeteiligungs- und Verwaltungsgesellschaft GmbH acquired all of the outstandingstock of Sirona Beteiligungs- und Verwaltungsgesellschaft mbH in a businesscombination accounted for as a purchase. As a result of the acquisitions, therespective consolidated financial information for the periods after each of theacquisitions is presented on a different cost basis than that for the periodsbefore the acquisition and, therefore, is not comparable.

KPMG DeutscheTreuhand-Gesellschaft

Aktiengesellschaft Wirtschaftsprüfungsgesellschaft

Frankfurt, Germany

December 8, 2006

F-4

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT FIRM**

The Board of Directors Sirona Dental Systems, Inc.:

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting under Item 9A, that Sirona Dental Systems, Inc. maintainedeffective internal control over financial reporting as of September 30,2006, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Sirona DentalSystems, Inc.’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that SironaDental Systems, Inc. maintained effective internal control over financialreporting as of September 30, 2006, is fairly stated, in all materialrespects, based on criteria establishedin Internal Control—Integrated Framework issued by COSO. Also, in ouropinion, Sirona Dental Systems, Inc. maintained, in all material respects,effective internal control over financial reporting as of September 30,2006, based on criteria established inInternal Control—Integrated Framework issued by COSO.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Sirona DentalSystems, Inc. and subsidiaries (Successor) as of September 30, 2006and 2005, and the related consolidated statements of operations, shareholders’equity and comprehensive income (loss), and cash flows for the periods fromOctober 1, 2005 to September 30, 2006 and from July 1, 2005 toSeptember 30, 2005 (Successor periods), and the consolidated statements ofoperations, shareholders’ equity and comprehensive income (loss), and cash 

F-5

----

flows ofSirona Dental Systems Beteiligungs- und Verwaltungs GmbH and subsidiaries(Predecessor 2) for the periods from October 1, 2004 to June 30, 2005and from February 17, 2004 to September 30, 2004 (Predecessor 2periods), and the consolidated statements of operations, shareholders’ equityand comprehensive income (loss), and cash flows of Sirona Beteiligungs- undVerwaltungsgesellschaft mbH and subsidiaries (Predecessor 1) for the periodfrom October 1, 2003 to February 16, 2004 (Predecessor 1 period), andour report dated December 8, 2006 containsan explanatory paragraph that states that the respective financialinformation for the periods after each of the acquisitions described in notes 2and 5 to the consolidated financial statements is presented on a different costbasis than that for the periods before the acquisition and, therefore, is notcomparable.

*KPMGDeutsche Treuhand-GesellschaftAktiengesellschaft Wirtschaftsprüfungsgesellschaft*

Frankfurt, GermanyDecember 8, 2006

F-6

----

**SIRONA DENTAL SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                            | ** ** | ** **                                                    | ** ** | **Successor**          | ** ** | **Successor**          | ** **    |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|------------------------|------------|------------------------|---------------|
| ** **                                                                                                            | ** ** | ** **                                                    | ** ** | **September 30,** | ** ** | **September 30,** | ** **    |
| ** **                                                                                                            | ** ** | **Note**                                                      | ** ** | **2006**               | ** ** | **2005**               | ** **    |
| ** **                                                                                                            | ** ** | **$’000 (except for share amounts)** | ** ** |
| **ASSETS**                                                                                                            | ** ** |                                                          | ** ** | ** **             |       |                   | ** **    | ** ** |   |   | ** ** |   |   |
| **Current assets**                                                                                                    | ** ** |                                                          | ** ** | ** **             |       |                   | ** **    | ** ** |   |   | ** ** |   |   |
| Cash and cash  equivalents                                                                                            |       |                                                          |       | ** **             |       |                   | $             | 80,560 |   |   |   | $ | 65,941 |   |   |
| Restricted cash                                                                                                       |       |                                                          |       | ** **             |       |                   | 953           |   |   |   | 674 |   |   |
| Restricted short  term investments                                                                                    |       |                                                          |       | ** **             |       |                   | —        |   |   |   | 745 |   |   |
| Accounts  receivable, net of allowance for doubtful accounts of $837 and $402,  respectively                          |       |                                                          | 8          | ** **             |       |                   | 66,090        |   |   |   | 47,631 |   |   |
| Inventories, net                                                                                                      |       |                                                          | 9          | ** **             |       |                   | 57,303        |   |   |   | 47,340 |   |   |
| Deferred tax  assets                                                                                                  |       |                                                          | 13         | ** **             |       |                   | 4,671         |   |   |   | 3,242 |   |   |
| Prepaid expenses  and other current assets                                                                            |       |                                                          | 10         | ** **             |       |                   | 16,074        |   |   |   | 33,856 |   |   |
| **Total  current assets**                                                                                             | ** ** |                                                          | ** ** | ** **             |       |                   | **225,651**   | ** ** |   |   | **199,429** |   |   |
| Property, plant  and equipment, net of accumulated depreciation and amortization of $18,139  and $3,428, respectively |       |                                                          | 11         | ** **             |       |                   | 61,042        |   |   |   | 49,180 |   |   |
| Goodwill                                                                                                              |       |                                                          | 12         | ** **             |       |                   | 613,549       |   |   |   | 468,769 |   |   |
| Investments                                                                                                           |       |                                                          |       | ** **             |       |                   | 750           |   |   |   | — |   |   |
| Intangible assets,  net of accumulated amortization of $66,242 and $11,852, respectively                              |       |                                                          | 12         | ** **             |       |                   | 618,993       |   |   |   | 489,442 |   |   |
| Other non-current  assets                                                                                             |       |                                                          |       | ** **             |       |                   | 17,370        |   |   |   | 21,981 |   |   |
| Deferred tax  assets                                                                                                  |       |                                                          | 13         | ** **             |       |                   | 3,649         |   |   |   | 9,874 |   |   |
| **Total  assets**                                                                                                     | ** ** |                                                          | ** ** | ** **             |       |                   | **1,541,004** | ** ** |   |   | **1,238,675** |   |   |
| **LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’  EQUITY**                                                     | ** ** |                                                          | ** ** | ** **             |       |                   | ** **    | ** ** |   |   | ** ** |   |   |
| **Current liabilities**                                                                                               | ** ** |                                                          | ** ** | ** **             |       |                   | ** **    | ** ** |   |   | ** ** |   |   |
| Trade accounts  payable                                                                                               |       |                                                          |       | ** **             |       |                   | $             | 30,303 |   |   |   | $ | 22,173 |   |   |
| Current portion of  long-term debt                                                                                    |       |                                                          | 15         | ** **             |       |                   | 14,738        |   |   |   | 10,103 |   |   |
| Income taxes  payable                                                                                                 |       |                                                          |       | ** **             |       |                   | 10,434        |   |   |   | 1,531 |   |   |
| Deferred tax  liabilities                                                                                             |       |                                                          | 13         | ** **             |       |                   | 3,208         |   |   |   | 3,219 |   |   |
| Accrued  liabilities and deferred income                                                                              |       |                                                          | 14         | ** **             |       |                   | 65,203        |   |   |   | 63,757 |   |   |
| **Total  current liabilities**                                                                                        | ** ** |                                                          | ** ** | ** **             |       |                   | **123,886**   | ** ** |   |   | **100,783** |   |   |
| Long term debt                                                                                                        |       |                                                          | 15         | ** **             |       |                   | 518,634       |   |   |   | 576,622 |   |   |
| Deferred tax  liabilities                                                                                             |       |                                                          | 13         | ** **             |       |                   | 243,491       |   |   |   | 196,392 |   |   |
| Other non-current  liabilities                                                                                        |       |                                                          |       | ** **             |       |                   | 18,128        |   |   |   | 9,585 |   |   |
| Indebtedness to  related parties                                                                                      |       |                                                          |       | ** **             |       |                   | —        |   |   |   | 184,712 |   |   |
| Pension related  provisions                                                                                           |       |                                                          | 22         | ** **             |       |                   | 48,167        |   |   |   | 43,847 |   |   |
| Deferred income                                                                                                       |       |                                                          | 16         | ** **             |       |                   | 100,589       |   |   |   | 100,000 |   |   |
| **Total  liabilities**                                                                                                | ** ** |                                                          | ** ** | ** **             |       |                   | **1,052,895** | ** ** |   |   | **1,211,941** |   |   |
| **Minority  interest**                                                                                                | ** ** |                                                          | ** ** | ** **             |       |                   | **263**       | ** ** |   |   | **42** |   |   |
| **Shareholders’ equity**                                                                                         | ** ** |                                                          | ** ** | ** **             |       |                   | ** **    | ** ** |   |   | ** ** |   |   |
| Preferred stock  ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)                          |       |                                                          |       | ** **             |       |                   | —        |   |   |   | — |   |   |
| Common stock  ($0.01 par value; 95,000,000 shares authorized: 54,608,134 shares issued and outstanding)               |       |                                                          |       | ** **             |       |                   | 546           |   |   |   | 30 |   |   |
| Additional paid-in  capital                                                                                           |       |                                                          |       | ** **             |       |                   | 582,447       |   |   |   | 123,696 |   |   |
| Excess of purchase  price over predecessor basis                                                                      |       |                                                          |       | ** **             |       |                   | (49,103       | ) |   |   | (49,103 | ) |   |
| Accumulated  deficit                                                                                                  |       |                                                          |       | ** **             |       |                   | (47,406       | ) |   |   | (48,161 | ) |   |
| Accumulated other  comprehensive income                                                                               |       |                                                          | 7          | ** **             |       |                   | 1,362         |   |   |   | 230 |   |   |
| **Total  shareholders’ equity**                                                                                  | ** ** |                                                          | ** ** | ** **             |       |                   | **487,846**   | ** ** |   |   | **26,692** |   |   |
| **Total  liabilities, minority interest and shareholders’ equity**                                               | ** ** |                                                          | ** ** | ** **             |       |                   | **$**         | **1,541,004** | ** ** |   |   | **$** | **1,238,675** |   |   |

 

The accompanying notes are an integral part of these financial statements.

F-7

----

**SIRONA DENTAL SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                           | ** ** | ** **      | ** ** | **Successor**          | ** ** | **Successor**          | ** **  | **Predecessor 2** | ** ** | **Predecessor 2** | ** **  | **Predecessor 1** | ** **  |
|------------------------------------------------------|------------|-----------------|------------|------------------------|------------|------------------------|-------------|------------------------|------------|------------------------|-------------|------------------------|-------------|
| ** **                                           | ** ** | ** **      | ** ** | ** **             | ** ** | **July 1,**       | ** **  | **October 1,**    | ** ** | **February 17,**  | ** **  | **October 1,**    | ** **  |
| ** **                                           | ** ** | ** **      | ** ** | **Year ended**    | ** ** | **2005 to**       | ** **  | **2004 to**       | ** ** | **2004 to**       | ** **  | **2003 to**       | ** **  |
| ** **                                           | ** ** | ** **      | ** ** | **September 30,** | ** ** | **September 30,** | ** **  | **June 30,**      | ** ** | **September 30,** | ** **  | **February 16,**  | ** **  |
| ** **                                           | ** ** | **Notes**       | ** ** | **2006**               | ** ** | **2005**               | ** **  | **2005**               | ** ** | **2004**               | ** **  | **2004**               | ** **  |
| ** **                                           | ** ** | **$’000s** | ** ** |
| **Revenue**                                          |       |            | 23         | ** **             |       |                   | **$**       | **520,604**            | ** ** |                   |        | **$**                  | **105,071** | ** ** |   |   | **$** | **358,285** | ** ** |   |   | **$** | **229,216** | ** ** |   |   | **$** | **158,601** | ** ** |   |   |
| Cost of sales                                        |       |            | 23         | ** **             |       |                   | 278,685     |                   |       |                   | 71,614      |                   |        |   | 199,463 |   |   |   | 152,938 |   |   |   | 76,947 | ** ** |   |   |
| **Gross profit**                                     | ** ** |            |       | ** **             |       |                   | **241,919** | ** **             |       |                   | **33,457**  | ** **             |        |   | **158,822** | ** ** |   |   | **76,278** | ** ** |   |   | **81,654** | ** ** |   |   |
| Selling, general and administrative expense          |       |            |       | ** **             |       |                   | 148,715     |                   |       |                   | 34,544      |                   |        |   | 93,236 |   |   |   | 65,424 |   |   |   | 33,454 | ** ** |   |   |
| Research and development                             |       |            |       | ** **             |       |                   | 33,107      |                   |       |                   | 7,863       |                   |        |   | 21,700 |   |   |   | 16,594 |   |   |   | 8,575 | ** ** |   |   |
| Provision for doubtful accounts and notes receivable |       |            |       | ** **             |       |                   | 348         |                   |       |                   | (192        | )                      |        |   | (127 | ) |   |   | (846 | ) |   |   | 368 | ** ** |   |   |
| Write off of in-process research and development     |       |            |       | ** **             |       |                   | 6,000       |                   |       |                   | 33,796      |                   |        |   | — |   |   |   | 20,217 |   |   |   | — | ** ** |   |   |
| Net other operating expense/  (income)               |       |            |       | ** **             |       |                   | 1,733       |                   |       |                   | (723        | )                      |        |   | (384 | ) |   |   | 955 |   |   |   | 82 | ** ** |   |   |
| **Operating income / (loss)**                        | ** ** |            |       | ** **             |       |                   | **52,016**  | ** **             |       |                   | **(41,831** | **)**                  |        |   | **44,397** | ** ** |   |   | **(26,066** | **)** |   |   | **39,175** | ** ** |   |   |
| Foreign currency transactions (gain)/loss, net       |       |            |       | ** **             |       |                   | (9,873      | )                      |       |                   | 601         |                   |        |   | 749 |   |   |   | 4,129 |   |   |   | 1,491 | ** ** |   |   |
| (Gain)/Loss on derivative  instruments               |       |            |       | ** **             |       |                   | (719        | )                      |       |                   | (1,682      | )                      |        |   | 4,383 |   |   |   | 1,498 |   |   |   | (1,358 | **)** |   |   |
| Interest expense, net                                |       |            | 21         | ** **             |       |                   | 54,275      |                   |       |                   | 11,087      |                   |        |   | 22,774 |   |   |   | 14,413 |   |   |   | 5,292 | ** ** |   |   |
| Other (income)                                       |       |            |       | ** **             |       |                   | —      |                   |       |                   | —      |                   |        |   | (129 | ) |   |   | — |   |   |   | — | ** ** |   |   |
| **Income/(Loss) before taxes and minority interest** | ** ** |            |       | ** **             |       |                   | **8,333**   | ** **             |       |                   | **(51,837** | **)**                  |        |   | **16,620** | ** ** |   |   | **(46,106** | **)** |   |   | **33,750** | ** ** |   |   |
| Income tax provision/(benefit)                       |       |            | 13         | ** **             |       |                   | 7,360       |                   |       |                   | (5,796      | )                      |        |   | 5,444 |   |   |   | (11,748 | ) |   |   | 13,181 | ** ** |   |   |
| Minority interest                                    |       |            |       | ** **             |       |                   | 218         |                   |       |                   | (6          | )                      |        |   | 50 |   |   |   | — |   |   |   | — | ** ** |   |   |
| **Net income/(loss)**                                | ** ** |            |       | ** **             |       |                   | **$**       | **755**                | ** ** |                   |        | **$**                  | **(46,035** | **)** |   |   | **$** | **11,126** | ** ** |   |   | **$** | **(34,358** | **)** |   |   | **$** | **20,569** | ** ** |   |   |
| Income/(Loss) per share                              |       |            |       | ** **             |       |                   |        |                   |       |                   |        |                   |        |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |
| —Basic                                          |       |            | 17         | ** **             |       |                   | $           | 0.02                   |       |                   |        | N/A                    |        |   |   | N/A |   |   |   | N/A |   |   |   | N/A | ** ** |   |   |
| —Diluted                                        |       |            | 17         | ** **             |       |                   | $           | 0.02                   |       |                   |        | N/A                    |        |   |   | N/A |   |   |   | N/A |   |   |   | N/A | ** ** |   |   |

 

The accompanying notes are an integral part of these financial statements.

F-8

----

**SIRONA DENTAL SYSTEMS,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYAND COMPREHENSIVE INCOME (LOSS)**

| ** **                                         | ** ** | ** **                                                                                           | ** ** | ** **             | ** ** | ** **     | ** ** | **Excess of**  | ** ** | ** **       | ** ** | ** **        | ** **  | ** ** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------|------------|---------------------|------------|------------------|------------|-------------------|-------------|------------|------------|
| ** **                                         | ** ** | ** **                                                                                           | ** ** | ** **             | ** ** | ** **     | ** ** | **purchase**        | ** ** | **Retained**     | ** ** | **Accumulated**   | ** **  | ** ** | ** ** |
| ** **                                         | ** ** | **Common**                                                                                           | ** ** | **Amount of**     | ** ** | **Additional** | ** ** | **price over** | ** ** | **earnings/**    | ** ** | **other**         | ** **  | ** ** | ** ** |
| ** **                                         | ** ** | **share**                                                                                            | ** ** | **common**             | ** ** | **paid-in**    | ** ** | **predecessor**     | ** ** | **(accumulated** | ** ** | **comprehensiv**  | ** **  | ** ** | ** ** |
| ** **                                         | ** ** | **capital**                                                                                          | ** ** | **shares issued** | ** ** | **capital**    | ** ** | **basis**           | ** ** | **deficit)**     | ** ** | **income/(loss)** | ** **  | **Total**  | ** ** |
| ** **                                         | ** ** | **$’000s (except for amount of  common shares issued)** | ** ** |
| **Balances as of September 30, 2003**         | ** ** |                                                                                                 | **$**      | **434**                | ** ** |           |       | ** **          | ** ** |             |       | **$**             | **72,568**  | ** ** |       |   | **$** | **—** |   |   |   | **$** | **16,694** |   |   |   | **$** | **(1,601** | **)** |   | **$** | **88,095** | ** ** |
| Comprehensive income:                              |       |                                                                                                 |       |                   |       |           |       | ** **          |       |             |       |              |        |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                         |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | 20,569 |   |   |   | — |   |   | 20,569 |   |
| Cumulative translation adjustment                  |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | — |   |   |   | 5,727 |   |   | 5,727 |   |
| Total comprehensive income                         |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | 20,569 |   |   |   | 5,727 |   |   | 26,296 |   |
| **Balances as of February 16, 2004**          | ** ** |                                                                                                 | **434**    | ** **             |       |           | ** ** | ** **          |       |             | **72,568** | ** **        |        |       | **—** |   |   |   | **37,263** |   |   |   | **4,126** | ** ** |   | **114,391** | ** ** |
| Restructuring adjustments                          |       |                                                                                                 | 195        |                   |       |           |       | ** **          |       |             | (20,811    | )                 |        |       | —     |   |   |   | (37,263 | ) |   |   | (4,126 | ) |   | (62,005 | ) |
|                                               | ** ** |                                                                                                 | **$**      | **629**                | ** ** |           |       | ** **          | ** ** |             |       | **$**             | **51,757**  | ** ** |       |   | **$** | **—** |   |   |   | **$** | **—** |   |   |   | **$** | **—** | ** ** |   | **$** | **52,386** | ** ** |
| **Predecessor 2**                                  | ** ** |                                                                                                 | ** ** | ** **             |       |           | ** ** | ** **          |       |             | ** ** | ** **        |        |       | ** ** |   |   |   | ** ** |   |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Comprehensive loss:                                |       |                                                                                                 |       |                   |       |           |       | ** **          |       |             |       |              |        |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                           |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | (34,358 | ) |   |   | — |   |   | (34,358 | ) |
| Cumulative translation adjustment                  |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | — |   |   |   | (752 | ) |   | (752 | ) |
| Total comprehensive loss                           |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | (34,358 | ) |   |   | (752 | ) |   | **(35,110** | **)** |
| **Balances as of September 30, 2004**         | ** ** |                                                                                                 | **$**      | **629**                | ** ** |           |       | ** **          | ** ** |             |       | **$**             | **51,757**  | ** ** |       |   | **$** | **—** |   |   |   | **$** | **(34,358** | ) |   |   | **$** | **(752** | **)** |   | **$** | **17,276** | ** ** |
| Comprehensive  income:                             |       |                                                                                                 |       |                   |       |           |       | ** **          |       |             |       |              |        |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                         |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | 11,126 |   |   |   | — |   |   | 11,126 |   |
| Cumulative translation adjustment                  |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | — |   |   |   | (1,287 | ) |   | (1,287 | ) |
| Total comprehensive income                         |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | 11,126 |   |   |   | (1,287 | ) |   | 9,839 |   |
| **Balances as of June 30, 2005**              | ** ** |                                                                                                 | **$**      | **629**                | ** ** |           |       | ** **          | ** ** |             |       | **$**             | **51,757**  | ** ** |       |   | **$** | **—** |   |   |   | **$** | **(23,232** | ) |   |   | **$** | **(2,039** | **)** |   | **$** | **27,115** | ** ** |
| Restructuring adjustments                          |       |                                                                                                 | (599       | )                      |       |           |       | ** **          |       |             | 71,939     |              |        |       | (49,103    | ) |   |   | 21,106 |   |   |   | 1,852 |   |   | 45,195 |   |
|                                               | ** ** |                                                                                                 | **$**      | **30**                 | ** ** |           |       | ** **          | ** ** |             |       | **$**             | **123,696** | ** ** |       |   | **$** | **(49,103** | ) |   |   | **$** | **(2,126** | ) |   |   | **$** | **(187** | **)** |   | **$** | **72,310** | ** ** |
| **Successor**                                      | ** ** |                                                                                                 | ** ** | ** **             |       |           | ** ** | ** **          |       |             | ** ** | ** **        |        |       | ** ** |   |   |   | ** ** |   |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Comprehensive loss:                                |       |                                                                                                 |       |                   |       |           |       | ** **          |       |             |       |              |        |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                           |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | (46,035 | ) |   |   | — |   |   | (46,035 | ) |
| Cumulative translation adjustment                  |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | — |   |   |   | 417 |   |   | 417 |   |
| Total comprehensive loss                           |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | (46,035 | ) |   |   | 417 |   |   | (45,618 | ) |
| **Balances as of September 30, 2005**         | ** ** |                                                                                                 | **$**      | **30**                 | ** ** |           |       | ** **          | ** ** |             |       | **$**             | **123,696** | ** ** |       |   | **$** | **(49,103** | ) |   |   | **$** | **(48,161** | ) |   |   | **$** | **230** | ** ** |   | **$** | **26,692** | ** ** |
| **Successor**                                      |       |                                                                                                 | $          | —                 |       |           |       | 36,972,480          | ** ** |             |       | —            |        |       |       | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |
| Issuance of common stock in Exchange               |       |                                                                                                 | 516        | * *               | * *   | * *       | 17,617,433 | ** **          |       |             | 455,007    |              |        |       | —     |   |   |   | — |   |   |   | — |   |   | 455,523 |   |
| Issuance of common stock upon excercise of options |       |                                                                                                 | —     | * *               | * *   | * *       | 18,221     | ** **          |       |             | 160        |              |        |       | —     |   |   |   | — |   |   |   | — |   |   | 160 |   |
| Stock compensation                                 |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | 3,537      |              |        |       | —     |   |   |   | — |   |   |   | — |   |   | 3,537 |   |
| Tax benefit of stock options exercised             |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | 47         |              |        |       | —     |   |   |   | — |   |   |   | — |   |   | 47 |   |
| Comprehensive loss:                                |       |                                                                                                 |       |                   |       |           |       | ** **          |       |             |       |              |        |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                         |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | 755 |   |   |   | — |   |   | 755 |   |
| Cumulative translation adjustment                  |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | — |   |   |   | 1,132 |   |   | 1,132 |   |
| Total comprehensive income                         |       |                                                                                                 | —     |                   |       |           |       | ** **          |       |             | —     |              |        |       | —     |   |   |   | 755 |   |   |   | 1,132 |   |   | 1,887 |   |
| **Balances  as of September 30,  2006**  | ** ** |                                                                                                 | **$**      | **546**                | * *   | * *       | * *   | 54,608,134          | ** ** |             |       | **$**             | **582,447** | ** ** |       |   | **$** | **(49,103** | ) |   |   | **$** | **(47,406** | ) |   |   | **$** | **1,362** | ** ** |   | **$** | **487,846** | ** ** |

 

The accompanying notes are an integral part of these financial statements.

F-9

----

**SIRONA DENTAL SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                    | ** ** | **Successor**          | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** **   | **Predecessor 2** | ** **  | **Predecessor 1** | ** **  |
|-----------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|--------------|------------------------|-------------|------------------------|-------------|
| ** **                                                                                    | ** ** | ** **             | ** ** | **July 1,**       | ** ** | **October 1,**    | ** **   | **February 17,**  | ** **  | **October 1,**    | ** **  |
| ** **                                                                                    | ** ** | **Year ended**    | ** ** | **2005 to**       | ** ** | **2004 to**       | ** **   | **2004 to**       | ** **  | **2003 to**       | ** **  |
| ** **                                                                                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**      | ** **   | **September 30,** | ** **  | **February 16,**  | ** **  |
| ** **                                                                                    | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005**               | ** **   | **2004**               | ** **  | **2004**               | ** **  |
| ** **                                                                                    | ** ** | **$’000s**        | ** ** |
| **Cash flows from operating  activities**                                                     | ** ** |                   | ** ** | ** **             |       |                   | ** **   | ** **             |        |                   | ** **  | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Net income/(loss)**                                                                         | ** ** |                   | **$**      | **755**                | ** ** |                   |         | **$**                  | **(46,035** | **)**                  |        |   | **$** | **11,126** | ** ** |   |   | **$** | **(34,358** | **)** |   |   | **$** | **20,569** | ** ** |   |
| **Adjustments to reconcile net  income/(loss) to net cash used in operating activities** |       |                   |       |                   |       |                   |         |                   |        |                   |        |   |   |   |   |   |   |   |   |   |   |
| Minority interest                                                                             |       |                   | 199        |                   |       |                   | —       |                   |        |                   | —      |   |   |   | — |   |   |   | — |   |   |
| Depreciation and amortization                                                                 |       |                   | 62,931     |                   |       |                   | 15,392       |                   |        |                   | 44,155      |   |   |   | 32,703 |   |   |   | 6,530 |   |   |
| (Gain) on disposal of property, plant and equipment                                           |       |                   | (22        | )                      |       |                   | (23          | )                      |        |                   | (45         | ) |   |   | (2 | ) |   |   | (9 | ) |   |
| (Gains)/losses on derivate instruments                                                        |       |                   | (719       | )                      |       |                   | (1,682       | )                      |        |                   | 4,383       |   |   |   | 1,498 |   |   |   | (1,358 | ) |   |
| Foreign currency transactions (gain)/loss                                                     |       |                   | (9,873     | )                      |       |                   | 601          |                   |        |                   | 749         |   |   |   | 4,129 |   |   |   | 1,491 |   |   |
| Accreted interest on long term debt                                                           |       |                   | 14,907     |                   |       |                   | 4,590        |                   |        |                   | 3,115       |   |   |   | 5,003 |   |   |   | — |   |   |
| Deferred income taxes                                                                         |       |                   | (12,340    | )                      |       |                   | 1,198        |                   |        |                   | (2,546      | ) |   |   | (9,076 | ) |   |   | 3,567 |   |   |
| Write off of in-process research and development                                              |       |                   | 6,000      |                   |       |                   | 33,796       |                   |        |                   | —      |   |   |   | 20,217 |   |   |   | — |   |   |
| Amortization of debt issuance cost                                                            |       |                   | 5,820      |                   |       |                   | 907          |                   |        |                   | 1,807       |   |   |   | 1,344 |   |   |   | 970 |   |   |
| Compensation expense from stock options                                                       |       |                   | 3,537      |                   |       |                   | —       |                   |        |                   | —      |   |   |   | — |   |   |   | — |   |   |
| **Changes  in assets and liabilities**                                                        |       |                   |       |                   |       |                   |         |                   |        |                   |        |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable and accounts receivable from  related parties                             |       |                   | (6,850     | )                      |       |                   | 10,287       |                   |        |                   | (1,547      | ) |   |   | (83 | ) |   |   | 230 |   |   |
| Inventories                                                                                   |       |                   | (529       | )                      |       |                   | 11,887       |                   |        |                   | (2,869      | ) |   |   | 19,865 |   |   |   | (11,821 | ) |   |
| Prepaid expenses and other current assets                                                     |       |                   | 18,110     |                   |       |                   | (15,474      | )                      |        |                   | (13         | ) |   |   | (3,355 | ) |   |   | 1,224 |   |   |
| Restricted Cash                                                                               |       |                   | (222       | )                      |       |                   | 443          |                   |        |                   | (276        | ) |   |   | 170 |   |   |   | 1,706 |   |   |
| Other non-current assets                                                                      |       |                   | 5,805      |                   |       |                   | 846          |                   |        |                   | (51         | ) |   |   | 970 |   |   |   | (1 | ) |   |
| Trade accounts payable and accounts  payable to related parties                               |       |                   | (2,247     | )                      |       |                   | 4,195        |                   |        |                   | (6,701      | ) |   |   | (4,413 | ) |   |   | 363 |   |   |
| Accrued liabilities                                                                           |       |                   | (6,332     | )                      |       |                   | 12,155       |                   |        |                   | 8,068       |   |   |   | 733 |   |   |   | 5,557 |   |   |
| Deferred income                                                                               |       |                   | 347        |                   |       |                   | 100,000      |                   |        |                   | —      |   |   |   | — |   |   |   | — |   |   |
| Other non-current liabilities                                                                 |       |                   | 9,207      |                   |       |                   | 7,809        |                   |        |                   | (6,809      | ) |   |   | 8,233 |   |   |   | (5,429 | ) |   |
| Income taxes payable                                                                          |       |                   | 8,230      |                   |       |                   | (3,489       | )                      |        |                   | 2,260       |   |   |   | (6,122 | ) |   |   | 4,669 |   |   |
| **Net cash provided by operating activities**                                                 | ** ** |                   | **96,714** | ** **             |       |                   | **137,403**  | ** **             |        |                   | **54,806**  | ** ** |   |   | **37,456** | ** ** |   |   | **28,258** | ** ** |   |
| **Cash  flows from investing activities**                                                     |       |                   |       |                   |       |                   |         |                   |        |                   |        |   |   |   |   |   |   |   |   |   |   |
| Investment in property, plant and  equipment                                                  |       |                   | (20,950    | )                      |       |                   | (3,634       | )                      |        |                   | (11,041     | ) |   |   | (8,837 | ) |   |   | (4,446 | ) |   |
| Proceeds from sale of property, plant and equipment                                           |       |                   | 804        |                   |       |                   | 741          |                   |        |                   | 191         |   |   |   | 66 |   |   |   | 11 |   |   |
| Restricted short term investments/securities                                                  |       |                   | 717        |                   |       |                   | (410         | )                      |        |                   | (272        | ) |   |   | (4 | ) |   |   | 5 |   |   |
| Purchase of intangible assets                                                                 |       |                   | (1,531     | )                      |       |                   | (398         | )                      |        |                   | (586        | ) |   |   | (337 | ) |   |   | (168 | ) |   |
| Aquisition of Sirona by MDP                                                                   |       |                   | —     |                   |       |                   | (556,297     | )                      |        |                   | —      |   |   |   | — |   |   |   | — |   |   |
| Acquisition of Sirona by EQT                                                                  |       |                   | —     |                   |       |                   | —       |                   |        |                   | (25,700     | ) |   |   | (359,531 | ) |   |   | — |   |   |
| Acquisition of businesses, net of cash acquired                                               |       |                   | 14,643     |                   |       |                   | —       |                   |        |                   | —      |   |   |   | (5,782 | ) |   |   | — |   |   |
| **Net cash  used in investing activities**                                                    | ** ** |                   | **(6,317** | **)**                  |       |                   | **(559,998** | **)**                  |        |                   | **(37,408** | **)** |   |   | **(374,425** | **)** |   |   | **(4,598** | **)** |   |
|                                                                                               |            |                        |            |                        |            |                        |              |                        |             |                        |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

The accompanying notes are an integral part of these financial statements.

F-10

----

| ** **                                                          | ** ** | **Successor**          | ** **                                                                            | **Successor**          | ** ** | **Predecessor 2** | ** **  | **Predecessor 2** | ** ** | **Predecessor 1** | ** **  |
|---------------------------------------------------------------------|------------|------------------------|---------------------------------------------------------------------------------------|------------------------|------------|------------------------|-------------|------------------------|------------|------------------------|-------------|
| ** **                                                          | ** ** | ** **             | ** **                                                                            | **July 1,**       | ** ** | **October 1,**    | ** **  | **February 17,**  | ** ** | **October 1,**    | ** **  |
| ** **                                                          | ** ** | **Year ended**    | ** **                                                                            | **2005 to**       | ** ** | **2004 to**       | ** **  | **2004 to**       | ** ** | **2003 to**       | ** **  |
| ** **                                                          | ** ** | **September 30,** | ** **                                                                            | **September 30,** | ** ** | **June 30,**      | ** **  | **September 30,** | ** ** | **February 16,**  | ** **  |
| ** **                                                          | ** ** | **2006**               | ** **                                                                            | **2005**               | ** ** | **2005**               | ** **  | **2004**               | ** ** | **2004**               | ** **  |
| ** **                                                          | ** ** | **$’000s**        | ** **                                                                            |
| **Cash flows from financing  activities**                           | ** ** |                   | ** **                                                                            | ** **             |       |                   | ** **  | ** **             |       |                   | ** **  | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Repayment of  shareholder loans                                     |       |                   |               — |                   |       |                   | (51,458     | )                      |       |                   | 2,596       |   |   |   | (110,661 | ) |   |   | 1,129 |   |   |
| Repayments of  long-term debt                                       |       |                   | (78,653                                                                               | )                      |       |                   | (440,593    | )                      |       |                   | (17,220     | ) |   |   | (35,670 | ) |   |   | (12,717 | ) |   |
| Proceeds from  borrowings                                           |       |                   | —                                                                                |                   |       |                   | 662,805     |                   |       |                   | —      |   |   |   | 372,089 |   |   |   | — |   |   |
| Proceeds  shareholder loan                                          |       |                   | —                                                                                |                   |       |                   | 181,960     |                   |       |                   | —      |   |   |   | 47,832 |   |   |   | — |   |   |
| Debt issuance  cost                                                 |       |                   | —                                                                                |                   |       |                   | (26,259     | )                      |       |                   | —      |   |   |   | (14,341 | ) |   |   | — |   |   |
| Common shares issued on share based compensation  plans             |       |                   | 160                                                                                   |                   |       |                   |        |                   |       |                   |        |   |   |   |   |   |   |   |   |   |   |
| Capital infusion                                                    |       |                   | —                                                                                |                   |       |                   | 122,392     |                   |       |                   | —      |   |   |   | 51,384 |   |   |   | — |   |   |
| **Net  cash (used in)/provided by financing activities**            | ** ** |                   | **(78,493**                                                                           | **)**                  |       |                   | **448,847** | ** **             |       |                   | **(14,624** | **)** |   |   | **310,633** | ** ** |   |   | **(11,588** | **)** |   |
| Change in cash and cash  equivalents                                |       |                   | 11,904                                                                                |                   |       |                   | 26,252      |                   |       |                   | 2,774       |   |   |   | (26,336 | ) |   |   | 12,072 |   |   |
| Effect of  exchange rate change on cash & cash equivalents |       |                   | 2,715                                                                                 |                   |       |                   | (2,839      | )                      |       |                   | 877         |   |   |   | 40 |   |   |   | 2,049 |   |   |
| Cash and cash  equivalents at beginning of period                   |       |                   | 65,941                                                                                |                   |       |                   | 42,528      |                   |       |                   | 38,877      |   |   |   | 65,173 |   |   |   | 51,052 |   |   |
| **Cash and cash equivalents at end of period**                      | ** ** |                   | **$**                                                                                 | **80,560**             | ** ** |                   |        | **$**                  | **65,941** | ** **             |        |   | **$** | **42,528** | ** ** |   |   | **$** | **38,877** | ** ** |   |   | **$** | **65,173** | ** ** |   |
| **Supplemental  information**                                       | ** ** |                   | ** **                                                                            | ** **             |       |                   | ** **  | ** **             |       |                   | ** **  | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Interest paid                                                       |       |                   | $                                                                                     | 32,456                 |       |                   |        | $                      | 7,554      |                   |        |   | $ | 22,274 |   |   |   | $ | 13,697 |   |   |   | $ | 1,885 |   |   |
| Interest  capitalized                                               |       |                   | 244                                                                                   |                   |       |                   | 3           |                   |       |                   | 51          |   |   |   | 22 |   |   |   | 72 |   |   |
| Income taxes paid  / (received)                                     |       |                   | 6,499                                                                                 |                   |       |                   | 2,054       |                   |       |                   | (1,393      | ) |   |   | (212 | ) |   |   | 10,046 |   |   |
| Accrued  acquisition costs (non-cash investing activity)            |       |                   | —                                                                                |                   |       |                   | 3,580       |                   |       |                   | —      |   |   |   | 25,700 |   |   |   |   |   |   |
| Acquisition of  businesses, net of cash aquired                     |       |                   |                                                                                  |                   |       |                   |        |                   |       |                   |        |   |   |   |   |   |   |   |   |   |   |
| Current assets                                                      |       |                   | $                                                                                     | 19,450                 |       |                   |        |                   |       |                   |        |   |   |   |   | $ | 6,219 |   |   |   |   |   |   |
| Property, plant  and equipment                                      |       |                   | 207,961                                                                               |                   |       |                   |        |                   |       |                   |        |   |   |   | 341 |   |   |   |   |   |   |
| Goodwill and  licenses                                              |       |                   | 289,048                                                                               |                   |       |                   |        |                   |       |                   |        |   |   |   | 5,839 |   |   |   |   |   |   |
| Current  liabilities                                                |       |                   | (75,579                                                                               | )                      |       |                   |        |                   |       |                   |        |   |   |   | (1,315 | ) |   |   |   |   |   |
| Other long term  liabilities                                        |       |                   | —                                                                                |                   |       |                   |        |                   |       |                   |        |   |   |   | (5,302 | ) |   |   |   |   |   |
| Shares and  options exchanged                                       |       |                   | (455,523                                                                              | )                      |       |                   |        |                   |       |                   |        |   |   |   | — |   |   |   |   |   |   |
|                                                                | ** ** |                   | **$**                                                                                 | **(14,643**            | **)**      |                   |        | ** **             | ** ** |                   |        | ** ** | ** ** |   |   | **$** | **5,782** | ** ** |   |   | ** ** | ** ** |   |

 

F-11

----

**SIRONA DENTALSYSTEMS, INC AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**1.**                 The Company andits operations

SironaDental Systems, Inc. and its subsidiaries manufacture high quality,technologically advanced dental equipment and systems solutions for the globaldental equipment market. We offer a broad range of products across all majorsegments of the dental equipment market including CEREC, CAD/CAM systems,digital and film based intra oral and panoramic imaging systems, treatmentcenters and instruments. We recently acquired the Schick business, whichfurther expanded our global presence and product offerings and strengthened ourresearch and development capabilities. Sirona has served equipment dealers and dentists worldwidefor more than 125 years. Sirona’s headquarters are located in Long Island City,New York with a significant facility located in Bensheim, Germany, as well asother manufacturing, assembling and sales & service facilitiesthroughout the world.

**2.**                 Basis ofpresentation and summary of significant accounting policies

The accompanying financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States (‘‘U.S. GAAP’’). Except as otherwisedisclosed, all amounts are reported in thousands of U.S. dollars ($), exceptper share amounts or otherwise disclosed.

***Principles ofconsolidation***

The consolidated financialstatements include, after eliminating inter-company transactions and balances,the accounts of Sirona Dental Systems, Inc. and its subsidiaries. TheCompany applies the equity method of accounting for investments in associatedcompanies over which the Company has significant influence but does not haveeffective control.

On September 25, 2005Schick Technologies, Inc. (“Schick”) which on June 20, 2006 wasrenamed as Sirona Dental Systems, Inc. (“Sirona” or the “Company”),entered into an Exchange Agreement with Sirona Holdings Luxco S.C.A. (“Luxco”)and Sirona Holding GmbH (“Sirona Holding”) providing for an issuance of 36,972,480shares of Schick common stock to Luxco in exchange for Luxco’s entire economicinterest in Sirona Holding, which consists of all of the issued and outstandingshare capital of Sirona Holding and the existing indebtedness of Sirona Holdingowed to Luxco in the principal amount of €150,992($181,960) plus accrued interest (the “Exchange”). The Exchange closed on June 20,2006. For accounting purposes, the Exchange has been accounted for as a reverseacquisition of Schick by Sirona Holding. The historical financial statements ofSirona Holding and its predecessors are the historical financial statements ofthe Company, and the acquisition by Sirona Holding of the assets andliabilities of Schick has been accounted for under the purchase method ofaccounting. Results of operations of Schick and its wholly owned subsidiaryhave been included in these annual financial statements from June 20,2006, the effective date of the Exchange (see Note 4—The Exchange Acquisition).

Certain prior periodamounts have been reclassified to conform to current period presentation.

On June 30, 2005,Sirona Holdings Luxco S.C.A. (‘‘Luxco’’), a Luxembourg-based holding entityowned by funds managed by Madison Dearborn Partners, Beecken Petty O’Keefe,management and employees of Sirona, obtained control over the Sirona business.The transaction was effected by using new legal entities, Sirona Holding GmbH(formerly Blitz 05-118 GmbH) and its wholly owned subsidiary SironaDental Services GmbH to acquire 100% of the interest in Sirona Dental SystemsBeteiligungs- und Verwaltungs GmbH, the former parent of the Sirona businessthrough a leveraged buy-out transaction (the ‘‘MDP Transaction’’). The MDPTransaction was accounted for in accordance with Emerging Issues Task ForceIssue 88-16, Basis in Leveraged Buyout Transactions (‘‘EITF 88-16’’),in a manner similar to a 

F-12

----

businesscombination under FASB Statement No. 141, Business Combinations (‘‘SFAS141’’). Certain members of Sirona management who were deemed to be in thecontrol group held equity interests in Sirona Group prior to and subsequent tothe MDP Transaction (‘‘Continuing Shareholders’’). The interests of theContinuing Shareholders have been reflected at the predecessor basis, resultingin 9.15% of each asset and liability acquired being valued at historical costat June 30, 2005. The remaining 90.85% interest in each asset andliability was recognized at fair value at June 30, 2005.

On February 16, 2004,funds managed by EQT, management and employees of Sirona, obtained control overthe Sirona business. The transaction was effected by using four new legalentities headed by Sirona Dental Systems Beteiligungs- und Verwaltungs GmbH toacquire 100% of the interest in Sirona Beteiligungs- und Verwaltungs GmbH, theformer parent of the Sirona business through a leveraged buy-out transaction(the ‘‘EQT Transaction’’). The EQT Transaction resulted in a change in controlover the Sirona business and has, therefore, been accounted for as a businesscombination under SFAS 141. The carrying values of the assets and liabilitieswere adjusted to their fair value on February 16, 2004, and the differencebetween the purchase price and the fair value of the net assets and liabilitieswas recorded as goodwill. Refer to note 5, Leveraged Buy-Out Transactions, forfurther discussion of the transactions and their impact on the Company’s andits predecessors’ consolidated financial statements. Since both transactionsmaterially changed the carrying values recorded in the Company’s and itspredecessors’ consolidated balance sheet, the following naming convention hasbeen used to distinguish between periods for which the financial statements arenot prepared on a comparable basis:

**SironaBeteiligungs- und Verwaltungsgesellschaft mbH—Predecessor 1**October 1, 2003—February 16, 2004

**SironaDental Systems Beteiligungs- und Verwaltungs GmbH—Predecessor 2**February 17, 2004—September 30, 2004October 1, 2004—June 30, 2005

**SironaDental Systems, Inc. (now the parent of Sirona Holding GmbH)—Successor**July 1, 2005—September 30, 2005October 1, 2005—September 30, 2006

The accounting policies ofthe successor and predecessor entities have not changed, except for a change inbasis resulting from purchase accounting.

***Fiscal year***

The Company’s fiscal yearends on September 30.

***Use of estimates***

The preparation of theconsolidated financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amount ofrevenues and expenses during the reporting periods. Actual results could differfrom estimates. Some of the more significant estimates include allowances fordoubtful accounts, inventory valuation reserves, purchase accountingassumptions, depreciable lives of assets, amortization periods, impairment oflong-lived assets, deferred tax asset valuation allowance, pension reserves,provisions and warranty reserves.

***Foreign currency***

The functional currencyfor foreign operations has been determined in all cases to be the localcurrency. Assets and liabilities of foreign subsidiaries are translated atexchange rates on the balance sheet date; revenue and expenses are translatedat the weighted average exchange rates for the interim periods 

F-13

----

withinthe full period. Cash flows are translated based on the weighted averageexchange rates for the full period on the net income line specific operating,investing and financing cash flows are translated based on the exchange rateapplicable to the respective transaction. The effects of these translationadjustments are recognized in shareholders’ equity, as a component ofaccumulated other comprehensive income (loss). Exchange gains and lossesarising from transactions denominated in a currency other than the functionalcurrency of the entity involved, as well as the fair value adjustment offorward foreign exchange contracts, are shown separately on the face of theconsolidated statements of operations.

***Comprehensiveincome***

In addition to net income(loss), comprehensive income (loss) includes other charges or credits to equityother than those resulting from transactions with shareholders. Accumulatedother comprehensive income relates to foreign currency translation adjustmentsrelated to the Company’s foreign subsidiaries. Components of comprehensiveincome are included within the Consolidated Statements of Shareholders’ Equityand Comprehensive Income.

***Revenue recognition***

Revenue, net of relateddiscounts and allowances, is recognized when persuasive evidence of thearrangement exists, the price is fixed or determinable, collectibility isreasonably assured and title and risk of loss has passed to customers based onthe shipping terms. Returns on products, excluding warranty related returns,are infrequent and insignificant. Revenue related to products that containsoftware which is more than incidental to the product is recognized inaccordance with SOP 97-2, ‘‘Software Revenue Recognition,’’ as amended bySOP 98-9, ‘‘Modification of SOP 97-2, Software Revenue Recognition,with Respect to Certain Transactions.’’ For orders which contain one or moreelements to be delivered at a future date, but do not include software that ismore than incidental to the other elements, the Company recognizes revenue inaccordance with EITF 00-21, ‘‘Accounting for Revenue Arrangements withMultiple Deliverables.’’ For revenue on certain CEREC units recognized inaccordance with both SOP 97-2 and EITF 00-21, the Company allocatesrevenues between the various elements using the relative fair value methodbecause evidence of fair value exists for all elements. Under the relative fairvalue method, as applied by the Company, the revenue is allocated between the elementsof the arrangement in proportion to the fair value of each element. The revenueallocated to the service contract is deferred until the service is provided.

The revenue allocated tothe CEREC product sold, which contains software and hardware the functionalityof which is dependent on the software and for which the software is integral(i.e., software-related hardware), is recognized as revenue upon transfer ofthe risk and rewards of ownership. The fair value of the product and theservice contract is based on the price charged when the same element is soldseparately to customers.

The Company uses therelative fair value method to recognize revenues when an order includes one ormore elements to be delivered at a future date and evidence of the fair valueof each of the elements exists.

The Company offers itscustomers an option to purchase extended warranties on certain products. TheCompany recognizes revenue on these extended warranty contracts ratably overthe life of the contract. The costs associated with these extended warrantycontracts are recognized when incurred.

The Company offersdiscounts to its distributors if certain conditions are met. Discounts andallowances are primarily based on the volume of products purchased or targetedto be purchased by the individual customer or distributor. Discounts arededucted from revenue at the time of sale. The Company estimates volumediscounts based on the individual customer’s historical and estimated futureproduct purchases.

F-14

----

Amounts received fromcustomers in advance of product shipment are classified as deferred incomeuntil the revenue can be recognized in accordance with the Company’s revenuerecognition policy.

***Research andDevelopment***

Amounts spent by theCompany for research and development (R&D) efforts are recorded as R&Dexpenses when incurred. R&D costs relate primarily to internal costs forsalaries, direct overhead costs and outside vendors. The Company capitalizescosts of equipment used for general R&D if it has alternative future use.The depreciation related to this capitalized equipment is included in theCompany’s R&D costs. Software development costs incurred prior to theattainment of technological feasibility are considered R&D and are expensedas incurred.

***Warranty Expense***

The Company offerswarranties on its products for periods between one and three years. Estimatedfuture warranty obligations related to product sales are charged to operationsin the period in which the related revenue is recognized. These estimates arebased on historical warranty experience and other relevant information of whichthe Company is aware. Estimated warranty expenses are recorded as an accruedliability and selling, general and administrative expense. During the yearended September 30 2006, warranty expense was $14,355 (July 1, 2005to September 30, 2005, $3,807; October 1, 2004 to June 30, 2005,$10,138; February 17, 2004 to September 30, 2004, $8,367; October 1,2003 to February 16, 2004, $4,924).

***Shipping andhandling costs***

Shipping and handlingcosts charged to customers are included in revenues and the associated expenseis recorded in cost of sales for all periods presented.

***Advertising costs***

Advertising costs areexpensed as incurred and recorded within selling, general and administrative expense.During the year ended September 30, 2006, advertising expense was $19,774(July 1, 2005 to September 30, 2005, $4,865; October 1, 2004 to June 30,2005, $14,742; February 17, 2004 to September 30, 2004, $8,212; October 1,2003 to February 16, 2004, $6,541).

***Pension benefits***

The Company has bothdefined benefit and defined contribution pension plans, as well as an earlyretirement plan.

The Company accounts forits defined benefit pension plans using FASB Statement 87, Employer’sAccounting for Pensions (‘‘SFAS 87’’) and the disclosure requirements underFASB Statement No. 132, ‘‘Employer’s Disclosure about Pensions and OtherPost-Retirement Benefits (Revised)’’ (‘‘SFAS 132’’), an amendment of FASBStatements No. 87, 88 and 106. Under SFAS 87, pension expense isrecognised on an accrual basis over the employee’s approximate service periods.SFAS 87 requires the use of an actuarial method for determining defined benefitpension costs and provides for the deferral of actuarial gains and losses (inexcess of a specified corridor) that result from changes in assumptions oractual experience differing from that assumed. SFAS 87 also provides for theprospective amortization of costs relating to changes in the benefit plan, aswell as the obligation resulting from the transition. Disclosure of thecomponents of periodic pension cost and the funded status of the pension plansare also required. When purchase accounting is applied, pension liabilities arerecognized for the projected benefit obligation in excess of plan assets.

F-15

----

For the definedcontribution pension plans, the net pension cost is equal to the contributionsrequired by the plan.

The Company also has anearly retirement plan, Altersteilzeit (‘‘ATZ’’), which allows certain Germanemployees who have been accepted into the plan to retire at 60 rather than atthe legal retirement age of 65. Eligible employees are those who have attainedthe age of 55 or who will attain the age of 55 by calendar year 2009 and havebeen accepted to participate in the ATZ plan. The ATZ plan can cover a periodbetween the ages of 58 to 63 of the participating employees and is split intoan active service period, where the employees work full time for the Company,and an inactive service period, where the employees do not work for thecompany. During the active service period, the employees receive 50% of theirsalary and the remaining 50% of their salary, plus a bonus payment equal to 35%of their salary is paid during the inactive service period. The Companyrecognizes the salary component of the ATZ plan over the period from thebeginning of the ATZ period to the end of the active service period. TheCompany recognizes the bonus component over the period from the point at whichthe employee signs the ATZ contract until the end of the active service period.

***Income Taxes***

Differences between thebasis of assets and liabilities for financial statement purposes and for taxreturn purposes are recorded as deferred tax assets or deferred tax liabilitiesin the accompanying consolidated financial statements. Deferred taxes representthe tax consequences in future years of these differences at each balance sheetdate, based on the enacted tax laws and statutory rates applicable to theperiods in which the differences are expected to affect taxable income. Theprovision (benefit) for income taxes represents the tax payable for the periodand the change during the period in deferred tax assets and liabilities. Avaluation allowance is established when it is more likely than not that the deferredtax assets are not realizable. The effect on deferred tax assets andliabilities of a change in the tax rates is recognized in income as anadjustment to income tax expense in the period that includes the enactmentdate.

***Cash and cashequivalents***

All highly liquidinvestments with an original maturity of three months or less are considered tobe cash equivalents. Cash equivalents are stated at cost, which approximatesfair value.

***Restricted cash andrestricted short-term investments***

Restricted cash representscash balances pledged as collateral to financial institutions that providesecurity for prepayments from customers and other bonds. Restricted short-terminvestments represent fixed term bank deposits with a maturity of greater thanthree months to secure guarantees given to customers by subsidiaries.

***Accounts receivable***

Accounts receivable arestated at the invoiced amount, less allowances for doubtful accounts.Collectibility of accounts receivable is regularly reviewed and is based uponmanagements’s knowledge of customers and compliance with credit terms. Theallowance for doubtful accounts is adjusted based on such evaluation, with acorresponding provision included in selling, general and administrativeexpense. Accounts receivable balances are written off when management deems thebalances uncollectible.

***Inventory***

Inventory is carried atthe lower of cost or market value. Cost is determined using standard costing,which approximates the weighted average cost method. In addition to directmaterial and direct labor costs, certain costs related to the overhead andproduction expenses are included in inventory. Inventory reserves are providedfor risks relating to slow moving, unmarketable and obsolete items.

F-16

----

***Investments incompanies***

The Company uses theequity method of accounting for investments in associated companies over whichthe Company has significant influence but does not have effective control.

***Property, plant andequipment***

Property, plant andequipment are recorded at historical cost less accumulated depreciation. As aresult of the transactions described in Note 5, a new cost basis wasestablished and adjustments were recorded to record property, plant andequipment assets at fair value in connection with the EQT transaction and90.85% of fair value in connection with the MDP transaction. Additions,improvements and major renewals, which extend the useful life of the asset arecapitalized; maintenance and repairs are expensed as incurred. When assets areretired or disposed of, the assets and related accumulated depreciation andamortization are removed from the balance sheet and the resulting gain or lossis reflected in current operating income. Development costs for external usesoftware incurred after the establishment of technological feasibility arecapitalized and amortized to cost of revenues on a straight-line basis over theexpected useful life of the software. Costs of software developed for internaluse incurred during the development of the application are capitalized and amortizedto operating expense on a straight-line basis over the expected useful life ofthe software. Prepayments for property, plant & equipment areclassified as property, plant and equipment and are not depreciated until theassets are received and placed into service.

Thecost of plant and equipment is depreciated using the straight-line method overthe following estimated useful lives of the respective assets.

| Buildings                                        |   | 25 to 50 years |   |
|--------------------------------------------------|--------|----------------|--------|
| Building improvements and leasehold improvements |   | 5 to 10 years  |   |
| Machinery and technical equipment                |   | 3 to 10 years  |   |
| Software and  software licenses                  |   | 3 to 5 years   |   |

 

***Finite-livedintangible assets***

Finite-lived intangibleassets are amortized according to the pattern in which the economic benefit ofthe asset is used up over their estimated useful lives, as shown below.

| Patents and  licenses                  |   | 10 - 13 years |   |
|----------------------------------------|--------|---------------|--------|
| Technologies and  Dealer Relationships |   | 1 - 13 years  |   |

 

***Impairment of long-lived and finite-lived assets***

Long lived assets held foruse by the Company are reviewed for impairment whenever events or circumstancesprovide evidence that suggests the carrying amount of the asset may not berecoverable. The Company performs ongoing impairment analysis on intangibleassets related to new technology. Determination of whether an impairment existsis based upon a comparison of the identifiable undiscounted cash flows of theassets or groups of assets to the carrying amount of the assets or groups ofassets. If impaired, the resulting charge reflects the excess of the asset’scarrying amount over its fair value.

***Goodwill and indefinite-lived intangible assets***

Goodwill and indefinitelived intangible assets, consisting of certain trademarks are not amortized,but are tested for impairment on an annual basis as of September 30, orwhenever events or circumstances indicate that the carrying amount may not berecoverable. These impairment tests are based upon a comparison of the fairvalue of the reporting units to their respective carrying amount. If thecarrying 

F-17

----

amountof the reporting unit exceeds its fair value, the goodwill impairment loss ismeasured as the excess of the carrying amount of goodwill over its implied fairvalue. If impairment is identified on indefinite-lived intangibles, the resultingcharge reflects the excess of the asset’s carrying amount over its fair value.

***Other non-current assets***

Other non-current assetsand prepaid expenses are mainly comprised of capitalized debt issuance costs.The costs are amortized using the effective interest method. The unamortizedbalance of such debt issuance costs was $16,780 and $21,567 as of September 30,2006 and 2005, respectively.

***Derivative financial instruments***

The Company enters into forward foreign currencycontracts in order to manage currency risks arising from its forecasted andfirmly committed foreign currency denominated cash flows. The Company entersinto these contracts to limit the foreign exchange rate risk for periodsgenerally not to exceed six months. The Company also enters into interest rateswaps and collars to manage its interest rates on its long term debt.

The Company does notutilize financial instruments for speculative purposes. The Company accountsfor derivative financial instruments in accordance with Statement of FinancialAccounting Standard No. 133, *‘‘Accountingfor Derivative Instruments and Hedging Activities’’*(‘‘SFAS 133’’). SFAS133 prescribes requirements for designation and documentation of hedgingrelationships and ongoing assessments of effectiveness in order to qualify forhedge accounting. The Company has not designated any of its derivatives asqualifying for hedge accounting under SFAS 133. All derivatives instruments aretherefore recognized as either assets or liabilities in the consolidated balancesheet at fair value. The fair value of the forward foreign currency contractsand interest rate swaps and collars are included within prepaid and othercurrent assets and the change in fair value is recognized within ‘‘Gains(losses) on derivative instruments’’ in the consolidated statement ofoperations.

***Fair value offinancial instruments***

Financial instrumentsconsist of cash, accounts receivable, accounts payable and other accruedexpenses that approximate fair value because of the short-term nature of theseitems. The fair value of the foreign currency forward contracts and interestrate swaps are estimated by obtaining quotes from financial institutions.

At September 30,2006, the foreign exchange forward contracts outstanding had notional amountsof $26,150 ($53,881 as at September 30, 2005) and a fair value liabilityof $(107) ($(1,399) as at September 30, 2005), with the unrealized fairvalue gain for the twelve months period ended September 30, 2006 of $1,377(July 1, 2005 to  September 30,2005 of $1,682; October 1, 2004 to June 30, 2005 of $(4,382)).

As September 30,2006, the interest rate swaps and collars had notional amounts of $337,358($341,000 as at September 30, 2005), and a fair value of $1,838 ($2,258 asat September 30, 2005), with the unrealized fair value loss for the twelvemonth period ended September 30, 2006 of $(659) (three month period ended September 30,2005 of $502; October 1, 2004 to June 30, 2005, $401).

***Concentration ofcredit risk***

Financial instruments thatpotentially subject the Company to concentrations of credit risk include cashand cash equivalents and accounts receivable. Sirona has two customersaccounting for more than 10% of revenue for the year ended September 30,2006. The accounts receivables from these customers amount to $20,073 in theaggregate as of September 30, 2006.

F-18

----

**3.**                 Recentaccounting pronouncements - not yet adopted

In May 2005, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154,“Accounting Changes and Error Corrections (a replacement of APB Opinion No. 20and FASB Statement No. 3)”. SFAS 154 requires that changes in accountingprinciples be given retrospective application to prior periods’ financialstatements. Previously most changes in accounting principle were recognized byincluding in net income of the period of the change the cumulative effect ofthe change. SFAS  154 is effective forfiscal years beginning after December 15, 2005. The Company is stilldetermining the effect SFAS 154 will have on its consolidated financialstatements, but it currently does not expect the effect to be material.

In September 2006, the FASB issued SFAS No. 157(“FAS 157”), “Fair Value Measurements.” Among other requirements, SFAS 157defines fair value and establishes a framework for measuring fair value andalso expands disclosure about the use of fair value to measure assets andliabilities. SFAS 157 prescribes a single definition of fair value as the pricethat would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date. SFAS157 is effective beginning the first fiscal year that begins after November 15,2007. The Company is still determining the effect SFAS 157 will have onits consolidated financial statements, but it currently does not expect theeffect to be material.

In September 2006, the FASB issued SFAS No. 158(“FAS 158”), “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and132(R)”. SFAS 158 requires an employer to: (a) recognize in itsstatement of financial position an asset for a plan’s overfunded status or aliability for a plan’s under-funded status; (b) measure a plan’s assetsand its obligations that determine its funded status as of the end of theemployer’s fiscal year (with limited exceptions); (c) recognize changes inthe funded status of a defined benefit postretirement plan in the year in whichthe changes occur. Those changes will be reported in comprehensive income of abusiness entity and in changes in net assets of a not-for-profitorganization. The requirement to recognize the funded status of a benefitplan and the disclosure requirements are effective for the Company for thefiscal year ending on September 30, 2007. The Company alreadymeasures plan assets and benefit obligations as of the date of fiscal year-end.The Company is still determining the effect SFAS 158 will have on itsconsolidated financial statements.

In July 2006, the FASB issued FASB Interpretation(“FIN”) No. 48, *“Accounting forUncertainty in Income Taxes”* which is an interpretation of FASBStatement 109, *“Accounting for Income Taxes.”*FIN 48 requires managements to perform a two-step evaluation of all taxpositions, ensuring that these tax return positions meet the “more-likely thannot” recognition threshold and can be measured with sufficient precision todetermine the benefit recognized in the financial statements. These evaluationsprovide management with a comprehensive model for how a company shouldrecognize, measure, present, and disclose in its financial statements certaintax positions that the Company has taken or expects to take on income taxreturns. FIN 48 is effective for the Company’s fiscal year ending September 30,2008. The Company is still determining the effect FIN 48 will have on itsconsolidated financial statements.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements When Quantifying Misstatements in CurrentYear Financial Statements” (“SAB 108”), which provides interpretive guidance onhow the effects of the carryover or reversal of prior year misstatements shouldbe considered in quantifying a current year misstatement. The guidance isapplicable for fiscal years ending after November 15, 2006. The Company isstill determining the effect SAB 108 will have on its consolidatedfinancial statements.

F-19

----

**4.**                 TheExchange

On September 25, 2005, Schick, a DelawareCorporation, which on June 20, 2006 was renamed Sirona Dental Systems, Inc.,entered into an Exchange Agreement with Sirona Holdings Luxco S.C.A. and SironaHolding providing for the issuance of 36,972,480 shares of Schick common stockto Luxco in exchange for Luxco’s entire economic interest in Sirona Holding,which consisted of all of the issued and outstanding share capital of SironaHolding and the existing indebtedness of Sirona Holding owed to Luxco in theprincipal amount of €150,992 plus accruedinterest totalling $ 205.566 as of June 20, 2006. It was also agreed thatSchick shareholders would receive a special $2.50 per share cash dividend.

At a special meeting, which took place on June 14,2006, Schick’s shareholders approved the Exchange Agreement and the amendmentto the Amended and Restated Certificate of Incorporation to increase Schick’sauthorized shares of capital stock and to change Schick’s corporate name toSirona Dental Systems, Inc., and the amendment of Schick’s 1996 StockOption Plan. The fiscal year was changed from March 31 to September 30,Sirona Holding’s year end.

The Exchange was completed on June 20, 2006 andSchick has been included in the Company’s consolidated statement of operationssince then. The cash dividend was paid on June 23, 2006. Sirona Holding isdeemed to be the acquiring company under U.S. GAAP because Luxco, SironaHolding’s shareholder, has a controlling ownership interest in the combinedcompany, Sirona Holding’s designees to the board represent a majority of thedirectors and  Sirona Holding’s senior management represents a majority ofmanagement.

The transaction was accounted for as a purchasebusiness combination in accordance with FASB Statement No. 141, BusinessCombinations (“SFAS 141”). The carrying values of Schick’s assets and liabilitieswere adjusted to their fair values on June 20, 2006, and the differencebetween the purchase price and the fair value of the net assets and liabilitieswas recorded as goodwill.

The purchase price was comprised of 17,615,660 Schickshares outstanding on June 20, 2006. Based on the average of the closingprices for a range of trading days (September 22, 2005 through September 28,2005, inclusive) around the announcement date of September 26, 2005 of theExchange Agreement, the fair value is $24.96 per share, or approximately$439,687. The purchase price also includes the estimated fair value of 862,220vested stock options which were not exercised prior to the Exchange ($15,363),458,179 unvested stock options ($8,111), reduced by the unvested options relatingto services to be provided in the future ($7,638), and direct acquisition costsof $7,338. The fair value of the vested and unvested options was estimatedusing the Black-Scholes model and assumptions as follows: the relevant exerciseprice, a market price of $24.96 (average of closing prices around the Exchangeannouncement date), volatility of 34.0%, estimated life of five years, and arisk free rate of 3.73%. The cost of the acquired business is reduced by theunearned portion of the unvested options relating to services to be provided inthe future (see Note 4).

Thetotal purchase price of Schick in the Exchange was as follows:

| ** **                                                                 | ** ** | **$’000s** | ** **  |
|----------------------------------------------------------------------------|------------|-----------------|-------------|
| Purchase price                                                             |       |            |        |
| Schick common  stock                                                       |       | $               | 439,687     |   |
| Schick restricted  vested options                                          |       | 15,363          |        |
| Schick unvested  options                                                   |       | 8,111           |        |
| Schick unvested  options relating to services to be provided in the future |       | (7,638          | )           |
| Sirona direct  transaction costs                                           |       | 7,338           |        |
|                                                                       | ** ** | **$**           | **462,861** | ** ** |

 

F-20

----

The allocation of thepurchase price, which is preliminary and therefore may change, is as follows:

| ** **                                 | ** ** | **$’000s** | ** **  |
|--------------------------------------------|------------|-----------------|-------------|
| Current assets                             |       | $               | 41,431      |   |
| Property, plant  and equipment             |       | 1,335           |        |
| Intangible assets  subject to amortization |       | 132,300         |        |
| Trade name not  subject to amortization    |       | 24,000          |        |
| In process  research and development       |       | 6,000           |        |
| Goodwill                                   |       | 126,748         |        |
| Receivable from  Luxco                     |       | 205,566         |        |
| Other assets                               |       | 1,060           |        |
| **Total assets**                           | ** ** | **538,440**     | ** **  |
| Current  liabilities                       |       | (12,445         | )           |
| Deferred taxes                             |       | (63,134         | )           |
| **Total liabilities assumed**              | ** ** | **(75,579**     | **)**       |
| **Purchase  Price**                        | ** ** | **$**           | **462,861** | ** ** |

 

The Company believes the acquisition will strengthenits competitive position in the technology-driven Imaging Systems segment byuniting research and development capabilities to accelerate productdevelopments and expanding its global presence, particularly in the significantU.S. market, and is expected to provide certain synergies.

Schick designs, develops and manufactures digitalimaging systems for the dental market. Schick currently manufactures andmarkets a variety of digital imaging products including an intra-oral digitalradiography system (CDR® and CDR WirelessTM), a digital panoramic radiographysensor (CDRPan®) and integrated device (CDRPanXTM), an intra-oral camera system(USBCam®), and a DC dental x-ray generator (SDXTM). The fair value of in processresearch and development (IPR&D) projects relate to these Intra-Oralproducts. IPR&D was appraised using discounted future probable cash flowson a project by project basis. Cash inflows from significant projects wereforecast to commence in the 1-2 years following the acquisition date. Thecash flows derived from IPR&D projects were discounted at a rate of 13%.The Company believes the rate used was appropriate given the risks associatedwith the technologies including their incomplete status. No alternative futureuse was identified for IPR&D projects so the entire $6,000 value of thoseassets was charged to the income statement at the acquisition date, included inthe write off in-process research and development line item, for the year endedSeptember 30, 2006.

Asummary of the identifiable intangible assets acquired is as follows:

| ** **              | ** ** | ** **          | ** ** | **Weighted average**    | ** ** |
|-------------------------|------------|---------------------|------------|------------------------------|------------|
| ** **              | ** ** | **Fair value** | ** ** | **amortization period** | ** ** |
| Developed  technologies |       | $                   | 127,000    |                         |       | 10 years |   |   |
| Dealer  relationships   |       | 3,300               |       |                         | 10 years   |   |   |
| CDR trademark           |       | 2,000               |       |                         | 20 years   |   |   |
| Schick trademark        |       | 24,000              |       |                         | indefinite |   |   |
|                         |            |                     |            |                              |            |  |  |  |

 

The fair value of the technology assets was determinedby using an earnings - based valuation method. The useful life was determinedbased on the expected use of the technology, any legal provisions that maylimit the useful life of the technology, the effects of known advances,obsolescence, demand and competition and the level of maintenance expensesrequired to obtain the future cash flows of the technology. Based on thesefactors, technologies were assigned useful lives of 10 years.

F-21

----

The fair value of the dealer relationships wasdetermined using the replacement cost valuation method, which considered thecost which would have been incurred to search, engage and train the new dealersto service Schick’s products. The remaining useful life of a contractual dealerrelationship relates to the estimated average period of 10 years after which anexisting dealer needs to be retrained, similar to a new dealer.

The fair values of thetrademarks were determined using the relief from royalty method and assumedroyalty rates ranging from 0.25% to 2.0%. The Company deems the Schicktrademark to be an indefinite lived intangible asset as it is used worldwide,can be separated from other assets, does not have any legal, regulatory,contractual, competitive, economic or other factors that limit its useful live,and requires no material levels of maintenance to retain its cash flow. Assuch, that trademark is not currently subject to amortization. The Companyevaluates the useful life of trademarks each year to determine whether factsand circumstances continue to support an indefinite life for this asset.

**5.**                 LeveragedBuy-out transactions

***MDPTransaction***

On June 30, 2005, Sirona Holdings Luxco S.C.A. (‘‘Luxco’’),a Luxembourg-based holding entity owned by funds managed by Madison DearbornPartners, Beecken Petty O’Keefe, management and employees of Sirona, obtainedcontrol over the Sirona business. The transaction was effected by using newlegal entities, Sirona Holding GmbH (formerly Blitz 05-118 GmbH) and itswholly owned subsidiary Sirona Dental Services GmbH to acquire 100% of theinterest in Sirona Dental Systems Beteiligungs- und Verwaltungs GmbH, theformer parent of the Sirona business through a leveraged buy-out transaction(the ‘‘MDP Transaction’’). Results of operations for the Sirona businessessubsequent to that date have been included in the successor period in theconsolidated statements of operations and cash flows.

The purchase price, comprising cash paid and directacquisition costs, was €464,590, consisting of €454,990paid in cash and €9,600of direct acquisition costs. The purchase price was denominated in Euros andtranslated to U.S. dollars at the exchange rate prevailing on the date of thetransaction of 1.2051. The purchase price denominated in U.S. dollars is$559,877.

The transaction was accounted for in accordance withEmerging Issues Task Force Issue 88-16, Basis in Leveraged BuyoutTransactions (‘‘EITF 88-16’’), in a manner similar to a businesscombination under FASB Statement No. 141, Business Combinations (‘‘SFAS141’’). Certain members of Sirona management who were deemed to be in thecontrol group held equity interests in Sirona Group prior to and subsequent tothe MDP Transaction (‘‘Continuing Shareholders’’). The interests of thecontinuing Shareholders have been reflected at the predecessor basis, resultingin 9.15% of each asset and liability acquired being valued at historical costat June 30, 2005. The remaining 90.85% interest in each asset andliability was recognized at fair value at June 30, 2005. The applicationof the preceding guidance to the book and fair values of the acquired assetsresulted in a difference between the purchase price in the acquisition (€464,590)and the recorded value of the acquired assets. This difference was recorded asa reduction to the shareholders’ equity of Sirona.

In connection with the leveraged buy-out transaction,Sirona incurred debt of €700,992 ($844,765) tofinance the purchase price and repay the shareholder loan granted by thesellers and repay other existing debt of €301,012 ($362,261). Thedebt comprised €550,000($662,805) of bank loans and a shareholder loan of €150,992 ($181,960) grantedby Luxco.

The purchase price was allocated to the assetsacquired and liabilities assumed as of June 30, 2005 and the differencebetween the purchase price allocation and the fair value of the net assets wasrecorded as goodwill. However, due to the continuing ownership by management,the assets and liabilities were carried over from the Predecessor 2 balancesheet upon closing to the extent that management had an ownership 

F-22

----

interest in Sirona DentalSystems Beteiligungs- und Verwaltungs GmbH. A contra equity account named ‘‘Excessof purchase price over predecessor basis’’ has been recorded in the successorperiod to reflect the predecessor basis of management that acquired an interestin Sirona Holding GmbH. The purchase price allocation was based on informationavailable and expectations and assumptions deemed reasonable by management.

In process research and development (IPR&D) wasappraised using discounted future probable cash flows on a project by projectbasis. Cash inflows from significant projects were forecast to commence in the1-2 years following the date of the valuation exercise. Discount rates ofbetween 25-30% were applied to the cash flows, depending on level of riskassociated with the project. In process research and development (IPR&D)projects primarily relate to (i) 3D-Imaging, (ii) enhancements to theCAD/CAM system’s hardware and software and (iii) a new treatment centerplatform.

Thefair values of these projects and estimated costs to complete at June 30,2005 were:

| **Project**                     | ** ** | ** ** | ** ** | **Fair value** | ** ** | **Estimated Cost** | ** ** |
|---------------------------------|------------|------------|------------|---------------------|------------|-------------------------|------------|
| 3 D Imaging                     |       |       | $          | 9,310               |       |                    |       | $ | 7,000 |   |   |
| CAD/CAM  enhancements           |       |       | 10,310     |                |       |                    | 8,000      |   |   |
| New Treatment  Center platforms |       |       | 10,295     |                |       |                    | 8,000      |   |   |
| Other                           |       |       | 3,882      |                |       |                    | 2,000      |   |   |

 

No alternative future use was identified for theseassets, and therefore the entire value of those assets was charged to theincome statement, included in the write off in-process research and developmentline item, for the three month period to September 30, 2005.

F-23

----

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed at the date of the acquisition:

| **$’000s**                                  | ** ** | ** ** | ** **    | **As of June 30, 2005** | ** ** |
|--------------------------------------------------|------------|------------|---------------|---------------------------------------------|------------|
| Current assets                                   |       |       | $             | 176,691                                     |       |   |
| Property, plant  and equipment                   |       |       | 49,724        |                                        |       |
| Intangible assets  subject to amortization       |       |       | 407,903       |                                        |       |
| Trademarks not  subject to amortization          |       |       | 93,488        |                                        |       |
| In process  research and development             |       |       | 33,797        |                                        |       |
| Goodwill                                         |       |       | 469,198       |                                        |       |
| Other assets                                     |       |       | 13,702        |                                        |       |
| **Total assets**                                 | ** ** | ** ** | **1,244,503** |                                        |       |
| Current liabilities                              |       |       | 176,663       |                                        |       |
| Non-current  liabilities                         |       |       | 355,477       |                                        |       |
| Deferred taxes                                   |       |       | 201,589       |                                        |       |
| **Total liabilities assumed**                    | ** ** | ** ** | **733,729**   |                                        |       |
| **Excess purchase price over predecessor basis** | ** ** | ** ** | **49,103**    |                                        |       |
| **Purchase  price**                              | ** ** | ** ** | **$**         | **559,877**                                 |       |   |

 

| ** **                                        | ** ** | ** ** | ** **  | **Weighted average**    | ** ** |
|---------------------------------------------------|------------|------------|-------------|------------------------------|------------|
| ** **                                        | ** ** | ** ** | ** **  | **amortization period** | ** ** |
| Licensing  agreements, patents and similar rights |       | $          | 124,264     |                         |       | 13 years |   |   |
| Technologies                                      |       | 273,930    |        |                         | 10 years   |   |   |
| Dealer  relationships                             |       | 9,709      |        |                         | 10 years   |   |   |
| ** **                                        | ** ** | **$**      | **407,903** |                         |       |   |   |   |

 

F-24

----

Technology assets include trade secrets, productionprocesses, CAD drawings, parts lists, blueprints and software for products thatreached technological feasibility.

The fair value of the technology assets was determinedby using an earnings-based valuation method. The useful life was determinedbased on the expected use of the technology by Sirona, any legal provisionsthat may limit the useful life of the technology, the effects of knownadvances, obsolescence, demand and competition and the level of maintenanceexpense required to obtain the future cash flows of the technology. Based onthese factors, technologies were assigned useful lives of 1 to 13 years.

The fair value of the dealer relationships wasdetermined using the replacement cost valuation method, which considered thecost which would have been incurred to search, engage and train the newdealers. The remaining useful life of a contractual dealer relationship relatesto the estimated average period of 10 years after which an existing dealer needsto be retrained, similar to a new dealer.

The fair values of thetrademarks were determined using the relief from royalty method and assumedroyalty rates ranging from 0.25% to 1.0%. The Company deems trademarks to beindefinite lived intangible assets as the trademarks are used worldwide, can beseparated from any other asset, do not have any legal, regulatory, contractualcompetitive, economic or other factors that limit their useful lives, andrequire no material levels of maintenance to retain their cash flow. As such,trademarks are not currently subject to amortization. The Company evaluates theuseful life of trademarks each year to determine whether facts andcircumstances continue to support an indefinite life for these assets. Thetransaction resulted in goodwill due to the significant growth prospects andindustry dynamics as well as the experienced management team which are notrecognized as a separate asset.

***EQT Transaction***

On February 16, 2004, funds managed by EQT,directors, management and employees of Sirona, obtained control over the Sironabusiness. The transaction was effected by using four new legal entities headedby Sirona Dental Systems Beteiligungs- und Verwaltungs GmbH to acquire 100% ofthe interest in Sirona Beteiligungs- und Verwaltungs GmbH, the former parent ofthe Sirona business through a leveraged buy-out transaction (the ‘‘EQTTransaction’’). The transaction resulted in a change in control over the Sironabusiness and has, therefore, been accounted for as a business combination underSFAS 141. The carrying values of the assets and liabilities were adjustedto their fair value on February 16, 2004, and the difference between thepurchase price and the fair value of the net assets and liabilities wasrecorded as goodwill. There was no shareholder interest that continued to becarried at predecessor basis. Results of operations for the Sirona businessesfrom the date of this transaction until the MDP Transaction have been includedin the Predecessor 2 period in the consolidated statement of operations andcash flows.

The purchase price, comprising cash paid and directacquisition costs, was €309,873 consisting of €284,167paid at closing, a €20,000holdback payment, subject to possible indemnification claims by EQT, and €5,706of direct acquisition costs. Payment of €20,000 was made on December 15,2004 at the expiration of the indemnification period, as no claims were made.In connection with the leveraged buy-out transaction, Sirona incurred debt of €338,566($419,923) to finance the purchase price and repay the shareholder loan grantedby the sellers and repay other existing debt of €109,918 ($136,331). Thedebt incurred comprised €300,000 ($372,090) of bank loans and ashareholder loan of €38,566($47,833) granted by EQT.

The carrying values of the assets and liabilities werestepped up to their fair values on February 16, 2004 and the differencebetween the purchase price and the fair value of the net assets was recorded asgoodwill. The purchase price was denominated in Euros and translated to U.S.Dollars at the exchange rate prevailing on the date of the transaction of1.2403. The purchase price denominated in U.S. dollars was $384,335.

F-25

----

The purchase price allocation was based on informationavailable and expectations and assumptions deemed reasonable by management.

IPR&D was appraised using discounted futureprobable cash flows on a project by project basis. Cash inflows fromsignificant projects were forecast to commence in the 1-2 years followingthe date of the valuation exercise. Discount rates of between 25-30% wereapplied to the cash flows, depending on level of risk associated with theproject. No alternative future use was identified for these assets, andtherefore the entire value of those assets was charged to the income statement,included in the write off in-process research and development line item, forthe three month period to September 30, 2004.

Thefollowing table summarizes the purchase price allocation for the transaction:

| **$’000s**                            | ** ** | ** ** | ** **  | **As of February 16, 2004** | ** ** |
|--------------------------------------------|------------|------------|-------------|-------------------------------------------------|------------|
| Current assets                             |       |       | $           | 191,310                                         |       |   |
| Property, plant  and equipment             |       |       | 56,122      |                                            |       |
| Intangible assets  subject to amortization |       |       | 393,980     |                                            |       |
| Trademarks not  subject to amortization    |       |       | 86,945      |                                            |       |
| In process  research and development       |       |       | 20,217      |                                            |       |
| Goodwill                                   |       |       | 67,989      |                                            |       |
| Other assets                               |       |       | 9,038       |                                            |       |
| **Total assets**                           | ** ** | ** ** | **825,601** |                                            |       |
| Current  liabilities                       |       |       | 107,455     |                                            |       |
| Non-current  liabilities                   |       |       | 147,964     |                                            |       |
| Deferred taxes                             |       |       | 185,847     |                                            |       |
| **Total liabilities assumed**              | ** ** | ** ** | **441,266** |                                            |       |
| **Purchase  price**                        | ** ** | ** ** | **$**       | **384,335**                                     |       |   |

 

| ** **                                        | ** ** | ** ** | ** **  | **Weighted average**    | ** ** |
|---------------------------------------------------|------------|------------|-------------|------------------------------|------------|
| ** **                                        | ** ** | ** ** | ** **  | **amortization period** | ** ** |
| Licensing  agreements, patents and similar rights |       | $          | 122,739     |                         |       | 13 years |   |   |
| Technologies                                      |       | 258,962    |        |                         | 10 years   |   |   |
| Dealer  relationships                             |       | 12,279     |        |                         | 10 years   |   |   |
| ** **                                        | ** ** | **$**      | **393,980** |                         |       |   |   |   |

 

Technology assets include trade secrets, productionprocesses, CAD drawings, parts lists, blueprints and software products thatreached technological feasibility.

The fair value of the technology assets was determinedby using an earnings-based valuation method. The useful life was determinedbased on the expected use of the technology by Sirona, any legal provisionsthat may limit the useful life of the technology, the effects of knownadvances, obsolescence, demand and competition and the level of maintenanceexpense required to obtain the future cash flows of the technology. Based onthese factors, technologies were assigned useful lives of 1 to 13 years.

The fair value of the dealer relationships wasdetermined using the replacement cost valuation method, which considered thecost which would have been incurred to search, engage and train the newdealers. The remaining useful life of a contractual dealer relationship relatesto the estimated average period of 10 years after which an existing dealerneeds to be retrained, similar to a new dealer.

The fair values of thetrademarks were determined using the relief from royalty method and assumedroyalty rates ranging from 0.25% to 1.0%. The Company deems trademarks to beindefinite lived intangible assets as the trademarks are used worldwide, can beseparated from any other asset, do not have 

F-26

----

anylegal, regulatory, contractual competitive, economic or other factors thatlimit their useful lives, and require no material levels of maintenance toretain their cash flow. As such, trademarks are not currently subject toamortization. The Company evaluates the useful life of trademarks each year todetermine whether facts and circumstances continue to support an indefinitelife for these assets.

***Pro Forma Information on Business Combinations***

Thepro forma condensed consolidated information for the year ended September 30,2005 gives effect to the Exchange and the MDP Transaction as if they hadoccurred on October 1, 2004; the pro forma information for the year ended September 30,2006 gives effect to the Exchange as if it had occurred on October 1,2005.

| ** **                                                   | ** ** | **Fiscal year ended** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **September 30,**          | ** ** | **September 30,** | ** ** |
| **$’000s**                                              | ** ** | ** **                      | ** ** | **2006(1)** | ** ** | **2005(2)** | ** ** |
| **Revenue**                                                  |       | $                               | 575,899    |   | $ | 523,817 |   |
| Cost of Sales                                                |       | 305,609                         |       | 308,061 |   |
| **Gross profit**                                             | ** ** | **270,290**                     | ** ** | **215,756** | ** ** |
| Operating  expenses/(income):                                |       |                            |       |   |   |
| Selling general and administrative expense                   |       | 171,615                         |       | 158,750 |   |
| Research and development                                     |       | 37,067                          |       | 34,462 |   |
| Provision for doubtful accounts and notes receivable         |       | 348                             |       | (319 | ) |
| Net other operating expenses                                 |       | 1,732                           |       | — |   |
| **Operating income**                                         | ** ** | **59,528**                      | ** ** | **22,863** | ** ** |
| Foreign currency  transaction (gain) / loss                  |       | (9,873                          | )          | 1,350 |   |
| (Gain) / Loss on  derivative instruments                     |       | (719                            | )          | 2,701 |   |
| Interest expense,  net                                       |       | 43,207                          |       | 39,814 |   |
| Other (income)                                               |       | (30                             | )          | (128 | ) |
| **Income/(loss) before income taxes and minority  interest** | ** ** | **26,943**                      | ** ** | **(20,874** | **)** |
| Income tax  provision/(benefit)                              |       | 10,704                          |       | (7,584 | ) |
| Minority interest                                            |       | 218                             |       | 44 |   |
| **Net income / (loss)**                                      | ** ** | **$**                           | **16,021** | ** ** | **$** | **(13,334** | **)** |
| Income / (loss) per share basic                              |       | $                               | 0.29       |   | $ | (0.24 | ) |
| Income / (loss)  per share diluted                           |       | $                               | 0.29       |   | $ | (0.24 | ) |
| Weighted average  shares - basic                             |       |   54,608,134               |       |   54,588,140 |   |
| Weighted average shares  - basic and diluted                 |       |   54,683,307               |       |   54,588,140 |   |
|                                                              |            |                                 |            |  |  |  |  |  |  |

 

----

(1)          Gives pro forma effectto the Exchange, as if it occurred on October 1, 2005.

(2)          Gives pro forma effectto the Exchange and the MDP Transaction as if the transactions occurred on October 1,2004.

F-27

----

**6.**                 EmployeeShare-Based Compensation

FASB Statement No. 123 (Revised 2004),Share-Based Payment (“SFAS 123(R)”) requires that all share-based compensationarrangements, including grants of stock option awards to employees, berecognized based on the estimated fair value of the share-based payment award.The historical financial information of the Company is based on Sirona Holding’sfinancial information prior to the Exchange which closed on June 20, 2006.Sirona Holding was a non-public entity and did not grant any share-basedpayment awards prior to the June 20, 2006 Exchange. The share-based awardsassumed or issued in connection with the Exchange are subject to the guidanceof SFAS 123(R). As there were no share-based awards issued by Sirona Holdingprior to the Exchange, the adoption of SFAS 123(R) did not result in anytransitional adjustments or a requirement to provide pro forma disclosures forprior periods.

In connection with the reverse acquisition of Schickeffected by the Exchange, share-based awards outstanding under Schick’s 1996Stock Option Plan (the “Plan”) and 1997 Stock Option Plan for Non-EmployeeDirectors (the “Directors Plan”) continue to be outstanding. At the date of theExchange, 862,220 vested and 458,179 unvested options were outstanding (seenote 4). Stock options granted under the assumed stock option plans have acontractual life of 10 years from the date of grant and requisite serviceperiods of 2 to 4 years. The Company does not expect to repurchase these shareswithin the next 12 months.

The Plan permitted incentive and non-qualified optionsto purchase shares of common stock to be granted to employees, directors andconsultants. The 1996 Plan allowed for the issuance of 4,700,000 options andexpired on April 22, 2006. Accordingly, no further options may be grantedunder the Plan.

The Directors Plan stipulates that the exercise priceof non-qualified options granted under that plan must equal or exceed 85% ofthe fair market value of the common stock as of the date of grant of theoption, and no option may be exercisable after ten years from the date ofgrant. The Company has never granted options at less than market on the date ofgrant. The Directors Plan also provides that certain awards will become fullyvested and/or exercisable upon a change in control (as defined in the DirectorsPlan) subject to certain restrictions. At September 30, 2006, 7,000 shareswere available for grant.

In contemplation of the Exchange, Schick conditionallygranted to certain employees and consultants options to purchase 1,530,000shares of Schick common stock as of September 25, 2005. The optionsgranted were conditional on the Exchange closing. Upon the June 20, 2006closing of the Exchange, the date of grant for accounting purposes, theconditional options commenced vesting over a four year period.

Thefair value of each option award is estimated on the date of grant using theBlack-Scholes option-pricing model using the assumptions noted in the followingtable. The expected life represents the period of time the options are expectedto be outstanding. As a public company with no prior option history, Sironaassessed Schick’s historical volatilities and compared these to a peer group.Because Schick did not trade on an organized marketplace or exchange from 1999to 2002 that period is not indicative of the expected volatility. Furthermorethe volatility after the announcement date in 2005 is affected by the ExchangeAgreement. Based on these factors and after consideration of the historicalvolatilities of the peer group companies, the Company determined that thevolatility of Schick shares during the 52 week period prior to the announcementdate results in the best estimate of the expected volatility at 34%. Theaverage option life was estimated to range between 5 and 6.25 years based onanticipated employee exercise behaviour. It has been common for optionrecipients to realize gains as the market price of the stock attained in themoney levels. Substantial share appreciation in the two years prior to theannounced Exchange triggered significant option exercises at Schick. TheExchange itself triggered additional disqualifying distributions in response tothe subsequent stock price run up in spite of the announced dividend. Theexpected dividend yield is based on Sirona’s history of not paying regulardividends in the past and the Company’s current intention not to pay regulardividends in the foreseeable future. The 

F-28

----

risk-free rate is based on the U.S. Treasuryyield curve in effect at the time of grant and has a term equal to the expectedlife of the options.

| ** **           | ** ** | **Year ended**              | ** **      |
|----------------------|------------|----------------------------------|-----------------|
| ** **           | ** ** | **September 30, 2006** | ** **      |
| Expected  Volatility |       |                             | 34              | % |   |
| Risk-free rate       |       |                             | 3.73            | % |   |
| Expected term        |       |                             | 5 to 6.25 years |   |   |
| Expected dividends   |       |                             | —          |   |   |

 

Compensation expense of $3,537 has been chargedagainst income for stock-based compensation for the year ended September 30,2006. This charge was recorded within selling, general and administration for$2,544, research and development for $601, and cost of sales for $391. Thetotal income tax benefit recognized in the income statement for the share-basedcompensation arrangements was $1,395, for the fiscal year ended September 30,2006. Sirona did not grant any share-based awards prior to the closing of theExchange so prior periods were not burdened by share-based compensationexpense.

Thefollowing is a summary of Sirona’s stock option activity for the year ended September 30,2006:

| ** **                                                                  | ** ** | **Year ended**              | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **September 30, 2006** | ** ** |
| ** **                                                                  | ** ** | ** **                       | ** ** | **Weighted average** | ** ** |
| ** **                                                                  | ** ** | **Number of options**  | ** ** | **exercise price $** | ** ** |
| Outstanding at  beginning of period                                         |       |                             | —     |   |   |   | — |   |   |
| Schick awards  assumed in Exchange and included in purchase accounting |       |                             | 1,320,399  |   |   |   | $ | 11.16 |   |   |
| Conditional  Schick awards not reflected in purchase accounting             |       |                             | 1,530,000  |   |   |   | 25.10 |   |   |
| Granted                                                                     |       |                             | 60,000     |   |   |   | 42.50 |   |   |
| Exercised                                                                   |       |                             | (18,221    | ) |   |   | 9.79 |   |   |
| Expired                                                                     |       |                             | —     |   |   |   | — |   |   |
| Forfeited                                                                   |       |                             | (32,500    | ) |   |   | 25.10 |   |   |
| Outstanding at  end of period                                               |       |                             | 2,859,678  |   |   |   | 19.13 |   |   |
| Exercisable at end of  point                                                |       |                             | 1,026,761  |   |   |   | 11.19 |   |   |
|                                                                             |            |                                  |            |  |  |  |  |  |  |  |

 

There were 18,221 options, exercised during the yearended September 30, 2006. The total intrinsic value of options exercisedfor the fiscal year ended September 30, 2006 was $457. The aggregateintrinsic value of stock options exercisable at September 30, 2006 was $22,318and these options have a weighted average remaining contractual life of 6.9years. The aggregate intrinsic value of stock options outstanding at September 30,2006 was approximately $39,452 and these options have a weighted-averageremaining contractual life of 8.6 years.

F-29

----

Asummary of the status of Sirona’s non-vested options as of September 30,2006, and the changes during the year ended September 30, 2006, ispresented below:

| ** **                                                                  | ** ** | **Year ended**              | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **September 30, 2006** | ** ** |
| ** **                                                                  | ** ** | ** **                       | ** ** | **Weighted average** | ** ** |
| ** **                                                                  | ** ** | ** **                       | ** ** | **grant date** | ** ** |
| **Nonvested stock options**                                       | ** ** | ** **                       | ** ** | **Number of shares** | ** ** | **fair value $** | ** ** |
| Schick awards assumed in  Exchange and included in purchase accounting |       |                             |       |   |   |   |   |   |   |
| Nonvested at  beginning of period                                           |       |                             | 1,320,399  |   |   |   | $ | 23.43 |   |   |
| Conditional  Schick awards not reflected in purchase accounting        |       |                             | 1,530,000  |   |   |   | 24.17 |   |   |
| Granted                                                                     |       |                             | 60,000     |   |   |   | 15.46 |   |   |
| Vested                                                                      |       |                             | (1,026,761 | ) |   |   | 26.08 |   |   |
| Forfeited                                                                   |       |                             | (32,500    | ) |   |   | 20.83 |   |   |
| Nonvested at  September 30, 2006                                       |       |                             | 1,832,917  |   |   |   | 25.08 |   |   |
|                                                                             |            |                                  |            |  |  |  |  |  |  |  |  |  |

 

As of September 30, 2006,there was $41,331 of total compensation cost to be recognized in future periodsrelated to outstanding non-vested share-based compensation awards. The cost isexpected to be recognized over a weighted-average period of 2.75 years. Thecash received and the actual tax benefit realized for the tax deductions fromoption exercises was $160 and $32 for the year ended September 30, 2006. Thetotal fair value of options vested for the year ended September 30, 2006 is$2,321.

**7.**                 ComprehensiveIncome

Comprehensive income for the fiscal year ending September 30,2006 was $1,887 comprising net income of $755 and cumulative translationadjustment of $1,132.

Comprehensive(loss)/income for the three month period ending September 30, 2005 and forthe nine-month periods ending June 30, 2005 was ($45,618) and $9,839,respectively. These amounts were comprised of net / (loss) income of ($46,035)and net income of $11,126, respectively, and cumulative translation adjustmentsof $417 and ($1,287), respectively.

F-30

----

**8.**                 Accountsreceivable

Theallowance for doubtful accounts was developed as follows:

| ** **                                                   | ** ** | ** **                         | ** ** | **Additions**                 | ** ** | ** **              | ** ** | ** **     | ** ** |
|--------------------------------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|-------------------------|------------|----------------|------------|
| ** **                                                   | ** ** | **Balance at beginning** | ** ** | **Charged to Cost** | ** ** | **Charged to**     | ** ** | ** **     | ** ** | **Balance at** | ** ** |
| ** **                                                   | ** ** | **of period**                 | ** ** | **and Expenses**         | ** ** | **Other Accounts** | ** ** | **Deductions** | ** ** | **End of Period** | ** ** |
| Successor                                                    |       |                               |       |                          |       |                    |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| For the year ended September 30, 2006                   |       |                               | $          | 402                           |       |                    |       | $              | 647        |   |   |   | — |   |   |   | $ | 212 |   |   |   | $ | 837 |   |   |
| From July 1,  2005 to September 30, 2005           |       |                               | —     |                          |       |                    | 402        |           |       |   | — |   |   |   | — |   |   |   | 402 |   |   |
| Predecessor 2                                                |       |                               |       |                          |       |                    |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| From October 1, 2004 to June 30, 2005              |       |                               | 526        |                          |       |                    | 427        |           |       |   | — |   |   |   | 462 |   |   |   | 491 |   |   |
| From  February 17, 2004 to September 30, 2004 |       |                               | —     |                          |       |                    | 526        |           |       |   | — |   |   |   | — |   |   |   | 526 |   |   |
| Predecessor 1                                                |       |                               |       |                          |       |                    |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| From  October 1, 2003 to February 16, 2004         |       |                               | 2,886      |                          |       |                    | 1,160      |           |       |   | — |   |   |   | 609 |   |   |   | 3,437 |   |   |
|                                                              |            |                                    |            |                               |            |                         |            |                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**9.**                 Inventories, net

| ** **        | ** ** | **Successor**          | ** ** | **Successor**          | ** ** |
|-------------------|------------|------------------------|------------|------------------------|------------|
| ** **        | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **        | ** ** | **2006**               | ** ** | **2005**               | ** ** |
| ** **        | ** ** | **$’000s**        | ** ** |
| Finished goods    |       |                   | $          | 28,382                 |       |   |   | $ | 24,439 |   |   |
| Work in progress  |       |                   | 11,688     |                   |       |   | 12,153 |   |   |
| Raw materials     |       |                   | 25,630     |                   |       |   | 18,460 |   |   |
|              | ** ** | ** **             | **65,700** |                   | ** ** | ** ** | **55,052** |   |   |
| Inventory reserve |       |                   | (8,397     | )                      |       |   | (7,712 | ) |   |
|              | ** ** | ** **             | **$**      | **57,303**             |       | ** ** | ** ** | **$** | **47,340** |   |   |

 

F-31

----

Theinventory reserve was developed as follows:

| ** **                                                   | ** ** | **Balance at beginning** | ** ** | **Charged to Cost** | ** ** | **Charged to**     | ** ** | ** **     | ** ** | **Balance at**         | ** ** |
|--------------------------------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|-------------------------|------------|----------------|------------|-----------------------------|------------|
| ** **                                                   | ** ** | **of period**                 | ** ** | **and Expenses**         | ** ** | **Other Accounts** | ** ** | **Deductions** | ** ** | **End of Period** | ** ** |
| Sucessor                                                     |       |                               |       |                          |       |                    |       |           |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| For the year ended September 30, 2006                   |       |                               | $          | 7,712                         |       |                    |       | $              | 1,976      |                        |       |   | — |   |   |   | $ | 1,291 |   |   |   | $ | 8,397 |   |   |
| From July 1, 2005 to September 30, 2005            |       |                               | 7,542      |                          |       |                    | 425        |           |       |                        | —     |   |   |   | 255 |   |   |   | 7,712 |   |   |
| Predecessor 2                                                |       |                               |       |                          |       |                    |       |           |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| From October 1, 2004 to June 30, 2005              |       |                               | 6,950      |                          |       |                    | 1,833      |           |       |                        | —     |   |   |   | 1,241 |   |   |   | 7,542 |   |   |
| From February 17, 2004 to September 30,  2004 |       |                               | 6,776      |                          |       |                    | 2,062      |           |       |                        | —     |   |   |   | 1,888 |   |   |   | 6,950 |   |   |
| Predecessor 1                                                |       |                               |       |                          |       |                    |       |           |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| From  October 1, 2003 to February 16, 2004         |       |                               | 6,201      |                          |       |                    | 781        |           |       |                        | —     |   |   |   | 206 |   |   |   | 6,776 |   |   |
|                                                              |            |                                    |            |                               |            |                         |            |                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In the fiscal year ending September 30, 2006,$4.214 of general and administrative cost was charged to inventory ( July 1,2005 to September 30, 2005, $1.091; October 1, 2004 to June 30,2005, $3.728; February 17, 2004 to September 30, 2004, $2.720; October 1,2003 to February 16, 2004, $1.990).

In the period ending September 30,2006, $401 of general and administrative cost remained in inventory (September 30,2005; $541).

**10.**          Prepaidexpenses and other current assets

Included within prepaidexpenses and other current assets as at September 30, 2006 is a VATreceivable of $ 2,666 (September 30, 2005, $17,179).

**11.**          Property,plant and equipment, net

| ** **                                                   | ** ** | ** **      | ** ** | **Accumulated**  | ** ** | ** **                | ** ** |
|--------------------------------------------------------------|------------|-----------------|------------|------------------|------------|---------------------------|------------|
| **Successor**                                                | ** ** | ** **      | ** ** | **Depreciation** | ** ** | ** **                | ** ** |
| **As of September 30, 2006**             | ** ** | ** **      | ** ** | **Gross**        | ** ** | **and Amortization** | ** ** | **Net** | ** ** |
| ** **                                                   | ** ** | **$’000s** | ** ** |
| Land                                                         |       | $               | 11,859     |             |       | $                         | —     |   |   | $ | 11,859 |   |
| Buildings,  building improvements and leasehold improvements |       | 14,841          |       |             | 1,775      |                      |       | 13,066 |   |
| Machinery and  technical equipment                           |       | 34,992          |       |             | 14,263     |                      |       | 20,729 |   |
| Software and  software licences                              |       | 13,101          |       |             | 2,101      |                      |       | 11,000 |   |
| Prepayments for  property, plant and equipment               |       | 4,388           |       |             | —     |                      |       | 4,388 |   |
|                                                         | ** ** | **$**           | **79,181** | ** **       | ** ** | **$**                     | **18,139** |   | ** ** | **$** | **61,042** | ** ** |
|                                                              |            |                 |            |                  |            |                           |            |  |  |  |  |  |  |  |

 

F-32

----

| ** **                                                   | ** ** | ** **      | ** ** | **Accumulated**  | ** ** | ** **                | ** ** |
|--------------------------------------------------------------|------------|-----------------|------------|------------------|------------|---------------------------|------------|
| **Successor**                                                | ** ** | ** **      | ** ** | **Depreciation** | ** ** | ** **                | ** ** |
| **As of September 30, 2005**             | ** ** | ** **      | ** ** | **Gross**        | ** ** | **and Amortization** | ** ** | **Net** | ** ** |
| ** **                                                   | ** ** | **$’000s** | ** ** |
| Land                                                         |       | $               | 10,391     |             |       | $                         | —     |   |   | $ | 10,391 |   |
| Buildings,  building improvements and leasehold improvements |       | 14,968          |       |             | 291        |                      |       | 14,677 |   |
| Machinery and technical  equipment                           |       | 22,383          |       |             | 2,563      |                      |       | 19,820 |   |
| Software and  software licences                              |       | 4,866           |       |             | 574        |                      |       | 4,292 |   |
|                                                         | ** ** | **$**           | **52,608** | ** **       | ** ** | **$**                     | **3,428**  |   | ** ** | **$** | **49,180** | ** ** |
|                                                              |            |                 |            |                  |            |                           |            |  |  |  |  |  |  |  |

 

Depreciation and amortization expense for the yearended September 30, 2006 was $13,771, for the twelve month period endedSeptember 30, 2005, $16,192 (October 1, 2004 to June 30, 2005,$12,738, July 1, 2005 to September 2005, $3,454) and for thetwelve month period ending September 30, 2004, $13,894 (October 1,2003 to February 16, 2004, $4,501, February 17, 2004 to September 30,2004, $9,393).

Amortization expense forcapitalized software development costs for the year ended September 30,2006 was $270, for the twelve month period ended September 30, 2005 was$995 (October 1, 2004 to June 30, 2005, $840, July 1, 2005 to September 2005,$155) and for the twelve month period ending September 30, 2004 was $949(October 1, 2003 to February 16, 2004, $583, February 17, 2004to September 30, 2004, $366). Buildings and leasehold improvements includesoffice space that is leased under operating leases to third parties with ahistorical cost of $1,719 and $1,634 and carrying amount of $675 and $629 atSeptember 30, 2006 and 2005, respectively.

**12.**          Intangibleassets and goodwill

The Company performed the required annual impairmenttests as of September 30 in each year and identified no impairment.

Amortization and depreciation expense for finite-livedidentifiable intangible assets for the year ended September 30, 2006 was$52,813, for the twelve month period ending September 30, 2005 was $43,355(October 1, 2004 to June 30, 2005, $31,417, July 1, 2005 toSeptember 30, 2005, $11,938) and for the twelve month period endingSeptember 30, 2004, $25,339 (October 1, 2003 to February 16,2004, $2,029, February 17, 2004 to September 30, 2004, $23,310). Theannual estimated amortization expense related to these intangible assets forthe fiscal years 2007, 2008, 2009, 2010 and 2011 is $75,651, $78,256, $65,913,$55,201 and $47,910, respectively.

Thefollowing table presents details of intangible assets, related accumulatedamortization and goodwill:

| ** **                             | ** ** | ** **      | ** **    | **Accumulated**  | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-----------------|---------------|------------------|------------|------------|------------|
| ** **                             | ** ** | **Gross**       | ** **    | **amortization** | ** ** | **Net**    | ** ** |
| ** **                             | ** ** | **$’000s** | ** **    |
| **Successor**                          |       |            |          |             |       |       |       |   |   |
| **September 30,  2006**           |       |            |          |             |       |       |       |   |   |
| Patents &  Licenses           |       | $               | 132,736       |             |       | $          | 17,168     |   |   | $ | 115,568 |   |
| Trademarks                             |       | 124,282         |          |             | 28         |       |       | 124,254 |   |
| Technologies and  dealer relationships |       | 428,217         |          |             | 49,046     |       |       | 379,171 |   |
|                                   |       | 685,235         |          |             | 66,242     |       |       | 618,993 |   |
| Goodwill                               |       | 613,549         |          |             | —     |       |       | 613,549 |   |
| **Total  intangible assets**           | ** ** | **$**           | **1,298,784** | ** **       | ** ** | **$**      | **66,242** |   | ** ** | **$** | **1,232,542** | ** ** |

 

F-33

----

 

| ** **                             | ** ** | ** **      | ** **  | **Accumulated**  | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-----------------|-------------|------------------|------------|------------|------------|
| ** **                             | ** ** | **Gross**       | ** **  | **amortization** | ** ** | **Net**    | ** ** |
| ** **                             | ** ** | **$’000s** | ** **  |
| **Successor**                          |       |            |        |             |       |       |       |   |   |
| **September 30,  2005**           |       |            |        |             |       |       |       |   |   |
| Patents &  Licenses           |       | $               | 124,510     |             |       | $          | 2,263      |   |   | $ | 122,247 |   |
| Trademarks                             |       | 93,403          |        |             | —     |       |       | 93,403 |   |
| Technologies and  dealer relationships |       | 283,381         |        |             | 9,589      |       |       | 273,792 |   |
|                                   |       | 501,294         |        |             | 11,852     |       |       | 489,442 |   |
| Goodwill                               |       | 468,769         |        |             | —     |       |       | 468,769 |   |
| **Total  intangible assets**           | ** ** | **$**           | **970,063** | ** **       | ** ** | **$**      | **11,852** |   | ** ** | **$** | **958,211** | ** ** |

 

The change in the value ofgoodwill from September 30, 2005 to September 30, 2006 is related tothe Exchange as well as differences in exchange rates. Goodwill has also beenreduced by $132 as a result of tax benefits received from exercises subsequentto the Exchange of options vested and included in the determination of purchaseprice at the time of the Exchange. The goodwill generated by the Exchange wasallocated to the Imaging Systems segment and amounted to $126,748. The changerelated to the differences in exchange rate amounted to $18,164.

**13.**          Incometaxes

Theincome tax (provision) benefit is comprised of the following:

| ** **      | ** ** | **Successor**          | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** ** | **Predecessor 2** | ** ** | **Predecessor 1** | ** ** |
|-----------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **      | ** ** | ** **             | ** ** | **July 1,**       | ** ** | **October 1,**    | ** ** | **February 17,**  | ** ** | **October 1,**    | ** ** |
| ** **      | ** ** | **Year ended**    | ** ** | **2005 to**       | ** ** | **2004 to**       | ** ** | **2004 to**       | ** ** | **2003 to**       | ** ** |
| ** **      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **September 30,** | ** ** | **February 16,**  | ** ** |
| ** **      | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2004**               | ** ** |
| ** **      | ** ** | **$’000s**        | ** ** |
| Current         |       |                   |       |                   |       |                   |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Domestic (U.S.) |       |                   | $          | (2,031                 | )          |                   |       | $                      | —     |                   |       |   | $ | — |   |   |   | $ | (6 | ) |   |   | $ | (66 | ) |   |
| Foreign         |       |                   | (16,784    | )                      |       |                   | (182       | )                      |       |                   | (7,643     | ) |   |   | 1,011 |   |   |   | (12,591 | ) |   |
| Total Current   |       |                   | (18,815    | )                      |       |                   | (182       | )                      |       |                   | (7,643     | ) |   |   | 1,005 |   |   |   | (12,657 | ) |   |
| Deferred        |       |                   |       |                   |       |                   |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Domestic (U.S.) |       |                   | 2,444      |                   |       |                   | 57         |                   |       |                   | 10         |   |   |   | 1,054 |   |   |   | — |   |   |
| Foreign         |       |                   | 9,011      |                   |       |                   | 5,921      |                   |       |                   | 2,189      |   |   |   | 9,689 |   |   |   | (524 | ) |   |
| Total Deferred  |       |                   | 11,455     |                   |       |                   | 5,978      |                   |       |                   | 2,199      |   |   |   | 10,743 |   |   |   | (524 | ) |   |
| **Total**       | ** ** | ** **             | **$**      | **(7,360**             | **)**      | ** **             | ** ** | **$**                  | **5,796**  |                   | ** ** | ** ** | **$** | **(5,444** | **)** | ** ** | ** ** | **$** | **11,748** |   | ** ** | ** ** | **$** | **(13,181** | **)** | ** ** |

 

F-34

----

Thesignificant components of deferred tax assets and liabilities of continuingoperations included in the consolidated balance sheets are:

| ** **                                                                        | ** ** | **Successor**             | ** ** | **Successor**             | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                                        | ** ** | **At September 30, 2006** | ** ** | **At September 30, 2005** | ** ** |
| ** **                                                                        | ** ** | **Current**               | ** ** | **Non-current**           | ** ** | **Current** | ** ** | **Non-current** | ** ** |
| ** **                                                                        | ** ** | **assets**                | ** ** | **assets**                | ** ** | **assets** | ** ** | **assets** | ** ** |
| ** **                                                                        | ** ** | **(liabilities)**         | ** ** | **(liabilities)**         | ** ** | **(liabilities)** | ** ** | **(liabilities)** | ** ** |
| ** **                                                                        | ** ** | **$’000s**           | ** ** |
| Employee benefit  accruals                                                        |       |                      | $          | 62                        |       |   |   | $ | 7,497 |   |   |   | $ | — |   |   |   | $ | 275 |   |   |
| Goodwill  amortization for tax purposes (historical tax deductible goodwill) |       |                      | —     |                      |       |   | (5,520 | ) |   |   | — |   |   |   | (1,049 | ) |   |
| Debt issuance  costs                                                              |       |                      | (1,232     | )                         |       |   | (5,939 | ) |   |   | — |   |   |   | (8,984 | ) |   |
| Inventory reserve                                                                 |       |                      | 3,410      |                      |       |   | — |   |   |   | (1,329 | ) |   |   | — |   |   |
| Receivables                                                                       |       |                      | (245       | )                         |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Property, plant  and equipment                                                    |       |                      | —     |                      |       |   | (5,987 | ) |   |   | — |   |   |   | (494 | ) |   |
| Intangible assets                                                                 |       |                      | —     |                      |       |   | (232,168 | ) |   |   | — |   |   |   | (183,171 | ) |   |
| Long term debt                                                                    |       |                      | (247       | )                         |       |   | (2,033 | ) |   |   | — |   |   |   | — |   |   |
| Deferred income                                                                   |       |                      | —     |                      |       |   | (1,697 | ) |   |   | — |   |   |   | — |   |   |
| Tax loss  carryforward                                                            |       |                      | 1,361      |                      |       |   | 8,963 |   |   |   | 191 |   |   |   | 9,093 |   |   |
| Valuation  allowances on tax loss carryforwards                                   |       |                      | —     |                      |       |   | (3,208 | ) |   |   | — |   |   |   | (3,782 | ) |   |
| Other                                                                             |       |                      | (1,646     | )                         |       |   | 250 |   |   |   | 1,161 |   |   |   | 1,594 |   |   |
| Total                                                                             |       |                      | 1,463      |                      |       |   | (239,842 | ) |   |   | 23 |   |   |   | (186,518 | ) |   |
| Deferred tax  assets—current and non-current                                 |       |                      | 4,671      |                      |       |   | 3,649 |   |   |   | 3,242 |   |   |   | 9,874 |   |   |
| Deferred tax  liabilities—current and non-current                            |       |                      | (3,208     | )                         |       |   | (243,491 | ) |   |   | (3,219 | ) |   |   | (196,392 | ) |   |
| Net deferred tax  asset (liability)                                               |       |                      | $          | 1,463                     |       |   |   | $ | (239,842 | ) |   |   | $ | 23 |   |   |   | $ | (186,518 | ) |   |

 

In assessing the realizability of deferred tax assets,management considers whether it is more likely than not that some portion orall of the deferred tax assets will not be realized. The ultimate realizationof deferred tax assets is dependent upon sufficient taxable income within thecarryback years and the generation of future taxable income during the periodsin which those temporary differences and tax loss carryforwards becomedeductible. Management considers taxable income in the carry back years, ifcarry back is permitted in the tax law, the projected future taxable income,and tax planning strategies in making this assessment.

As ofSeptember 30, 2006 the Company had $ 35,389 of gross tax losscarry-forwards subject to expiration as follows:

| **Year of expiration** | ** ** | ** ** | ** ** | **Losses** | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|
| 2009                             |       | $          | 1,440      |       |
| 2010                             |       | 380        |       |
| 2011                             |       | 517        |       |
| 2012                             |       | 1,971      |       |
| 2013 - 2025                      |       | 4,727      |       |
| Subtotal                         |       | 9,035      |       |
| Indefinite                       |       | 26,354     |       |
| **Total**                        | ** ** | **$**      | **35,389** |       |

 

F-35

----

The Company recognized a valuation allowance of $3,208at September 30, 2006 ($3,782 at September 30, 2005) on deferred taxassets relating to tax loss carry-forwards of $ 9,154, as management believesthat it is more likely than not, that the benefits of those existing tax losscarry-forwards will not be realized within the period those tax losses aredeductible.

Thedifference between the applicable statutory tax rate and the Company’s incometax (provision) benefit included in the consolidated statements of operationsconsisted of the following: The statutory tax rate for 2006 is the U.S. federaltax rate as a result of the Exchange (described in Note 4). The expected taxrate of prior periods is the German Corporation tax rate, the applicable taxrate before the Exchange.

| ** **                                               | ** ** | **Successor**          | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** ** | **Predecessor 2** | ** ** | **Predecessor 1** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | ** **             | ** ** | **July 1,**       | ** ** | **October 1,**    | ** ** | **February 17,**  | ** ** | **October 1,**    | ** ** |
| ** **                                               | ** ** | **Year ended**    | ** ** | **2005 to**       | ** ** | **2004 to**       | ** ** | **2004 to**       | ** ** | **2003 to**       | ** ** |
| ** **                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **September 30,** | ** ** | **February 16,**  | ** ** |
| ** **                                               | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2004**               | ** ** |
| ** **                                               | ** ** | **$’000s**        | ** ** |
| Income/(loss)  before income taxes and minority interest |       |                   | $          | 8,333                  |       |                   |       | $                      | (51,837    | )                      |       |   | $ | 16,620 |   |   |   | $ | (46,106 | ) |   |   | $ | 33,750 |   |   |   |
| Computed tax  (provision)/benefit                        |       |                   | (2,917     | )                      |       |                   | 19,128     |                   |       |                   | (6,133     | ) |   |   | 17,014 |   |   |   | (12,454 | ) |   |   |
| Foreign tax  differential                                |       |                   | (314       | )                      |       |                   | (352       | )                      |       |                   | (2,584     | ) |   |   | (313 | ) |   |   | — |   |   |   |
| Non deductible  expenses                                 |       |                   | (127       | )                      |       |                   | (23        | )                      |       |                   | (179       | ) |   |   | (74 | ) |   |   | (22 | ) |   |   |
| Permanent  differences relating to German trade taxes    |       |                   | (2,600     | )                      |       |                   | (1,283     | )                      |       |                   | (1,101     | ) |   |   | 949 |   |   |   | — |   |   |   |
| Subpart F income  net of tax credit                      |       |                   | (372       | )                      |       |                   | —     |                   |       |                   | —     |   |   |   | — |   |   |   | — |   |   |   |
| IPR&D                                                |       |                   | (2,100     | )                      |       |                   | (12,471    | )                      |       |                   | —     |   |   |   | (7,460 | ) |   |   | — |   |   |   |
| Tax income from  prior periods                           |       |                   | —     |                   |       |                   | —     |                   |       |                   | 3,812      |   |   |   | 848 |   |   |   | — |   |   |   |
| Permanent  differences                                   |       |                   | 1,391      |                   |       |                   | (79        | )                      |       |                   | —     |   |   |   | (62 | ) |   |   | (250 | ) |   |   |
| Additional state  taxes                                  |       |                   | (420       | )                      |       |                   | —     |                   |       |                   | —     |   |   |   | — |   |   |   | — |   |   |   |
| Other                                                    |       |                   | 99         |                   |       |                   | 876        |                   |       |                   | 741        |   |   |   | 846 |   |   |   | (455 | ) |   |   |
| **(Provision)/benefit  for income taxes**                | ** ** | ** **             | **$**      | **(7,360**             | **)**      | ** **             | ** ** | **$**                  | **5,796**  |                   | ** ** | ** ** | **$** | **(5,444** | **)** | ** ** | ** ** | **$** | **11,748** |   | ** ** | ** ** | **$** | **(13,181** | **)** | ** ** |   |

 

The permanent differences primarily include theeffects of non-taxable interest.

During the period from October 1, 2004 toJune 30, 2005, the Company resolved an issue related to its German incometax returns for the tax years 1998 to 2002 with the German authorities. TheCompany had filed an objection against taxable treatment of a transaction in1998. The Company prevailed with its views that the transaction should betreated as non-taxable and recognized the impact of the non-taxable treatmentwhen it became probable that it was sustainable; the balance is included in ‘‘Taxincome from prior periods’’. The German authorities refunded an amount of$3,812 in connection with the issue.

F-36

----

Thecomponents of income (loss) before income taxes and minority interests are:

| ** **    | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** ** | **Predecessor 2** | ** ** | **Predecessor 1** | ** ** | **Predecessor 1** | ** ** |
|---------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **    | ** ** | ** **             | ** ** | **July 1,**       | ** ** | **October 1,**    | ** ** | **February 17,**  | ** ** | **October 1,**    | ** ** |
| ** **    | ** ** | **Year ended**    | ** ** | **2005 to**       | ** ** | **2004 to**       | ** ** | **2004 to**       | ** ** | **2003 to**       | ** ** |
| ** **    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **September 30,** | ** ** | **February 16,**  | ** ** |
| ** **    | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2004**               | ** ** |
| ** **    | ** ** | **$’000s**        | ** ** |
| Germany       |       |                   | $          | 15,756                 |       |                   |       | $                      | (50,015    | )                      |       |   | $ | 23,936 |   |   |   | $ | (44,731 | ) |   |   | $ | 33,777 |   |   |
| United States |       |                   | (4,374     | )                      |       |                   | (131       | )                      |       |                   | (419       | ) |   |   | 24 |   |   |   | (105 | ) |   |
| Other Foreign |       |                   | (3,049     | )                      |       |                   | (1,691     | )                      |       |                   | (6,897     | ) |   |   | (1,399 | ) |   |   | 78 |   |   |
|          |       |                   | $          | 8,333                  |       |                   |       | $                      | (51,837    | )                      |       |   | $ | 16,620 |   |   |   | $ | (46,106 | ) |   |   | $ | 33,750 |   |   |

 

Noneof the goodwill recognized in the Exchange is tax deductible. The portion ofcapitalized goodwill that is deductible for tax purposes as a result of the MDPand EQT Transactions as of June 30, 2005 and February 17, 2004 was$88,219 and $72,281 respectively.

| ** **                                  | ** ** | ** **         | ** ** | **Charged**       | ** ** | **Addition** | ** ** | ** **     | ** ** | ** **      | ** ** |
|---------------------------------------------|------------|--------------------|------------|-------------------|------------|--------------|------------|----------------|------------|-----------------|------------|
| ** **                                  | ** ** | **Balance**        | ** ** | **(credited)**    | ** ** | **Charged**  | ** ** | ** **     | ** ** | **Balance**     | ** ** |
| ** **                                  | ** ** | **at**             | ** ** | **to**            | ** ** | **to**       | ** ** | ** **     | ** ** | **at**          | ** ** |
| ** **                                  | ** ** | **beginning**      | ** ** | **Cost and** | ** ** | **other**    | ** ** | ** **     | ** ** | **End of** | ** ** |
| ** **                                  | ** ** | **of Period** | ** ** | **Expenses**      | ** ** | **Accounts** | ** ** | **Deductions** | ** ** | **Period**      | ** ** |
| ** **                                  | ** ** | **$’000s**    | ** ** |
| Valuation  allowance deferred tax asset     |       |               |       |              |       |         |       |           |       |            |       |   |   |   |   |   |   |   |   |
| For the year ended  September 30, 2006 |       |               | $          | 3,782             |       |         |       | $              | (574       | )               |       |   | — |   |   |   | — |   |   | $ | 3,208 |   |
|                                             |            |                    |            |                   |            |              |            |                |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |

 

Income taxes on cumulative earnings of foreignsubsidiaries have not been provided for because such earnings are intended tobe indefinitely reinvested in those operations.

The German tax authorityis currently examining the Company’s tax returns for the years 2001 to 2004.The Company does not believe the results of the examination will have anadverse material effect on the Company’s financial position, results of operationsor liquidity.

**14.**          Accruedliabilities and deferred income

| ** **                                                                | ** ** | **Successor**          | ** ** | **Successor**          | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                | ** ** | **2006**               | ** ** | **2005**               | ** ** |
| ** **                                                                | ** ** | **$’000s**        | ** ** |
| Employee benefits  (e. g. bonuses, vacation, overtime, Christmas payment) |       |                   | $          | 26,779                 |       |   |   | $ | 22,610 |   |   |
| Product warranty                                                          |       |                   | 10,879     |                   |       |   | 9,276 |   |   |
| Property taxes                                                            |       |                   | 1,526      |                   |       |   | — |   |   |
| Other provisions                                                          |       |                   | 12,648     |                   |       |   | 11,967 |   |   |
| VAT accruals                                                              |       |                   | —     |                   |       |   | 15,800 |   |   |
| Other liabilities                                                         |       |                   | 13,371     |                   |       |   | 4,104 |   |   |
|                                                                      | ** ** | ** **             | **$**      | **65,203**             |       | ** ** | ** ** | **$** | **63,757** |   |   |

 

F-37

----

**15.**          Long-termdebt

| ** **                                                                                                                        | ** ** | **Successor**          | ** **  | **Successor**          | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|------------------------|------------|
| ** **                                                                                                                        | ** ** | **September 30,** | ** **  | **September 30,** | ** ** |
| ** **                                                                                                                        | ** ** | **2006**               | ** **  | **2005**               | ** ** |
| ** **                                                                                                                        | ** ** | **$’000s**        | ** **  |
| Shareholder loan  from Luxco                                                                                                      |       |                   | $           | —                 |       |   |   | $ | 184,712 |   |   |
| Bank loans                                                                                                                        |       |                   |        |                   |       |   |   |   |   |
| Senior syndicated loan,  Tranches A, variable rate repayable in semi-annual installments starting                                 |       |                   |        |                   |       |   |   |   |   |
| September 2006  through June 2012                                                                                       |       |                   | 118,013     |                   |       |   | 162,172 |   |   |
| Senior syndicated  loan, Tranches B, variable rate repayable at end of term in June 2013                                     |       |                   | 158,587     |                   |       |   | 150,500 |   |   |
| Senior syndicated  loan, Tranche C, interest at EURIBOR plus 3.25%, repayable in full at end  of term in June 2014 |       |                   | 139,574     |                   |       |   | 150,500 |   |   |
| Mezzanine loan,  interest at EURIBOR plus 9.5%, repayable in full at end of term in  June 2015                               |       |                   | 115,344     |                   |       |   | 121,888 |   |   |
| Other debt                                                                                                                        |       |                   | 1,854       |                   |       |   | 1,665 |   |   |
|                                                                                                                              | ** ** | ** **             | **533,372** |                   | ** ** | ** ** | **771,437** |   |   |
| Less current  portion                                                                                                             |       |                   | 14,738      |                   |       |   | 10,103 |   |   |
|                                                                                                                              | ** ** | ** **             | **$**       | **518,634**            |       | ** ** | ** ** | **$** | **761,334** |   |   |

 

Thetable below reflects the contractual maturity dates of the various borrowingsat September 30, 2006:

| **Year ending September 30,** | ** ** | ** **      | ** **  | ** ** | ** ** |
|----------------------------------------------|------------|-----------------|-------------|------------|------------|
| ** **                                   | ** ** | **$’000s** | ** **  |
| 2007                                         |       | $               | 14,738      |       |
| 2008                                         |       | 17,478          |        |
| 2009                                         |       | 19,318          |        |
| 2010                                         |       | 19,318          |        |
| 2011                                         |       | 23,918          |        |
| Thereafter                                   |       | 438,602         |        |
| ** **                                   | ** ** | **$**           | **533,372** | ** ** |

 

The amounts disclosed above do not include interest,except for the 2007 amount, which includes interest of $5.

In connection with the MDPTransaction, the financing of the Company was restructured.

 

F-38

----

***Shareholder loan***

Luxco granted SironaHolding a loan of €150,992 in connection withthe MDP Transaction. The loan accrues interest at 7.5% per annum. In connectionwith the Exchange, Sirona Dental Systems, Inc. took over the shareholderloan from Luxco. Effective June 20, 2006 (closing of the transaction) theshareholder loan is eliminated on consolidation. The interest is beingaccumulated until the end of the loan term on June 30, 2015, when the loanand the interest is required to be repaid. From October 1, 2005 through June 20,2006 interest of €8,305($10,086) has been accreted.

***Bank loans***

Bank loans outstanding at September 30,2006 comprise senior ranking loans and accreted interest of $531,518, dividedinto three tranches, including a mezzanine loan, plus an acquisition facilityand an overdraft facility.

Tranche A is a U.S. Dollardenominated loan and has a principal amount of $162,689 and is repayable insemi-annual instalments through June 30, 2012. The repayments will becalculated as a percentage of the loan amount. As of September 30, 2006the loan, including accreted interest, amounts to $118,013 as the company madean unscheduled repayment of $38,379, which reduced the regular repayments prorata, and a scheduled repayment of $5,519. Tranche A has an interest rate ofLIBOR plus a margin of 1.5% to 2.25% per annum. Interest is payable on amonthly, quarterly, or semi-annual basis, at the discretion of the Company. Twostep up swaps have been established for 70% of the interest for the next threeyears. The interest rate swaps fix the LIBOR element of interest payable on 70%of the principal amount of the loan for defined twelve month periods over thethree years. The defined interest rates fixed for each twelve month periodrange from 1.75% to 4.71%. Settlement of the swaps is required on a quarterlybasis.

Tranche B is a € denominatedloan in the principal amount of €125.0 million and isrepayable in a single amount of €125,000 on June 30,2013. Including accreted interest the loan amounts to €125.0 millionplus accreted interest of €0.2 million ($158,587) as at September 30,2006. Tranche B has an interest rate of EURIBOR plus a margin of 2.25% to 2.75%per annum. Interest is paid on a monthly, quarterly or semi annual basis, atthe discretion of the Company. The Company entered into four cap/ floor collarsfor 51% of the interest for the next three years. Under the terms of thecollars the floor interest rates are 1.595% and 1.85% and the cap interestrates are 5% and 4.10%. Settlements of the contracts are required on aquarterly basis.

Tranche C is a €denominated loan and has a principle amount of €125,000 and is repayableon June 30, 2014. As at September 30, 2006 the loan amounts to €110,000 plus accreted interest of € 170 ($139,574)as the Company made an unscheduled repayment of €15,000 during the year.Tranche C has an interest rate of EURIBOR plus a margin of 3.25% per annum.Interest is paid on a monthly, quarterly or semi-annual basis, at thediscretion of the Company. The Company entered into two cap/floor collars for51% of the EURIBOR element of the interest for the next three years. Under theterms of the collars the floor interest rates are 1.595% and 1.85% and the capinterest rates are 5% and 4.10%. Settlements of the contracts are required on aquarterly basis.

At inception, themezzanine loan had a principal amount of €165,000($198,842), and under the terms of the loan, the full amount was repayable atthe end of the loan term, in June 2015. The Company repaid €65,000of the mezzanine debt in the three month period to September 30, 2005 and €15,000 in fiscal year 2006. The mezzanine loan has an interest rate of EURIBORplus a margin of 9.5% per annum. The 9.5% margin is divided into twocomponents: 4.5% per annum is payable on an on-going basis, and the remaining5% per annum will accrete until the end of the loan term. The remaining loanoutstanding as of September 30, 2006 including accreted interest amountsto €91,044($115,344). The Company entered into two cap/ floor collars for 51% of theEURIBOR portion of the interest for the next three years. Under the terms ofthe collars the floor interest rates are 1.68% and 1.85% and the cap interestrates are 5% and 4.02%. Settlements of the contract are required on a quarterlybasis.

F-39

----

The mezzanine loan issubordinated to the senior ranking loans, and the shareholder loans aresubordinated to both the senior ranking loans and the mezzanine loan.

All of the bank loanagreements stipulate early repayment of certain amounts under certainconditions. In particular, up to 50% of excess cash flow, as defined in thecontract, falls due one month after the issuance of audited consolidated GermanGAAP financial statements, starting in fiscal year 2007, depending on the levelof the Company’s adjusted EBITDA.

The Company has agreed tocertain debt covenants in relation to this financing. The covenants stipulatethat the Company must maintain certain ratios in respect of cash flows,interest payments and defined earnings measures and also place a limit oncapital expenditures. If the Company breaches any of the covenants, the loanswill become repayable on demand.

The margins of Tranches Aand B and the acquisition facility are fixed for one year and thereafter willbe calculated based on a ratio of net debt to EBITDA for the previous reportingperiod, all derived from the consolidated financial statements prepared inaccordance with German GAAP, starting in fiscal year 2007.

The bank loans are securedby the pledge of the equity interests in certain Sirona subsidiaries. Inaddition, all receivables, bank accounts, tangible assets, inventories,patents, trademarks and other property rights of Sirona Dental Systems GmbH andSirona Dental Services GmbH are also pledged as security for the loans.

In addition, as at September 30,2006 an overdraft facility exists of €40,000 ($50,676) andacquisition facility of €50,000 ($63,345). At September 30, 2006,none of the overdraft or acquisition facilities had been drawn down.

**16.**          Deferredincome

OnJune 30, 2005, Sirona and its largest distributor, Patterson, amended theterms of an existing distribution agreement to extend Patterson’s rights asexclusive distributor of certain Sirona products within the United States andCanada from October 1, 2007 through September 30, 2017. Asconsideration for the extension of its exclusivity rights, Patterson made aone-time payment of $100 million to Sirona in July 2005. Sironarecorded the full amount of the payment as deferred revenue and will beginamortizing the amount into revenue on a straight-line basis over ten yearsbeginning October 1, 2007. In the event of termination by Patterson forcertain breaches of contract by Sirona, Sirona has to refund to Paterson theunearned portion of the $100 million payment as liquidated damages.Depending on the reason for termination, the amount of liquidated damagesdeclines (i) on a straight line basis beginning in fiscal 2008 or(ii) by $15 million per year in each of fiscal 2008 through fiscal2012 and by $5 million per year thereafter. Sirona accounts for thedeferred revenue related to the Patterson payment as a monetary liability sothe effects of remeasurement of the amount from U.S. dollar to Euro arereflected currently in the statement of operations. Sirona recognized$0.398 million loss and $4.972 million of Foreign currencytransaction gains in the statements of operations for the years endedSeptember 30, 2005 and 2006, respectively.

**17.**          Incomeper share

The computation ofbasic and diluted income (loss) per share is as follows:

| ** **                                                  | ** ** | **Year ended** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|
| **$’000 except for share amounts** | ** ** | ** **          | ** ** | **September 30, 2006** | ** ** |
| Net income                                                  |       |                | $          | 755 |   |   |
| Weighted average shares  outstanding - basic                |       |                | 41,884,704 |   |   |
| Dilutive effect of stock  options                           |       |                | 321,933    |   |   |
| Weighted average shares  outstanding - diluted              |       |                | 42,206,637 |   |   |
| Income per share                                            |       |                |       |   |   |
| Basic                                                       |       |                | $          | 0.02 |   |   |
| Diluted                                                     |       |                | $          | 0.02 |   |   |
|                                                             |            |                     |            |  |  |  |  |  |

 

F-40

----

Stock options to acquire 60,000 shares of Sirona’scommon stock that were granted in connection with the Directors Plan were notincluded in the computation of diluted earnings per share for the twelve monthended September 30, 2006, because the options’ underlying exercise priceswere greater than the average market price of Sirona’s common stock for theperiod.

Share and per shareinformation is not presented for periods prior to the Exchange because suchinformation is not meaningful.

**18.**          Commitmentsand contingencies

***Operating lease commitments***

The Company leases certain vehicles and IT equipmentfrom unrelated third parties. The leases are non-cancellable and have terms ofgreater than one year. During the year ended September 30, 2006 leasingexpense was $3,336 (July 1, 2005 to September 2005, $255; October 1,2004 to June 30, 2005, $753; February 17, 2004 to September 30,2004, $571; October 2003 to February 16, 2004, $400).

In July 2005, Sirona entered into a sale andleaseback agreement regarding unused land on the site of the headquarters inBensheim. The land was sold for $1,067 to an unrelated property developmentcompany, who will construct an office building based on Sirona’s specificationson the site. Sirona will lease the property from the property developmentcompany through an 18-year lease. Under the terms of the lease, rent isfixed at $1,202 ($1,523 at the €/$ exchange rate of September 30,2006) per annum until 2013. After 2013, rent is subject to adjustment accordingto an inflation index. Rental payments will commence once the building is readyfor occupation, which is currently anticipated to be in April 2007. Theland remains as an asset of Sirona’s balance sheet and the building will beaccounted for as an operating lease.

Futureminimum lease payments under non-cancelable operating lease agreements as of September 30,2006 are as follows:

| **Year ending September 30,** | ** ** | ** **      | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                              | ** ** | **$’000s** | ** ** |
| 2007                                    |       | $               | 4,669      |       |
| 2008                                    |       | 4,144           |       |
| 2009                                    |       | 3,543           |       |
| 2010                                    |       | 2,765           |       |
| 2011                                    |       | 2,704           |       |
| Thereafter                              |       | 21,317          |       |
| ** **                              | ** ** | **$**           | **39,142** | ** ** |

***Guarantees***

Customers can financetheir purchase of Sirona products from the respective dealer through financialinstitutions. Prior to March 2003, Sirona would offer to guarantee up to10% of the total liability due to the financial institution from Sirona customersif the customer defaulted on their payments. However, the contracts negotiatedwith the dealers, who sold the products to the third party customers, grantedSirona a right of recourse against the dealer if the customer defaulted ontheir payments. The Company ceased issuing these guarantees after March 2003.The arrangements were generally provided for a five year period; therefore therelated guarantees issued by Sirona are expected to expire by 2008. Under USGAAP, only guarantees issued after December 31, 2002 are required to bemeasured at fair value and recognized in Sirona’s financial statements.

***Contingencies***

The Company may beinvolved in lawsuits, claims, investigations and proceedings, including patentandcommercialmatters that arise in the ordinary course of business. At September 30,2006, there 

F-41

----

are nosuchmatters pending that the Company expects to be material in relation to itsbusiness, consolidated financial position,results of operations or cash flows.

**19.**          Productwarranty

Thefollowing table provides the changes in the product warranty accrual for theyear ended September 30, 2006

| ** **                                        | ** ** | **Year ended**    | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **September 30,** | ** ** |
| ** **                                        | ** ** | **2006**               | ** ** |
| ** **                                        | ** ** | **$’000s**        | ** ** |
| Opening balance                                   |       |                   | $          | 9,276 |   |   |
| Accruals for warranties  issued during the period |       |                   | 15,453     |   |   |
| Warranty settlements  made during the period      |       |                   | (14,355    | ) |   |
| Translation adjustment                            |       |                   | 505        |   |   |
| Closing balance                                   | ** ** | ** **             | **$**      | **10,879** |   |   |

 

**20.**          Unconditionalpurchase commitments

As of September 30,2006, the Company had unconditional purchase commitments of $43,820, mainly forpurchases of raw material and components. The commitments are due in fiscalyear 2007, ($40,099), in fiscal year 2008, ($3,469) and in fiscal year 2009,($252).

**21.**          Interest

| ** **                             | ** ** | **Successor**          | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** ** | **Predecessor 2** | ** **  | **Predecessor 1** | ** ** |
|----------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|-------------|------------------------|------------|
| ** **                             | ** ** | ** **             | ** ** | **July 1,**       | ** ** | **October 1,**    | ** ** | **February 17,**  | ** **  | **October 1,**    | ** ** |
| ** **                             | ** ** | **Year ended**    | ** ** | **2005 to**       | ** ** | **2004 to**       | ** ** | **2004 to**       | ** **  | **2003 to**       | ** ** |
| ** **                             | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **September 30,** | ** **  | **February 16,**  | ** ** |
| ** **                             | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005**               | ** ** | **2004**               | ** **  | **2004**               | ** ** |
| ** **                             | ** ** | **$’000s**        | ** ** |
| Interest expense                       |       |                   | $          | (45,675                | )          |                   |       | $                      | (8,990      | )                      |       |   | $ | (21,306 | ) |   |   | $ | (12,272 | ) |   |   | $ | (1,895 | ) |   |   |
| Interest expense  from related parties |       |                   | (10,086    | )                      |       |                   | (2,939     | )                      |        |                   | (2,594     | ) |   |   | (2,573 | ) |   |   | (3,730 | ) |   |   |
| Interest income                        |       |                   | 1,486      |                   |       |                   | 842        |                   |        |                   | 1,126      |   |   |   | 432 |   |   |   | 333 |   |   |   |
|                                   | ** ** | ** **             | **$**      | **(54,275**            | **)**      | ** **             | ** ** | **$**                  | **(11,087** | **)**                  | ** ** | ** ** | **$** | **(22,774** | **)** | ** ** | ** ** | **$** | **(14,413** | **)** | ** ** | ** ** | **$** | **(5,292** | **)** | ** ** |   |

**22.**          Pensionplans

***Defined benefit plans***

In Germany the Company traditionally had an unfundeddefined benefit pension plan whose benefits are based primarily on years ofservice and wage and salary group. As of January 1, 2001, the companyreplaced its unfunded defined benefit pension plan with a new definedcontribution plan. All new hires after that date only receive definedcontributions to a pension plan based on a percentage of the employee’seligible compensation. However, due to grandfathering provisions for certainexisting employees hired before that date, the Company continues to beobligated to provide pension benefits which are at a minimum equal to benefitsthat would have been available under the terms of the traditional definedbenefit plans (Grandfathered Benefit). The Grandfathered Benefit andcontributions to the Company’s pension plan made for those employees after January 1,2001 are included in the disclosures for defined benefit plans. The Companyaccounts for the Grandfathered Benefit by recognizing the higher of the definedcontribution obligation or the defined benefit obligation for the minimumbenefit.

In addition, the Company offers defined contributionbenefits under the terms of a Section 401(k) plan to employees in theU.S.

The Company uses an actuarial measurement date of September 30.

F-42

----

Changein the projected benefit obligation and plan assets for all of the Company’sdefined benefit plans is as follows:

| ** **                                            | ** ** | **Successor**          | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | ** **             | ** ** | **July 1,**       | ** ** | **October 1,**    | ** ** |
| ** **                                            | ** ** | **Year ended**    | ** ** | **2005 to**       | ** ** | **2004 to**       | ** ** |
| ** **                                            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** |
| ** **                                            | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005**               | ** ** |
| ** **                                            | ** ** | **$’000s**        | ** ** |
| Projected benefits  obligation at beginning of period |       |                   | $          | 48,547                 |       |                   |       | $ | 47,352 |   |   |   | $ | 38,809 |   |   |
| Service cost                                          |       |                   | 1,149      |                   |       |                   | 906        |   |   |   | 247 |   |   |
| Interest cost                                         |       |                   | 1,941      |                   |       |                   | 476        |   |   |   | 1,563 |   |   |
| Actuarial loss (gain)                                 |       |                   | (431       | )                      |       |                   | 46         |   |   |   | 8,596 |   |   |
| Investment earnings                                   |       |                   | 304        |                   |       |                   | 50         |   |   |   | 164 |   |   |
| Benefits paid                                         |       |                   | (723       | )                      |       |                   | (232       | ) |   |   | (511 | ) |   |
| Currency translation                                  |       |                   | 2,601      |                   |       |                   | (51        | ) |   |   | (1,516 | ) |   |
| Projected benefit  obligation at end of period        |       |                   | 53,388     |                   |       |                   | 48,547     |   |   |   | 47,352 |   |   |
| Fair value of plan  assets at beginning of period     |       |                   | 4,656      |                   |       |                   | 3,839      |   |   |   | 3,772 |   |   |
| Actual return on plan  assets                         |       |                   | 304        |                   |       |                   | 50         |   |   |   | 164 |   |   |
| Employer’s contribution                          |       |                   | 1,268      |                   |       |                   | 831        |   |   |   | — |   |   |
| Benefits paid                                         |       |                   | (51        | )                      |       |                   | (55        | ) |   |   | — |   |   |
| Currency Translation                                  |       |                   | (147       | )                      |       |                   | (9         | ) |   |   | (97 | ) |   |
| Fair value of plan assets  at end of period           |       |                   | 6,030      |                   |       |                   | 4,656      |   |   |   | 3,839 |   |   |
| Funded status                                         |       |                   | $          | (47,358                | )          |                   |       | $ | (43,891 | ) |   |   | $ | (43,513 | ) |   |

 

Componentsof net periodic benefit costs are as follows:

| ** **                | ** ** | **Successor**          | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** ** | **Predecessor 2** | ** ** | **Predecessor 1** | ** ** |
|---------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                | ** ** | ** **             | ** ** | **July 1,**       | ** ** | **October 1,**    | ** ** | **February 17,**  | ** ** | **October 1,**    | ** ** |
| ** **                | ** ** | **Year ended**    | ** ** | **2005 to**       | ** ** | **2004 to**       | ** ** | **2004 to**       | ** ** | **2003 to**       | ** ** |
| ** **                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **September 30,** | ** ** | **February 16,**  | ** ** |
| ** **                | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2004**               | ** ** |
| ** **                | ** ** | **$’000s**        | ** ** |
| Service cost              |       |                   | $          | 1,149                  |       |                   |       | $                      | 906        |                   |       |   | $ | 247 |   |   |   | $ | 1,053 |   |   |   | $ | 163 |   |   |
| Interest cost             |       |                   | 1,941      |                   |       |                   | 476        |                   |       |                   | 1,563      |   |   |   | 1,105 |   |   |   | 792 |   |   |
| Other                     |       |                   | —     |                   |       |                   | —     |                   |       |                   | —     |   |   |   | — |   |   |   | (343 | ) |   |
| Net periodic benefit cost |       |                   | $          | 3,090                  |       |                   |       | $                      | 1,382      |                   |       |   | $ | 1,810 |   |   |   | $ | 2,158 |   |   |   | $ | 612 |   |   |

 

The accumulated benefit obligation as of September 30,2006 and 2005 was $46,248 and $43,720, respectively.

Thereconciliation of the funded status of the Company’s defined benefit plans tothe amounts recognized on the balance sheets is as follows:

| ** **                      | ** ** | **Successor**          | ** ** | **Successor**          | ** ** |
|---------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                      | ** ** | **2006**               | ** ** | **2005**               | ** ** |
| ** **                      | ** ** | **$’000s**        | ** ** |
| Funded status                   |       |                   | $          | (47,358                | )          |   |   | $ | (43,891 | ) |   |
| Recognized pension  provision   |       |                   | (48,167    | )                      |       |   | (43,847 | ) |   |
| Un-recognized net (loss) / gain |       |                   | $          | 809                    |       |   |   | $ | (44 | ) |   |

 

To the extent the defined benefit obligation isrecognized for the Grandfather Benefit, the long-term estimated rate of returnon plan assets is 5% per annum. This rate was based on an appropriate long-termrate for the plan assets held.

F-43

----

Thebenefits expected to be paid in cash of the following five years, and inaggregate for the fiscal years thereafter, are as follows:

| **Year ending September 30,** | ** ** | ** ** | ** ** | **$’000s** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------|------------|
| 2007                                         |       | $          | 1,023      |            |
| 2008                                         |       | 1,220      |       |
| 2009                                         |       | 1,669      |       |
| 2010                                         |       | 1,837      |       |
| 2011                                         |       | 2,035      |       |
| Thereafter                                   |       | 11,404     |       |
| ** **                                   | ** ** | **$**      | **19,188** | ** **      |

 

Thecontributions expected to be made in each of the following five years and inaggregate thereafter are as follows:

| **Year ending September 30,** | ** ** | ** ** | ** ** | **$’000s** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------|------------|
| 2007                                         |       | $          | 1,300      |            |
| 2008                                         |       | 1,335      |       |
| 2009                                         |       | 1,367      |       |
| 2010                                         |       | 1,404      |       |
| 2011                                         |       | 1,418      |       |
| Thereafter                                   |       | 19,823     |       |
| ** **                                   | ** ** | **$**      | **26,647** | ** **      |

 

Weighted-averageassumptions used to determine both benefit obligations and net periodic benefit costsare as follows:

| ** **    | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** ** | **Predecessor 1** | ** ** |
|---------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **    | ** ** | ** **             | ** ** | **July 1,**       | ** ** | **October 1,**    | ** ** | **February 17,** | ** ** | **October 1,** | ** ** |
| ** **    | ** ** | **Year ended**    | ** ** | **2005 to**       | ** ** | **2004 to**       | ** ** | **2004 to** | ** ** | **2003 to** | ** ** |
| ** **    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **September 30,** | ** ** | **February 16,** | ** ** |
| ** **    | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005**               | ** ** | **2004** | ** ** | **2004** | ** ** |
| Discount rate |       |                   | 4.50       | %                      |       |                   | 4.25       | % |   |   | 5.75 | % |   |   | 5.75 | % |   |   | 5.75 | % |   |
|               |            |                        |            |                        |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The plan assets consist of contributions made bySirona to a pension fund managed by an insurance company as custodian, whichinvests these funds. The insurance company guarantees a minimum return on thecontributions. The expected long term return on plan assets is estimated to be5%. This rate is based on an estimated long term return rate for the type ofplan assets held.

TheCompany’s weighted average asset allocations by the insurance company by assetcategory are asfollows:

| ** **               | ** ** | **Successor**          | ** ** | **Successor**          | ** ** |
|--------------------------|------------|------------------------|------------|------------------------|------------|
| ** **               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **               | ** ** | **2006**               | ** ** | **2005**               | ** ** |
| Equity securities        |       |                   | 34.8       | %                      |       |   | 40.5 | % |   |
| Fixed income  securities |       |                   | 52.0       | %                      |       |   | 41.3 | % |   |
| Other                    |       |                   | 13.2       | %                      |       |   | 18.2 | % |   |
|                     |       |                   | 100.0      | %                      |       |   | 100.0 | % |   |

 

F-44

----

***Defined Contribution plans***

The Company made contributions to the German plan of$358 for the twelve month period ended September 30, 2006 (July 1,2005 ended September 30, 2005, $654; October 1, 2004 to June 30,2005, $0; February 17, 2004 to September 30, 2004, $676;October 1, 2003 to February 16, 2004, $0) and contributions to theU.S. plans of $259 for the twelve month period ended September 30, 2006(July 1, 2005 to September 30, 2005, $41; October 1, 2004 toJune 30, 2005, $105; February 17, 2004 to September 30, 2004,$52; October 1, 2003 to February 16, 2004, $46). The Company isobligated to match employee contributions.

**23.**          Segmentreporting

*Descriptionof segments.**  *Sironamanages its business on both a product and geographic basis and has four reportingsegments; Dental CAD/CAM Systems, Imaging Systems, Treatment Centers, andInstruments. There are two regional sales organisations, USA and Other WorldMarkets, which distribute Sirona’s products globally through a network ofindependent distributors to dental practices, clinics and laboratories. TheElectronic Center is a shared facility that manufactures electronic componentsand provides services for all Sirona segments, and to a very limited extent,external parties. Further shared functions including customer service,logistics, site management, IT and administration are operated centrally.

Description of the Company’s segments:

*DentalCAD/CAM Systems.**  *DentalCAD/CAM Systems products comprise CAD/CAM chairside systems for the dentist(CEREC) as well as CAD/CAM systems for the laboratories, such as inlab, inEOSand a central manufacturing service for copings and bridge-frameworks. TheCEREC system allows dentists to prepare restorations in an ‘‘out-of-mouthpre-shaped’ process and insert them into the patient’s mouths during a singleappointment.

*ImagingSystems.**  *Imagingsystems products comprise a broad range of equipment for diagnostic imaging inthe dental practice, using both film-based and digital technologies. Sirona hasdeveloped a broad range of imaging systems for panoramic and intra-oralapplications.

*TreatmentCenters.**  *Sirona’streatment centers comprise a broad range, from standard dentist chairs tosophisticated centers with integrated diagnostic, hygiene and ergonomicfunctionalities, such as C2+ and M1+, as well as specialist centers used inpreventative treatment (ProFeel+) and for training purposes.

*Instruments.**  *Sirona offers a wide range ofhandpiece products, encompassing handheld and power-operated handpieces forcavity preparation, endodontics, periodontology and prophylaxis. The handpiecesare supplemented by multi-function tips, supply and suction hoses, as well ascare and hygiene systems for handpiece preparation. Sirona’s handpieces areoften sold as complete packages in combination with treatment centers. Thedivision also supplies parts for other divisions, especially Treatment Units(OEM turbines and tubes) and CAD/CAM Systems.

F-45

----

Thefollowing tables reflect the results of the Company’s reportable segments underthe Company’s management reporting system. The segment performance measure usedto monitor segment performance is gross profit (‘‘Segment Performance Measure’’).Gross profit, which is based on the records as prepared under statutory Germanaccounting standards, excluding the impact of the EQT Transaction and MDPTransaction, is considered to better reflect the performance of each segment asit eliminates the need to allocate centrally incurred costs and significantpurchase accounting impacts that the Company does not believe arerepresentative of the performance of the segments. Furthermore, the Companymonitors performance geographically by region. As the Company manages itsbusiness on both a product and a geographical basis, U.S. GAAP requiressegmental disclosure based on product information.

| ** **                                 | ** ** | **Successor**          | ** ** | **Successor**          | ** ** | **Predecessor 2** | ** ** | **Predecessor 2** | ** **  | **Predecessor 1** | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|-------------|------------------------|------------|
| ** **                                 | ** ** | **October 1,**    | ** ** | **July 1,**       | ** ** | **October 1,**    | ** ** | **February 17,**  | ** **  | **October 1,**    | ** ** |
| ** **                                 | ** ** | **2005 to**       | ** ** | **2005 to**       | ** ** | **2004 to**       | ** ** | **2004 to**       | ** **  | **2003 to**       | ** ** |
| ** **                                 | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **September 30,** | ** **  | **February 16,**  | ** ** |
| ** **                                 | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005**               | ** ** | **2004**               | ** **  | **2004**               | ** ** |
| ** **                                 | ** ** | **$’000s**        | ** ** |
| **Revenue  External**                      |       |                   |       |                   |       |                   |       |                   |        |                   |       |   |   |   |   |   |   |   |   |   |   |
| Dental CAD/CAM Systems                     |       |                   | $          | 183,810                |       |                   |       | $                      | 31,269      |                   |       |   | $ | 137,699 |   |   |   | $ | 66,454 |   |   |   | $ | 54,319 |   |   |
| Imaging Systems                            |       |                   | 132,726    |                   |       |                   | 27,211     |                   |        |                   | 72,963     |   |   |   | 50,185 |   |   |   | 30,349 |   |   |
| Treatment Centers                          |       |                   | 130,108    |                   |       |                   | 33,235     |                   |        |                   | 95,908     |   |   |   | 73,099 |   |   |   | 50,793 |   |   |
| Instruments                                |       |                   | 71,880     |                   |       |                   | 14,620     |                   |        |                   | 48,575     |   |   |   | 38,129 |   |   |   | 23,724 |   |   |
| **Total**                                  | ** ** | ** **             | **$**      | **518,524**            |       | ** **             | ** ** | **$**                  | **106,335** |                   | ** ** | ** ** | **$** | **355,145** |   | ** ** | ** ** | **$** | **227,867** |   | ** ** | ** ** | **$** | **159,185** |   |   |
| **Revenue  Internal**                      |       |                   |       |                   |       |                   |       |                   |        |                   |       |   |   |   |   |   |   |   |   |   |   |
| Dental CAD/CAM Systems                     |       |                   | $          | —                 |       |                   |       | $                      | —      |                   |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Imaging Systems                            |       |                   | 74         |                   |       |                   | —     |                   |        |                   | 85         |   |   |   | 335 |   |   |   | 72 |   |   |
| Treatment Centers                          |       |                   | 60         |                   |       |                   | —     |                   |        |                   | —     |   |   |   | — |   |   |   | — |   |   |
| Instruments                                |       |                   | 11,355     |                   |       |                   | 2,678      |                   |        |                   | 8,653      |   |   |   | 7,108 |   |   |   | 4,415 |   |   |
| Intercompany elimination                   |       |                   | (11,489    | )                      |       |                   | (2,678     | )                      |        |                   | (8,738     | ) |   |   | (7,443 | ) |   |   | (4,487 | ) |   |
| **Total**                                  | ** ** | ** **             | **$**      | **—**             |       | ** **             | ** ** | **$**                  | **—**  |                   | ** ** | ** ** | **$** | **—** |   | ** ** | ** ** | **$** | **—** |   | ** ** | ** ** | **$** | **—** |   |   |
| **Revenue  Total**                         |       |                   |       |                   |       |                   |       |                   |        |                   |       |   |   |   |   |   |   |   |   |   |   |
| Dental CAD/CAM Systems                     |       |                   | $          | 183,810                |       |                   |       | $                      | 31,269      |                   |       |   | $ | 137,699 |   |   |   | $ | 66,454 |   |   |   | $ | 54,319 |   |   |
| Imaging Systems                            |       |                   | 132,799    |                   |       |                   | 27,211     |                   |        |                   | 73,048     |   |   |   | 50,520 |   |   |   | 30,421 |   |   |
| Treatment Centers                          |       |                   | 130,168    |                   |       |                   | 33,235     |                   |        |                   | 95,908     |   |   |   | 73,099 |   |   |   | 50,793 |   |   |
| Instruments                                |       |                   | 83,236     |                   |       |                   | 17,298     |                   |        |                   | 57,228     |   |   |   | 45,237 |   |   |   | 28,139 |   |   |
| **Total**                                  | ** ** | ** **             | **$**      | **530,013**            |       | ** **             | ** ** | **$**                  | **109,013** |                   | ** ** | ** ** | **$** | **363,883** |   | ** ** | ** ** | **$** | **235,310** |   | ** ** | ** ** | **$** | **163,672** |   |   |
| **Segment  performance measure**           |       |                   |       |                   |       |                   |       |                   |        |                   |       |   |   |   |   |   |   |   |   |   |   |
| Dental CAD/CAM Systems                     |       |                   | $          | 135,678                |       |                   |       | $                      | 22,903      |                   |       |   | $ | 98,677 |   |   |   | $ | 46,438 |   |   |   | $ | 39,781 |   |   |
| Imaging Systems                            |       |                   | 67,686     |                   |       |                   | 11,195     |                   |        |                   | 29,377     |   |   |   | 19,928 |   |   |   | 11,767 |   |   |
| Treatment Centers                          |       |                   | 49,112     |                   |       |                   | 13,074     |                   |        |                   | 32,996     |   |   |   | 21,528 |   |   |   | 17,712 |   |   |
| Instruments                                |       |                   | 35,497     |                   |       |                   | 6,183      |                   |        |                   | 22,691     |   |   |   | 16,514 |   |   |   | 11,226 |   |   |
| **Total**                                  | ** ** | ** **             | **$**      | **287,973**            |       | ** **             | ** ** | **$**                  | **53,355**  |                   | ** ** | ** ** | **$** | **183,741** |   | ** ** | ** ** | **$** | **104,408** |   | ** ** | ** ** | **$** | **80,486** |   |   |
| **Depreciation  and amortization expense** |       |                   |       |                   |       |                   |       |                   |        |                   |       |   |   |   |   |   |   |   |   |   |   |
| Dental CAD/CAM Systems                     |       |                   | $          | 2,042                  |       |                   |       | $                      | 746         |                   |       |   | $ | 1,988 |   |   |   | $ | 1,786 |   |   |   | $ | 1,053 |   |   |
| Imaging Systems                            |       |                   | 2,834      |                   |       |                   | 1,120      |                   |        |                   | 2,890      |   |   |   | 2,238 |   |   |   | 1,163 |   |   |
| Treatment Centers                          |       |                   | 2,372      |                   |       |                   | 655        |                   |        |                   | 2,093      |   |   |   | 1,701 |   |   |   | 742 |   |   |
| Instruments                                |       |                   | 2,722      |                   |       |                   | 756        |                   |        |                   | 1,785      |   |   |   | 1,306 |   |   |   | 652 |   |   |
| **Total**                                  | ** ** | ** **             | **$**      | **9,970**              |       | ** **             | ** ** | **$**                  | **3,277**   |                   | ** ** | ** ** | **$** | **8,756** |   | ** ** | ** ** | **$** | **7,031** |   | ** ** | ** ** | **$** | **3,610** |   |   |

 

F-46

----

***Reconciliation ofthe results of the segment performance measure to the consolidated statementsof operations***

Segmentresults are determined based on the Company’s internal management reportingprocess, which reflects the way management views its businesses, and are notprepared in accordance with US GAAP, which is the basis of accounting used toprepare these consolidated financial statements. The following table anddiscussion provide a reconciliation of the total results of operations andtotal assets of the Company’s business segments under management reporting tothe consolidated financial statements. Inter-segment transactions are based onamounts which management believes approximate the amounts of transactions withunrelated third parties.

| ** **                                                   | ** ** | **Successor**          | ** **  | **Successor**          | ** ** | **Predecessor 2** | ** **  | **Predecessor 2** | ** **  | **Predecessor 1** | ** **  |
|--------------------------------------------------------------|------------|------------------------|-------------|------------------------|------------|------------------------|-------------|------------------------|-------------|------------------------|-------------|
| ** **                                                   | ** ** | ** **             | ** **  | **July 1,**       | ** ** | **October 1,**    | ** **  | **February 17,**  | ** **  | **October 1,**    | ** **  |
| ** **                                                   | ** ** | **Year ended**    | ** **  | **2005 to**       | ** ** | **2004 to**       | ** **  | **2004 to**       | ** **  | **2003 to**       | ** **  |
| ** **                                                   | ** ** | **September 30,** | ** **  | **September 30,** | ** ** | **June 30,**      | ** **  | **September 30,** | ** **  | **February 16,**  | ** **  |
| ** **                                                   | ** ** | **2006**               | ** **  | **2005**               | ** ** | **2005**               | ** **  | **2004**               | ** **  | **2004**               | ** **  |
| ** **                                                   | ** ** | **$’000s**        | ** **  |
| **Revenue**                                                  |       |                   |        |                   |       |                   |        |                   |        |                   |        |   |   |   |   |   |   |   |   |   |   |
| Total segments                                               |       |                   | $           | 518,524                |       |                   |        | $                      | 106,335     |                   |        |   | $ | 355,145 |   |   |   | $ | 227,867 |   |   |   | $ | 159,185 |   |   |
| Electronic centre                                            |       |                   | 181         |                   |       |                   | 4           |                   |        |                   | 971         |   |   |   | 1,243 |   |   |   | 1,159 |   |   |
| Differences management reporting vs U.S. GAAP           |       |                   | 1,899       |                   |       |                   | (1,268      | )                      |        |                   | 2,169       |   |   |   | 106 |   |   |   | (1,743 | ) |   |
| Consolidated revenue                                         | ** ** | ** **             | **520,604** |                   | ** ** | ** **             | **105,071** | ** **             | ** **  | ** **             | **358,285** |   | ** ** | ** ** | **229,216** | ** ** | ** ** | ** ** | **158,601** |   |   |
| **Depreciation and amortization**                            |       |                   |        |                   |       |                   |        |                   |        |                   |        |   |   |   |   |   |   |   |   |   |   |
| Total segments                                               |       |                   | 9,970       |                   |       |                   | 3,277       |                   |        |                   | 8,756       |   |   |   | 7,031 |   |   |   | 3,610 |   |   |
| Electronic Centre and corporate                              |       |                   | 1,864       |                   |       |                   | 383         |                   |        |                   | 1,179       |   |   |   | 989 |   |   |   | 577 |   |   |
| Differences management reporting vs. US GAAP            |       |                   | 55,020      |                   |       |                   | 11,732      |                   |        |                   | 34,220      |   |   |   | 24,683 |   |   |   | 2,343 |   |   |
| Consolidated depreciation and amortization                   | ** ** | ** **             | **66,854**  |                   | ** ** | ** **             | **15,392**  | ** **             | ** **  | ** **             | **44,155**  |   | ** ** | ** ** | **32,703** | ** ** | ** ** | ** ** | **6,530** |   |   |
| **Segment performance measure**                              |       |                   |        |                   |       |                   |        |                   |        |                   |        |   |   |   |   |   |   |   |   |   |   |
| Total segments                                               |       |                   | 287,973     |                   |       |                   | 53,355      |                   |        |                   | 183,741     |   |   |   | 104,408 |   |   |   | 80,486 |   |   |
| Electronic centre and corporate                              |       |                   | 4,266       |                   |       |                   | 1,336       |                   |        |                   | 2,323       |   |   |   | 4,998 |   |   |   | 1,033 |   |   |
| Differences management reporting vs. US GAAP            |       |                   | (50,320     | )                      |       |                   | (21,234     | )                      |        |                   | (27,242     | ) |   |   | (33,128 | ) |   |   | 135 |   |   |
| Consolidated gross profit                                    | ** ** | ** **             | **241,919** |                   | ** ** | ** **             | **33,457**  | ** **             | ** **  | ** **             | **158,822** |   | ** ** | ** ** | **76,278** | ** ** | ** ** | ** ** | **81,654** |   |   |
| Selling, general and administrative expense                  |       |                   | 148,715     |                   |       |                   | 34,544      |                   |        |                   | 93,236      |   |   |   | 65,424 |   |   |   | 33,454 |   |   |
| Research and development                                     |       |                   | 33,107      |                   |       |                   | 7,863       |                   |        |                   | 21,700      |   |   |   | 16,594 |   |   |   | 8,575 |   |   |
| Provision for doubtful accounts and notes receivable         |       |                   | 348         |                   |       |                   | (192        | )                      |        |                   | (127        | ) |   |   | (846 | ) |   |   | 368 |   |   |
| Write off of in-process research and development             |       |                   | 6,000       |                   |       |                   | 33,796      |                   |        |                   | —      |   |   |   | 20,217 |   |   |   | — |   |   |
| Net other operating (income) / loss                          |       |                   | 1,733       |                   |       |                   | (723        | )                      |        |                   | (384        | ) |   |   | 955 |   |   |   | 82 |   |   |
| Foreign currency transaction loss                            |       |                   | (9,873      | )                      |       |                   | 601         |                   |        |                   | 749         |   |   |   | 4,129 |   |   |   | 1,491 |   |   |
| Loss / (gain) on derivative  instruments                     |       |                   | (719        | )                      |       |                   | (1,682      | )                      |        |                   | 4,383       |   |   |   | 1,498 |   |   |   | (1,358 | ) |   |
| Interest expense, net                                        |       |                   | —      |                   |       |                   | 11,087      |                   |        |                   | 22,774      |   |   |   | 14,413 |   |   |   | 5,292 |   |   |
| Other income                                                 |       |                   | 54,275      |                   |       |                   | —      |                   |        |                   | (129        | ) |   |   | — |   |   |   | — |   |   |
| **Income/(Loss)  before income taxes and minority interest** | ** ** | ** **             | **$**       | **8,333**              |       | ** **             | ** **  | **$**                  | **(51,837** | **)**                  | ** **  | ** ** | **$** | **16,620** |   | ** ** | ** ** | **$** | **(46,106** | **)** | ** ** | ** ** | **$** | **33,750** |   |   |

 

F-47

----

The adjustments that theCompany records to reconcile management reporting to the consolidated financialstatements prepared in accordance with U.S. GAAP primarily relate to theexclusion of amortization and depreciation related to the step-up to fair valueof the intangible and tangible assets as a result of the EQT Transaction andthe MDP Transaction. In addition, management reporting is based on German GAAPwhich differs from US GAAP. The main differences between management reportingbased on German GAAP and U.S. GAAP applicable to the Company include:

*Revenue recognition*

Management reportingrecognizes revenue upon shipment of the product. For consolidated financialstatements purposes, revenue is recognized upon risk of loss being transferredto the buyer, which depends in part on the shipping terms.

*Provisions*

Management reportingrecords provisions even though the occurrence of a loss may not be probable ora legal obligation may not exist. For consolidated financial statementspurposes certain provisions such as the allowance for doubtful accounts andloss contingencies are recognized when a loss is probable and reasonablyestimable.

*Inventory*

Management reporting doesnot include inventory overhead costs which relate to the production process.For consolidated financial statements purposes, these overhead costs arecapitalized in inventory.

*Pension expense*

Management reportingmeasures pension expense using the entry age normal approach. For consolidatedfinancial statements purposes, pension expense is recognized using theprojected unit credit method.

*Software costcapitalization*

Management reporting doesnot capitalize costs relating to the development of software for internal useor software that is more than incidental to equipment that is intended to besold. For consolidated financial statements purposes, certain costs that areincurred in the development stage are capitalized for software for internaluse. For software developed and to be included in products that are intended tobe sold, costs that are incurred after the software has achieved technologicalfeasibility are capitalized until the software is available for market release.

*Foreign currencyaccounting*

Until September 30,2005, Management reporting translated the income statements of foreignsubsidiaries at the spot rate at the balance sheet date and only recognizesunrealized losses on foreign currency denominated receivables or payables. Forconsolidated financial statements purposes, the income statements of foreignsubsidiaries are translated using a weighted average rate for the respectiveperiod, whereas foreign currency denominated receivables and payables aretranslated at the rate at the balance sheet date. Since October, 2005 themethod used in management reporting has been adjusted to be consistent with themethod used in the consolidated financial statements.

F-48

----

*Purchase accounting*

Management reporting excludes amortization anddepreciation related to the step-up to fair value of the intangible andtangible assets as a result of the EQT Transaction, the MDP Transaction and theExchange. In addition, management reporting also excludes the incremental costof sales due to the step up in value of inventory recognized in purchaseaccounting. For consolidated financial statements purposes, amortization anddepreciation related to the step up of definite-lived intangibles and tangibleassets are recognized and amortized over their estimated useful lives. Inaddition, incremental costs due to the step-up in value of inventory recognizedin purchase accounting are expensed when revenue for the product is recognized.

Thefollowing information is presented in accordance with U.S. GAAP: 

| ** **             | ** ** | **Successor**          | ** ** | **Successor**          | ** ** |
|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **             | ** ** | **2006**               | ** ** | **2005**               | ** ** |
| ** **             | ** ** | **$’000s**        | ** ** |
| **Total assets**       |       |                   |       |                   |       |   |   |   |   |
| Dental CAD/CAM Systems |       |                   | $          | 757,071                |       |   |   | $ | 755,591 |   |   |
| Imaging Systems        |       |                   | 493,133    |                   |       |   | 177,131 |   |   |
| Treatment Centers      |       |                   | 196,010    |                   |       |   | 203,142 |   |   |
| Instruments            |       |                   | 94,790     |                   |       |   | 102,811 |   |   |
| **Total**              | ** ** | ** **             | **$**      | **1,541,004**          |       | ** ** | ** ** | **$** | **1,238,675** |   |   |
| **Goodwill**           |       |                   |       |                   |       |   |   |   |   |
| Dental CAD/CAM Systems |       |                   | $          | 272,810                |       |   |   | $ | 261,912 |   |   |
| Imaging Systems        |       |                   | 198,049    |                   |       |   | 69,859 |   |   |
| Treatment Centers      |       |                   | 87,650     |                   |       |   | 84,151 |   |   |
| Instruments            |       |                   | 55,040     |                   |       |   | 52,847 |   |   |
| **Total**              | ** ** | ** **             | **$**      | **613,549**            |       | ** ** | ** ** | **$** | **468,769** |   |   |

 

| ** **                                        | ** ** | **Germany**     | ** ** | **United  States** | ** ** | **Rest of  World** | ** ** | **Total**     | ** ** |
|---------------------------------------------------|------------|-----------------|------------|--------------------|------------|-------------------------|------------|---------------|------------|
| ** **                                        | ** ** | **$’000s** | ** ** |
| **Net Sales***                                    |       |            |       |               |       |                    | ** ** | ** **    | ** ** |
| October 1, 2005 to September 30, 2006   |       | $               | 118,378    |               | $          | 156,720                 |       | $             | 245,506    | ** ** | **$** | **520,604** | ** ** |
| July 1, 2005 to September 30, 2005      |       | 27,467          |       | 20,833             |       | 56,771                  | ** ** | **105,071**   | ** ** |
| October 1, 2004 to June 30, 2005        |       | 101,414         |       | 103,457            |       | 153,414                 | ** ** | **358,285**   | ** ** |
| February 17, 2004 to September 30, 2004 |       | 66,888          |       | 52,240             |       | 110,088                 | ** ** | **229,216**   | ** ** |
| October 1, 2003 to February 16, 2004    |       | 41,834          |       | 35,964             |       | 80,803                  | ** ** | **158,601**   | ** ** |
| **Long-lived  assets**                            |       |            |       |               |       |                    | ** ** | ** **    | ** ** |
| September 30, 2006                           |       | 1,025,891       |       | 281,762            |       | 4,051                   | ** ** | **1,311,704** | ** ** |
| September 30,  2005                          |       | 1,026,409       |       | 576                |       | 2,387                   | ** ** | **1,029,372** | ** ** |
|                                                   |            |                 |            |                    |            |                         |            |               |            |  |  |  |  |

 

Duringthe periods of October 1, 2005 through September 30, 2006, July 1,2005 through September 30, 2005, October 1, 2004 to June 30,2005, February 17, 2004 to September 30, 2004, and October 1,2004 to February 16, 2004, revenues from two customers represented 45%,29%, 36%, 28%, and 40% of net sales, respectively. No other customer accountedfor more than 10% of revenues.

----

*                    Sales areallocated to the country in which the customer is located.

F-49

----

**24.**          Relatedparties

***Other related party transactions MDP***

In connection with the MDPTransaction a service agreement has been put in place between Sirona, MDP IVOffshore GP, LP and Harry M. Jansen Kraemer, who is a member of the AdvisoryCommittee to the Board of Luxco Manager. This agreement provides for a one-timepayment of €10,000 ($12,000) from Sirona to the other twoparties for advice, support for negotiating the purchase agreement, preparationof financial models and projections and due diligence services for Sironarelated to the MDP Transaction. The payment was made in the three month periodended September 30, 2005.

***EQT***

In connection with the EQTtransaction, a payment was made, for transaction related services performed byEQT, by Sirona to EQT Northern Europe Limited, Guernsey. The amount paid in theperiod from October 1, 2003 to February 16, 2004 was $5,344, andthere was no amount outstanding at September 30, 2004.

***Sirona Dental Systems SARL, Luxembourg***

Sirona Dental SystemsSARL, Luxembourg was the parent company of Sirona from 1997 until theacquisition of the Company by EQT in February 2004. During this periodSirona incurred fees from Sirona Dental Systems SARL. Amounts charged in theperiod from October 1, 2003 to February 16, 2004 were $202.

***Sirona Equipos Dentales Iberica (‘‘SEDI’’)***

SEDI was a related party of Sirona in the year ended September 30,2003 and for part of the year ended September 30, 2004 due to Sirona’s 25%equity investment in the company. SEDI ceased to be a related party on July 16,2004. On July 16, 2004, Sirona acquired the remaining 75% of the equity inSEDI from the majority shareholder and SEDI therefore became a 100% ownedsubsidiary included within the Company’s consolidated financial statements.SEDI acts as a distributor for Sirona in the Spanish market.

Revenue recorded by Sironarelating to sales to SEDI in the periods from February 17, 2004 to September 30,2004, and for October 1, 2003 to February 16, 2004 were $2,086 and$2,108, respectively.

***BERAG***

The Company considers BERAG, an actuarial firm used bySirona, to be a related party of Sirona. The Managing Director of BERAG, Dr. Blum,is also a member of the Supervisory Board of Sirona Dental Systems GmbH, asubsidiary of Sirona Dental Systems, Inc.

Sirona recorded expensesin relation to BERAG in each of the period being presented as follows; October 1,2005 to September 30, 2006, $94; July 1, 2005 to September 30,2005, $21; October 1, 2004 to June 30, 2005, $67; February 17,2004 to September 30, 2004, $12; October 1, 2004 to February 16,2004, $9. Amounts owed to BERAG as at September 30, 2006 and September 30,2005, were $0 and $69, respectively.

***demedis Group***

Revenue recorded by Sironarelating to sales to the demedis Group, an entity under control of SironaDental Systems SARL and a distributor of Sirona products in certain Europeanmarkets, in the period from October 1, 2003 to February 16, 2004 was$28,258.

F-50

----

***Sirona Holdings S. C.A Luxembourg***

Effective October 1, 2005, an advisory serviceagreement has been signed between the Company and Sirona Holdings S.C.A.,Luxembourg. Under the agreement, Sirona will pay an annual fee to SironaHoldings S.C.A., Luxembourg of €325 ($400), and SironaHoldings S.C.A., Luxemburg will provide to Sirona certain advisory servicesregarding the structure, terms and condition of debt offerings by Sirona,financing sources and options, business development and other services.

**25.**          Subsequentevent

On November 22, 2006, the Company entered into anew senior credit facility, which includes: (1) a term loan A1 in anaggregate principal amount of $150,000 (the “tranche A1 term loan”) availableto Sirona’s subsidiary, Schick Technologies, Inc., as borrower, (2) aterm loan A2 in an aggregate principal amount of Euro 275,000 (the “tranche A2term loan”) available to Sirona’s subsidiary, Sirona Dental Services GmbH, asborrower, and (3) a $150,000 revolving credit facility available to SironaDental Systems GmbH, Schick Technologies, Inc. and Sirona Dental ServicesGmbH, as initial borrowers. The revolving credit facility is available forborrowing in Euro, U.S.$, Yen or any other freely available currency agreed toby the facility agent. Initial borrowings under the new credit facility plusexcess cash were used to retire the outstanding borrowings under the Company’sprevious credit facilities. Each of the facilities has a five-year maturity. Thefacilities are made available on an unsecured basis. Subject to certainlimitations, each European guarantor guarantees the performance of eachEuropean borrower, except itself, and each U.S. guarantor guarantees theperformance of each U.S. borrower, except itself.

Under Sirona’s current financial ratios, the newfacilities bear interest at a margin of 75 basis points plus, in the case ofEuro-denominated loans, EURIBOR and, in the case of other loans, LIBOR. Amargin ratchet has been agreed, which is subject to a certain ratio withrespect of net debt and a defined earnings measure and becomes effective 12months after the initial drawdown of the facility.

The new senior credit facility contains restrictivecovenants that limit Sirona’s ability to make loans, make investments,including in joint ventures, incur additional indebtedness, make acquisitionsor pay dividends, subject to agreed upon exceptions. The Company hasagreed to certain debt covenants in relation to this financing. The covenantsstipulate that the Company must maintain certain ratios in respect of interest paymentsand defined earnings measures. If the Company breaches any of the covenants,the loans will become repayable on demand. The Company has accounted for thisre-financing as a debt extinguishment.

F-51

----

**26.**          Unauditedquarterly information

Thefollowing is a summary of the Company’s unaudited quarterly operating resultsfor the years ended September 30, 2006 and 2005:

| ** **                                                   | ** ** | **Successor**                                                                 | ** ** | **Successor**               | ** ** | **Successor**              | ** ** | **Successor**              | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                   | ** ** | **Sept 30, 2006**                                                   | ** ** | **June 30, 2006** | ** ** | **Mar 31, 2006** | ** ** | **Dec 31, 2005** | ** ** |
| ** **                                                   | ** ** | **$’000s (except for weighted average shares)** | ** ** |
| **Revenue**                                                  |       | $                                                                             | 135,542    |                        | $          | 117,337                    |       |                       | $          | 131,843 |   |   |   | $ | 135,882 |   |   |
| Cost of Sales                                                |       | 76,640                                                                        |       | 65,565                      |       |                       | 66,816     |                       |       |   | 69,664 |   |   |
| **Gross profit**                                             | ** ** | **58,902**                                                                    | ** ** | **51,772**                  | ** ** | ** **                 | **65,027** |                       | ** ** | ** ** | **66,218** |   |   |
| Operating expenses  (income):                                |       |                                                                          |       |                        |       |                       |       |                       |       |   |   |   |   |
| Selling, general  and administrative expense                 |       | 47,603                                                                        |       | 33,470                      |       |                       | 35,339     |                       |       |   | 32,303 |   |   |
| Research and  development                                    |       | 9,968                                                                         |       | 8,166                       |       |                       | 8,026      |                       |       |   | 6,947 |   |   |
| Write off of  in-process research and development            |       | —                                                                        |       | 6,000                       |       |                       | —     |                       |       |   | — |   |   |
| Provision for doubtful accounts and notes receivable         |       | 304                                                                           |       | (138                        | )          |                       | 322        |                       |       |   | (140 | ) |   |
| Other operating  (income) expenses, net                      |       | (572                                                                          | )          | 622                         |       |                       | 1,376      |                       |       |   | 308 |   |   |
| **Operating income**                                         | ** ** | **1,599**                                                                     | ** ** | **3,652**                   | ** ** | ** **                 | **19,964** |                       | ** ** | ** ** | **26,800** |   |   |
| Foreign currency  transactions (gain) / loss                 |       | (392                                                                          | )          | (11,361                     | )          |                       | (3,377     | )                          |       |   | 5,257 |   |   |
| Unrealized loss/(gain) on derivative instruments             |       | 3,050                                                                         |       | (2,397                      | )          |                       | (1,647     | )                          |       |   | 275 |   |   |
| Interest expense,  net                                       |       | 10,382                                                                        |       | 14,893                      |       |                       | 13,545     |                       |       |   | 15,455 |   |   |
| Other income                                                 |       | —                                                                        |       | —                      |       |                       | —     |                       |       |   | — |   |   |
| **(Loss)/income before income taxes and minority  interest** | ** ** | **(11,441**                                                                   | **)**      | **2,517**                   | ** ** | ** **                 | **11,443** |                       | ** ** | ** ** | **5,813** |   |   |
| Income tax (benefit) provision                               |       | (10,103                                                                       | )          | 7,983                       |       |                       | 6,976      |                       |       |   | 2,504 |   |   |
| Minority interest                                            |       | 150                                                                           |       | 45                          |       |                       | 23         |                       |       |   | (1 | ) |   |
| **Net  (loss) / income**                                     | ** ** | **$**                                                                         | **(1,488** | **)**                       | **$**      | **(5,511**                 | **)**      | ** **                 | **$**      | **4,444** |   | ** ** | ** ** | **$** | **3,310** |   |   |
| Income / (loss) per share—basic                         |       | $                                                                             | (0.03      | )                           | $          | (0.14                      | )          |                       | N/A        |   |   |   | N/A |   |   |
| Income / (loss)  per share—diluted                      |       | $                                                                             | (0.03      | )                           | $          | (0.14                      | )          |                       | N/A        |   |   |   | N/A |   |   |
| Weighted average  shares—basic                          |       | 54,599,627                                                                    |       | 38,908,289                  |       |                       | N/A        |                       |       |   | N/A |   |   |
| Weighted average shares—diluted                         |       | 54,599,627                                                                    |       | 38,908,289                  |       |                       | N/A        |                       |       |   | N/A |   |   |

 

F-52

----

 

| ** **                                                   | ** ** | **Successor**              | ** **  | ** **  | ** ** | **Predecessor 2**      | ** ** | **Predecessor 2**       | ** **  | **Predecessor 2**     | ** ** |
|--------------------------------------------------------------|------------|----------------------------|-------------|-------------|------------|-----------------------------|------------|------------------------------|-------------|----------------------------|------------|
| ** **                                                   | ** ** | **Sep 30, 2005** | ** **  | ** **  | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** **  | **Dec 31, 2004** | ** ** |
| ** **                                                   | ** ** | **$’000s**            | ** **  |
| **Revenue**                                                  |       |                       | $           | 105,071     |       |                        |       |                         |        | $                          | 106,372    |   |   |   | $ | 120,385 |   |   |   | $ | 131,528 |   |   |
| Cost of Sales                                                |       |                       | 71,614      |        |       |                        |       |                         | 61,046      |                       |       |   | 65,959 |   |   |   | 72,458 |   |   |
| **Gross profit**                                             | ** ** | ** **                 | **33,457**  | ** **  | ** ** | ** **                  | ** ** | ** **                   | **45,326**  | ** **                 | ** ** | ** ** | **54,426** |   | ** ** | ** ** | **59,070** |   |   |
| Operating expenses  (income):                                |       |                       |        |        |       |                        |       |                         |        |                       |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expense                  |       |                       | 34,544      |        |       |                        |       |                         | 32,677      |                       |       |   | 30,082 |   |   |   | 30,477 |   |   |
| Research and  development                                    |       |                       | 7,863       |        |       |                        |       |                         | 6,740       |                       |       |   | 7,829 |   |   |   | 7,131 |   |   |
| Write off of  in-process research and development            |       |                       | 33,796      |        |       |                        |       |                         | —      |                       |       |   | — |   |   |   | — |   |   |
| Provision for  doubtful accounts and notes receivable        |       |                       | (192        | )           |       |                        |       |                         | (130        | )                          |       |   | 144 |   |   |   | (141 | ) |   |
| Other operating  (income) expenses, net                      |       |                       | (723        | )           |       |                        |       |                         | (471        | )                          |       |   | (560 | ) |   |   | 647 |   |   |
| **Operating income**                                         | ** ** | ** **                 | **(41,831** | **)**       | ** ** | ** **                  | ** ** | ** **                   | **6,510**   | ** **                 | ** ** | ** ** | **16,931** |   | ** ** | ** ** | **20,956** |   |   |
| Foreign currency  transactions loss / (gain)                 |       |                       | 601         |        |       |                        |       |                         | 8,578       |                       |       |   | 3,437 |   |   |   | (11,266 | ) |   |
| Unrealized (gain) / loss on derivative instruments           |       |                       | (1,682      | )           |       |                        |       |                         | 4,304       |                       |       |   | 1,093 |   |   |   | (1,014 | ) |   |
| Interest expense,  net                                       |       |                       | 11,087      |        |       |                        |       |                         | 7,035       |                       |       |   | 7,725 |   |   |   | 8,014 |   |   |
| Other income                                                 |       |                       | —      |        |       |                        |       |                         | (129        | )                          |       |   | — |   |   |   | — |   |   |
| **(Loss)/income before income taxes and minority  interest** | ** ** | ** **                 | **(51,837** | **)**       | ** ** | ** **                  | ** ** | ** **                   | **(13,278** | **)**                      | ** ** | ** ** | **4,676** |   | ** ** | ** ** | **25,222** |   |   |
| Income tax  (benefit) provision                              |       |                       | (5,796      | )           |       |                        |       |                         | (3,234      | )                          |       |   | 1,722 |   |   |   | 6,956 |   |   |
| Minority interest                                            |       |                       | (6          | )           |       |                        |       |                         | (236        | )                          |       |   | 286 |   |   |   | — |   |   |
| **Net  (loss) / income**                                     | ** ** | ** **                 | **$**       | **(46,035** | **)**      | ** **                  | ** ** | ** **                   | ** **  | **$**                      | **(9,808** | **)** | ** ** | ** ** | **$** | **2,668** |   | ** ** | ** ** | **$** | **18,266** |   |   |

 

F-53

----