|                                    
|------------------------------------
|UNITED
  STATES                     
|SECURITIES
  AND EXCHANGE COMMISSION
|Washington, D.C. 20549              
|                                    
|FORM
  10-K                         

|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934    
|  |                                                                                           
|  | For
  the fiscal year ended September 30, 2006                                            
|  |                                                                                           
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
  THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
from          to

Commission file number: 000-21377

|                                                      
|------------------------------------------------------
|ROFIN-SINAR
  TECHNOLOGIES INC.                       
|                                                      
|(Exact name of Registrant as specified in its charter)

|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 38-3306461                         
|                                                              |  |                                    
|(State of other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              |  |                                    
|40984 Concept Drive, Plymouth, MI                             |  | 48170                              
|                                                              |  |                                    
|(Address of principal executive offices)                      |  | (Zip Code)                         

Registrants
telephone number, including area code: (734) 455-5400

Securities
registered pursuant to Section 12(b) of the Act: NONE

Securities
registered pursuant to Section 12(g) of the Act:

|                   
|-------------------
|Title of each class
|                   

Common Stock, $.01 par value
Rights Associated with Common Stock, par value $.01 per Share


Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No
x

Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes x No o

Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes x No o

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.

|                          |  |                     |  |                        
|------------------------- |  | ------------------- |  | -----------------------
|Large accelerated filer x |  | Accelerated filer o |  | Non-accelerated filer o

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No
x

The aggregate
market value of the voting and non-voting common equity held by non-affiliates
of the Registrant based upon the closing price of the common stock on March 31,
2006 as reported by the NASDAQ National market was approximately
$823,953,328.00. For the purposes hereof, affiliates include all executive
officers and directors of the registrant.

15,419,500
shares of the Registrants common stock, par value $.01 per share, were
outstanding as of December 6, 2006.

Certain
sections of the Companys Proxy Statement to be filed in connection with the
Companys 2007 Annual Meeting of Stockholders to be held in March 2007 are
incorporated by reference herein at Part III, Items 10-14.

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ROFIN-SINAR TECHNOLOGIES INC.

TABLE OF CONTENTS

|         |          |                                                                                                                      |  |     
|-------- | -------- | -------------------------------------------------------------------------------------------------------------------- |  | ----
|         |          |                                                                                                                      |  | Page
|         |          |                                                                                                                      |  |     
|PART I   |          |                                                                                                                      |  |     
|         |          |                                                                                                                      |  |     
|         | ITEM 1.  | BUSINESS                                                                                                             |  | 1   
|         |          |                                                                                                                      |  |     
|         | ITEM 1A. | RISK FACTORS                                                                                                         |  | 17  
|         |          |                                                                                                                      |  |     
|         | ITEM 1B. | UNRESOLVED STAFF COMMENTS                                                                                            |  | 21  
|         |          |                                                                                                                      |  |     
|         | ITEM 2.  | PROPERTIES                                                                                                           |  | 22  
|         |          |                                                                                                                      |  |     
|         | ITEM 3.  | LEGAL PROCEEDINGS                                                                                                    |  | 23  
|         |          |                                                                                                                      |  |     
|         | ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                  |  | 23  
|         |          |                                                                                                                      |  |     
|PART II  |          |                                                                                                                      |  |     
|         |          |                                                                                                                      |  |     
|         | ITEM 5.  | MARKET PRICE FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
  MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |  | 23  
|         |          |                                                                                                                      |  |     
|         | ITEM 6.  | SELECTED FINANCIAL DATA                                                                                              |  | 24  
|         |          |                                                                                                                      |  |     
|         | ITEM 7.  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
  RESULTS OF OPERATIONS                              |  | 25  
|         |          |                                                                                                                      |  |     
|         | ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                           |  | 32  
|         |          |                                                                                                                      |  |     
|         | ITEM 8.  | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                             |  | 32  
|         |          |                                                                                                                      |  |     
|         | ITEM 9.  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE                               |  | 33  
|         |          |                                                                                                                      |  |     
|         | ITEM 9A. | CONTROLS AND PROCEDURES                                                                                              |  | 33  
|         |          |                                                                                                                      |  |     
|         | ITEM 9B. | OTHER INFORMATION                                                                                                    |  | 34  
|         |          |                                                                                                                      |  |     
|PART III |          |                                                                                                                      |  |     
|         |          |                                                                                                                      |  |     
|         | ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                            |  | 34  
|         |          |                                                                                                                      |  |     
|         | ITEM 11. | EXECUTIVE COMPENSATION                                                                                               |  | 34  
|         |          |                                                                                                                      |  |     
|         | ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
  RELATED STOCKHOLDER MATTERS                     |  | 34  
|         |          |                                                                                                                      |  |     
|         | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
  INDEPENDENCE                                           |  | 35  
|         |          |                                                                                                                      |  |     
|         | ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                               |  | 35  
|         |          |                                                                                                                      |  |     
|PART  IV |          |                                                                                                                      | 
|         |          |                                                                                                                      |  |     
|         | ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                           |  | 36  

i

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PART I

Cautionary Note Regarding Forward-Looking
Statements

Certain
statements in this Annual Report on Form 10-K constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995 (the Reform Act). Forward-looking statements include all statements
that do not relate solely to historical or current facts, and can be identified
by the use of words such as may, believe, will, expect, project,
anticipate, estimate, plan or continue. These forward-looking
statements are based on the current plans and expectations of our management
and are subject to a number of uncertainties and risks that could significantly
affect our current plans and expectations, as well as future results of
operations and financial condition.

These factors
include (among others):

| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | downturns in
  the machine tool, automotive, semiconductor and electronics industries which
  may have, in the future, a material adverse effect on sales and profitability
  of the Company;
| |   |                                                                                                                                                                                              
| |  | the ability
  of the Companys OEM-customers to incorporate its laser products into their
  systems;                                                                                         
| |   |                                                                                                                                                                                              
| |  | the impact of
  exchange rate fluctuations, which may be significant because a substantial
  portion of the Companys operations is located overseas;                                        
| |   |                                                                                                                                                                                              
| |  | the level of
  competition and the ability of the Company to compete in the markets for its
  products;                                                                                      
| |   |                                                                                                                                                                                              
| |  | the Companys
  ability to develop new and enhanced products to meet market demand or to
  adequately utilize its existing technology;                                                       
| |   |                                                                                                                                                                                              
| |  | third party
  infringement of the Companys proprietary technology or third party claims
  against the Company for the infringement or misappropriation of their
  proprietary rights;       
| |   |                                                                                                                                                                                              
| |  | competing
  technologies that are similar to or that serve the same uses as the Companys
  technology;                                                                                      
| |   |                                                                                                                                                                                              
| |  | the scope of
  patent protection that the Company is able to obtain or maintain;                                                                                                             
| |   |                                                                                                                                                                                              
| |  | the
  Companys ability to efficiently manage the risks associated with its
  international operations; and                                                                                  
| |   |                                                                                                                                                                                              
| |  | the other
  risks described under ITEM 1A - Risk Factors.                                                                                                                                  

In making
these forward-looking statements, we claim the protection of the safe-harbor
for forward-looking statements contained in the Reform Act. We do not assume
any obligation to update these forward-looking statements to reflect actual
results, changes in assumptions, or changes in other factors affecting such
forward-looking statements.

|        |         
|------- | --------
|ITEM 1. | BUSINESS

COMPANY OVERVIEW AND HISTORY

Rofin-Sinar
Technologies Inc., a newly listed NASDAQ Company in 1996 (herein also referred
to as Rofin or RSTI or the Company or we, us or our) is a
leader in
the design, development, engineering, manufacturing and marketing of
laser-based products, primarily used for cutting, welding and marking a wide
range of materials. Lasers are a non-contact technology for material
processing, which have several advantages compared to conventional manufacturing
tools that are desirable in industrial applications. The Companys lasers all
deliver a high-quality beam at guaranteed power outputs and feature compact
design, high processing speed, flexibility, low operating and maintenance costs
and easy integration into the customers production process. As a technological
leader in CO2, solid-state lasers and diode lasers,
the Company is able to meet a broad range of its customers material processing
requirements.

1

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Based on
projected 2006 industry data for laser products used for macro (cutting and
welding) applications and marking and micro (fine cutting, fine welding, and
perforating) applications combined, the Company believes it has a worldwide
market share (based on sales volume) of approximately 20% and that it is among
the largest suppliers of laser products used for marking applications
worldwide. The Company has sold more than 40,000 laser sources since 1975 and
currently has over 3,000 active customers (including multinational companies
with multiple facilities purchasing from the Company). During fiscal 2006,
2005, and 2004, approximately 49%, 50%, and 49%, respectively, of the Companys
revenues related to sales of laser products for macro applications and
approximately 51%, 50%, and 51%, respectively, related to sales of laser
products for marking and micro applications.

Through its
global manufacturing, distribution and service network, the Company provides a
comprehensive range of laser sources and laser-based system solutions to three
principal target markets: the machine tool, automotive, and semiconductor and
electronics industries. The Company sells directly to end-users and to original
equipment manufacturers (OEMs) (principally in the machine tool industry)
that integrate Rofins laser sources with other system components. Many of
Rofins customers are among the largest global participants in their respective
industries. During fiscal 2006, 2005, and 2004, 30%, 29%, and 22%,
respectively, of the Companys sales were in North America, 48%, 54%, and 59%,
respectively, were in Europe and 22%, 17%, and 19%, respectively, were in Asia.
See Note 13, Geographic Information, to the consolidated financial statements
for further information.

The
consolidated                 financial
statements included in this Annual Report on Form 10-K present the historical
financial information of Rofin-Sinar Technologies Inc. and its wholly-owned
subsidiaries. These financial statements include the consolidated accounts of
Rofin-Sinar, Inc. (RS Inc.), PRC Laser Corp. (PRC), Lee Laser, Inc. (Lee)
and Rofin-Sinar Technologies Europe S.L. (RSTE). RS Inc. owns 100% of
Rofin-Baasel Canada Ltd. (RCA) (formed in May 2006) and 100% of DILAS
Diodelaser Inc. (formed in October 2005). RSTE, a European holding company
formed in 1999, owns 100% of Rofin-Sinar Laser GmbH (RSL), 95% of Dilas
Diodenlaser GmbH (Dilas), 100% of Rofin-Baasel Italiana S.r.l., 100% of
Rofin-Baasel France S.A., 80% of Rofin-Sinar UK Ltd., 100% of Rofin-Baasel UK
Ltd., 100% of Rofin-Baasel Benelux B.V., 100% of Rofin-Baasel Singapore Pte.
Ltd., 100% of Rofin-Baasel Taiwan Ltd., 100% of Rofin-Baasel Korea Co., Ltd.,
and 100% of Rofin-Baasel Espana S.L. (RBE).

The financial
statements of PRC include the consolidated accounts of PRC Laser Europe N.V., Belgium.

The financial
statements of RSL include the consolidated accounts of its 88%-owned
subsidiary, Rofin-Baasel Japan Corporation, its 100%-owned subsidiary,
Rasant-Alcotec Beschichtungstechnik GmbH (Rasant), its 100%-owned subsidiary,
Carl Baasel Lasertechnik GmbH & Co. KG (CBL), its 90%-owned subsidiary
Optoskand AB (Optoskand), its 100%-owned subsidiary, CBL
Verwaltungsgesellschaft GmbH and its 80%-owned subsidiary Rofin-Baasel China
Co., Ltd. .

The financial
statements of CBL include the consolidated accounts of its wholly-owned
subsidiaries, Rofin-Baasel, Inc., Wegmann-Baasel Laser und elektrooptische
Geraete GmbH, and PMB Elektronik GmbH, as well as its 40% equity investment in
H2B Photonics GmbH.

On February
28, 2004, the Company acquired 90% of the share capital of Optoskand AB,
Gothenburg, Sweden, through its wholly-owned subsidiary RSL. The Company has a
call option exercisable beginning in 2009 for the remaining 10% of the common
stock for a fixed price of Euro 0.1 million. Accordingly, the Companys
financial statements present Optoskand as if it was 100% owned.

On March 29,
2004, the Company issued and sold 2.5 million shares of its common stock in an
underwritten public offering at a price of $28.00 per share. The underwriters
exercised their over-allotment option resulting in an additional 360,000 shares
of common stock being issued and sold on April 8, 2004. The Company realized
net proceeds of $75.3 million as a result of these transactions.

On August 20,
2004, the Company acquired an additional 15% of the share capital of Dilas
Diodenlaser GmbH, Mainz, Germany, through its wholly-owned subsidiary RSTE. The
Company currently holds 95% of the share capital.

On August 31,
2004, the Company acquired 100% of the share capital of PRC Laser Corporation
based in Landing, New Jersey (including its wholly-owned European subsidiary
PRC Laser Europe N.V., Oudenaarde, Belgium), and Lee Laser, Inc., based in
Orlando, Florida.

2

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On October 22,
2004, the remaining 17% of the share capital of Rofin-Baasel Espana S.L. was
purchased by the Company through RSTE under an option agreement between the
Company and the former minority shareholder.

On December 9,
2004, the Company purchased an additional 5% of the share capital of
Rofin-Sinar U.K. Ltd. through RSTE under an option agreement between the
Company and the minority shareholders. The Company held 76% of the share
capital as a result of this purchase.

On December 2,
2005, the Company purchased an additional 4% of the share capital of
Rofin-Sinar U.K. Ltd. through Rofin-Sinar Technologies Europe S.L. under an
option agreement between the Company and the former minority shareholders. The
Company currently holds 80% of the share capital of Rofin-Sinar U.K. Ltd. This
purchase resulted in goodwill of $0.5 million.

On March 23,
2006, the Company acquired 40% of the share capital of H2B Photonics GmbH,
Garbsen (Germany) through its wholly owned subsidiary Carl Baasel Lasertechnik
GmbH & Co. KG. H2B Photonics GmbH specializes in the development,
manufacturing and sales of laser-based systems used to cut brittle materials,
such as glass, to produce perfectly cut edges.

BUSINESS STRATEGY

The Companys
business strategy is to maximize shareholder value by (i) strengthening its
position as a leading supplier to the global market for macro (cutting and
welding) applications; (ii) capitalizing on its leadership position in marking
applications; (iii) extending its position in micro (fine cutting, fine welding
and perforating) applications; (iv) cross-selling its various laser products to
its existing large customer base; (v) enlarging its market coverage
geographically and by developing new applications, and (vi) strengthening its
product portfolio and customer base through acquisitions.

The Company
believes that the major sources of its future growth will be the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Developing
  New Laser Products through Technological Innovation: Product innovation in
  response to evolving customer needs for increased output power, greater
  penetration and higher processing speeds is a key component of the Companys
  strategy. The Company is currently focusing its research and development
  activity on increasing the output power of its CO2, diffusion
  cooled, wave-guide Slab lasers and enhancing the performance of its line of
  high power, fast flow CO2 lasers. The Company is also further
  expanding its series of end pumped, solid-state lasers for marking and micro
  applications and is actively engaged in the development of diode pumped,
  solid-state lasers using a process commonly referred to as disc design.
  This type of solid-state laser is capable of performing heavy industrial
  material processing applications, as well as fine cutting and fine welding
  applications, more precisely than previously possible.                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Focusing on
  Cross-Selling to Existing Customers in Target Markets: The Company intends to
  continue to focus its sales and marketing activities on the machine tool,
  automotive, semiconductor and electronics, and medical device industries. The
  Company has targeted and will continue to target these industries because
  they use advanced manufacturing processes that require continuing investments
  to improve production efficiency and because the Company has significant
  market presence in these sectors. To exploit its opportunities by developing
  new applications for existing laser technologies, the Company is exploring
  the potential for use of high-power CO2 lasers in car body
  assembly by using its Remote Welding System concept in response to the
  interest shown by sub suppliers to car manufacturers in reducing their
  reliance on spot-welding guns. In addition, building on the success of its
  laser marking of small integrated circuits, the Company intends to develop
  new applications, such as fine welding and micro soldering for the semiconductor
  and electronics industry. In the packaging industry, the Company is seeking
  new opportunities for foil perforation based on its extensive knowledge of
  paper perforation with lasers.

3

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Capitalizing
  on Global Presence to Attract New Customers: The Company intends to
  capitalize on its customer base and the presence of its manufacturing, sales
  and service operations in the three principal geographic markets in which its
  customers operate (North America, Europe and the Asia/Pacific region) to
  increase market share in its existing industrial and geographic markets. The
  Company believes its global manufacturing, distribution and service network
  allows it to be more responsive to customers needs and positions it to
  expand into additional promising markets which offer high long-term potential
  for growth.                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Offering
  Customized Solutions Based on Standard Platforms: While the Company offers a
  wide range of laser applications and develops customized solutions for its
  customers, these applications and solutions are built on a focused number of
  product families comprised of standardized laser sources. For example, for
  its OEM customers in the machine tool industry, the Company provides
  customized power supply packaging services. For its marking customers, the
  Company combines its standard laser marker with customized parts handling and
  software. For its micro applications customers, the Company delivers its
  standard laser sources in different customized packages. The Company believes
  that this product strategy has contributed to increases in product sales and
  intends to continue offering focused customization services and pursuing its
  initiatives to standardize its core products so as to lower its production
  costs and continue to improve its profitability.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Acquiring
  Complementary Business Operations or Products: Since 1997 the Company has
  successfully completed and integrated seven acquisitions, including its
  acquisitions of Dilas (1997), assets of Palomar Technologies UK Ltd. (1998), RasantAlcotec
  Beschichtungstechnik GmbH (1999), Baasel Lasertech (2000), Z-Laser S.A.
  (2001), Optoskand AB (2004), PRC Laser Corporation (2004), and Lee Laser,
  Inc. (2004). Management believes that, collectively, these
  acquisitions have advanced the Companys worldwide expansion, consolidated
  the Companys position in the industrial laser material processing market and
  contributed to the Companys financial performance during the last several
  years. The Company will continue to seek opportunities to make value-based
  acquisitions that complement its business operations, broaden its product
  offerings or provide access to new geographical markets.                                                                                

THE INDUSTRIAL
LASER MARKET FOR MATERIAL PROCESSING

Over the past
30 years, lasers have revolutionized industrial manufacturing and have been
used increasingly to provide reliable, flexible, non-contact, compact and
high-speed alternatives to conventional technologies for processing various
kinds of metal and non-metal materials in a broad range of advanced manufacturing
applications. The industrial laser market is generally considered to be made up
of laser sources sold for industrial applications including material
processing, medical therapeutic, instrumentation, research, telecommunications,
optical storage, entertainment, image recording, inspection, measurement and
control, bar-code scanning and other end-uses.

LASER TECHNOLOGY

The term
laser is an acronym for Light Amplification by Stimulated Emission of
Radiation. Lasers were first developed in the early 1960s in the United
States. A laser consists of an active lasing medium that gives off its own
light (radiation) when excited, an optical resonator with a
partially-reflective output mirror at one end, a fully-reflective rear mirror
at the other that permits the light to bounce back and forth between the
mirrors through the lasing medium, and an external energy source used to excite
the lasing medium. A laser works by causing the energy source to excite (pump)
the lasing medium, which converts the energy from the source into an emission
consisting of particles of light (photons). These photons stimulate the release
of more photons, as they are reflected between the two mirrors, which form the
resonator. The resulting build-up in the number of photons is emitted in the
form of a laser beam through an output port or window. By changing the energy
and the lasing medium, different wavelengths and types of laser light can be
produced. The laser produces light from the lasing medium to achieve the
desired intensity, uniformity and wavelength through a series of reflective
mirrors. The heat generated by the excitation of the lasing medium is
dissipated through a cooling mechanism, which varies according to the type of
laser technology.

4

---



Lasers are
used for material processing because of the excellent focusability of laser
beams. When focused through lenses and mirrors, the energy density in the focus
spot is so high that metals and other materials can be melted and vaporized.
The principal factors that distinguish different types of lasers and determine
the particular laser suitable for a specific application are pulse duration,
wavelength, output power, spatial coherence and cost per watt of laser power.
The three principal types of laser technologies currently used for material
processing are CO2 lasers, solid-state lasers and diode lasers. CO2
lasers, which use CO2 gas as the lasing medium, are divided into
high-power (above 500 watts) and low-power (below 500 watts) applications.
There are two methods for CO2 excitation, radio frequency (RF or
HF) and direct current (DC) excitation. Most high-power CO2
lasers are based on gas flow, in which a continuous supply of fresh laser gas
flows through the laser cavity to create the energy necessary for excitation.
Due to their ability to generate comparatively high levels of continuous-wave
(CW) power, CO2 lasers are a particularly attractive laser medium
for material processing applications. Material processing applications for CO2
laser sources vary according to the power output and configuration of the laser
system. The primary applications for high-power CO2 lasers are
cutting and welding of metal. Low-power CO2 lasers are used
principally for marking, cutting and engraving of non-metal materials. While
both low- and high-power CO2 lasers are used for cutting, the
materials they are used to process and their physical size can vary
significantly.

Solid-state lasers use flash lamps or laser
diodes as source of excitation and are referred to as flash-lamp pumped or diode-pumped.
The lasing medium is a solid-state crystal, generally in the form of a rod or a
disc. The crystal material is either Neodymium Yttrium Aluminium Garnet
(Nd:YAG) or Neodymium Vanadate (Nd:YVO4). The crystal rod is
positioned in a cavity, which is either a gold or ceramic reflector, and pumped
using flash lamps or laser diodes from the side, or alternatively the rod is
pumped from its ends with laser diodes. Typical output powers vary from 3 to
500 watts from a single rod and output powers up to 6,000 watts can be achieved
by combining several cavities within a resonator. Solid-state lasers can be run
either in a pulsed or continuous-wave manner. Marking applications generally
require higher pulsing frequencies which are achieved by inserting a Q-switch,
which is a fast electro-optical shutter, into the laser resonator, enabling
frequencies to be switched up or down in multiples of 10 kHz at a time. Recent
development efforts in the area of solid-state lasers have focused on a process
commonly referred to as disc design. In the disc design the lasing medium
is a thin crystal (typically Ytterbium:YAG) disc, which is excited by laser
diodes in an optical multi-pass configuration.

Diode lasers
involve the production of laser light in a special semiconductor structure on a
Gallium Arsenide (GaAs) basis. A typical 10 mm long diode laser bar contains
approximately 25 single laser emitters. When mounted on a specially designed,
highly-efficient heat sink, a diode bar is able to produce up to 50 watts of
laser output power. A single high-power diode module consists of: (1) a
semiconductor wafer bar; (2) a micro channel cooling device, on which the laser
bar is mounted; and (3) a micro-lens system, which is mounted in front of the
laser bar and which collimates the laser beam in the high-divergent optical
axis. Power can be increased by stacking several diode modules on top of each
other. Through optical combination of such stacks, output power in the kilowatt
range can be achieved. Diode lasers typically have larger spot diameters when
focused, and are typically used for surface treatment, soldering and plastic
welding.

THE COMPANYS LASER PRODUCTS

The Company
distinguishes itself from the majority of its competitors who specialize in
only one or two of the three principal laser technologies for material
processing by offering its customers CO2, solid-state and diode
laser sources and solutions in a variety of configurations and options. As a
technological leader in CO2 lasers, solid-state and diode lasers,
the Company is able to meet a broad range of its customers cutting, welding,
and marking requirements. The Companys lasers all deliver a high-quality beam
at guaranteed power outputs and feature compact design, high processing speed,
flexibility, low operating and maintenance costs, and easy integration into the
customers production process. The Companys engineers and other technical
experts work directly with the customer in the Companys applications centers
to develop and customize the optimal solution for the customers manufacturing
requirements.

The Company
currently offers a comprehensive range of laser products and related services
for three principal material processing applications:

| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | cutting and
  welding (macro applications);                        
| |   |                                                                    
| |  | marking; and                                                       
| |   |                                                                    
| |  | fine
  cutting, fine welding, and perforating (micro applications).

5

---



Besides
offering laser systems for some specialized niche applications, the Company
works directly with its customers to develop and customize optimal solutions
for their unique manufacturing requirements. In developing its laser-based
solutions, the Company offers customers its expertise in:

| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | product
  development and manufacturing services based on more than 30 years of laser
  technology experience and applications know-how;                                                            
| |   |                                                                                                                                                                                                     
| |  | application
  and process development, which means developing new laser-based applications
  for manufacturing customers and assisting them in integrating lasers into
  their production processes;
| |   |                                                                                                                                                                                                     
| |  | system
  engineering, which means advising customers on machine design, including
  tooling, automation and controls for customers in need of turn-key
  solutions; and                           
| |   |                                                                                                                                                                                                     
| |  | extensive
  after-sales support of its laser products, including technical support, field
  service, maintenance and training programs, and rapid spare parts delivery.                             

The following
table sets forth the Companys net sales of laser products used for macro
applications and of laser products used for marking and micro applications in
fiscal 2006, 2005, and 2004:

|                                   |  |                |         |      |   |         |  |   |         | 
|---------------------------------- |  | -------------- | ------- | ---- | - | ------- |  | - | ------- | 
|                                   |  | September 30,  |        
|                                   |  |                |        
|Product
  Category*                |  | 2006           |         | 2005 |   | 2004    | 
|                                   |  |                |         |      |   |         | 
|                                   |  | (in thousands) |        
|                                   |  |                |         |      |   |         |  |   |         | 
|Laser macro
  products             |  | $              | 207,258 |      | $ | 189,241 |  | $ | 158,820 | 
|Laser
  marking and micro products |  |                | 213,632 |      |   | 185,950 |  |   | 163,808 | 
|                                   |  |                |         |      |   |         |  |   |         | 
|                                   |  | $              | 420,890 |      | $ | 375,191 |  | $ | 322,628 | 
|                                   |  |                |         |      |   |         |  |   |         | 

|  |                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------
| 
|* | For each
  product category, net sales include sales of service (including training,
  maintenance and repair) and spare parts.

The laser
sources sold by the Company consist of a laser head (containing the lasing
medium, resonator, source of excitation, resonator mirrors and cooling
mechanism), power supply, and microcontroller (for control and monitoring). For
a more detailed discussion of the components of a laser source, see Laser
Technology. Products are offered in different configurations and utilize
different design principles according to the desired application.

The following
table sets forth the Companys product categories by principal markets and
principal applications:

|                         |  |                                                                         |  |                                                                     
|------------------------ |  | ----------------------------------------------------------------------- |  | --------------------------------------------------------------------
|PRODUCT CATEGORY         |  | PRINCIPAL MARKETS                                                       |  | PRINCIPAL APPLICATIONS                                              
|                         |  |                                                                         |  |                                                                     
|                         |  |                                                                         |  |                                                                     
|Laser macro
  products   |  | Machine tool                                                            |  | Cutting and
  welding of metals                                     
|                         |  |                                                                         |  |                                                                     
|                         |  | Automotive                                                              |  | Cutting and
  welding of metals                                     
|                         |  |                                                                         |  |                                                                     
|Laser
  marking products |  | Semiconductor
  and electronics                                         |  | Marking of
  integrated circuits, electronic components, smart cards
|                         |  |                                                                         |  |                                                                     
|                         |  | Automotive                                                              |  | Marking of
  labels and car components                              
|                         |  |                                                                         |  |                                                                     
|Laser micro
  products   |  | Dental and
  jewelry, medical components, semiconductor and electronics |  | Spot
  welding, fine cutting, micro structuring                     
|                         |  |                                                                         |  |                                                                     
|                         |  | Paper,
  plastic foils                                                  |  | Perforating
  of cigarette tip paper and packaging foils            

6

---



LASER MACRO PRODUCTS

The Companys
business strategy for its macro laser business is to grow its revenues by:

| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increasing
  its market share in its existing CO2 laser market through
  increased sales of its low- and high- power, diffusion cooled, wave guide
  Slab lasers;                                
| |   |                                                                                                                                                                                                  
| |  | developing
  diffusion-cooled Slab lasers with higher output power to achieve higher
  welding depths and faster speeds and thereby widen their potential usage;                                 
| |   |                                                                                                                                                                                                  
| |  | further
  developing the Remote Welding System, Tube Welding, Profile Welding, and
  Scanner Welding concepts;                                                                                   
| |   |                                                                                                                                                                                                  
| |  | continuing
  ongoing product engineering for its diode pumped, solid state lasers to
  further penetrate the market and to further increase the output power for
  heavy automotive applications.

The Companys
family of CO2 laser products for macro applications, and their
principal markets and applications, are discussed below.

|               |  |                 |  |                       |  |                      |  |                            | 
|-------------- |  | --------------- |  | --------------------- |  | -------------------- |  | -------------------------- | 
|LASER
  SERIES |  | POWER
  RANGE   |  | MODE OF 
  EXCITATION |  | PRINCIPAL 
  MARKETS |  | APPLICATIONS               | 
|               |  |                 |  |                       |  |                      |  |                            | 
|DC Slab Series |  | 1.0 kW - 8.0 kW |  | High Frequency        |  | Machine tool         |  | Cutting and welding        | 
|HFSeries       |  | 4.0 kW - 8.0 kW |  | High Frequency        |  | Automotive           |  | Welding                    | 
|SC Series      |  | 100 W - 600 W   |  | High Frequency        |  | Machine tool         |  | Cutting and 
  structuring | 
|XL Series      |  | 1.0 kW - 1.5 kW |  | Direct Current        |  | Machine tool         |  | Cutting and welding        | 
|STS Series     |  | 2.0 kW - 5.0 kW |  | Direct Current        |  | Machine tool         |  | Cutting and welding        | 
|FH Series      |  | 6.0 kW - 7. kW  |  | Direct Current        |  | Machine tool         |  | Cutting and welding        | 

The Company
believes that it is the only laser manufacturer of diffusion cooled, Slab-based
lasers in the high-power range. In the DC Slab Series laser design, a
radio-frequency excited gas discharge occurs between two water-cooled
electrodes that have a large surface area that permits maximum heat
dissipation. The core diffusion cooled, wave-guide technology is protected by
three patents, and the Company has exclusive license rights to this technology
on a worldwide basis for power levels above 500 watts for material processing
applications. Principal markets for the Slab Series lasers are the machine tool
and automotive industries.

The Companys
HF Series lasers combine proven cross-flow design principles with modern
high-frequency discharge excitation technology. The Company ships this product
predominantly to customers in the automotive industry, and their sub-suppliers,
in the United States and Europe, where it has been used in a significant number
of welding applications, including transmissions, tailored blanks, steel tubes
and many other car parts and components.

The Companys
XL, STS, and FH Series fast-axial flow CO2 lasers are used for both
cutting and welding applications marketed under the PRC brand. In the
fast-axial flow principle, the gas discharge occurs in a tube in the same
direction as the resonator, through which the laser gas mixture flows at a high
speed. XL, STS, and FH Series products are used primarily by the machine tool
industry.

The Companys
SC Series diffusion cooled, wave-guide CO2 lasers are developed and
produced by Rofin-Sinar UK Ltd.. The SC Series are sealed-off lasers, which are
also based on the Slab laser principle used for the DC Slab Series. These
lasers are used for cutting and structuring applications. Principal markets are
the machine tool and automotive industries.

The Companys
family of solid-state laser products for macro applications, and their
principal markets, are discussed below.

|               |  |                 |  |                   |  |                     |  |                     | 
|-------------- |  | --------------- |  | ----------------- |  | ------------------- |  | ------------------- | 
|LASER
  SERIES |  | POWER
  RANGE   |  | MODE OFEXCITATION |  | PRINCIPAL
  MARKETS |  | APPLICATIONS        | 
|               |  |                 |  |                   |  |                     |  |                     | 
|DP Series      |  | 1.0 kW - 4.0 kW |  | Laser Diodes      |  | Automotive          |  | Cutting and welding | 
|DS Series      |  | 1.0 kW - 3.0 kW |  | Laser Diodes      |  | Automotive          |  | Cutting and welding | 
|LY Products    |  | 1.0 kW          |  | Flash lamp        |  | Automotive          |  | Cutting and welding | 

7

---



Rofins
DP/DS/LY Series of continuous wave, solid-state lasers are designed exclusively
for use with flexible fiber-optic beam delivery systems, making them
particularly well-suited for integration into complex production systems for
cutting and welding applications. The LY product is a flash lamp pumped solid
state laser mainly targeting low price markets. The key competitive advantages
of the DP/DS Series lasers are the fact that they are diode-pumped and that
they are designed to allow multiple power output configurations. These
configurations include continuous wave, pulsed and power ramping modes, which
allow Rofin to address a wide range of customer applications. In addition,
several features of the DP/DS Series laser are designed for easy maintenance,
such as the simple modular resonator design, easily accessed power supply and
PC-based controller equipped with a modem, which allows communication with a
remote service center. The diode pumping technology is characterized by high
beam quality and high efficiency. These lasers are used principally in the
automotive industry.

The Companys
family of diode laser products for welding, soldering and surface treatment
applications, and their principal markets, are discussed below.

|               |  |               |  |                       |  |                             |  |                               | 
|-------------- |  | ------------- |  | --------------------- |  | --------------------------- |  | ----------------------------- | 
|LASER
  SERIES |  | POWER
  RANGE |  | MODE OF 
  EXCITATION |  | PRINCIPAL 
  MARKETS        |  | APPLICATIONS                  | 
|               |  |               |  |                       |  |                             |  |                               | 
|Diode Lasers   |  | 10 W - 3.6 kW |  | Direct Current        |  | Electronics 
  Machine tool |  | Soldering
  Surface treatment | 

The Companys
diode lasers are designed to meet the requirements of a wide range of welding,
soldering, and surface treatment applications. The Companys high-power laser
diodes can be stacked into arrays achieving output powers in the multiple
kilowatt range. In addition to their use in the automotive, machine tool and
electronics markets, these lasers are also sold into the medical device and research
markets. Additionally, laser diodes are sold as components both internally and
externally.

LASER MARKING
PRODUCTS

The company
entered the laser-marking business in 1989 when it acquired Laser Optronic GmbH
from Coherent General Inc. and designed and introduced the PowerLine laser
marker. Since then the Company has developed a broad line of market leading
laser markers that deliver optimal results in terms of quality and speed on a
wide range of materials. Based on its vast experience, ROFIN offers
standardized and customized laser marking systems for use in various industrial
segments. Strength and experience in research and development, application and
software ensure innovative, tailored solutions which meet most exigent customer
demands. The Companys laser marking products incorporate high value-added
software VisualLaser Marker and LaserCAD - to facilitate use in the customers
own environment.

|                                                                                                                                          |   |                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------- | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company
  believes that the following factors have contributed to the growth that it
  has experienced in the laser marking business:
|                                                                                                                                          |   |                                                                                                                                                                                                                                          
|                                                                                                                                          |  | the
  Companys ability to tailor its laser marking solutions to the customers
  requirements;                                                                                                                                          
|                                                                                                                                          |   |                                                                                                                                                                                                                                          
|                                                                                                                                          |  | the
  Companys expertise in solid-state laser beam power, mode structure and
  high-frequency switching capability which provides optimal quality in terms
  of marking contrast and speed on a wide variety of materials;              
|                                                                                                                                          |   |                                                                                                                                                                                                                                          
|                                                                                                                                          |  | the
  Companys proprietary software  VisualLaserMarker and LaserCAD - which
  provides an interface between the laser marking products and the customers
  computers and supports a broad range of network communication software; and
|                                                                                                                                          |   |                                                                                                                                                                                                                                          
|                                                                                                                                          |  | the
  Companys innovative character which is reflected in cutting-edge products
  which satisfy standard as well as complex market requirements.                                                                                        

8

---



The Companys
business strategy for its laser marking business is four-fold:

| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to expand
  its position in worldwide laser marking markets with particular focus on the
  automotive, semiconductor and electronics industries;
| |   |                                                                                                                                                 
| |  | to offer a
  balanced product portfolio covering different technologies which addresses
  high-end and general application markets;             
| |   |                                                                                                                                                 
| |  | to practice
  market and application development with existing and new products; and                                                            
| |   |                                                                                                                                                 
| |  | to
  capitalize on its installed base of lasers by cross-selling the Companys
  products to the existing customers.                            

The Companys
family of laser marking products is as follows:

|                                 |  |                                                                              |  |                                                                                           |  |                                                                   |  |                                                                                                | 
|-------------------------------- |  | ---------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- | 
|LASER
  SERIES                   |  | POWER
  RANGE                                                                |  | MODE OF 
  EXCITATION                                                                     |  | PRINCIPAL 
  MARKETS                                              |  | APPLICATIONS                                                                                   | 
|                                 |  |                                                                              |  |                                                                                           |  |                                                                   |  |                                                                                                | 
|PowerLine 
  StarMark Series     |  | 2 W  120 W                                                                  |  | laser diodes, flash 
  lamps or CO2                                                       |  | Semiconductor, 
  electronics, 
  general marking 
  applications |  | IC marking, marking 
  of metals plastics and 
  organic materials, 
  Day and Night 
  design | 
|MultiScan 
  VectorScan          |  | 100 W                                                                        |  | High Frequency                                                                            |  | Packaging                                                         |  | Consumer goods 
  marking                                                                      | 
|LabelMarker E 
  Easymark        |  | Stand-alone laser based system 
  Laser workstation                          |  | Automotive 
  general marking 
  applications, 
  medical 
  components, tool 
  industry |  | Label marking 
  Metal and plastics 
  marking                    | 
|SLM series 
  CombiLine E Series |  | Laser work station for integration 
  of a wide range of ROFIN laser markers |  | general marking
  applications                                                            |  | Metal and plastics 
  marking                                     | 

PowerLine/StarMark
Series  The Companys standard PowerLine and StarMark laser marking products
consist of a range of 2 watts to 120 watts lasers with a galvo-head, a personal
computer with state-of-the-art processor and Rofins proprietary
VisualLaserMarker and LaserCAD software. The modular design of the PowerLine
and StarMark markers with 19 components enable the customers to order the most
suitable configuration for their production processes or systems (e.g. OEM
customers may order the laser head and 19 modules, for easy integration into
the system specified by the end user). The PowerLine and StarMark solid-state lasers
incorporate either diode modules or a dual or single lamp ceramic cavity design
using long-life lamps both of which result in higher output power (and
therefore higher marking speeds), higher energy efficiency (and therefore
reduced operating costs), high beam quality (and therefore constant and
reliable marking quality), and longer service intervals. New-generation,
completely air-cooled solutions ensure besides compact dimensions further
increase in efficiency. The Companys proprietary VisualLaserMarker and
LaserCAD software provide the customers with a user-friendly software
environment that allows them to select fonts, import graphics, preview marking
and control all laser parameters and job programs. Special options and
accessories include a double marking head allowing speeds of up to 1,200
characters per second in certain applications (most notably marking of
integrated circuits), as well as beam-switching and -splitting options for
marking of products in multiple production lines using a single laser. Their
main application - among a wide variety of possible applications - is the
marking of plastics and smartcards in the semiconductor and electronics
industries.

MultiScan VS 
This vector scanning marker utilizes a 100 watts sealed-off CO2
laser and features the ability to mark components that are moving at high
speeds. The main application is the marking of consumer goods in the packaging
industry.

LabelMarker E
- This stand-alone laser based system is Rofins state-of-the art solution when
it comes to high demands concerning speed and reliability in the process of
label marking. The LabelMarker E ensures high efficiency and a short marking
time due to an integrated, powerful laser. Flexible parameter settings enable
the marking of pictures and machine readable symbols. As an elaborate
all-in-one solution, the LabelMarker E is compact and comfortable. This laser
system with the safety class 1 can be used in any production area without
additional safety requirements.

9

---



EasyMark -
EasyMark is a class 1 transportable desktop device. The 100 V  240 V
connection and an integrated cooling based on thermo-electrical technology
guarantee quick and easy initial operation. The EasyMark offers a
program-controlled z axis and a rotary axis which can optionally be integrated.
An aluminum T-slot plate facilitates mounting of customer-specific workpiece
carriers. Processing of workpieces of different size and shape is thus
possible.

SLM Series /
CombiLine E Series  These compact laser workstations have been designed for
small and medium-size batches. They integrate a wide range of ROFIN laser
markers depending on the customers specific application. Supply units are
incorporated in the housing to provide efficient use of the floor space.
Different versions either with rotary or work table with various axes enable
exact adaptation to the required tasks.

LASER MICRO PRODUCTS

After the
acquisition of Baasel Lasertech, the Company formed a separate sales and
marketing group focused on micro applications. This group markets and sells a
broad range of laser products, including lamp pumped, pulsed, solid-state
lasers for various spot welding and fine cutting applications, CO2
Slab lasers for perforating applications, Q switched, solid-state lasers for
surface structuring and diode lasers for soldering and plastic welding
applications. Relying on its many years of experience in perforating cigarette
paper, the Company is pursuing new perforating applications in the packaging
industry.

The Companys
business strategy for its micro applications business is to:

| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | further
  increase its share of the manual spot welding market in the jewelry and
  dental industries and develop customers in other industries that use a
  similar product and technology for industrial applications, such as tool
  repair;
| |   |                                                                                                                                                                                                                                                
| |  | focus on
  manufacturers of medical instruments and implants within the medical device
  industry using mainly the applications cutting and welding                                                                                            
| |   |                                                                                                                                                                                                                                                
| |  | increase its
  sales of perforating systems to the packaging industry for applications like
  easy-tear and special perforated foils for food packaging that allow the
  transfer of air and keep moisture in packaged goods; and              
| |   |                                                                                                                                                                                                                                                
| |  | develop a
  new market for plastic welding, glass cutting, and solar-cell structuring
  applications.                                                                                                                                          

The Companys
family of laser products for micro applications is as follows:

|                  |  |               |  |                       |  |                                          |  |                     | 
|----------------- |  | ------------- |  | --------------------- |  | ---------------------------------------- |  | ------------------- | 
|LASER
  SERIES    |  | POWER
  RANGE |  | MODE OF 
  EXCITATION |  | PRINCIPAL 
  MARKETS                     |  | APPLICATIONS        | 
|                  |  |               |  |                       |  |                                          |  |                     | 
|StarWeld Series   |  | 20 W - 500 W  |  | Flash Lamp            |  | Jewelry, 
  Medical Device 
  Electronic |  | Spot welding        | 
|DS Disc Series    |  | 60 W - 750 W  |  | Diode                 |  | Electronics                              |  | Cutting/Structuring | 
|StarCut Series    |  | 12 W - 150 W  |  | Flash Lamp/Diode      |  | Medical                                  |  | Fine cutting        | 
|PerfoLas Systems  |  | n.a.          |  | n.a.                  |  | Paper                                    |  | Perforating         | 
|StarShape Systems |  | n.a.          |  | n.a.                  |  | Packaging                                |  | Perforating         | 
|Series 800        |  | 2 W - 500 W   |  | Flash Lamp            |  | OEM                                      |  | Micro/Marking       | 
|Series 600        |  | 25 W - 100 W  |  | Flash Lamp            |  | OEM                                      |  | Micro/Marking       | 
|Series LDP        |  | 10 W - 200 W  |  | Diode                 |  | OEM                                      |  | Micro/Marking       | 
|Series LEP        |  | 4 W - 6 W     |  | Diode                 |  | OEM                                      |  | Micro/Marking       | 

StarWeld Series
 Rofins standard StarWeld laser products consist of pulsed solid-state lasers
in the range of 20 watts to 500 watts. Although the StarWeld Series has a wide
variety of possible applications, its main application is the fine welding of
jewelry, electronics, and dental parts.

DS Disc Series
 Rofins Disc laser products use laser diodes as the source of excitation to
pump a thin crystal (disc). The output power is in the range of 60 watts to 750
watts and the main application is structuring or cutting of electronics.

10

---



StarCut Series
 Rofins StarCut laser products use pulsed solid-state lasers in the range of
12 watts to 150 watts. Their main application is the fine cutting of medical
devices.

PerfoLas
Systems  The PerfoLas Systems consist of a high-power CO2 laser and
a specially designed beam delivery and paper handling system that includes a
laser beam splitter (PerfoLas Multiplexer) which allows customers to drill more
than 500,000 holes per second into paper or foils. The main application for these
lasers is perforation of cigarette tip paper.

StarShape
Systems  The StarShape Systems consist of a CO2 or solid-state
laser in combination with a galvo scanning head and is used for precise
cutting, drilling, and surface structuring.

The Series 600
and 800 are flashlamp pumped, solid-state lasers sold to OEM-customers and
system integrators for various micro and marking applications.

The Series LDP
and LEP are diode pumped, solid-state lasers sold to OEM-customers and system
integrators for various micro and marking applications.

APPLICATIONS DEVELOPMENT

In addition to
manufacturing and selling laser sources for macro applications and marking and
micro applications, Rofin operates application centers in eight countries where
it develops laser-based solutions for customers seeking alternatives to
conventional manufacturing techniques. Revenues derived from application
development are not a significant component of total revenues. Applications
development is generally a support service to the sales and marketing function
and is performed to customize the laser to the particular needs of the
customer. The Company currently has approximately 30 employees in applications
development.

MARKETS AND CUSTOMERS

Rofin sells
its laser products and laser-based system solutions to a wide range of
industries. Our three principal markets are the machine tool, automotive, and
semiconductor and electronics industries. The following table sets forth the
allocation of the Companys total laser sales among our principal markets:

|                                   |  |              |   |      |    |      |  |                      |   |  |                                                                               | 
|---------------------------------- |  | ------------ | - | ---- | -- | ---- |  | -------------------- | - |  | ----------------------------------------------------------------------------- | 
|                                   |  | Fiscal Years |   |      |   
|                                   |  |              |   |      |   
|Principal
  Market                 |  | 2006         |   | 2005 |    | 2004 |  | Primary Applications |  
|                                   |  |              |   |      |    |      |  |                      |  
|Machine Tool                       |  | 31           | % |      | 33 | %    |  | 33                   | % |  | Cutting and
  welding                                                         | 
|                                   |  |              |   |      |    |      |  |                      |   |  |                                                                               | 
|Semiconductor
  and 
  Electronics |  | 18           | % |      | 12 | %    |  | 16                   | % |  | Marking of
  integrated 
  circuits, electronic 
  components and smart cards | 
|                                  
|Automotive                         |  | 7            | % |      | 9  | %    |  | 14                   | % |  | Cutting,
  welding and 
  component marking                                   | 
|                                   |  |              |   |      |    |      |  |                      |   |  |                                                                               | 
|                                   |  | 56           | % |      | 54 | %    |  | 63                   | % |  |                                                                               | 

The remaining
44%, 46%, and 37%, of total laser sales in fiscal 2006, 2005, and 2004, respectively,
were attributable to customers in a wide variety of other industries including
aerospace, consumer goods, medical device manufacturers, job shops, jewelry,
universities and institutes. No one customer accounted for over 10% of total
sales in any of these periods.

11

---



SALES,
MARKETING AND DISTRIBUTION

Rofin sells
its products in approximately 40 countries to OEMs, systems integrators and
industrial end-users who have in-house engineering resources capable of
integrating Rofins products into their own production systems. Lasers for
cutting applications are marketed and sold principally to OEMs in the machine
tool industry who sell laser cutting machines incorporating Rofins products
without any substantial involvement by Rofin. Lasers for welding applications
are marketed and sold both to systems integrators and to end-users. Laser
marking products are marketed and sold directly to end-users and to OEMs for
integration into their handling systems (mainly for integrated circuit and
smart card marking applications). Laser micro products are marketed and sold
directly to end-users and to OEM-customers (mainly for jewelry and dental
applications). In the case of both welding lasers and laser marking products,
the end-user is significantly involved in the selection of the laser component
and will often specify to the OEM that it desires a Rofin laser. In these
cases, Rofins application engineers work directly with the end-user to
optimize the applications performance and demonstrate the advantages of the
Companys products.

Rofin has
approximately 115 direct sales engineers operating in 24 countries,
approximately 35 of whom are dedicated to marketing lasers for macro
applications and approximately 80 of whom are dedicated to marketing laser for
marking and micro applications. Rofin sales engineers work either in a
well-defined geographic territory or are dedicated to specific industries or
applications. In addition, Rofin has 20 independent representatives marketing
the Companys laser products in Australia, Argentina, Brazil, Denmark, Finland,
India, Israel, Mexico, Northern Africa, the Philippines, Russia, Singapore,
South Africa, Sweden, Eastern Europe, China, Thailand, and the United Kingdom.
These independent representatives provide Rofin with sales leads and
opportunities, but do not distribute Rofins products. All sales and delivery
of product are conducted by the Company. Twelve of the independent
representative agreements are on an exclusive basis, with the other eight on a
non-exclusive basis. These agreements provide for a standard percentage of the
net sales price to be paid as commissions to the representatives. The duration
of the agreements is usually one year (with an automatic one-year extension)
and a six months cancellation clause.

Rofin directs
its worldwide sales and marketing of lasers for macro applications from its
offices in Hamburg (Germany), and of laser diode components, from Mainz
(Germany) and Tucson, Arizona. Worldwide sales and marketing of laser marking
products is directed from Rofins offices in Gunding-Munich (Germany) and, for
laser micro products and power supplies, from Starnberg (Germany). In Europe,
Rofin also maintains sales and service offices in Belgium, France, Italy, the
Netherlands, Spain, Switzerland, and the United Kingdom.

North American
sales of Rofins macro and micro laser products are managed out of the
Companys Plymouth, Michigan, facility and marking products are managed out of
its Boxborough, Massachusetts, facility.The Company also maintains a sales office
in Tempe, Arizona, to support the expansion of Rofins laser marking business
in the North American market and a new sales and service office in Mississauga,
Canada to support the Canadian market.

PRC Laser
directs its worldwide sales and marketing of lasers for macro applications from
its office in Landing, New Jersey, while Lee Laser directs its worldwide sales
and marketing of laser for micro applications from its office in Orlando,
Florida. Both companies sell their products independently under their own
brand.

The Company
maintains sales and service offices in Japan, Singapore, South Korea, Taiwan,
and China to cover the Asia/Pacific region. Over the next five years, the
Company expects demand for industrial lasers to increase in the Asia/Pacific
region. The Company believes that the geographic market with the greatest
long-term potential over the next 10 to 15 years is China, principally due to
the expansion of domestic automobile and semiconductor and electronic
production in that country. The Company has a technology license agreement with
the Nanjing Electric Laser Center, or NELC, under which NELC manufactures CO2
laser sources for sale in the Chinese market.

CUSTOMER SERVICE, REPLACEMENT PARTS AND
COMPONENTS

During fiscal
2006, 2005, and 2004, approximately 35% of the Companys revenues were
generated from sales of after-sales services, replacement parts and components
for laser products. The Company believes that a high level of customer support
is necessary to successfully develop and maintain long-term relationships with
its OEM and end-user customers. This close relationship is maintained as
customers needs change and evolve.

12

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Recognizing
the importance of its existing and growing installed multinational customer
base, the Company has expanded its local service and support platform into new
geographic regions. Rofin has 312 customer service personnel. The Companys
field service and in-house technical support personnel receive ongoing training
with respect to the Companys laser products, maintenance procedures, laser
-operating techniques, and processing technology. Most of the Companys
OEM-customers also provide customer service and support to end-users.

Many of
Rofins laser products are operated 24 hours a day in high speed, quality-oriented
manufacturing operations. Accordingly, the Company provides 24 hour, year-round
service support to its customers in the United States, Germany, and the
majority of other countries in which it operates. The Company plans to continue
adopting similar service support elsewhere. In addition, eight-hour response
time is provided to certain key customers. This support includes field service
personnel who reside in close proximity to the Companys installed base. The
Company provides customers with process diagnostic and verification techniques,
as well as specialized training in the operation and maintenance of its
systems. The Company also offers regularly scheduled and intensive training
programs and customized maintenance contracts for its customers.

Of Rofins 312
customer service personnel, approximately 200 employees operate in the field in
50 countries. Field service personnel are also involved in the installation of
the Companys systems.

Rofins
approach to the sale of replacement parts is closely linked to the Companys
strategic focus on rapid customer response. The Company provides
around-the-clock order entry and provides same or next day delivery of parts
worldwide in order to minimize disruption to customers manufacturing
operations. Rofin typically provides a minimum one-year warranty for its
products with warranty extensions negotiated on a case-by-case basis. It agrees
to after-sales service and parts supply up to a period of 10 years, if
requested by a customer. The Companys growing base of installed laser sources
and laser-based systems is expected to continue to generate a stable source of
parts and service sales.

In addition,
the Company offers components such as laser diodes, fiber optic delivery
systems, and power supplies. These high technology components are mainly
integrated by other laser manufacturer into their product portfolio.

COMPETITION

Laser Macro Products

The market for
laser macro products and systems is fragmented and includes a large number of
competitors, many of which are small or privately owned or which compete with
Rofin on a limited geographic, industry-specific or application-specific basis.
The Company also competes in certain target markets with competitors that are
part of large industrial groups and have access to substantially greater
financial and other resources than Rofin. Competition among laser manufacturers
is also based on attracting and retaining qualified engineering and technical
personnel. The overall competitive position of the Company will depend upon a
number of factors, including product performance and reliability, price,
customer support, manufacturing quality, the compatibility of its products with
existing laser systems, and the continued development of products utilizing the
technologies of diode lasers and diode pumped, solid-state lasers.

Rofin believes
it is among the top three suppliers of laser sources in the worldwide market
for macro applications. Companies such as Trumpf and Fanuc (for high-power CO2lasers), Excel/Synrad and Coherent (for low-power CO2 lasers),
Trumpf and IPG (for solid-state lasers) and Laserline and Jenoptik (for diode
lasers and laser diodes) compete in certain of the markets in which Rofin
operates. However, in the Companys opinion, none of these companies compete in
all of the industries, applications and geographic markets currently served by
Rofin. We believe that only Trumpf has a product range and worldwide presence
similar to that of the Company. The Company believes that it has a competitive
advantage over these companies due to its exclusive access (for material
applications of 500 watts and above) to the patented diffusion cooling
technology incorporated in its CO2 Slab lasers. See Intellectual
Property.

13

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Laser Marking and Micro Products

Significant
competitive factors in the laser marking and micro market include system
performance and flexibility, cost, the size of each manufacturers installed
base, capability for customer support and breadth of product line. Because many
of the components required to develop and produce a laser product for marking
and micro applications are commercially available, barriers to entry into this
market are low and the Company expects new competitive products to enter this
market. The Company believes that its product range for marking and micro
applications will compete favorably in this market primarily due to the
performance and price characteristics of such products.

The Companys
laser marking products compete with conventional ink-based and acid-etching
technologies, as well as with laser mask-marking. The Companys micro products
compete with conventional welding, etching and spark erosion technologies. The
Company believes that its principal competitors in the laser marking and micro
market include Trumpf, GSI Group, Unitek Miyachi, Lasag, IPG and Excel/Control
Laser.

Rofin also
competes with manufacturers of conventional non-laser products in applications
such as welding, drilling, soldering, cutting, and marking. The Company
believes that as manufacturing industries continue to modernize, seek to reduce
production costs and require more precise and flexible production, the features
of laser-based systems will become more desirable than systems incorporating
conventional material processing techniques and processes. The increased
acceptance of these laser applications by industrial users will be enhanced by
laser product line expansion to include lower and higher power CO2
lasers, advancements in fiber-optic beam delivery systems, improvements in
reliability, and the introduction of lower and higher power diode lasers and
diode pumped, solid-state lasers capable of performing heavy industrial
material processing and marking and micro applications.

MANUFACTURING AND ASSEMBLY

Rofin
manufactures and tests its high-power CO2 and solid-state laser
macro products at its Hamburg (Germany), Plymouth, Michigan, Landing, New
Jersey, Atsugi-shi (Japan) and Kingston upon Hull (UK) facilities. The
Companys laser marking products are manufactured and tested at its facilities in
Gunding-Munich (Germany), Starnberg (Germany), Singapore, Boxborough,
Massachusetts and Orlando, Florida. Rofins micro application products are
manufactured and tested in Starnberg (Germany). The Companys diode laser
products are manufactured and tested at its Mainz (Germany) and Tucson, Arizona
facilities. The Companys low-power CO2 laser products are
manufactured and tested in Kingston upon Hull (UK). Coating of Rofins Slab
laser electrodes is performed at the Overath (Germany) facility. The Companys
fiber optics and beam delivery systems are manufactured and tested in
Gothenburg (Sweden), and power supplies are manufactured and tested in
Starnberg (Germany).

Given the
competitive nature of the laser business, the Company focuses substantial
efforts on maintaining and enhancing the efficiency and quality of its
manufacturing operations. The Company utilizes just-in-time and cell-based
manufacturing techniques to reduce manufacturing cycle times and inventory
levels, thus enabling it to offer on-time delivery and high-quality products to
its customers.

Rofins
in-house manufacturing includes only those manufacturing operations that are
critical to achieve quality standards or protect intellectual property. These
manufacturing activities consist primarily of product development, testing of
components and subassemblies (some of which are supplied from within the
Company and others of which are supplied by third party vendors and then
integrated into the Companys finished products), assembly and final testing of
the completed product, as well as proprietary software design and
hardware/software integration. Although the Company minimizes the number of
suppliers and component types wherever practicable it has at least two sources
of supply for key items. Rofin has a qualifying program for its vendors and
generally seeks to build long-term relationships with such vendors. The Company
purchases certain major components from single suppliers. The Company estimates
that 18% of its revenues are from the sale of products that require specialized
components currently only available from single sources. Rofin has written
agreements with such suppliers and has not had material delays in supplies from
these sources. The Company believes that it could, if necessary, purchase such
components from alternative sources, within four to six months, following
appropriate qualification of such new vendors.

14

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Rofin is
committed to meeting internationally recognized manufacturing standards. Its
Hamburg, Gunding-Munich, Starnberg, and Mainz facilities are ISO 9001
certified. In addition, the following facilities are ISO 9002 certified:
Pamplona (Spain), Milan (Italy), Paris (France), Willerby (UK), Gothenburg
(Sweden) and Singapore.

RESEARCH AND DEVELOPMENT

During fiscal
2006, 2005, and 2004, Rofins net spending on research and development was
$24.0 million, $22.6 million, and $20.5 million, respectively. The Companys
net spending on research and development reflects receipt of funding under
German government and European Union grants totaling $1.2 million, $0.9
million, and $1.1 million, in fiscal 2006, 2005, and 2004, respectively. Rofin
has approximately 190 employees engaged in product research and development.

Rofins
research and development activities are directed at meeting customers
manufacturing needs and application processes. Core competencies include CO2
gas lasers, solid-state lasers, diode lasers, precision optics, electronic
power supplies, fiber optics, beam delivery, control interfaces, software
programming and systems integration. The Company strives for customer-driven
development activities and promotes the use of alliances with key customers and
joint development programs in a wide range of its target markets.

The Companys
research and development activities are carried out in nine centers in Hamburg,
Gunding-Munich, Starnberg, and Mainz (all Germany), Kingston upon Hull (UK),
Gothenburg (Sweden), Plymouth, Michigan, Landing, New Jersey, and Orlando,
Florida (all USA), and are centrally coordinated and managed. Rofin maintains
close working relationships with the leading industrial, government and
university research laboratories in Germany, including the Fraunhofer Institute
for Laser Technology in Aachen, the Institute for Technische Physik of the
German Space and Aerospace Research Center in Stuttgart, the Fraunhofer
Institute for Material Science in Dresden, the Laser Center in Hannover, and
elsewhere around the world, including the University of Edinburgh in the United
Kingdom. These relationships include funding of research, joint development
programs, personnel exchange programs, and licensing of patents developed at
these institutes.

INTELLECTUAL PROPERTY

Rofin owns
intellectual property, which includes patents, proprietary software, technical
know-how and expertise, designs, process techniques and inventions.

While policies
and procedures are in place to protect critical intellectual property rights,
Rofin believes that its success depends to a larger extent on the innovative
skills, know-how, technical competence and abilities of Rofins personnel. The
Company is also a worldwide licensee of two U.S. patents, one Japanese patent
and their corresponding foreign counterparts, which expire in 2007, 2009, and
2010, respectively. These licenses are exclusive for industrial material
processing applications of 500 watts and above for the diffusion cooled,
wave-guide technology used in the Companys Slab Series CO2 lasers
and non-exclusive for applications below 500 watts. In Rofins view, the
technology protected by these three patents represents a significant step
forward in industrial laser technology for material processing and is an
important source of Rofins current revenues and future growth and
profitability.

Rofin protects
its intellectual property in a number of ways including, in certain
circumstances, patents. Rofin has sought patent protection primarily in the
United States, Europe, and Japan. Rofin currently holds 158 separate patents
for inventions relating to lasers, processes and power supplies with expiration
dates ranging from 2007 to 2024. In addition, 44 patent applications have been
filed and are under review by the relevant patent authorities. Rofin requires
its employees and certain of its customers, suppliers, representatives, agents and
consultants to enter into confidentiality agreements to further safeguard
Rofins intellectual property.

Rofin, from
time to time, receives notices from third parties alleging infringement of such
parties patent or other intellectual property rights by Rofins products.
While these notices are common in the laser industry and Rofin has in the past
been able to develop non-infringing technology or license necessary patents or
technology on commercially reasonable terms, Rofin cannot assure that it would
in the future prevail in any litigation seeking damages or expenses from Rofin
or to enjoin Rofin from selling its products on the basis of such alleged
infringement. Nor can Rofin assure that it would be able to develop any
non-infringing technology or to license any valid and infringed patents on
commercially reasonable terms. In the event any third party made a valid claim
against Rofin or its customers and a license were not made available to Rofin
on commercially reasonable terms, Rofin would be adversely affected.

15

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From time to
time, Rofin files notices of opposition to certain patents on laser
technologies held by others, including academic institutions and competitors of
Rofin, which the Company believes could inhibit its ability to develop laser products
for industrial material processing applications.

ORDER BACKLOG

The Companys
order backlog was $84.9 million, $76.3 million, and $72.8 million, as of
September 30, 2006, 2005, and 2004 respectively. The Companys order backlog,
which contains relatively little service, training and spare parts, represents
approximately three months of laser shipments. The increase in the Companys
order backlog from September 30, 2005 to September 30, 2006, was attributable
to higher orders for macro applications. The fluctuation of the U.S. dollar in
fiscal 2006 had an unfavorable effect of approximately $1.6 million on
year-to-year order backlog. The increase in the Companys order backlog from
September 30, 2004 to September 30, 2005 was attributable to higher orders for
micro applications. The fluctuation of the U.S. dollar in fiscal 2005 had a
favorable effect of approximately $2.2 million on year-to-year order backlog.

An order is
entered into backlog by Rofin when a purchase order with an assigned delivery date
has been received. Delivery schedules range from one week to six months,
depending on the size, complexity and availability of the product or system
ordered, although typical delivery dates for laser source products range
between 6-12 weeks from the date an order is placed. Although there is a risk
that customers may cancel or delay delivery of their orders, orders for
standard non-customized lasers can typically be allocated to other customers
without significant additional costs. The Company also manages this risk by
establishing the right to charge a cancellation fee that covers any material
and developmental costs incurred prior to the order being cancelled.
Enforcement of this right is dependent on many factors including, but not
limited to, the customers requested length of delay, the number of other
outstanding orders with the same customer and the ability to quickly convert
the canceled order to another sale.

The Company
anticipates shipping the present backlog during fiscal 2007. However, the Companys
backlog at any given date is not necessarily indicative of actual sales for any
future period.

EMPLOYEES

At September
30, 2006, Rofin had 1,490 full-time employees, of which 840 were in Germany,
260 in the United States, 3 in Canada, 40 in France, 47 in Italy, 110 in the
United Kingdom, 30 in Spain, 8 in the Netherlands, 39 in Sweden, 11 in Belgium,
28 in Singapore, 11 in Korea, 14 in Taiwan, 19 in China, and 30 in Japan,
whereas at September 30, 2005, Rofin had 1,413 full-time employees, of which 832
were in Germany, 242 in the United States, 39 in France, 44 in Italy, 101 in
the United Kingdom, 26 in Spain, 8 in the Netherlands, 29 in Sweden, 10 in
Belgium, 24 in Singapore, 11 in Korea, 12 in Taiwan, 7 in China, and 28 in
Japan. The average number of employees for the fiscal year ended September 30,
2006, was 1,443.

While the
Companys employees are not covered by collective bargaining agreements and the
Company has never experienced a work stoppage, slowdown or strike, the
Companys employees at its Hamburg and Starnberg facilities are each
represented by a nine-person works council and in Gunding-Munich by a
seven-person works council. Additionally, Hamburg and Gunding-Munich are
represented by a four-person central works council. Matters relating to
compensation, benefits and work rules are negotiated and resolved between
management and the works council for the relevant location. The Company
considers its relations with its employees to be good.

GOVERNMENT REGULATION

The majority
of the Companys laser products sold in the United States are classified as
Class IV Laser Products under applicable rules and regulations of the Center
for Devices and Radiological Health (CDRH) of the U.S. Food and Drug
Administration. The same classification system is applied in the European
markets. Safety rules are formulated with Deutsche Industrie Norm (i.e.,
German Industrial Standards) or ISO standards, which are internationally
harmonized.

CDRH
regulations generally require a self-certification procedure pursuant to which
a manufacturer must file with the CDRH with respect to each product
incorporating a laser device, periodic reporting of sales and purchases and
compliance with product labeling standards. The Companys laser products for
macro, micro and laser marking applications can result in injury to human
tissue if directed at an individual or otherwise misused.

16

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The Company believes that its laser products for
macro, micro and marking applications are in substantial compliance with all
applicable laws for the manufacture of laser devices.

AVAILABLE INFORMATION

The Company makes available, free of charge on its internet
website, its Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after they are electronically filed with, or furnished
to, the Securities and Exchange Commission (the SEC). You can find these
reports on the Companys website at www.rofin.com under the heading
Investor Relations.

These reports may also be obtained at the SECs Public
Reference Room at 450 Fifth Street NW, Washington, D.C. 20549. Information on
the operation of the Public Reference Room is available by calling the SEC at
(202) 942-8090. You may also access this information at the SECs website (http://www.sec.gov).
This site contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC.

|         |               
|-------- | --------------
|ITEM 1A. | RISK
  FACTORS

DOWNTURNS IN THE INDUSTRY, PARTICULARLY IN THE MACHINE
TOOL, AUTOMOTIVE, AND SEMICONDUCTOR AND ELECTRONICS INDUSTRIES MAY HAVE, IN THE
FUTURE, A MATERIAL ADVERSE EFFECT ON OUR SALES AND PROFITABILITY.

Our business depends substantially upon capital
expenditures particularly by manufacturers in the machine tool, automotive, and
semiconductor and electronics industries. We estimate that approximately 56% of
our laser sales during fiscal year 2006 were to these three industry markets.
These industries are cyclical and have historically experienced periods of
oversupply, resulting in significantly reduced demand for capital equipment,
including the products manufactured and marketed by us. For the foreseeable
future, our operations will continue to depend upon capital expenditures in
these industries, which, in turn, depend upon the market demand for their
products. Decreased demand from manufacturers in these industries, for example,
during a downturn, may lead to decreased demand for our products. Although such
decreased demand would reduce our sales, we may not be able to reduce expenses
quickly, due in part to the need for continual investment in research and
development and the need to maintain extensive ongoing customer service and
support capability. Although we order materials for assembly in response to
firm orders, the lead time for assembly and delivery of some of our products
creates a risk that we may incur expenditures or purchase inventories for
products which we cannot sell.

Accordingly, any downturn or slowdown in the machine
tool, automotive, and semiconductor and electronics industries could have a
material adverse effect on our financial condition and results of operations.

A HIGH PERCENTAGE OF OUR SALES ARE OVERSEAS AND OUR
RESULTS ARE THEREFORE SUBJECT TO THE IMPACT OF EXCHANGE RATE FLUCTUATIONS.

Although we report our results in U.S. dollars,
approximately 61% of our current sales are denominated in other currencies,
including the Euro, Swedish krona, British pound, Singapore dollar, Japanese
yen, Korean won, Taiwanese NT dollar, Canadian dollar, and Chinese RMB. The fluctuation
of the Euro, and the other functional currencies, against the U.S. dollar has
had the effect of increasing and decreasing (as applicable) reported net sales
as well as cost of goods sold and gross margin and selling, general and
administrative expenses denominated in such foreign currencies when translated
into U.S. dollars as compared to prior periods. Our subsidiaries will, from
time to time, pay dividends in their respective functional currencies, thus
presenting another area of potential currency exposure for us in the future.

We also face transaction risk from fluctuations in
exchange rates between the various currencies in which we do business. We
believe that a certain portion of the transaction risk of our operations in
multiple currencies is mitigated by our hedging activities, utilizing forward
exchange contracts and forward exchange options. We also continue to borrow in
each operating subsidiarys functional currency to reduce exposure to exchange
gains and losses. However, there can be no assurance that changes in currency
exchange rates will not have a material adverse effect on our business,
financial condition and results of operations.

17

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OUR INABILITY TO MANAGE THE RISKS ASSOCIATED WITH OUR
INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT OUR BUSINESS.

Our products are currently marketed in approximately
40 countries, with Germany, the rest of Europe, the United States and the
Asia/Pacific region being our principal markets. Our operations and sales in
our principal markets are subject to risks inherent in international business
activities, including:

| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the general political and economic conditions in
  each such country or region;                                                                                                          
| |   |                                                                                                                                                                                          
| |  | overlap of differing tax structures;                                                                                                                                                     
| |   |                                                                                                                                                                                          
| |  | management of an organization spread over various
  jurisdictions; and                                                                                                                   
| |   |                                                                                                                                                                                          
| |  | unexpected changes in regulatory requirements and
  compliance with a variety of foreign laws and regulations, such as import and
  export licensing requirements and trade restrictions.

Our failure to manage the risks associated with our
international business operations could have a material adverse effect on our
financial condition and results of operations.

Our profitability may be adversely affected by
economic slowdowns in the United States, Europe, or the Asia/Pacific region. A
recession in these economies could trigger a decline in laser sales to the
machine tool, automotive, or semiconductor/electronics industries, and any
related weaknesses in their respective currencies could adversely affect
customer demand for our products, the U.S. dollar value of our foreign currency
denominated sales, and ultimately our consolidated results of operations.

WE DEPEND ON THE ABILITY OF OUR OEM-CUSTOMERS TO
INCORPORATE OUR LASER PRODUCTS INTO THEIR SYSTEMS.

Our sales depend in part upon the ability of our
OEM-customers to develop and sell systems that incorporate our laser products.
Adverse economic conditions, large inventory positions, limited marketing
resources, and other factors affecting these OEM-customers could have a
substantial impact upon our financial results. We cannot provide assurances
that our OEM-customers will not experience financial or other difficulties that
could adversely affect their operations and, in turn, our financial condition
or results of operations.

WE EXPERIENCED IN THE PAST, AND EXPECT TO EXPERIENCE
IN THE FUTURE, FLUCTUATIONS IN OUR QUARTERLY RESULTS. THESE FLUCTUATIONS MAY
INCREASE THE VOLATILITY OF OUR STOCK PRICE.

We have experienced and expect to continue to
experience some fluctuations in our quarterly results. We believe that
fluctuations in quarterly results may cause the market prices of our common
stock, on the NASDAQ National Market and the Frankfurt Stock Exchange, to
fluctuate, perhaps substantially. Factors which may have an influence on the Companys
operating results in a particular quarter include:

| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing of the receipt of orders from major
  customers;                                                                                                                                           
| |   |                                                                                                                                                                                                       
| |  | product mix;                                                                                                                                                                                          
| |   |                                                                                                                                                                                                       
| |  | competitive pricing pressures;                                                                                                                                                                        
| |   |                                                                                                                                                                                                       
| |  | the relative proportions of domestic and
  international sales;                                                                                                                                       
| |   |                                                                                                                                                                                                       
| |  | our ability to design, manufacture and introduce new
  products on a cost-effective and timely basis;                                                                                                 
| |   |                                                                                                                                                                                                       
| |  | the delayed effect of incurrence of expenses to
  develop and improve marketing and service capabilities;                                                                                             
| |   |                                                                                                                                                                                                       
| |  | foreign currency fluctuations;                                                                                                                                                                        
| |   |                                                                                                                                                                                                       
| |  | ability of our suppliers to produce and deliver
  components and parts, including sole or limited source components, in a
  timely manner, in the quantity desired and at the prices we have budgeted;
| |   |                                                                                                                                                                                                       
| |  | our ability to control expenses; and                                                                                                                                                                  
| |   |                                                                                                                                                                                                       
| |  | costs related to acquisitions of businesses.                                                                                                                                                          

18

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These and other factors make it difficult for us to
release precise predictions regarding the results and the development of our
business.

In addition, our backlog at any given time is not
necessarily indicative of actual sales for any succeeding period. As our
delivery schedule typically ranges from one week to six months, our sales will
often reflect orders shipped in the same quarter that they are received.
Moreover, customers may cancel or reschedule shipments and production
difficulties could delay shipments. Accordingly, the Companys results of
operations are subject to significant fluctuations from quarter to quarter. See
also Business-Order Backlog.

Other factors that we believe may cause the market
price of our common stock to fluctuate, perhaps substantially, include
announcements of new products, technologies or customers by us or our
competitors, developments with respect to intellectual property and shortfalls
in our operations relative to analysts expectations. In addition, in recent
years, the stock market in general, and the shares of technology companies in
particular, have experienced wide price fluctuations. These broad market and
industry fluctuations, particularly in the semiconductor and electronics and
automotive industries, may adversely affect the market prices of our common
stock on the NASDAQ and the Frankfurt Stock Exchange.

THE MARKETS FOR OUR PRODUCTS ARE HIGHLY COMPETITIVE
AND INCREASED COMPETITION COULD INCREASE OUR COSTS, REDUCE OUR SALES OR CAUSE
US TO LOSE MARKET SHARE.

The laser industry is characterized by significant
price and technical competition. Our current and proposed laser products for
macro and marking and micro applications compete with those of several well-established
companies, some of which are larger and have substantially greater financial,
managerial and technical resources, more extensive distribution and service
networks, and larger installed customer bases than us.

We believe that competition will be particularly
intense in the CO2, diode laser, and solid-state laser markets, as
many companies have committed significant research and development resources to
pursue opportunities in these markets. There can be no assurance that we will
successfully differentiate our current and proposed products from the products
of our competitors or that the market place will consider our products to be
superior to competing products. Because many of the components required to
develop and produce a laser-based marking system are commercially available,
barriers to entry into this market are relatively low, and we expect new
competitive product entries in this market. To maintain our competitive
position in these markets, we believe that we will be required to continue a
high level of investment in engineering, research and development, marketing,
and customer service and support. There can be no assurance that we will have
sufficient resources to continue to make these investments, that we will be
able to make the technological advances necessary to maintain our competitive
position, or that our products will receive market acceptance. See also
Business - Competition.

OUR FUTURE GROWTH AND COMPETITIVENESS DEPEND UPON OUR
ABILITY TO DEVELOP NEW AND ENHANCED PRODUCTS TO MEET MARKET DEMAND AND TO
INCREASE OUR MARKET SHARE FOR LASER MARKING AND MICRO PRODUCTS.

If we are to increase our laser sales in the near
term, these sales will have to come through increases in market share for our
existing products, through the development of new products, or through the
acquisition of competitors or their products. To date, a substantial portion of
our revenues has been derived from sales of high-powered CO2 laser
sources, solid-state laser sources, and diode lasers. In order to increase
market demand for these products, we will need to devote substantial resources
to:

| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | continuing to broaden our CO2 laser
  product range;                                                                                 
| |   |                                                                                                                                      
| |  | continuing to increase the output power of our CO2
  laser sources, diode lasers, and diode pumped, solid-state laser products;
  and
| |   |                                                                                                                                      
| |  | continuing to reduce the manufacturing costs of our
  product range to achieve more attractive pricing.                              

A large part of our growth strategy depends upon being
able to increase our worldwide market share for laser marking and micro
products.

19

---



Our future success depends on our ability to
anticipate our customers needs and develop products that address those needs.
Our ability to control costs is limited by our need to invest in research and
development. If we are unable to implement our strategy to develop new and
enhanced products, our business, operating results and financial condition
could be adversely affected. We cannot provide assurance that we will
successfully implement our business strategy or that any of the newly developed
or enhanced products will achieve market acceptance or not be rendered obsolete
or uncompetitive by products of other companies. See also Managements
Discussion and Analysis of Financial Condition and Results of Operations and
Business - The Companys Laser Products.

IF WE LOSE OUR KEY MANAGEMENT PERSONNEL, WE MAY NOT BE
ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS OR ACHIEVE OUR OBJECTIVES.

Our future success depends in large part upon the
leadership and performance of our executive management team and key employees
at the operating level. These key employees include technical, sales and
support personnel for our operations on a worldwide basis. If we lose the
services of one or more of our executive officers or key employees, or if one or
more of them decides to join a competitor or otherwise compete directly or
indirectly with us, we may not be able to successfully manage our business or
achieve our business objectives. If we lose the services of any of our key
employees at the operating or regional level, we may not be able to replace
them with similarly qualified personnel, which could harm our business.

WE MAY NOT BE ABLE TO SUCCESSFULLY ACQUIRE NEW
OPERATIONS OR INTEGRATE FUTURE ACQUISITIONS, WHICH COULD CAUSE OUR BUSINESS TO
SUFFER.

An important part of our growth strategy is making
strategic acquisitions of companies with complementary operations or products.
We may be unable to successfully complete potential strategic acquisitions if
we cannot reach agreement on acceptable terms or for other reasons. Future
acquisitions may require us to obtain additional debt or equity financing,
which may not be available on terms acceptable to us, if at all. In connection
with future acquisitions, we may assume the liabilities of the companies we acquire.
Any debt that we incur to pay for future acquisition could contain covenants
that restrict the manner in which we operate our business. Any new equity
securities that we issue for this purpose would be dilutive to our existing
stockholders. If we buy a company or a division of a company, we may experience
difficulty integrating that company or divisions personnel and operations,
which could negatively affect our operating results.

In addition:

| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the key personnel of the acquired company may decide
  not to work for us;                                                                                                                  
| |   |                                                                                                                                                                                             
| |  | we may experience additional financial and
  accounting challenges and complexities in areas such as tax planning,
  treasury management and financial reporting;                           
| |   |                                                                                                                                                                                             
| |  | we may be held liable for risks and liabilities
  (including for environmental-related costs) as a result of our acquisitions,
  some of which we may not discover during our due diligence;
| |   |                                                                                                                                                                                             
| |  | our ongoing business may be disrupted or receive
  insufficient management attention; and                                                                                                   
| |   |                                                                                                                                                                                             
| |  | we may not be able to realize the cost savings or
  other financial benefits we anticipated.                                                                                                

WE DEPEND ON LIMITED SOURCE SUPPLIERS THAT COULD CAUSE
SUBSTANTIAL MANUFACTURING DELAYS AND INCREASE OUR COSTS IF A DISRUPTION IN
SUPPLY OCCURS.

We estimate that 18% of our revenues are derived from
sales of products that require specialized components only available from
single sources. We also rely on a limited number of independent contractors to
manufacture subassemblies for some of our products. There can be no assurance
that, in the future, our current or alternative sources will be able to meet
all of our demands on a timely basis. If one or more of our suppliers or
subcontractors experiences difficulties that result in a reduction or
interruption in supply to us, or if they fail to meet any of our manufacturing
requirements, our business could be harmed until we are able to secure
alternative sources, if any. If we are unable to find necessary parts or
components on commercially reasonable terms, we could be required to reengineer
our products to accommodate available substitutions which would increase our
costs and/or have a material adverse effect on manufacturing schedules, product
performance and market acceptance.

20

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OUR FAILURE TO PROTECT OUR PROPRIETARY TECHNOLOGY OR
TO AVOID LITIGATION FOR INFRINGEMENT OR MISAPPROPRIATION OF PROPRIETARY RIGHTS
OF THIRD PARTIES COULD RESULT IN A LOSS OF REVENUES AND PROFITS.

From time to time, we receive notices from third
parties alleging infringement of such parties patent or other proprietary
rights by our products. While these notices are common in the laser industry
and we have in the past been able to develop non-infringing technology or
license necessary patents or technology on commercially reasonable terms, there
can be no assurance that we would in the future prevail in any litigation
seeking damages or expenses from us or to enjoin us from selling its products
on the basis of such alleged infringement, or that we would be able to develop
any non-infringing technology or license any valid and infringed patents on
commercially reasonable terms. In the event any third party made a valid claim
against us or our customers and a license was not made available to us on
commercially reasonable terms, we would be adversely affected.

Our future success depends in part upon our
intellectual property rights, including trade secrets, know-how and continuing
technological innovation. There can be no assurance that the steps taken by us
to protect our intellectual property rights will be adequate to prevent
misappropriation or that others will not develop competitive technologies or
products.

We currently hold 158 United States and foreign
patents on our laser sources, with expiration dates ranging from 2007 to 2024.
We have also obtained licenses under certain patents covering lasers and
related technology incorporated into our products. Of particular importance is
the license of three patents related to the sales of our Slab Series CO2
lasers, which we estimate to account for approximately 21% of our revenue. In
addition, 44 patent applications have been filed and are under review by the
relevant patent authorities. There can be no assurance that other companies are
not investigating or developing other technologies that are similar to ours,
that any patents will issue from any application filed by us or that, if
patents do issue, the claims allowed will be sufficiently broad to deter or
prohibit others from marketing similar products. In addition, there can be no
assurance that any patents issued to us will not be challenged, invalidated or
circumvented, or that the rights thereunder will provide a competitive
advantage to us. See also Business - Intellectual Property.

ANY DEFECTS IN OUR PRODUCTS OR CUSTOMER PROBLEMS
ARISING FROM THE USE OF OUR PRODUCTS MAY SERIOUSLY HARM OUR BUSINESS AND
REPUTATION.

Our laser products are technologically complex and may
contain known and undetected errors or performance problems. In addition,
performance problems can also be caused by the improper installation of our
products by a customer. These errors or performance problems could result in
customer dissatisfaction, which could harm our sales or customer relationships.
In addition, these problems may cause us to incur significant warranty and
repair costs and divert the attention of our engineering personnel from our
product development efforts.

|         |                            
|-------- | ---------------------------
|ITEM 1B. | UNRESOLVED
  STAFF COMMENTS

None.

21

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|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

The Companys manufacturing facilities include the
following:

|                                   |  |                   |  |                  |  |                                                  | 
|---------------------------------- |  | ----------------- |  | ---------------- |  | ------------------------------------------------ | 
|Location
  of Facility             |  | Owned or
  Leased |  | Size
  (sq. ft.) |  | Primary
  Activity                               | 
|                                   |  |                   |  |                  |  |                                                  | 
|Hamburg, Germany                   |  | Owned*            |  | 164,699          |  | CO2 lasers, solid-state lasers, diode
  lasers   | 
|Starnberg, Germany                 |  | Leased            |  | 92,665           |  | Laser marking and micro products, power supplies | 
|Gunding-Munich, Germany            |  | Leased            |  | 66,959           |  | Solid-state lasers, laser marking products       | 
|Plymouth, Michigan                 |  | Leased            |  | 52,128           |  | CO2 lasers, laser micro and marking
  systems    | 
|Kingston upon Hull, United Kingdom |  | Leased            |  | 48,485           |  | Low-power CO2lasers                              | 
|Orlando, Florida                   |  | Owned             |  | 35,207           |  | Solid-state lasers                               | 
|Landing, New Jersey                |  | Owned/Leased      |  | 34,292           |  | CO2 lasers                                       | 
|Mainz, Germany                     |  | Leased            |  | 32,054           |  | Diode lasers and components                      | 
|Boxborough, Massachusetts          |  | Leased            |  | 22,000           |  | Laser marking systems                            | 
|Gothenburg, Sweden                 |  | Leased            |  | 15,225           |  | Fiber optic production                           | 
|Overath, Germany                   |  | Leased            |  | 12,417           |  | Coating of materials                             | 
|Sakai, Atsugi-shi, Japan           |  | Leased            |  | 9,763            |  | CO2lasers                                        | 
|Pamplona, Spain                    |  | Owned             |  | 7,532            |  | Laser marking systems                            | 
|Singapore                          |  | Leased            |  | 6,047            |  | Laser marking products                           | 
|Tucson, Arizona                    |  | Leased            |  | 3,715            |  | Components                                       | 

|  |                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------
|* | The facility is owned by RSL; the real property on
  which the facility is located is leased by RSL under a 99-year lease.

The Kingston upon Hull (United Kingdom) facility lease
expires in 2012. The Gunding-Munich (Germany) facility lease expires in 2007.
The Company resigned from the contract and intends to move to another facility
in the beginning of 2008. The leases on its Japanese facilities in Atsugi-shi
expire in 2007, with a renewal option for five years. The Mainz (Germany)
facility lease expires in 2011 and 2015 and the Overath (Germany) facility
leases expire in 2008. The Singapore facility lease expires in 2009. The
Starnberg (Germany) main facility is leased until 2017 from a member of the
Companys board of directors and includes a clause to terminate the lease
contract within a two-year notice period during the contract. The leases on its
U.S. facilities in Boxborough, Massachusetts, Plymouth, Michigan, Landing, New
Jersey, and Tucson, Arizona expire in 2010, 2012, 2007, and 2013 respectively.
The Gothenburg (Sweden) facility lease expires in 2008, with a renewal option
for three years.

The Company maintains sales, administration and
research and development facilities at each of the Hamburg, Starnberg,
Gunding-Munich, Mainz, Kingston upon Hull, Gothenburg, Plymouth, Landing, and
Orlando locations. The Company also maintains sales and service offices
worldwide, all of which are leased, with the exception of the Pamplona, Spain,
and Seoul (South Korea) properties which are owned. In May 2006 the Company
opened a sales and service office in Mississauga, Canada to support the
Canadian market. The facility in Canada is leased.

The Company believes that its existing facilities are
adequate to meet its currently projected needs for the next 12 months and that
suitable additional or alternative space would be available, if necessary, in
the future on commercially reasonable terms.

22

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|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

The Company has been and is likely to be involved from
time to time in litigation involving its intellectual property and ordinary
routine litigation arising in the ordinary course of business.

The licensor of patents covering the technology used
in certain of the Companys CO2 lasers has asserted that the Company
has calculated royalties due in respect of certain sales of such CO2
laser in a manner that is not consistent with the applicable license agreement.
In addition, the licensor claims that it has not been provided with copies of
invoices and other documentation relating to such sales, to which it asserts it
is entitled under the license agreement. The Company disputes these and related
allegations and believes that it is in compliance with all of its obligations
under the license agreement. The Company is currently in discussions with the
licensor in order to resolve these disagreements. The parties have reached an
agreement in principle that an independent auditor should be appointed to
review the calculations made by the Company in connection with the royalties it
has paid in the past. Management believes that it will achieve a resolution of
this matter that will not have a material adverse impact on the Companys
financial condition or results of operation or cash flows.

|        |                                                      
|------- | -----------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF
  SECURITY HOLDERS

There were no matters submitted to a vote of the
security holders during the fourth quarter of fiscal year 2006.

PART II

|        |                                                                                                                       
|------- | ----------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET PRICE FOR REGISTRANTS
  COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
  SECURITIES

The Companys common stock is traded on the NASDAQ
National Market and also on the Prime Standard Segment of the Frankfurt Stock
Exchange, under the symbol RSTI and international securities identification
number (ISIN) US7750431022, respectively. The table below sets forth the high
and low closing sales prices of the Companys common stock for each quarter
ended during the last two fiscal years as reported by the National Association
of Securities Dealers, Inc.:

|                   |  |  |                           |       |     |   |       | 
|------------------ |  |  | ------------------------- | ----- | --- | - | ----- | 
|                   |  |  | Common Stock Trade Prices |      
|                   |  |  |                           |      
|Quarter
  ended    |  |  | High                      |       | Low |  
|                   |  |  |                           |       |     |  
|December 31, 2004  |  |  | $                         | 42.57 |     | $ | 29.22 | 
|March 31, 2005     |  |  | $                         | 42.12 |     | $ | 31.60 | 
|June 30, 2005      |  |  | $                         | 33.22 |     | $ | 29.24 | 
|September 30, 2005 |  |  | $                         | 38.42 |     | $ | 32.29 | 
|December 31, 2005  |  |  | $                         | 45.85 |     | $ | 34.00 | 
|March 31, 2006     |  |  | $                         | 54.24 |     | $ | 42.49 | 
|June 30, 2006      |  |  | $                         | 63.34 |     | $ | 49.31 | 
|September 30, 2006 |  |  | $                         | 60.77 |     | $ | 50.26 | 

At December 6, 2006, the Company had 12 holders of
record of its common stock and 15,419,500 shares outstanding. A significantly
greater number of holders of the Companys common stock are street name or
beneficial holders, whose shares are held of record by bankers, brokers and
other financial institutions. The Company has not paid dividends on its common
stock and does not anticipate paying dividends in the foreseeable future.

23

---



|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

The following table sets forth selected consolidated
financial data for the five fiscal years ended September 30, 2006. The
information sets forth below should be read in conjunction with the consolidated
financial statements and notes thereto filed as part of this Annual Report.

|                                                        |  |                                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|------------------------------------------------------- |  | ---------------------------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                        |  | Year ended September 30,                 |        
|                                                        |  |                                          |        
|                                                        |  | 2006                                     |         | 2005 |   | 2004    |   | 2003 |         | 2002 |  
|                                                        |  |                                          |         |      |   |         |   |      |         |      |  
|                                                        |  | (in thousands, except per share amounts) |        
|STATEMENT OF
  OPERATIONS DATA:                         |  |                                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net sales                                               |  | $                                        | 420,890 |      | $ | 375,191 |   | $    | 322,628 |      | $ | 257,746 |   | $ | 221,948 |  
|Cost of goods
  sold                                    |  |                                          | 242,619 |      |   | 222,189 |   |      | 190,473 |      |   | 161,465 |   |   | 143,128 |  
|Gross profit                                            |  |                                          | 178,271 |      |   | 153,002 |   |      | 132,155 |      |   | 96,281  |   |   | 78,820  |  
|Selling, general
  & administrative expenses            |  |                                          | 76,900  |      |   | 66,171  |   |      | 58,336  |      |   | 51,282  |   |   | 46,401  |  
|Research &
  development expenses                       |  |                                          | 23,968  |      |   | 22,565  |   |      | 20,473  |      |   | 18,060  |   |   | 13,249  |  
|Amortization
  expense                                  |  |                                          | 3,532   |      |   | 5,270   |   |      | 2,389   |      |   | 1,654   |   |   | 3,762   |  
|Income from
  operations                                |  |                                          | 73,871  |      |   | 58,996  |   |      | 50,957  |      |   | 25,285  |   |   | 15,408  |  
|Net interest
  expense (income)                         |  |                                          | (2.588  | )    |   | 148     |   |      | 1,771   |      |   | 3,249   |   |   | 3,407   |  
|Income before
  income taxes                            |  |                                          | 76,664  |      |   | 58,570  |   |      | 50,078  |      |   | 24,727  |   |   | 12,385  |  
|Income tax
  expense                                    |  |                                          | 27,041  |      |   | 20,595  |   |      | 17,648  |      |   | 9,422   |   |   | 7,384   |  
|Net income                                              |  |                                          | 49,623  |      |   | 37,975  |   |      | 32,430  |      |   | 15,305  |   |   | 5,001   |  
|Earnings per
  common share  Basic                     |  | $                                        | 3.25    |      | $ | 2.52    |   | $    | 2.41    |      | $ | 1.31    |   | $ | 0.43    |  
|Earnings per
  common share  Diluted                   |  | $                                        | 3.16    |      | $ | 2.44    |   | $    | 2.31    |      | $ | 1.29    |   | $ | 0.43    |  
|Shares used in
  computing earnings per share  Basic   |  |                                          | 15,284  |      |   | 15,072  |   |      | 13,479  |      |   | 11,640  |   |   | 11,552  |  
|Shares used in
  computing earnings per share  Diluted |  |                                          | 15,687  |      |   | 15,561  |   |      | 14,020  |      |   | 11,863  |   |   | 11,592  |  
|                                                        |  |                                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|OPERATING DATA
  (as percentage of sales):              |  |                                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Gross profit                                            |  |                                          | 42.4    | %    |   | 41.0    | % |      | 41.0    | %    |   | 37.4    | % |   | 35.5    | %
|Selling, general
  & administrative expenses            |  |                                          | 18.3    | %    |   | 17.6    | % |      | 18.1    | %    |   | 19.9    | % |   | 20.9    | %
|Research &
  development expenses                       |  |                                          | 5.7     | %    |   | 6.0     | % |      | 6.4     | %    |   | 7.0     | % |   | 6.0     | %
|Income from
  operations                                |  |                                          | 17.6    | %    |   | 15.7    | % |      | 15.8    | %    |   | 9.8     | % |   | 6.9     | %
|Income before
  income taxes                            |  |                                          | 18.4    | %    |   | 15.8    | % |      | 15.5    | %    |   | 9.6     | % |   | 5.6     | %
|                                                        |  |                                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|BALANCE SHEET
  DATA:                                   |  |                                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Working capital                                         |  | $                                        | 282,659 |      | $ | 222,002 |   | $    | 163,540 |      | $ | 98,759  |   | $ | 81,661  |  
|Total assets                                            |  |                                          | 501,521 |      |   | 428,638 |   |      | 413,806 |      |   | 291,486 |   |   | 240,815 |  
|Line of credit
  and loans                              |  |                                          | 35,416  |      |   | 41,002  |   |      | 54,802  |      |   | 68,833  |   |   | 63,135  |  
|Stockholders
  equity                                  |  |                                          | 358,440 |      |   | 294,166 |   |      | 257,384 |      |   | 140,586 |   |   | 108,418 |  

24

---



|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND
  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Rofin-Sinar Technologies Inc. is a leader in the
design, development, engineering, manufacture, and marketing of laser-based
products, primarily used for cutting, welding, and marking a wide range of
materials.

During fiscal year 2006, 49% of revenues related to
sales for macro applications and approximately 51% related to sales of laser
products for marking and micro applications.

On February 28, 2004, the Company acquired 90% of the
share capital of Optoskand AB, Gothenburg (Sweden) through its wholly-owned
subsidiary RSL. The Company has a call option exercisable, beginning in 2009,
for the remaining 10% of the common stock for a fixed price of Euro 0.1
million. Accordingly, the Companys financial statements present Optoskand as
if it was 100% owned.

On March 29, 2004, the Company issued and sold 2.5
million common shares in an underwritten public offering at a price of $28.00
per share. The underwriters exercised their over-allotment option on April 8,
2004, resulting in 360,000 additional common shares being issued and sold. The
Company realized net proceeds of $75.3 million as a result of these
transactions.

On August 20, 2004, the Company acquired an additional
15% of the share capital of Dilas Diodenlaser GmbH, Mainz (Germany) through its
wholly-owned subsidiary RSTE. The Company currently holds 95% of the share
capital.

On August 31, 2004, the Company acquired 100% of the
share capital of PRC Laser Corporation based in Landing, New Jersey (and its
wholly-owned European subsidiary PRC Laser Europe N.V., Oudenaarde, Belgium),
and Lee Laser, Inc. based in Orlando, Florida, from Dover Industries, Inc. PRC
manufactures high power, fast-axial flow CO2 lasers and Lee Laser
produces solid-state lasers for material processing.

Effective October 22, 2004, the Company purchased the
remaining 17% share capital of Rofin-Baasel Espana S.L. through RSTE under an
option agreement between the Company and the former minority shareholder.

Effective December 9, 2004, the Company purchased an
additional 5% of the share capital of Rofin-Sinar U.K. Ltd. through RSTE under
an option agreement between the Company and the former minority shareholders.
The Company held 76% of the share capital as a result of this purchase.

In July 2005, the Company formed a new Chinese
subsidiary, Rofin-Baasel China Co., Ltd. as a wholly owned subsidiary of the
Companys wholly owned subsidiary RSL.

Effective October 1, 2005, the Company formed DILAS
Diode Laser Inc. in Tucson, Arizona as a wholly owned subsidiary of the
Companys wholly owned subsidiary, Rofin-Sinar Inc.

Effective December 2, 2005, the Company purchased an
additional 4% of the share capital of Rofin-Sinar U.K. Ltd. through Rofin-Sinar
Technologies Europe S.L. under an option agreement between the Company and the
former minority shareholders. The Company currently holds 80% of the share
capital of Rofin-Sinar U.K. Ltd. This purchase resulted in goodwill of $0.5
million.

On March 23, 2006, the Company acquired 40% of the
share capital of H2B Photonics GmbH, Garbsen (Germany) through its wholly owned
subsidiary Carl Baasel Lasertechnik GmbH & Co. KG. H2B Photonics GmbH
specializes in the development, manufacturing and sales of laser-based systems
used to cut brittle materials, such as glass, to produce perfectly cut edges.

Effective May 1, 2006, the Company formed Rofin-Baasel
Canada Ltd. in, Mississauga, Canada as a wholly owned subsidiary of the
Companys wholly owned subsidiary, Rofin-Sinar Inc.

25

---



Outlook

Management believes
that near-term growth in the laser macro business depends on the general
investment cycle for capital goods. In the marking and micro business,
near-term, management sees continuing demand especially from the electronics
and medical device industry. In addition, we will further broaden our presence
in Asia. The Company believes that its broad product portfolio and its
diversified customer base should help a worsening of business conditions in
single industrial or geographical markets in future.

RESULTS
OF OPERATIONS

For the periods indicated, the following table sets
forth the percentage of net sales represented by the respective line items in
the Companys consolidated statements of operations:

|                                             |  |                                 |   |       |   |       |   |  | 
|-------------------------------------------- |  | ------------------------------- | - | ----- | - | ----- | - |  | 
|                                             |  | Fiscal Year ended September 30, |  
|                                             |  |                                 |  
|                                             |  | 2006                            |   | 2005  |   | 2004  |  
|                                             |  |                                 |   |       |   |       |  
|Net sales                                    |  | 100.0                           | % | 100.0 | % | 100.0 | %
|Cost of goods sold                           |  | 57.6                            | % | 59.2  | % | 59.0  | %
|Gross profit                                 |  | 42.4                            | % | 40.8  | % | 41.0  | %
|Selling, general and administrative expenses |  | 18.3                            | % | 17.6  | % | 18.1  | %
|Research & development expenses              |  | 5.7                             | % | 6.1   | % | 6.4   | %
|Intangibles amortization                     |  | 0.8                             | % | 1.4   | % | 0.7   | %
|Income from operations                       |  | 17.6                            | % | 15.7  | % | 15.8  | %
|Income before income taxes                   |  | 18.2                            | % | 15.6  | % | 15.5  | %
|Net income                                   |  | 11.8                            | % | 10.1  | % | 10.0  | %

Fiscal
Year 2006 Compared to Fiscal Year 2005

Net Sales  Net sales of $420.9 million represents an
increase of $45.7 million, or 12%, over the prior year. Net sales increased
$27.8 million, or 10%, in Europe/Asia and increased $17.9 million, or 17%, in
the United States, as compared to the prior year. The U.S. dollar fluctuated
against foreign currencies, which had an unfavorable effect on net sales of
$8.8 million. Net sales of laser products for macro applications increased by
6% to $113.4 million, primarily due to the higher demand for our lower and
higher power CO2 lasers from the OEM machine tool industry. Net
sales of lasers for marking and micro applications increased by 17% to $158.5
million compared to fiscal year 2005, mainly due to the higher demand for our
lasers for micro and marking applications principally to the semiconductor,
electronics and medical instruments industries. The overall net sales increase
was also supported by a strong spare parts, service, and component business
which increased by 12% to $149.0 million in fiscal year 2006.

Gross Profit  The Companys gross profit of $178.3
million increased by $25.3 million, or 17%, over the prior year. As a
percentage of sales, gross profit increased from 41% in fiscal year 2005 to 42%
in fiscal year 2006. The percentage margin in fiscal year 2006 was primarily a
result of a favorable product mix across all product lines, and the higher
production efficiencies gained with the record high production volume. Gross
profit was unfavorably affected by $3.1 million in fiscal year 2006 due to the
fluctuation of the U.S. dollar.

Selling, General and Administrative Expenses 
Selling, general and administrative expenses increased by $10.7 million, or
16%, to $76.9 million, compared to fiscal year 2005 primarily as a result of
our increased selling and marketing activities, including our new formed
subsidiaries in China, the U.S., and Canada, and higher commissions related to
our record high revenues. Selling, General and Administrative Expenses were
impacted by the first-time implementation of SFAS 123R, which resulted in $3.3
million stock-based compensation expenses. As a percentage of net sales,
selling, general and administrative expenses remained at 18%. Selling, general
and administrative expenses were favorably affected by $1.5 million in fiscal
year 2006 due to the fluctuation of the U.S. dollar.

26

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Research and Development  The Companys net expenses
for research and development amounted to $24.0 million, which represents an
increase of $1.4 million, or 6%, over fiscal year 2005 primarily due to ongoing
research and development work mainly in the area of diode pumped, solid-state
lasers, and CO2 lasers.
Gross research and development expenses for fiscal years 2006 and 2005,
were $25.2 million and $23.5 million, respectively, and were reduced by $1.2
million and $0.9 million of government grants during the respective
periods.  The Company will continue to
apply for, and expects to continue receiving, government grants towards
research and development, especially in Europe.  Research and development expenses were favorably affected by $0.7
million in fiscal year 2006 due to the fluctuation of the U.S. dollar.

Other Income - Net other income of $3.7 million fiscal
year 2006 represents an increase of $3.6 million compared to the corresponding
period in the prior year.  Due to our
continued cash generation, the low interest rate on outstanding debts, and
higher interest rates on short-term investments, we were able to achieve net
interest income of $2.6 million in fiscal year 2006, compared to net interest
expenses of $0.1 million in fiscal 2005. The remaining increase in other income
is mainly due to $0.3 million of foreign currency gains in fiscal 2006 compared
to $0.3 million of foreign currency losses in fiscal 2005.

Income Tax Expense  Income tax expense of $27.0
million in fiscal year 2006 and $20.6 million in fiscal year 2005, represent
effective tax rates of 35.3 % and 35.2% for the respective periods. The
effective tax rate in both years is the result of higher income in countries
with lower statutory income tax rates, tax exempt interest income in the U.S.
and reductions in the valuation allowance on net operating loss
carryforwards.

Net Income  As a result of the foregoing factors, the
Companys net income of $49.6 million ($3.16 per diluted share, based on 15.7
million weighted average common shares outstanding) in fiscal year 2006
increased by $11.6 million over the prior years net income of $38.0 million
($2.44 per diluted share, based on 15.6 million weighted average common shares
outstanding). The implementation of SFAS 123R had an effect of reducing net
income by $3.0 million. Currency translation decreased net income by $0.2
million of fiscal year 2006 net income.

Fiscal
Year 2005 Compared to Fiscal Year 2004

Net Sales  Net sales of $375.2 million represents an
increase of $52.6 million, or 16%, over the prior year.  Net sales increased $14.7 million, or 6%, in
Europe/Asia and increased $37.9 million, or 54%, in the United States, as
compared to the prior year.  The U.S.
dollar weakened against foreign currencies, which had a favorable effect on net
sales of $11.4 million.  Net sales of
laser products for macro applications increased by 19% to $189.2 million,
primarily due to the full-year impact of the consolidation of PRC Laser, with
the remaining increase due to a shift in product mix to CO2 lasers
with higher output power.  Net sales of
lasers for marking and micro applications increased by 14% to $186.0 million
compared to fiscal year 2004, mainly due to the contribution of Lee Laser and
the strong demand for our micro products mainly in medical instrument
applications.  The overall net sales
increase was also supported by a strong service, spare parts, and component
business which increased by 26% to $131.3 million in fiscal year 2005.

Gross Profit  The Companys gross profit of $153.0
million increased by $20.8 million, or 16%, over the prior year.  As a percentage of sales, gross profit
remained at 41%.  The percentage margin
in fiscal year 2005 was primarily a result of a favorable product mix. Gross
profit was favorably affected by $3.6 million in fiscal year 2005 due to the
weakening of the U.S. dollar.

Selling, General and Administrative Expenses 
Selling, general and administrative expenses increased by $7.9 million, or 14%,
to $66.2 million, compared to fiscal year 2004 primarily due to a full year
impact of the consolidation of   PRC and
Lee Laser  and expenses associated with
Section 404 certification required by the
Sarbanes Oxley Act of 2002.  As a
percentage of net sales, selling, general and administrative expenses remained
at 18%.  Selling, general and
administrative expenses were unfavorably affected by $2.1 million in fiscal
year 2005 due to the weakening of the U.S. dollar.

27

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Research and Development  The Companys net expenses
for research and development amounted to $22.6 million, which represents an
increase of $2.1 million, or 10%, over fiscal year 2004 primarily due to
ongoing research and development work mainly in the area of diode pumped,
solid-state lasers, and CO2 lasers.
Gross research and development expenses for fiscal years 2005 and 2004,
were $23.5 million and $21.6 million, respectively, and were reduced by $0.9
million and $1.1 million of government grants during the respective
periods.  The Company will continue to
apply for, and expects to continue receiving, government grants towards
research and development, especially in Europe.  Research and development expenses were unfavorably affected by
$0.9 million in fiscal year 2005 due to the weakening of the U.S. dollar.

Income Tax Expense  Income tax expense of $20.6
million in fiscal year 2005 and $17.6 million in fiscal year 2004, represent
effective tax rates of 35.2% for both periods. The effective tax rate in both
years is the result of higher income in countries with lower statutory income
tax rates, tax exempt interest income in the U.S. and reductions in the
valuation allowance on net operating loss carryforwards.

Net Income  As a result of the foregoing factors, the
Companys net income of $38.0 million ($2.44 per diluted share, based on 15.6
million weighted average common shares outstanding) in fiscal year 2005
increased by $5.5 million over the prior years net income of $32.4 million
($2.31 per diluted share, based on 14.0 million weighted average common shares
outstanding).  Currency translation
decreased net income by $0.4 million, or 1%, of fiscal year 2005 net income.

LIQUIDITY
AND CAPITAL RESOURCES

The Companys primary sources of liquidity at
September 30, 2006, were cash and cash equivalents of $75.4 million, short-term
investments of $94.1 million, an annually renewable $25.0 million line of
credit with Deutsche Bank AG, and several other lines of credit to support
foreign subsidiaries in their local currencies in an aggregate amount of $78.0
million (translated at the applicable exchange rate at September 30,
2006).  As of September 30, 2006, $8.5
million was outstanding under the Deutsche Bank facility and $26.9 million
under other lines of credit.  Therefore,
$67.6 million is unused and available under Rofins lines of credit.  The Company is subject to financial
covenants under this facility and these lines of credit, which could restrict
the Company from drawing money under them.
At September 30, 2006, the Company was in compliance with these
covenants.

Cash and cash equivalents increased by $34.8 million
during fiscal year 2006.  Approximately
$58.3 million in cash and cash equivalents were provided by operating
activities, primarily as the result of increased net income and other non-cash
items, principally depreciation and amortization.  Operating cash flow was negatively affected by a increase in
accounts receivables and in inventories, partially offset by an increase in
accrued liabilities and in income taxes payable.

Uses of cash for investing activities totaled $22.8
million for the year ended September 30, 2006, and related primarily to the
purchase of short-term investments ($15.4 million) and various additions to
property and equipment in connection with the expansion of the Companys
operations ($6.4 million).

Net cash used by financing activities totaled $3.3
million and was primarily related to current period repayments of bank debt,
net of borrowings of $7.0 million, offset by $3.7 million generated through
issuance of new shares from the exercise of stock options.

The Company expects that its capital expenditures will
be approximately $7.0 million in 2007.

Management believes that cash flows from operations,
along with existing cash and cash equivalents and availability under our credit
facilities and lines of credit, will provide adequate resources to meet the
Companys capital requirements and operational needs on both a current and a
long-term basis.

28

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The following table illustrates the Companys
contractual obligations as of September 30, 2006:

|                            |  |                                         |         |           |   |        |  |       |        |           |   |       |  |   |       | 
|--------------------------- |  | --------------------------------------- | ------- | --------- | - | ------ |  | ----- | ------ | --------- | - | ----- |  | - | ----- | 
|                            |  | Payments
  due by period (in thousands) |        
|                            |  |                                         |        
|                            |  |                                         |         | Less than |   | 1-3    |  | 3-5   |        | More than |  
|Contractual Obligations     |  | Total                                   |         | 1 Year    |   | Years  |  | Years |        | 5 Years   |  
|                            |  |                                         |         |           |   |        |  |       |        |           |  
|                            |  |                                         |         |           |   |        |  |       |        |           |   |       |  |   |       | 
|Long-term debt              |  | $                                       | 18,089  |           | $ |       |  | $     | 18,089 |           | $ |      |  | $ |      | 
|Pension obligations         |  |                                         | 4,388   |           |   | 521    |  |       | 960    |           |   | 1,413 |  |   | 1,494 | 
|Operating lease obligations |  |                                         | 15,734  |           |   | 5,885  |  |       | 6,988  |           |   | 2,159 |  |   | 702   | 
|Purchase obligations        |  |                                         | 77,798  |           |   | 55,820 |  |       | 21,978 |           |   |      |  |   |      | 
|Interest obligation         |  |                                         | 1,736   |           |   | 890    |  |       | 846    |           |   |      |  |   |      | 
|Other long-term liabilities |  |                                         | 727     |           |   | 61     |  |       | 107    |           |   | 12    |  |   | 547   | 
|                            |  |                                         |         |           |   |        |  |       |        |           |   |       |  |   |       | 
|Total                       |  | $                                       | 118,472 |           | $ | 63,177 |  | $     | 48,968 |           | $ | 3,584 |  | $ | 2,743 | 
|                            |  |                                         |         |           |   |        |  |       |        |           |   |       |  |   |       | 

Off-Balance
Sheet Arrangements

The Company has no off-balance sheet arrangements or
financing arrangements involving variable interest entities.

CURRENCY
EXCHANGE RATE FLUCTUATIONS

Although the Company prepares its consolidated
financial statements in U.S. dollars, approximately 61% of its net sales are
denominated in other currencies, primarily Euro, Swedish krona, British pound,
Singapore dollar, Taiwanese dollar, Korean won, Japanese yen, Canadian dollar,
and Chinese RMB.  Net sales and costs
and related assets and liabilities are generally denominated in the functional
currencies of the operations, thereby serving to reduce the Companys exposure
to exchange gains and losses.

Exchange differences upon translation from each
operations functional currency to U.S. dollars are accumulated as a separate
component of equity.  The currency
translation adjustment component of shareholders equity had the effect of
increasing total equity by $16.4 million at September 30, 2006, as compared to
$7.5 million at September 30, 2005.

The fluctuation of the Euro and the other relevant
functional currencies against the U.S. dollar has had the effect of increasing
or decreasing (as applicable) reported net sales, as well as cost of goods
sold, gross margin, selling, general and administrative expenses, and research
and development expenses, denominated in such foreign currencies when translated
into U.S. dollars as compared to prior periods.

The following table illustrates the effect of the
changes in exchange rates on the Companys fiscal 2006, 2005 and 2004, net
sales, gross profit, and income from operations:

|                       |  |                    |       |                          |   |                    |  |                          |       |        |   |                      |  |   |       |  |   |       | 
|---------------------- |  | ------------------ | ----- | ------------------------ | - | ------------------ |  | ------------------------ | ----- | ------ | - | -------------------- |  | - | ----- |  | - | ----- | 
|                       |  |                    |       |                          |   |                    | 
|                       |  | Fiscal
  Year 2006 |       | Fiscal
  Year 2005       |   | Fiscal
  Year 2004 | 
|                       |  |                    |       |                          |   |                    | 
|                       |  | Actual             |       | At 2005
  Exchange Rates |   | Actual             |  | At 2004
  Exchange Rates |       | Actual |   | At 2003ExchangeRates | 
|                       |  |                    |       |                          |   |                    |  |                          |       |        |   |                      | 
|                       |  | (in
  millions)    |      
|Net sales              |  | $                  | 420.9 |                          | $ | 429.7              |  | $                        | 375.2 |        | $ | 363.8                |  | $ | 322.6 |  | $ | 296.3 | 
|Gross profit           |  |                    | 178.3 |                          |   | 181.4              |  |                          | 153.0 |        |   | 149.4                |  |   | 132.2 |  |   | 124.4 | 
|Income from operations |  |                    | 73.9  |                          |   | 74.8               |  |                          | 59.0  |        |   | 58.4                 |  |   | 51.0  |  |   | 50.0  | 

Between fiscal year 2006 and 2005, the average
exchange rate for the Euro weakened against the U.S. dollar by approximately
3.0%.  The impact of this weakening was
to decrease net sales and gross profit by $8.8 million and $3.1 million,
respectively, because approximately 61% of sales are denominated in other
currencies, primarily the Euro.  This
weakening of the Euro had the effect of decreasing operating expense by $2.2
million, thereby reducing income from operations only by $0.9 million.

29

---



Between fiscal year 2005 and 2004, the average
exchange rate for the Euro strengthened against the U.S. dollar by
approximately 2.3%.  The impact of this
strengthening was to increase net sales and gross profit by $11.4 million and
$3.6 million, respectively, because approximately 66% of sales are denominated
in other currencies, primarily the Euro.
However, because more than 66% of operating expenses are also
denominated in these other currencies, this same strengthening of the Euro had
the effect of increasing operating expenses and thereby reducing the overall
exchange rate effect on income from operations by $0.6 million.

Between fiscal year 2004 and 2003, the average
exchange rate for the Euro strengthened against the U.S. dollar by
approximately 11%.  The impact of this
strengthening was to increase net sales and gross profit by $26.3 million and $7.8
million, respectively, because approximately 71% of sales are denominated in
other currencies, primarily the Euro.
However, because approximately 82% of operating expenses are also
denominated in these other currencies, this same strengthening of the Euro had
the effect of increasing operating expenses, thereby reducing the overall
exchange rate effect on income from operations by $1.0 million.

CRITICAL
ACCOUNTING POLICIES

The Companys significant accounting policies are more
fully described in Note 1 of the consolidated financial statements.  Certain of the accounting policies require
the application of significant judgment by management in selecting appropriate
assumptions for calculating financial estimates.  By their nature, these judgments are subject to an inherent
degree of uncertainty.

Allowance for Doubtful Accounts

The Company records allowances for uncollectible
customer accounts receivable based on historical experience.  Additionally, an allowance is made based on
an assessment of specific customers financial condition and liquidity.  If the financial condition of the Companys
customers were to deteriorate, additional allowances may be required.  No individual customer represents more than
10% of total accounts receivable.  Any
increase in allowance will impact operating income during a given period.

Inventory Valuation

Inventories are stated at the lower of cost or market,
after provisions for excess and obsolete inventory salable at prices below
cost. Provisions for slow moving and obsolete inventories are provided based on
current assessments about historical experience and future product demand and
production requirements for the next twelve months.  These factors are impacted by market conditions, technology
changes, and changes in strategic direction, and require estimates and
management judgment that may include elements that are uncertain.  The Company evaluates the adequacy of these
provisions quarterly.  Although the
Company strives to achieve a balance between market demands and risk of
inventory excess or obsolescence, it is possible that, should conditions
change, additional provisions may be needed.
Any changes in provisions will impact operating income during a given
period.

Warranty Reserves

The Company provides reserves for the estimated costs
of product warranties when revenue is recognized. The Company relies upon historical experience, expectation of
future conditions, and its service data to estimate its warranty reserve.  The Company continuously monitors these data
to ensure that the reserve is sufficient. Warranty expense has historically
been within our expectations.   To the
extent we experience increased warranty claim activity or increased costs
associated with servicing those claims (such costs may include material, labor,and
travel costs), revisions to the estimated warranty liability would be
required.  Increases in reserves will impact
operating income during the period.

30

---



Pension Obligations

The determination of the Companys obligation and
expense for pension is dependent on the selection of certain assumptions used
by actuaries in calculating those amounts.
Assumptions are made about interest rates, expected investment return on
plan assets, total turnover rates, and rates of future compensation increases.  In addition, the Companys actuarial
consultants use subjective factors such as withdrawal rates and mortality rates
to develop their calculations of these amounts.  The Company generally reviews these assumptions at the beginning
of each fiscal year.  The Company is
required to consider current market conditions, including changes in interest
rates, in making these assumptions.  The
actuarial assumptions that the Company uses may differ materially from actual
results due to changing market and economic conditions, higher or lower
withdrawal rates or longer or shorter life spans of participants.  These differences may result in a
significant impact on the amount of pension benefits expense the Company has
recorded or may record.

The discount rate enables the Company to state
expected future cash flows at a present value on the measurement date.  The Company has little latitude in selecting
this rate and it must represent the market rate of high-quality fixed income
investments.  A lower discount rate
increases the present value of benefit obligations and increases pension
expense.

To determine the expected long-term rate of return on
plan assets, the Company considers the current and expected asset allocations,
as well as historical and expected returns on various categories of plan
assets.

Share-Based Payment

Stock-based compensation cost is measured at grant
date, based on the fair value of the award, and is recognized as expense over
the employee requisite vesting period.
We make judgments about the fair value of the awards, including the expected
term of the award, volatility of the underlying stock and estimated
forfeitures, which impact the amount of compensation expense recognized in the
financial statements. Such amounts may change as a result of additional grants,
forfeitures, modifications in assumptions and other factors. SFAS No. 123R
provides that income tax effects of share-based payments are recognized in the
financial statements for those awards which will normally result in tax
deductions under existing tax law. Under current U.S. federal tax laws, we
receive a compensation expense deduction related to stock options only when
those options are exercised and vested shares are received.  Accordingly, the financial statement
recognition of compensation cost for stock options creates a deductible
temporary difference which results in a deferred tax asset and a corresponding
deferred tax benefit in the income statement for all U.S. based employees.
Stock compensation expense related to non-U.S. employees is treated as a
permanent difference for income tax purposes.

New
Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial
statement recognition, measurement and disclosure of uncertain tax positions
recognized in an enterprises financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. Tax positions must meet a
more-likely-than-not recognition threshold at the effective date to be
recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will
be effective for fiscal years beginning after December 15, 2006 (our
fiscal year 2008) and the provisions of FIN 48 will be applied to all tax
positions under Statement No. 109 upon initial adoption. The cumulative
effect of applying the provisions of this interpretation will be reported as an
adjustment to the opening balance of retained earnings for that fiscal year.
The Company is currently evaluating the potential impact of FIN 48 on its
consolidated financial statements.

In September 2006, the SEC issued Staff Accounting
Bulletin No. 108 (SAB No. 108). SAB No. 108 addresses the
process and diversity in practice of quantifying financial statement
misstatements resulting in the potential build up of improper amounts on the
balance sheet. We will be required to adopt the provisions of SAB No.108 in
fiscal 2007. We currently do not believe that the adoption of SAB No. 108
will have a material impact on our consolidated financial statements.

31

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In September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements, (SFAS No. 157). SFAS No. 157
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. The changes to current practice resulting from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. The Statement is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We do not
believe that the adoption of the provisions of SFAS No. 157 will
materially impact our financial position and results of operations.

In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans  an amendment of FASB Statements No.87, 88, 106, and 132®, (SFAS
No. 158). SFAS No. 158 requires an employer to recognize the
over-funded or under-funded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year
in which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. The
provisions of this Statement are effective for an employer with publicly traded
equity securities and are required to recognize the funded status of a defined
benefit postretirement plan and to provide the required disclosures as of the
end of the fiscal year ending after December 15, 2006. The Company is
currently evaluating the potential impact of SFAS No. 158 on its consolidated
financial statements.

|         |                                                             
|-------- | ------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE
  DISCLOSURES ABOUT MARKET RISK

The following discussion about the Companys market
risk disclosures involves forward-looking statements.  Actual results could differ materially from those projected in
the forward-looking statements.  The
Company is exposed to market risk related to changes in interest rates and
foreign currency exchange rates.  The
Company does not use derivative financial instruments for trading purposes.

Interest
Rate Sensitivity

As of September 30, 2006, the Company maintained cash
equivalents and short-term investments of $109.7 million, consisting mainly of
non-taxable interest bearing securities and demand deposits all with maturities
of less than three months.  If short-term
interest rates were to increase or decrease by 10%, the impact on interest
income would be approximately $0.4 million.

As of September 30, 2006, the Company had $17.5
million of variable rate debt on which the interest rate is reset every six months,
$2.8 million of variable rate debt on which the interest rate is set annually
and $15.1 million of fixed rate debt.
Maturities of this debt are as follows: $17.4 million is due in 2007,
$14.9 million is due in 2008, and $3.2 million is due in 2009.  A 10% change in the variable interest rates
of the Companys debt would result in an increase or decrease in interest
expense of less than $0.1 million.

Additionally, the Company entered into interest swap
agreements of total notional amount of Euro 13.0 million  (equivalent to $16.5 million based on the
exchange rate at September 30, 2006) to minimize the interest expenses on short
and long-term debt by shifting from variable to fixed interest rates.

Foreign
Currency Exchange Risk

The Company enters into foreign currency forward
contracts and forward exchange options generally of less than one year duration
to hedge a portion of its foreign currency risk on sales transactions. At
September 30, 2006, the Company held Japanese yen forward exchange options with
notional amounts of Euro 0.4 million and Japanese yen forward exchange options
with notional amount of $0.2 million. The gains or losses resulting from a 10%
change in currency exchange rates would be less than $0.1 million.

|        |                                                           
|------- | ----------------------------------------------------------
|ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS
  AND SUPPLEMENTARY DATA

See Item 14(a) for an index to the consolidated
financial statements.  No supplementary
financial information is required to be presented pursuant to Item 302(a) of
Regulation S-K.

32

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|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH
  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

|         |                          
|-------- | -------------------------
|ITEM 9A. | CONTROLS
  AND PROCEDURES

Attached as
exhibits to this Form 10-K are certifications of the Companys chief executive
officer and chief financial officer, which are required in accordance with Rule
13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act).
This Controls and Procedures section includes information concerning the
controls and controls evaluation referred to in the certifications. Part III,
Item 15 of this Form 10-K sets forth the report of KPMG LLP, our independent
registered public accounting firm, regarding its audit of the Companys
internal control over financial reporting and of managements assessment of
internal control over financial reporting set forth below in this section. This
section should be read in conjunction with the certifications and the KPMG
report for a more complete understanding of the topics presented.

Evaluation of Disclosure Controls and Procedures

The Companys chief executive officer and chief
financial officer have concluded that, as of September 30, 2006, the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended) were effective, based on
the evaluation of these controls and procedures required by Rule 13a-15(b) or
15d-15(b) of the Securities Exchange Act of 1934, as amended.

Such disclosure controls and procedures are controls
and procedures designed to ensure that all information required to be disclosed
in the Companys reports filed under the Exchange Act is recorded, processed,
summarized, and reported within the time periods set forth in applicable
Securities and Exchange Commission forms, rules and regulations.  In addition, Rofin has reviewed its internal
control over financial reporting and has concluded that there has been no
change in such internal control during the fourth quarter of fiscal year 2006
that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.

Management Report on Internal Control Over Financial
Reporting

The Companys management is responsible for
establishing and maintaining adequate internal control over financial reporting
to provide reasonable assurance regarding the reliability of the Companys
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records, that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Companys assets that could have a material effect on the financial
statements.

Management assessed the Companys internal control
over financial reporting as of September 30, 2006, the end of its fiscal year.
Management based its assessment on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Managements assessment included evaluation of such
elements as the design and operating effectiveness of key financial reporting
controls, process documentation, accounting policies, and the Companys overall
control environment. This assessment is supported by testing and monitoring
performed by the Companys Internal Audit organization.

Based on its assessment, management has concluded that
the Companys internal control over financial reporting was effective as of the
end of the fiscal year to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external reporting purposes in accordance with generally accepted
accounting principles.  Management
reviewed the results of its assessment with the Audit Committee of the
Companys Board of Directors.

33

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The Companys independent registered public accounting
firm, KPMG LLP, audited managements assessment and independently assessed the
effectiveness of the Companys internal control over financial reporting.  KPMG LLP has issued an attestation report
concurring with managements assessment, which is included at the beginning of
Part III, Item 15 of this Annual Report on Form 10-K.

|         |                    
|-------- | -------------------
|ITEM 9B. | OTHER
  INFORMATION

None.

PART III

|         |                                                            
|-------- | -----------------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS
  AND CORPORATE GOVERNANCE

The information required by this item is included in
the Election of Directors, Directors and Executive Officers, Section 16(a)
Beneficial Ownership Reporting Compliance, and Committees of the Board of
Directors; Meetings and Compensation of Directors, sections of the Companys
Proxy Statement to be filed in connection with the Companys 2007 Annual
Meeting of Stockholders to be held in March 2007, and is incorporated by
reference herein.

|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

The information required by this item is included in
the Executive Compensation and Related Information section of the Companys
Proxy Statement to be filed in connection with the Companys 2007 Annual
Meeting of Stockholders to be held in March 2007, and is incorporated by
reference herein.

|         |                                                                                                 
|-------- | ------------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN
  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is included in
the Security Ownership of Certain Beneficial Owners and Management sections
of the Companys Proxy Statement to be filed in connection with the Companys
2007 Annual Meeting of Stockholders to be held in March 2007, and is incorporated
by reference herein.

The following table sets forth the number of
securities authorized for issuance under our equity compensation plans at
September 30, 2006:

|                                                               |  |                                                                                                        |           |                                                                                     |  |                                                                                                                                                            |  |  |       | 
|-------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ | --------- | ----------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----- | 
|                                                               |  | 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:      |  |                                                                                                        |           |                                                                                     |  |                                                                                                                                                            |  |  |       | 
|Equity Incentive Plan                                          |  |                                                                                                        | 1,317,700 |                                                                                     |  | 29 3⁄4                                                                                                                                                       |  |  | 7,250 | 
|                                                               |  |                                                                                                        |           |                                                                                     |  |                                                                                                                                                            |  |  |       | 
|Total equity compensation plans approved by
  security holders |  |                                                                                                        | 1,317,700 |                                                                                     |  | 29 3⁄4                                                                                                                                                       |  |  | 7,250 | 
|Equity compensation plans not approved by
  security holders   |  |                                                                                                        |          |                                                                                     |  |                                                                                                                                                           |  |  |      | 
|                                                               |  |                                                                                                        |           |                                                                                     |  |                                                                                                                                                            |  |  |       | 
|Total                                                          |  |                                                                                                        | 1,317,700 |                                                                                     |  | 29 3⁄4                                                                                                                                                       |  |  | 7,250 | 
|                                                               |  |                                                                                                        |           |                                                                                     |  |                                                                                                                                                            |  |  |       | 

The remaining information called for by this item 12
relating to Securities Authorized for Issuance Under Equity Compensation Plans
is incorporated by reference to note 15 of the Consolidated Financial
Statements included at Part III, Item 15 of this Annual Report on Form 10-K.

34

---



|         |                                                                           
|-------- | --------------------------------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED
  TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this item is included in
the Compensation Committee, Interlocks and Insider Participation and
Certain Transactions sections of the Companys Proxy Statement to be filed in
connection with the Companys 2007 Annual Meeting of Stockholders to be held in
March 2007, and is incorporated by reference herein.

The Company had sales to its minority shareholder in
Japan amounting to $1.8 million, $1.1 million, and $1.8 million in fiscal years
2006, 2005, and 2004, respectively, and to its minority shareholder in Sweden
amounting to $0.3 million in fiscal year 2006. As of September 30, 2006 and
2005, the accounts receivable with the minority shareholder in Japan amounted
to $1.2 million and $0.9 million, respectively.

RSL paid commissions to its minority shareholder of
Rofin-Baasel China of $0.3 million in fiscal 2006. No balances were outstanding
as of September 30, 2006. At September 30, 2005 the company had accounts
receivables of $0.2 from this minority shareholder.

The Companys sales to related parties have generally
been on terms comparable to those available in connection with sales to
unaffiliated parties.

The main facility in Starnberg (Germany) is rented
under a 25-year operating lease from the former minority shareholder of CBL Mr.
Baasel, who is also a member of the Board of Directors of the Company, and
includes a clause to terminate the lease contract within a two-year notice
period during the contract.  The Company
paid rent expense of $0.6 million to Mr. Baasel during fiscal years 2006, 2005,
and 2004, respectively.

The Company has accrued $0.1 million at September 30,
2006 and 2005, for the option to purchase the remaining minority interests in
Optoskand AB and $0.1 million were accrued for accumulated interests on this
obligation.  These amounts are included
in accounts payable to related party in the accompanying consolidated balance
sheet.

The Company believes that all transactions noted
above, have been executed on an arms-length basis.  Except for the foregoing, no director, officer, nominee director,
5% holder of the Companys shares, or immediate family member, associate or
affiliate thereof, had any material interest, direct or indirect, in any
transaction since the beginning of fiscal year 2003 or has any material
interest, direct or indirect, in any proposed transaction, having a value of
$60,000 or more.

Indebtedness of Officers and Directors

Since the beginning of fiscal year 2004, there has
been no indebtedness to the Company by any director or officer or associates of
any such person, other than reimbursements for purchases, for ordinary travel
and expense advances and for other transactions in the ordinary course of
business.

|         |                                         
|-------- | ----------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND
  SERVICES

The information set forth under Independent Public
Accountants - All Other Fees in the definitive form of the Companys Proxy
Statement relating to the 2007 Annual Meeting of Shareholders to be held in
March 2007, is incorporated by reference herein.

35

---



|         |                                           
|-------- | ------------------------------------------
|         |                                           
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

|   |    |                                                                                                                                                                                                                      |     
|-- | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|a. | 1. | Consolidated
  Financial Statements                                                                                                                                                                                  |     
|   |    |                                                                                                                                                                                                                      |     
|   |    | The
  following financial statements are filed as part of this 10-K:                                                                                                                                                 |     
|   |    |                                                                                                                                                                                                                      |     
|   |    | Reports of Independent Registered Public Accounting Firm                                                                                                                                                             | F-1 
|   |    |                                                                                                                                                                                                                      |     
|   |    | Consolidated Balance Sheets as of September 30, 2006, and 2005                                                                                                                                                       | F-3 
|   |    |                                                                                                                                                                                                                      |     
|   |    | Consolidated Statements of Operations for the years ended September
  30, 2006, 2005, and 2004                                                                                                                       | F-4 
|   |    |                                                                                                                                                                                                                      |     
|   |    | Consolidated Statements of Stockholders Equity and Comprehensive
  Income for the years ended September 30, 2006, 2005, and 2004                                                                                    | F-5 
|   |    |                                                                                                                                                                                                                      |     
|   |    | Consolidated Statements of Cash flows for the years ended September
  30, 2006, 2005, and 2004                                                                                                                       | F-6 
|   |    |                                                                                                                                                                                                                      |     
|   |    | Notes to Consolidated Financial Statements                                                                                                                                                                           | F-7 
|   |    |                                                                                                                                                                                                                      |     
|   | 2. | Financial Statement Schedules                                                                                                                                                                                        |     
|   |    |                                                                                                                                                                                                                      |     
|   |    | Schedule II
   Valuation and Qualifying Accounts                                                                                                                                                                    | F-27
|   |    |                                                                                                                                                                                                                      |     
|   |    | Schedules
  not listed above have been omitted because the matter or conditions are not
  present or the information required to be set forth therein is included in
  the Consolidated Financial Statements hereto. |     
|   |    |                                                                                                                                                                                                                      |     
|   | 3. | Exhibits                                                                                                                                                                                                             |     
|   |    |                                                                                                                                                                                                                      |     
|   |    | The exhibits
  listed in the accompanying index to exhibits are filed or incorporated by
  reference as part of this Annual Report.                                                                                  |     

36

---



|                 |  |                                                                                                                                                                                               
|---------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT
  NUMBER |  | DESCRIPTION                                                                                                                                                                                   
|                 |  |                                                                                                                                                                                               
|                 |  |                                                                                                                                                                                               
|3.1              |  | Certificate
  of Incorporation of the Company and Form of Certificate of Amendment thereto
  (*)                                                                                              
|                 |  |                                                                                                                                                                                               
|3.2              |  | By-Laws of
  the Company (**)                                                                                                                                                                 
|                 |  |                                                                                                                                                                                               
|4.1              |  | Form of
  Rights Agreement (*)                                                                                                                                                                
|                 |  |                                                                                                                                                                                               
|10.1             |  | Form of Sale
  and Transfer Agreement between Siemens Aktiengesellschaft and Rofin-Sinar
  Technologies Inc. (*)                                                                              
|                 |  |                                                                                                                                                                                               
|10.2             |  | Form of Sale
  and Transfer Agreement by and among Siemens Power Corporation and Rofin-Sinar
  Technologies Inc. (*)                                                                          
|                 |  |                                                                                                                                                                                               
|10.3             |  | Form of Tax
  Allocation and Indemnification Agreement among Rofin-Sinar Technologies Inc.,
  Rofin-Sinar, Inc., Siemens Corporation, and Siemens Power Corporation (*)                       
|                 |  |                                                                                                                                                                                               
|10.4             |  | Joint
  Venture Agreement, dated as of May 27, 1992, by and among Rofin-Sinar Laser
  GmbH, Marubeni Corporation and Nippei Toyama Corporation (*)                                            
|                 |  |                                                                                                                                                                                               
|10.5             |  | Cooperation
  Agreement, dated as of May 27, 1992, among Nippei Toyama Corporation,
  Rofin-Sinar Laser GmbH, and Marubeni Corporation (*)                                                    
|                 |  |                                                                                                                                                                                               
|10.6             |  | Cooperation
  Agreement, dated as of May 27, 1992, among Rofin-Sinar Laser GmbH, Marubeni
  Corporation, and Nippei Toyama Corporation (*)                                                    
|                 |  |                                                                                                                                                                                               
|10.7             |  | Inheritable
  Building Right (Erbbaurecht), dated as of March 1, 1990, between Rofin-Sinar
  Laser GmbH and Lohss GmbH (in German, English summary provided) (*)                              
|                 |  |                                                                                                                                                                                               
|10.8             |  | Lease
  Agreement, dated August 10, 1990, between Josef and Maria Kranz and
  Rofin-Sinar Laser GmbH (in German, English summary provided) (*)                                                
|                 |  |                                                                                                                                                                                               
|10.9             |  | Lease
  Agreement, dated June 14, 1989, between DR Group and Rofin-Sinar,
  Incorporated (Mast Street property) (*)                                                                           
|                 |  |                                                                                                                                                                                               
|10.10            |  | Lease
  Agreement, dated March 25, 1993, between DR Group and Rofin-Sinar,
  Incorporated (Plymouth Oaks Drive property) (*)                                                                  
|                 |  |                                                                                                                                                                                               
|10.11            |  | Rofin-Sinar
  Laser GmbH Pension Plan (in German, English summary provided) (*)                                                                                                               
|                 |  |                                                                                                                                                                                               
|10.12            |  | Form of 1996
  Equity Incentive Plan (*)                                                                                                                                                      
|                 |  |                                                                                                                                                                                               
|10.13            |  | Form of 1996
  Non-Employee Directors Stock Plan (*)                                                                                                                                         
|                 |  |                                                                                                                                                                                               
|10.14            |  | Deutsche
  Bank AG Commitment Letter dated August 22, 1996 (*)                                                                                                                                
|                 |  |                                                                                                                                                                                               
|10.15            |  | Form of
  Employment Agreement, dated as of September 2, 1996, among Peter Wirth,
  Rofin-Sinar Laser GmbH, and Rofin-Sinar Technologies Inc. (in German, English
  summary provided) (*)     
|                 |  |                                                                                                                                                                                               
|10.16            |  | Form of
  Employment Agreement, dated as of September 2, 1996, among Hinrich Martinen,
  Rofin-Sinar Laser GmbH, and Rofin-Sinar Technologies Inc. (in German, English
  summary provided) (*)
|                 |  |                                                                                                                                                                                               
|10.17            |  | Form of
  Employment Agreement, dated as of September 2, 1996, among Günther Braun,
  Rofin-Sinar Laser GmbH, and Rofin-Sinar Technologies Inc. (in German, English
  summary                 

37

---



|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT
  NUMBER |                                                                                                                                                                                      | DESCRIPTION                                                                                                                                                     
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|                 |                                                                                                                                                                                      | provided)
  (*)                                                                                                                                                 
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|10.18            |                                                                                                                                                                                      | English
  Translation of Acquisition Agreement, dated as of April 29, 2000, by and
  between Mannesmann Demag Krauss-Maffei AG and Rofin-Sinar Laser GmbH (****)
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|10.19            |                                                                                                                                                                                      | English
  Translation of Option Agreement between Carl Baasel and Rofin-Sinar Laser
  GmbH (***)                                                                
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|10.20            |                                                                                                                                                                                      | Lease
  Agreement between Carl Baasel and Rofin-Sinar Laser GmbH (***)                                                                                          
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|10.21            |                                                                                                                                                                                      | 2002 Equity
  Incentive Plan (*****)                                                                                                                            
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|14.1             |                                                                                                                                                                                      | Code of
  Business Ethics (******)                                                                                                                              
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|21.1             |                                                                                                                                                                                      | List of
  Subsidiaries of the Registrant                                                                                                                        
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|23.1             |                                                                                                                                                                                      | Consent of
  Independent Registered Public Accounting Firm                                                                                                      
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|31.1             |                                                                                                                                                                                      | Rule
  13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                                                                             
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|31.2             |                                                                                                                                                                                      | Rule
  13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                                                                             
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|32.1             |                                                                                                                                                                                      | Section 1350
  Certification of Chief Executive Officer                                                                                                         
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|32.2             |                                                                                                                                                                                      | Section 1350
  Certification of Chief Financial Officer                                                                                                         
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|(*)              | Incorporated
  by reference to the exhibits filed with the Companys Registration Statement
  on Form S-1 (File No. 333-09539) which was declared effective on September
  25, 1996.
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|(**)             | Incorporated
  by reference to the exhibit filed with the Companys Quarterly Report for the
  period ended March 31, 1998.                                                         
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|(***)            | Incorporated by reference to the exhibit filed with the Companys
  Current Report on Form 8-K filed with the Securities and Exchange Commission
  on May 24, 2000.                 
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|(****)           | Incorporated by reference to the exhibit filed with the Companys
  Annual Report on Form 10-K/A filed with the Securities and Exchange
  Commission on January 18, 2001.           
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|(*****)          | Incorporated by reference to the exhibit filed with the Companys
  Annual Report on Form 10-K filed with the Securities and Exchange Commission
  on December 23, 2003.            
|                 |                                                                                                                                                                                      |                                                                                                                                                                 
|(******)         | Incorporated by reference to the exhibit filed with the Companys
  Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission
  on January 30, 2004.        

38

---



SIGNATURES

Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|      |                   |                                                   
|----- | ----------------- | --------------------------------------------------
|Date: | December 12, 2006 | ROFIN-SINAR TECHNOLOGIES INC.                     
|      |                   |                                                   
|      |                   | By: /s/
  Günther Braun                           
|      |                   |                                                   
|      |                   | Günther Braun                                     
|      |                   | President,
  Chief Executive Officer, and Director

Pursuant to
the requirements of the Securities Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|          |                     |       |                                     |      |                  
|--------- | ------------------- | ----- | ----------------------------------- | ---- | -----------------
|SIGNATURE |                     | TITLE |                                     | DATE
|          |                     |       |                                     |     
|          |                     |       |                                     |     
|/s/       | Peter Wirth         |       | Chairman of
  the Board             |      | December 12, 2006
|          |                     |       |                                     |      |                  
|          | Peter Wirth         |       |                                     |      |                  
|          |                     |       |                                     |      |                  
|/s/       | Günther Braun       |       | President, Chief Executive Officer, |      | December 12, 2006
|          |                     |       | and Director                        |      |                  
|          | Günther Braun       |       |                                     |      |                  
|          |                     |       |                                     |      |                  
|/s/       | Ingrid Mittelstaedt |       | Chief
  Financial Officer           |      | December 12, 2006
|          |                     |       |                                     |      |                  
|          | Ingrid Mittelstaedt |       |                                     |      |                  
|          |                     |       |                                     |      |                  
|/s/       | Ralph Reins         |       | Director                            |      | December 12, 2006
|          |                     |       |                                     |      |                  
|          | Ralph Reins         |       |                                     |      |                  
|          |                     |       |                                     |      |                  
|/s/       | Gary Willis         |       | Director                            |      | December 12, 2006
|          |                     |       |                                     |      |                  
|          | Gary Willis         |       |                                     |      |                  
|          |                     |       |                                     |      |                  
|/s/       | Carl F.
  Baasel    |       | Director                            |      | December 12, 2006
|          |                     |       |                                     |      |                  
|          | Carl F.
  Baasel    |       |                                     |      |                  
|          |                     |       |                                     |      |                  
|/s/       | Daniel Smoke        |       | Director                            |      | December 12, 2006
|          |                     |       |                                     |      |                  
|          | Daniel Smoke        |       |                                     |      |                  
|          |                     |       |                                     |      |                  
|/s/       | Stephen
  Fantone   |       | Director                            |      | December 12, 2006
|          |                     |       |                                     |      |                  
|          | Stephen
  Fantone   |       |                                     |      |                  

39

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of
Directors and Stockholders
Rofin-Sinar Technologies Inc. and Subsidiaries

We have
audited the accompanying consolidated balance sheets of Rofin-Sinar
Technologies Inc. and subsidiaries as of September 30, 2006 and 2005, and the
related consolidated statements of operations, stockholders equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended September 30, 2006. In connection with our audits of the
consolidated financial statements, we also have audited financial statement
schedule, Valuation and Qualifying Accounts. These consolidated financial
statements and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rofin-Sinar
Technologies Inc. and subsidiaries as of September 30, 2006 and 2005, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2006, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.

We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Rofin-Sinar Technologies
Inc.s internal control over financial reporting as of September 30, 2006,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated December 12, 2006, expressed an unqualified opinion on
managements assessment of, and the effective operation of, internal control
over financial reporting.

/s/ KPMG LLP
Detroit, Michigan
December 12, 2006

F-1

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of
Directors and Stockholders
Rofin-Sinar Technologies Inc. and Subsidiaries

We have
audited managements assessment, included in the accompanying Managements
Report on Internal Control Over Financial Reporting (Item 9A), that Rofin-Sinar
Technologies Inc. maintained effective internal control over financial
reporting as of September 30, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Rofin-Sinar Technologies
Inc.s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based on our audit.

We conducted
our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A companys internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.

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

In our
opinion, managements assessment that Rofin-Sinar Technologies Inc. maintained
effective internal control over financial reporting as of September 30, 2006 is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Rofin-Sinar Technologies Inc. maintained, in all material
respects, effective internal control over financial reporting as of September
30, 2006 based on the COSO criteria.

We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Rofin-Sinar
Technologies Inc. and subsidiaries as of September 30, 2006 and 2005, and the
related consolidated statements of operations, stockholders equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended September 30, 2006, and our report dated December 12, 2006,
expressed an unqualified opinion on those consolidated financial statements and financial statement schedule and included an
 explanatory paragraph regarding the Companys adoption of Statement of Financial Accounting Standards No. 123R. Share-Based Payment, on October 1, 2005.

/s/ KPMG LLP
Detroit, Michigan
December 12, 2006

F-2

---



ROFIN-SINAR TECH

NOLOGIES INC. AND
  SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS 
  (dollars in thousands, except share data)

|                                                                                                                                             |  |                 |         |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ---- | - | ------- | -
|                                                                                                                                             |  | September
  30, |        
|                                                                                                                                             |  |                 |        
|                                                                                                                                             |  | 2006            |         | 2005 |  
|                                                                                                                                             |  |                 |         |      |  
|ASSETS                                                                                                                                       |  |                 |         |      |   |         |  
|Current assets:                                                                                                                              |  |                 |         |      |   |         |  
|Cash and cash equivalents                                                                                                                    |  | $               | 75,395  |      | $ | 40,602  |  
|Short-term investments                                                                                                                       |  |                 | 94,100  |      |   | 78,675  |  
|Accounts receivable, trade                                                                                                                   |  |                 | 87,909  |      |   | 79,921  |  
|Less allowance for doubtful accounts                                                                                                         |  |                 | (2,656  | )    |   | (2,398  | )
|                                                                                                                                             |  |                 |         |      |   |         |  
|Trade accounts receivable, net                                                                                                               |  |                 | 85,253  |      |   | 77,523  |  
|Accounts receivable from related party
  (note 12)                                                                                           |  |                 | 1,157   |      |   | 1,110   |  
|Other accounts receivable                                                                                                                    |  |                 | 2,667   |      |   | 1,691   |  
|Inventories (note 2)                                                                                                                         |  |                 | 116,965 |      |   | 107,105 |  
|Prepaid expenses                                                                                                                             |  |                 | 2,045   |      |   | 1,806   |  
|Deferred income tax assets (note 9)                                                                                                          |  |                 | 9,974   |      |   | 8,003   |  
|                                                                                                                                             |  |                 |         |      |   |         |  
|Total current assets                                                                                                                         |  |                 | 387,556 |      |   | 316,515 |  
|Property and equipment, at cost (note 3)                                                                                                     |  |                 | 77,903  |      |   | 70,911  |  
|Less accumulated depreciation                                                                                                                |  |                 | (41,649 | )    |   | (36,690 | )
|                                                                                                                                             |  |                 |         |      |   |         |  
|Property and equipment, net                                                                                                                  |  |                 | 36,254  |      |   | 34,221  |  
|Deferred income tax assets (note 9)                                                                                                          |  |                 | 1,818   |      |   | 2,949   |  
|Goodwill, net (note 4)                                                                                                                       |  |                 | 64,616  |      |   | 61,493  |  
|Intangibles,
  net (note 4)                                                                                                                  |  |                 | 10,221  |      |   | 13,158  |  
|Other assets                                                                                                                                 |  |                 | 1,056   |      |   | 302     |  
|                                                                                                                                             |  |                 |         |      |   |         |  
|Total assets                                                                                                                                 |  | $               | 501,521 |      | $ | 428,638 |  
|                                                                                                                                             |  |                 |         |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                         |  |                 |         |      |   |         |  
|Current liabilities:                                                                                                                         |  |                 |         |      |   |         |  
|Line of credit and short-term borrowings
  (notes 6)                                                                                         |  | $               | 17,327  |      | $ | 20,152  |  
|Accounts payable, trade                                                                                                                      |  |                 | 15,702  |      |   | 14,702  |  
|Accounts payable to related party (note 12)                                                                                                  |  |                 | 303     |      |   | 230     |  
|Income taxes payable (note 9)                                                                                                                |  |                 | 15,475  |      |   | 9,943   |  
|Deferred income tax liabilities (note 9)                                                                                                     |  |                 | 874     |      |   | 3,336   |  
|Accrued liabilities (note 5)                                                                                                                 |  |                 | 55,216  |      |   | 46,149  |  
|                                                                                                                                             |  |                 |         |      |   |         |  
|Total current liabilities                                                                                                                    |  |                 | 104,897 |      |   | 94,512  |  
|Long-term
  debt (note 7)                                                                                                                    |  |                 | 18,089  |      |   | 20,850  |  
|Pension obligations (note 10)                                                                                                                |  |                 | 11,295  |      |   | 11,126  |  
|Deferred
  income tax liabilities (note 9)                                                                                                   |  |                 | 5,347   |      |   | 5,339   |  
|Minority
  interests                                                                                                                         |  |                 | 2,787   |      |   | 2,072   |  
|Other
  long-term liabilities                                                                                                                |  |                 | 666     |      |   | 573     |  
|                                                                                                                                             |  |                 |         |      |   |         |  
|Total liabilities                                                                                                                            |  |                 | 143,081 |      |   | 134,472 |  
|Commitments (note 8)                                                                                                                         |  |                 |         |      |   |         |  
|Stockholders equity:                                                                                                                        |  |                 |         |      |   |         |  
|Preferred stock, 5,000,000 shares
  authorized, none issued or outstanding                                                                   |  |                 |        |      |   |        |  
|Common stock, $0.01 par value, 50,000,000
  shares authorized, 15,372,200 (15,122,650 at September 30, 2005) shares issued
  and outstanding |  |                 | 154     |      |   | 151     |  
|Additional paid-in capital                                                                                                                   |  |                 | 167,446 |      |   | 162,550 |  
|Retained earnings                                                                                                                            |  |                 | 174,694 |      |   | 125,071 |  
|Accumulated other comprehensive income                                                                                                       |  |                 | 16,146  |      |   | 6,394   |  
|                                                                                                                                             |  |                 |         |      |   |         |  
|Total stockholders equity                                                                                                                   |  |                 | 358,440 |      |   | 294,166 |  
|                                                                                                                                             |  |                 |         |      |   |         |  
|Total liabilities and stockholders equity                                                                                                   |  | $               | 501,521 |      | $ | 428,638 |  
|                                                                                                                                             |  |                 |         |      |   |         |  

See accompanying notes to
consolidated financial statements

F-3

---



ROFIN-SINAR TECHNOLOGIES INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2006, 2005, AND 2004
(dollars in thousands, except share and per share amounts)

|                                                                          |  |                             |            |      |   |            |   |   |            |  
|------------------------------------------------------------------------- |  | --------------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                          |  | Years
  ended September 30, |           
|                                                                          |  |                             |           
|                                                                          |  | 2006                        |            | 2005 |   | 2004       |  
|                                                                          |  |                             |            |      |   |            |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|Net sales                                                                 |  | $                           | 420,890    |      | $ | 375,191    |   | $ | 322,628    |  
|Cost of goods sold                                                        |  |                             | 242,619    |      |   | 222,189    |   |   | 190,473    |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|Gross profit                                                              |  |                             | 178,271    |      |   | 153,002    |   |   | 132,155    |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|Selling, general and administrative
  expenses                            |  |                             | 76,900     |      |   | 66,171     |   |   | 58,336     |  
|Research and development expenses                                         |  |                             | 23,968     |      |   | 22,565     |   |   | 20,473     |  
|Amortization expense                                                      |  |                             | 3,532      |      |   | 5,270      |   |   | 2,389      |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|Income from operations                                                    |  |                             | 73,871     |      |   | 58,996     |   |   | 50,957     |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|Other expense (income):                                                   |  |                             |            |      |   |            |   |   |            |  
|Interest, net                                                             |  |                             | (2,588     | )    |   | 148        |   |   | 1,771      |  
|Minority interest                                                         |  |                             | 890        |      |   | 554        |   |   | 708        |  
|Foreign currency losses (gains)                                           |  |                             | (344       | )    |   | 351        |   |   | (1,148     | )
|Miscellaneous                                                             |  |                             | (751       | )    |   | (627       | ) |   | (452       | )
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|Total other expense (income), net                                         |  |                             | (2,793     | )    |   | 426        |   |   | 879        |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|Income before income taxes                                                |  |                             | 76,664     |      |   | 58,570     |   |   | 50,078     |  
|Income tax expense (note 9)                                               |  |                             | 27,041     |      |   | 20,595     |   |   | 17,648     |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|Net income                                                                |  | $                           | 49,623     |      | $ | 37,975     |   | $ | 32,430     |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|Earnings per share (note 11):                                             |  |                             |            |      |   |            |   |   |            |  
|Basic                                                                     |  | $                           | 3.25       |      | $ | 2.52       |   | $ | 2.41       |  
|Diluted                                                                   |  | $                           | 3.16       |      | $ | 2.44       |   | $ | 2.31       |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|Weighted average shares used in computing
  earnings per share (note 11): |  |                             |            |      |   |            |   |   |            |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|Basic                                                                     |  |                             | 15,283,817 |      |   | 15,071,692 |   |   | 13,478,606 |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  
|Diluted                                                                   |  |                             | 15,686,892 |      |   | 15,561,006 |   |   | 14,020,154 |  
|                                                                          |  |                             |            |      |   |            |   |   |            |  

See
accompanying notes to consolidated financial statements

F-4

---



ROFIN-SINAR TECHNOLOGIES INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2006, 2005, AND 2004
(dollars in thousands)

|                                                 |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|------------------------------------------------ |  | --------------- | ---------- | --------- | - | ---------- |  | -------- | ------- | --------------- | ----- | ------------- | ----- | ----------- | ------ | - | - | ------- | -
|                                                 |  |                 |            |           |   |            |  |          |         |                 |       |               |       | Accumulated |        |   |   |        
|                                                 |  | Number of       |            | Common    |   | Additional |  |          |         |                 | Other |               | Total |            
|                                                 |  | Common
  Shares |            | Stock     |   | Paid-in    |  | Retained |         | Comprehensive   |       | Stockholders |      
|                                                 |  | Outstanding     |            | Par Value |   | Capital    |  | Earnings |         | Income
  (loss) |       | Equity        |      
|                                                 |  |                 |            |           |   |            |  |          |         |                 |       |               |      
|BALANCES at September 30, 2003                   |  |                 | 11,908,600 |           | $ | 119        |  | $        | 79,918  |                 | $     | 54,666        |       | $           | 5,883  |   | $ | 140,586 |  
|Comprehensive income:                            |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|Fair value of interest swap agreement            |  |                 |            |           |   |           |  |          |        |                 |       |              |       |             | 606    |   |   | 606     |  
|Foreign currency translation adjustment          |  |                 |            |           |   |           |  |          |        |                 |       |              |       |             | 4,873  |   |   | 4,873   |  
|Net income                                       |  |                 |            |           |   |           |  |          |        |                 |       | 32,430        |       |             |       |   |   | 32,430  |  
|                                                 |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|Total comprehensive income                       |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   | 37,909  |  
|Common stock issued in connection with:          |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|Secondary stock offering                         |  |                 | 2,860,000  |           |   | 29         |  |          | 75,236  |                 |       |              |       |             |       |   |   | 75,265  |  
|Stock incentive plans                            |  |                 | 161,950    |           |   | 1          |  |          | 3,623   |                 |       |              |       |             |       |   |   | 3,624   |  
|                                                 |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|BALANCES at September 30, 2004                   |  |                 | 14,930,550 |           | $ | 149        |  | $        | 158,777 |                 | $     | 87,096        |       | $           | 11,362 |   | $ | 257,384 |  
|                                                 |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|Comprehensive income:                            |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|Fair value of interest swap agreement            |  |                 |            |           |   |           |  |          |        |                 |       |              |       |             | 302    |   |   | 302     |  
|Minimum pension liability                        |  |                 |            |           |   |           |  |          |        |                 |       |              |       |             | (1,186 | ) |   | (1,186  | )
|Foreign currency translation adjustment          |  |                 |            |           |   |           |  |          |        |                 |       |              |       |             | (4,084 | ) |   | (4,084  | )
|Net income                                       |  |                 |            |           |   |           |  |          |        |                 |       | 37,975        |       |             |       |   |   | 37,975  |  
|                                                 |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|Total comprehensive income                       |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   | 33,007  |  
|Common stock issued in connection with:          |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|Stock incentive plans                            |  |                 | 192,100    |           |   | 2          |  |          | 3,773   |                 |       |              |       |             |       |   |   | 3,775   |  
|                                                 |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|BALANCES at September 30, 2005                   |  |                 | 15,122,650 |           | $ | 151        |  | $        | 162,550 |                 | $     | 125,071       |       | $           | 6,394  |   | $ | 294,166 |  
|                                                 |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|Comprehensive income:                            |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|Fair value of interest swap agreement            |  |                 |            |           |   |           |  |          |        |                 |       |              |       |             | 204    |   |   | 204     |  
|Minimum pension liability                        |  |                 |            |           |   |           |  |          |        |                 |       |              |       |             | 707    |   |   | 707     |  
|Foreign currency translation adjustment          |  |                 |            |           |   |           |  |          |        |                 |       |              |       |             | 8,841  |   |   | 8,841   |  
|Net income                                       |  |                 |            |           |   |           |  |          |        |                 |       | 49,623        |       |             |       |   |   | 49,623  |  
|                                                 |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|Total comprehensive income                       |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   | 59,375  |  
|Common stock issued in connection with:          |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|Stock incentive plans (net of taxes of
  $2,418) |  |                 | 249,550    |           |   | 3          |  |          | 4,896   |                 |       |              |       |             |       |   |   | 4,899   |  
|                                                 |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  
|BALANCES at September 30, 2006                   |  |                 | 15,372,200 |           | $ | 154        |  | $        | 167,446 |                 | $     | 174,694       |       | $           | 16,146 |   | $ | 358,440 |  
|                                                 |  |                 |            |           |   |            |  |          |         |                 |       |               |       |             |        |   |   |         |  

See
accompanying notes to consolidated financial statements

F-5

---



ROFIN-SINAR TECHNOLOGIES INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004 (dollars in thousands)

|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|----------------------------------------------------------------------------------- |  | --------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                    |  | Years
  ended September 30, |        
|                                                                                    |  |                             |        
|                                                                                    |  | 2006                        |         | 2005 |   | 2004    |  
|                                                                                    |  |                             |         |      |   |         |  
|CASH FLOWS
  FROM OPERATING ACTIVITIES:                                             |  |                             |         |      |   |         |   |   |         |  
|Net
  income                                                                        |  | $                           | 49,623  |      | $ | 37,975  |   | $ | 32,430  |  
|Adjustments to reconcile net income to net cash
provided by
  operating activities: |  |                             |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                       |  |                             | 9,076   |      |   | 10,451  |   |   | 6,730   |  
|Issuance of restricted stock                                                        |  |                             | 284     |      |   | 176     |   |   | 146     |  
|Provision for doubtful accounts                                                     |  |                             | 642     |      |   | (29     | ) |   | 230     |  
|Exchange rate gains                                                                 |  |                             | (22     | )    |   | (172    | ) |   | (864    | )
|Loss on disposal of property and
equipment                                          |  |                             | 47      |      |   | 86      |   |   | 280     |  
|Stock-based compensation expenses                                                   |  |                             | 3,320   |      |   |        |   |   |        |  
|Deferred income taxes                                                               |  |                             | (4,080  | )    |   | (3,655  | ) |   | (559    | )
|Increase in minority interest                                                       |  |                             | 890     |      |   | 595     |   |   | 708     |  
|Change in operating assets and
liabilities:                                         |  |                             |         |      |   |         |   |   |         |  
|Accounts receivable, trade                                                          |  |                             | (5,437  | )    |   | 1,542   |   |   | 3,498   |  
|Other accounts receivable                                                           |  |                             | (887    | )    |   | (114    | ) |   | (540    | )
|Inventories                                                                         |  |                             | (5,313  | )    |   | (2,540  | ) |   | (3,756  | )
|Prepaid expenses and other                                                          |  |                             | (571    | )    |   | (890    | ) |   | (405    | )
|Accounts payable                                                                    |  |                             | 403     |      |   | (4,872  | ) |   | (7,819  | )
|Income taxes payable                                                                |  |                             | 2,403   |      |   | 2,350   |   |   | 3,265   |  
|Accrued liabilities and
  pension obligations                                       |  |                             | 7,909   |      |   | (2,823  | ) |   | 5,538   |  
|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|Net
  cash provided by operating activities                                         |  |                             | 58,287  |      |   | 38,080  |   |   | 38,882  |  
|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|CASH FLOWS
  FROM INVESTING ACTIVITIES:                                             |  |                             |         |      |   |         |   |   |         |  
|Additions to property and equipment                                                 |  |                             | (6,396  | )    |   | (6,314  | ) |   | (4,469  | )
|Proceeds from the sale of property and
equipment                                    |  |                             | 262     |      |   | 289     |   |   | 132     |  
|Purchases of short-term investments, net                                            |  |                             | (15,425 | )    |   | (16,625 | ) |   | (58,050 | )
|Acquisition of business, net of cash
acquired                                       |  |                             | (1,249  | )    |   | (1,181  | ) |   | (34,960 | )
|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|Net
  cash used in investing activities                                             |  |                             | (22,808 | )    |   | (23,831 | ) |   | (97,347 | )
|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|CASH FLOWS
  FROM FINANCING ACTIVITIES:                                             |  |                             |         |      |   |         |   |   |         |  
|Borrowings from bank                                                                |  |                             | 16,095  |      |   | 41,137  |   |   | 8,792   |  
|Repayments to bank                                                                  |  |                             | (23,140 | )    |   | (53,931 | ) |   | (28,477 | )
|Payment to subsidiarys minority
shareholders                                       |  |                             |        |      |   |        |   |   | (715    | )
|Issuance of additional shares                                                       |  |                             |        |      |   |        |   |   | 75,265  |  
|Issuance of common stock                                                            |  |                             | 3,712   |      |   | 2,178   |   |   | 1,685   |  
|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|Net
  cash provided by (used in) financing activities                               |  |                             | (3,333  | )    |   | (10,616 | ) |   | 56,550  |  
|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|Effect of
  foreign currency translation on cash                                    |  |                             | 2,647   |      |   | (1,247  | ) |   | (356    | )
|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|Net increase
  (decrease) in cash and cash equivalents                              |  |                             | 34,793  |      |   | 2,386   |   |   | (2,271  | )
|Cash and
  cash equivalents at beginning of year                                    |  |                             | 40,602  |      |   | 38,216  |   |   | 40,487  |  
|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|Cash and
  cash equivalents at end of year                                          |  | $                           | 75,395  |      | $ | 40,602  |   | $ | 38,216  |  
|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|Cash paid
  during the year for interest                                            |  | $                           | 1,770   |      | $ | 1,886   |   | $ | 2,966   |  
|                                                                                    |  |                             |         |      |   |         |   |   |         |  
|Cash paid
  during the year for income taxes                                        |  | $                           | 28,087  |      | $ | 22,171  |   | $ | 11,883  |  
|                                                                                    |  |                             |         |      |   |         |   |   |         |  

See
accompanying notes to consolidated financial statements

F-6

---



ROFIN-SINAR
TECHNOLOGIES INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006, 2005, and 2004
(dollars in thousands, except per share amounts)

|   |                                 
|-- | --------------------------------
|1. | SUMMARY OF
  ACCOUNTING POLICIES

|    |                                          
|--- | -----------------------------------------
|(a) | Description
  of the Company and Business

The primary
business of Rofin is to develop, manufacture, and market industrial lasers and
supplies used for material processing applications. The majority of the
Companys customers are in the machine tool, automotive and semiconductor and
electronics industries and are located in the United States, Europe, and Asia.
For the years ended September 30, 2006, 2005, and 2004 Rofin generated
approximately 65% of its revenues from the sale of lasers and laser systems and
approximately 35% from aftermarket support for the Companys existing laser
products and from its components business.

The
accompanying financial statements present the historical financial information
of Rofin-Sinar Technologies Inc. (Rofin or RSTI or the Company) and its
wholly-owned subsidiaries. Rofin consists of Rofin-Sinar, Inc. (RS Inc.), PRC
Laser Corp. (PRC), Lee Laser, Inc. (Lee), Rofin-Baasel Canada Ltd.,
Dilas Diodelaser Inc. and Rofin-Sinar Technologies Europe S.L. (RSTE). RSTE, a European holding company
formed in 1999, owns 100% of Rofin-Sinar Laser GmbH (RSL), 95% of Dilas
Diodenlaser GmbH (Dilas), 100% of Rofin-Baasel Italiana S.r.l., 100% of
Rofin-Baasel France S.A., 80% of Rofin-Sinar UK Ltd., 100% of Rofin-Baasel UK
Ltd., 100% of Rofin-Baasel Benelux B.V., 100% of Rofin-Baasel Singapore Pte.
Ltd., 100% of Rofin-Baasel Espana S.L. (RBE), 100% of Rofin-Baasel Taiwan
Ltd., and 100% of Rofin-Baasel Korea Co., Ltd..

The financial
statements of PRC include the consolidated accounts of PRC Laser Europe N.V.,
Belgium.

RSL includes the consolidated accounts of its
88%-owned subsidiary Rofin-Baasel Japan Corp. (a Japanese corporation), its
100%-owned subsidiaries Rasant-Alcotec Beschichtungstechnik GmbH (Rasant),
and CBL Verwaltungsgesellschaft GmbH, its 90%-owned subsidiary Optoskand AB
(Optoskand), its 100%-owned subsidiary Carl Baasel Lasertechnik GmbH &
Co. KG. (CBL), and its 80%-owned subsidiary Rofin-Baasel China
Co., Ltd. (formed in July 2005).

CBL includes
the consolidated accounts of its wholly-owned subsidiaries Rofin-Baasel, Inc. (RB Inc), Wegmann-Baasel Laser und
elektrooptische Geraete GmbH, and PMB Elektronik GmbH, as well as its
40% equity investment in H2B Photonics GmbH.

All
significant intercompany balances and transactions have been eliminated in
consolidation.

On March 29,
2004, the Company issued and sold 2.5 million common shares in an underwritten
public offering at a price of $28.00 per share. The underwriters exercised
their over-allotment option on April 8, 2004 resulting in 360,000 additional
common shares being issued and sold. The Company realized net proceeds of
$75,265 as a result of these transactions.

|    |                                             
|--- | --------------------------------------------
|(b) | Acquisitions
  and Formation of New Entities

The Company
uses the purchase method of accounting for its acquisitions with the respective
results of operations included in the consolidated results from the date of
acquisition.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On February
  28, 2004, the Company acquired 90% of the share capital of Optoskand AB,
  Gothenburg (Sweden) through its wholly-owned subsidiary RSL. The Company has
  a call option exercisable beginning in 2009 for the remaining 10% of the
  common stock for a fixed price of approximately $0.1 million. The
  accompanying financial statements present Optoskand as if it was 100% owned.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | On August
  20, 2004, the Company acquired an additional 15% of the share capital of
  Dilas Diodenlaser GmbH, Mainz (Germany) through its wholly-owned subsidiary
  RSTE. The Company currently holds 95% of the share capital.                                                                                                                                                                   

F-7

---



|                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                  |  | On August
  31, 2004, the Company acquired 100% of the share capital of PRC Laser
  Corporation based in Landing, New Jersey (including its wholly-owned European
  subsidiary PRC Laser Europe N.V., Oudenaarde, Belgium) and Lee Laser, Inc.
  based in Orlando, Florida. This acquisition further strengthened the
  Companys position in the North American market for industrial lasers and
  increased the Companys customer base in North America and Asia.
|                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                  |  | Effective
  December 9, 2004, the Company purchased an additional 5% of the share capital
  of Rofin-Sinar U.K. Ltd. through Rofin-Sinar Technologies Europe S.L. under
  an option agreement between the Company and the former minority shareholders.
  The Company then held 76% of the share capital as a result of this purchase.
  This purchase resulted in goodwill of $0.6 million.                                                                        
|                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                  |  | Effective
  October 1, 2005, the Company formed DILAS Diode Laser Inc. in Tucson, Arizona
  as a wholly owned subsidiary of the Companys wholly owned subsidiary,
  Rofin-Sinar Inc.                                                                                                                                                                                                                                                                               
|                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                  |  | Effective
  December 2, 2005, the Company purchased an additional 4% of the share capital
  of Rofin-Sinar U.K. Ltd. through Rofin-Sinar Technologies Europe S.L. under
  an option agreement between the Company and the former minority shareholders.
  The Company currently holds 80% of the share capital of Rofin-Sinar U.K. Ltd.
  This purchase resulted in goodwill of $0.5 million.                                                                       
|                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                  |  | Effective
  May 1, 2006, the Company formed Rofin-Baasel Canada Ltd. in, Mississauga,
  Canada as a wholly owned subsidiary of the Companys wholly owned subsidiary,
  Rofin-Sinar Inc.                                                                                                                                                                                                                                                                            
|                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|The Company
  uses the equity method of accounting for the following acquisition.
|                                                                                 
|                                                                                  |  | On March 23,
  2006, the Company acquired 40% of the share capital of H2B Photonics GmbH,
  Garbsen (Germany) through its wholly owned subsidiary Carl Baasel
  Lasertechnik GmbH & Co. KG. H2B Photonics GmbH specializes in the development,
  manufacturing and sales of laser-based systems used to cut brittle materials,
  such as glass, to produce perfectly cut edges.                                                                                     

The following
unaudited pro-forma financial information for the PRC and Lee Laser acquisition
reflects the consolidated results of operations as if the acquisition had taken
place on October 1, 2003.

| |                                                 |  |      |         | 
| | ----------------------------------------------- |  | ---- | ------- | 
| |                                                 |  | 2004 |        
| |                                                 |  |      |        
| | Net sales                                       |  | $    | 357,541 | 
| | Net income                                      |  | $    | 33,016  | 
| | Earnings per
  average weighted share - Basic   |  |      | 2.45    | 
| | Earnings per
  average weighted share - Diluted |  |      | 2.35    | 

|    |                                              
|--- | ---------------------------------------------
|(c) | Cash
  Equivalents and Short-term Investments

Cash equivalents consist of financial
instruments that are readily convertible into cash and have original maturities
of three months or less at the time of acquisition.

Short-term investments include auction rate
securities. Auction rate securities are variable rate securities tied to
short-term interest rates with maturities on the face of the securities in
excess of 90 days. Auction rate securities have rate resets through a
modified Dutch auction, at predetermined short-term intervals, usually every 7,
28, 35, or 49 days. The securities trade at par and are callable at par on
any payment date at the option of the issuer. Investment earnings paid during a
given period are based upon the reset rate determined during the prior auction.

Although these securities are issued and
rated as long-term securities, they are priced and traded as short-term
instruments because of the liquidity provided through the interest rate reset.

Purchases of
short-term investments, net, included
in the accompanying consolidated statements of cash flows, have been included
to reflect the purchases and sales of auction rate securities during the years
presented.

F-8

---



Interest
income on cash equivalents and short-term investments was $3,998, $2,126
and $1,108 for the years ended September 30, 2006, 2005, and 2004,
respectively, and was offset by interest expense in the accompanying
consolidated statements of operations.

|    |            
|--- | -----------
|(d) | Inventories

Inventories
are stated at the lower of cost or market, after provisions for excess and
obsolete inventory salable at prices below cost. Costs are determined using the
first in, first out and weighted average cost methods.

The Company
writes down inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.

|    |                         
|--- | ------------------------
|(e) | Property and
  Equipment

Property and
equipment are recorded at cost and depreciated over their estimated useful
lives, except for leasehold improvements, which are amortized over the lesser
of their estimated useful lives or the term of the lease. The methods of
depreciation are straight line for financial reporting purposes and accelerated
for income tax purposes. Depreciable lives for financial reporting purposes are
as follows:

|                                    | Useful Lives                          
|----------------------------------- | --------------------------------------
|                                    |                                       
|Buildings                           | 40 Years                              
|Technical machinery
  and equipment | 3-10 Years                            
|Furniture
  and fixtures            | 3-10 Years                            
|Computers
  and software            | 3-4 Years                             
|Leasehold
  improvements            | Lesser of term of lease 
  or 15 Years

The Company
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.

|    |                                       
|--- | --------------------------------------
|(f) | Goodwill and
  Other Intangible Assets

Goodwill
represents the excess purchase price over the fair value of the assets acquired
in connection with the Companys acquisitions.

Goodwill is
required to be tested on an annual basis for potential impairment at the
reporting unit level. A reporting unit is defined as the lowest level of an
entity that is a business and that can be distinguished, physically and operationally
and for internal reporting purposes, from other activities, operations, and
assets of the entity. A reporting unit can be no higher than a reportable
operating segment and would generally be lower than that level of reporting.
The Company identified three reporting units: the German reporting unit; the
North America reporting unit; and the reporting unit for the rest of the world.

In testing for
impairment, the fair value of each reporting unit is compared to its carrying
amount. If the carrying value is below the fair value assessment, there will be
no impairment loss. If the fair value is below the carrying value, then the
Company is required to perform an additional test to determine the impaired
fair value of the goodwill and its carrying amount.

The Company
completed its annual goodwill impairment testing as of October 1st
and determined that the fair value of each reporting unit exceeds its carrying
value and accordingly, the second step of the impairment test was not required
to be performed.

F-9

---



|    |                                                        
|--- | -------------------------------------------------------
|(g) | Revenue
  Recognition and Accounts Receivable Valuation

Revenue is
recognized when persuasive evidence of an arrangement exists, the product has
been delivered, the price is fixed or determinable and collection is probable.
Terms under these arrangements are generally free on board (FOB) shipping
point, or (EXW) ex works factory, at which time legal title passes from the
Company to the customer. Therefore, delivery is generally considered to have
occurred upon shipment. In certain circumstances customers may negotiate
different terms. In these situations, delivery is considered to have occurred
once legal title has passed from the Company to the customer. This may be at
delivery to the customers destination or acceptance by the Companys customer.
The Companys products typically include a one-year warranty and the estimated
cost of product warranty claims is accrued at the time the sale is recognized,
based on historical experience.

Sales to
end-user customers and resellers typically do not have customer acceptance
provisions and only certain of the original equipment manufacturer (OEM)
customer sales have customer acceptance provisions. Customer acceptance is
generally limited to performance under published product specifications. For the
few product sales that have customer acceptance provisions because of higher
than published specifications, (1) the products are tested and accepted by the
customer at a Company site or by the customers acceptance of the results of a
testing program prior to shipment to the customer, or (2) the revenue is
deferred until customer acceptance occurs.

The vast
majority of our sales are made to OEMs, resellers and end-users in the
industrial market. Sales made to OEMs and resellers in the industrial market do
not require installation of the products by the Company, as installation is
performed by the customer and are not subject to other post-delivery
obligations. For end-users, where the Company has agreed to perform
installation or provide training, the Company defers revenue related to
installation services until installation is completed. The Company defers
revenue on training services until these services are provided.

The Company
records allowances for uncollectible customer accounts receivable based on historical
experience. Additionally, an allowance is made based on an assessment of
specific customers financial condition and liquidity. If the financial
condition of the Companys customers were to deteriorate, additional allowances
may be required.

|    |             
|--- | ------------
|(h) | Income Taxes

Income taxes
are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss tax
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized.

|    |                            
|--- | ---------------------------
|(i) | Accounting
  for Warranties

The Company
issues a standard warranty of one year for parts and labor on lasers that are
sold. Additionally, extended warranties are negotiated on a
contract-by-contract basis. The Company provides for estimated warranty costs
as products are shipped.

The Companys estimate of costs
to fulfill its warranty obligations is based on historical experience and
expectation of future conditions. To the extent the Company experiences
increased warranty claim activity or increased costs associated with servicing
those claims, revisions to the estimated warranty liability would be required.

F-10

---



|    |                             
|--- | ----------------------------
|(j) | Foreign Currency Translation

The assets and liabilities of the Companys operations
outside the United States are translated into U.S. dollars at exchange rates in
effect on the balance sheet date, and revenues and expenses are translated
using a weighted average exchange rate during the period.  Gains or losses resulting from the
translation of foreign currency financial statements are recorded as a separate
component of stockholders equity.
Gains or losses resulting from foreign currency transactions are
included in net income.

|    |                         
|--- | ------------------------
|(k) | Earnings per Share (EPS)

Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding during the period.  Diluted EPS reflects the potential dilution
from common stock equivalents (stock options).

|    |                     
|--- | --------------------
|(l) | Comprehensive Income

Comprehensive income consists of net income, foreign
currency translation adjustments, minimum pension liability, and fair value of
interest rate swap agreements, and is presented in the consolidated statements
of stockholders equity and comprehensive income. Accumulated other
comprehensive income is comprised of the following:

|                                                                                             |  |                 |        |      |   |        |  
|-------------------------------------------------------------------------------------------- |  | --------------- | ------ | ---- | - | ------ | -
|                                                                                             |  | September
  30, |       
|                                                                                             |  |                 |       
|                                                                                             |  | 2006            |        | 2005 |  
|                                                                                             |  |                 |        |      |  
|Foreign currency
  translation adjustment                                                    |  | $               | 16,360 |      | $ | 7,519  |  
|Minimum pension
  liability (net of tax effect of $300 in 2006 and $746 in 2005)             |  |                 | (479   | )    |   | (1,186 | )
|Fair value of
  interest swap agreements (net of tax effect of $154 in 2006 and $37 in 2005) |  |                 | 265    |      |   | 61     |  
|                                                                                             |  |                 |        |      |   |        |  
|Total
  accumulated other comprehensive income                                               |  | $               | 16,146 |      | $ | 6,394  |  
|                                                                                             |  |                 |        |      |   |        |  

|    |                                  
|--- | ---------------------------------
|(m) | Research and Development Expenses

Research and development costs are expensed when
incurred and are net of German government and European grants of $1,193, $895,
and $1,056 received for the years ended September 30, 2006, 2005, and 2004,
respectively.  The Company has no future
obligations under such grants.

|    |                      
|--- | ---------------------
|(n) | Financial Instruments

The fair value of financial instruments, consisting
principally of cash, short-term investments, accounts receivable, accounts
payable, and line of credits, approximate carrying value due to the short-term
nature of such instruments.  The fair
value of long-term debt approximates the carrying value due to the variable
based interest on such debt.  The fair
values of interest rate swap agreements were estimated by discounting expected
cash flows using market interest rates over the remaining term of the
instrument.

|    |                                 
|--- | --------------------------------
|(o) | Derivative Financial Instruments

The Company uses derivative financial instruments to
manage funding costs and exposures arising from fluctuations in interest
rates.  These derivative financial
instruments consist primarily of interest rate swaps.  The Company does not use derivative financial instruments for
trading purposes.

Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Certain Hedging Activities
and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activity, an Amendment of SFAS 133 require that all derivative
instruments be recorded on the balance sheet as either an asset or liability
measured at their respective fair values and that changes in the derivative
instruments fair value be recognized in earnings.  On the date the derivative contract is entered into, the Company
designates the derivative as a hedge of the variability of cash flows to be
paid related to a recognized liability (cash flow hedge).  Changes in the fair value of a derivative
that is highly effective and that is designated and qualifies as a cash flow
hedge are recorded in other comprehensive income, until earnings are affected
by the variability in cash flows of the designated hedged item.

F-11

---



Interest rate swap agreements designated as hedges of
the Companys financial liabilities are recorded in the consolidated balance
sheet at fair value.  Adjustments to the
fair value of the derivative asset or liability are recorded as an adjustment
to other comprehensive income.

From time to time, the Company enters into foreign
currency forward contracts and forward exchange options generally of less than
one year duration to hedge a portion of its sales transactions denominated in
foreign currencies.  At September 30,
2006, the Company held Japanese yen forward exchange options with notional
amounts of Euro 0.4 million and Japanese yen forward exchange options with
notional amount of $0.2 million.

The Company manages exposure to counterparty credit
risk by entering into derivative financial instruments with highly rated
institutions that can be expected to fully perform under the terms of such
agreements.

|    |                 
|--- | ----------------
|(p) | Operating Leases

The Company leases facilities under operating leases.
Building lease agreements generally include rent escalation clauses. 
Most of the Companys lease agreements include renewal periods at the Companys
option. The Company recognizes scheduled rent increases on a straight-line
basis over the lease term beginning with the date the Company takes possession
of the leased space.

|    |                 
|--- | ----------------
|(q) | Use of Estimates

Management of the Company makes a number of estimates
and assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reporting of revenues
and expenses, to prepare these financial statements in conformity with
generally accepted U.S. accounting principles.
Significant items subject to such estimates and assumptions include the
valuation allowance for receivables, inventory valuation, warranty liabilities,
and assets and obligations related to employee benefits.  Actual results could differ from these
estimates.

|    |                      
|--- | ---------------------
|(r) | Stock Incentive Plans

In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment, as a replacement to SFAS No. 123 Accounting for
Stock-Based Compensation.  SFAS No.
123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
which allowed companies to use the intrinsic method of valuing share-based
payment transactions. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on the fair-value method as defined in SFAS No. 123.
On March 29, 2005, the SEC issued SAB No. 107 to provide guidance regarding the
adoption of SFAS No. 123R and disclosures in Managements Discussion and
Analysis. The effective date of SFAS No. 123R was modified by SAB No. 107 to
begin with the first annual reporting period of the registrants first fiscal
year beginning on or after June 15, 2005. Accordingly, the Company implemented
SFAS No. 123R effective October 1, 2005.
Prior to the adoption of SFAS No. 123R, benefits of tax deductions in
excess of recognized compensation costs were reported as operating cash flows.  SFAS No. 123R requires excess tax benefits
to be reported as a financing cash inflow rather than as a reduction of taxes
paid.

Previously the Company measured compensation expense
for its stock-based employee compensation plans using the intrinsic value
method prescribed by APB Opinion No. 25, as permitted by SFAS No. 123 and SFAS
No. 148 Accounting for Stock-Based Compensation - Transition and Disclosure.
Had the fair value-based method under SFAS No. 123 been applied, compensation
expense would have been recorded for the options outstanding based on their
respective vesting schedules.

F-12

---



|    |                            
|--- | ---------------------------
|(s) | Shipping and Handling Costs

The Company accounts for shipping and handling costs
in accordance with Emerging Issues Task Force (EITF) Issue No. 00-10,
Accounting for Shipping and Handling Fees and Costs.  In accordance with EITF No. 00-10, revenue
received from shipping and handling fees is reflected in net sales.

|    |                  
|--- | -----------------
|(t) | Reclassifications

Certain balances from 2005 have been reclassified to
conform with the current presentation.

|    |                              
|--- | -----------------------------
|(u) | New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the
financial statement recognition, measurement and disclosure of uncertain tax
positions recognized in an enterprises financial statements in accordance with
FASB Statement No. 109, Accounting for Income Taxes. Tax positions must
meet a more-likely-than-not recognition threshold at the effective date to be
recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will
be effective for fiscal years beginning after December 15, 2006 (our
fiscal year 2008) and the provisions of FIN 48 will be applied to all tax
positions under Statement No. 109 upon initial adoption. The cumulative
effect of applying the provisions of this interpretation will be reported as an
adjustment to the opening balance of retained earnings for that fiscal year.
The Company is currently evaluating the potential impact of FIN 48 on its consolidated
financial statements.

In September 2006, the SEC issued Staff Accounting
Bulletin No. 108 (SAB No. 108). SAB No. 108 addresses the
process and diversity in practice of quantifying financial statement
misstatements resulting in the potential build up of improper amounts on the
balance sheet. We will be required to adopt the provisions of SAB No.108 in
fiscal 2007. We currently do not believe that the adoption of SAB No. 108
will have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements, (SFAS No. 157). SFAS No. 157
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. The changes to current practice resulting from the application
of this Statement relate to the definition of fair value, the methods used to
measure fair value, and the expanded disclosures about fair value measurements.
The Statement is effective for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. We do not believe that the
adoption of the provisions of SFAS No. 157 will materially impact our
financial position and results of operations.

In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans  an amendment of FASB Statements No.87, 88, 106, and 132(R), (SFAS
No. 158). SFAS No. 158 requires an employer to recognize the
over-funded or under-funded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year
in which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. The
provisions of this Statement are effective for an employer with publicly traded
equity securities and are required to recognize the funded status of a defined
benefit postretirement plan and to provide the required disclosures as of the
end of the fiscal year ending after December 15, 2006. The Company is
currently evaluating the potential impact of SFAS No. 158 on its
consolidated financial statements.

F-13

---



|   |            
|-- | -----------
|2. | INVENTORIES

Inventories are summarized as follows:

|                             |  |                 |         |      |   |         | 
|---------------------------- |  | --------------- | ------- | ---- | - | ------- | 
|                             |  | September
  30, |        
|                             |  |                 |        
|                             |  | 2006            |         | 2005 |  
|                             |  |                 |         |      |  
|Finished goods               |  | $               | 16,510  |      | $ | 10,268  | 
|Work in progress             |  |                 | 30,160  |      |   | 28,173  | 
|Raw materials
  and supplies |  |                 | 38,097  |      |   | 38,913  | 
|Demo inventory               |  |                 | 11,900  |      |   | 11,346  | 
|Service parts                |  |                 | 20,298  |      |   | 18,405  | 
|                             |  |                 |         |      |   |         | 
|Total
  inventories          |  | $               | 116,965 |      | $ | 107,105 | 
|                             |  |                 |         |      |   |         | 

|   |                       
|-- | ----------------------
|3. | PROPERTY AND EQUIPMENT

Property and equipment include the following:

|                                        |  |                 |        |      |   |        | 
|--------------------------------------- |  | --------------- | ------ | ---- | - | ------ | 
|                                        |  | September
  30, |       
|                                        |  |                 |       
|                                        |  | 2006            |        | 2005 |  
|                                        |  |                 |        |      |  
|Buildings                               |  | $               | 29,352 |      | $ | 28,062 | 
|Technical
  machinery and equipment     |  |                 | 20,442 |      |   | 16,351 | 
|Construction in
  progress              |  |                 | 951    |      |   | 1,238  | 
|Furniture and
  fixtures                |  |                 | 13,660 |      |   | 13,072 | 
|Computers and
  software                |  |                 | 7,145  |      |   | 6,535  | 
|Leasehold
  improvements                |  |                 | 6,353  |      |   | 5,653  | 
|                                        |  |                 |        |      |   |        | 
|Total property
  and equipment, at cost |  | $               | 77,903 |      | $ | 70,911 | 
|                                        |  |                 |        |      |   |        | 

|   |                                     
|-- | ------------------------------------
|4. | GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the
years ended September 30, 2006, and 2005, are as follows:

|                                        |  |         |        |                 |   |       |   |       |        |   |   |        |  
|--------------------------------------- |  | ------- | ------ | --------------- | - | ----- | - | ----- | ------ | - | - | ------ | -
|                                        |  | Germany |        | United
  States |   | Other |   | Total |       
|                                        |  |         |        |                 |   |       |   |       |       
|Balance as of
  September 30, 2004      |  | $       | 39,390 |                 | $ | 9,506 |   | $     | 12,883 |   | $ | 61,779 |  
|Additional
  goodwill from acquisitions |  |         |       |                 |   | 300   |   |       | 597    |   |   | 897    |  
|Currency
  exchange difference          |  |         | (831   | )               |   | (64   | ) |       | (288   | ) |   | (1,183 | )
|                                        |  |         |        |                 |   |       |   |       |        |   |   |        |  
|Balance as of
  September 30, 2005      |  | $       | 38,559 |                 | $ | 9,742 |   | $     | 13,192 |   | $ | 61,493 |  
|                                        |  |         |        |                 |   |       |   |       |        |   |   |        |  
|Additional
  goodwill from acquisitions |  |         |       |                 |   |      |   |       | 504    |   |   | 504    |  
|Currency
  exchange difference          |  |         | 1,812  |                 |   | 138   |   |       | 669    |   |   | 2,619  |  
|                                        |  |         |        |                 |   |       |   |       |        |   |   |        |  
|Balance as of
  September 30, 2006      |  | $       | 40,371 |                 | $ | 9,880 |   | $     | 14,365 |   | $ | 64,616 |  
|                                        |  |         |        |                 |   |       |   |       |        |   |   |        |  

F-14

---



The carrying values of other intangible assets are as
follows:

|                               |  |                            |        |                               |  
|------------------------------ |  | -------------------------- | ------ | ----------------------------- | -
|                               |  | September
  30, 2006       |        | September
  30, 2005          |  
|                               |  |                            |        |                               |  
|                               |  | Gross
  Carrying 
  Amount |        | Accumulated
  
  Amortization |  
|                               |  |                            |        |                               |  
|Amortized
  intangible assets: |  |                            |        |                               |  
|Patents                        |  | $                          | 7,580  |                               | $
|Customer base                  |  |                            | 13,856 |                               |  
|Other                          |  |                            | 4,360  |                               |  
|                               |  |                            |        |                               |  
|Total                          |  | $                          | 25,796 |                               | $
|                               |  |                            |        |                               |  

Patents are amortized over the life of the patent
which ranges from 1 to 20 years.
Customer base is amortized on a straight-line basis over seven
years.  Amortization expense for the years
ended September 30, 2006, 2005, and 2004, was $3,532, $5,270, $2,389,
respectively.  At September 30, 2006,
estimated amortization expense for the next five fiscal years based on the
average exchange rates as of September 30, 2006, are as follows:

|     |  |   |       | 
|---- |  | - | ----- | 
|2007 |  | $ | 3,000 | 
|2008 |  |   | 2,300 | 
|2009 |  |   | 2,200 | 
|2010 |  |   | 800   | 
|2011 |  |   | 800   | 

|   |                    
|-- | -------------------
|5. | ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:

|                            |  |                 |        |      |   |        | 
|--------------------------- |  | --------------- | ------ | ---- | - | ------ | 
|                            |  | September
  30, |       
|                            |  |                 |       
|                            |  | 2006            |        | 2005 |  
|                            |  |                 |        |      |  
|Employee
  compensation     |  | $               | 18,300 |      | $ | 16,372 | 
|Warranty
  reserves         |  |                 | 11,754 |      |   | 10,836 | 
|Other taxes
  payable       |  |                 | 497    |      |   | 524    | 
|Customer
  deposits         |  |                 | 12,349 |      |   | 8,515  | 
|Other                       |  |                 | 12,316 |      |   | 9,902  | 
|                            |  |                 |        |      |   |        | 
|Total accrued
  liabilities |  | $               | 55,216 |      | $ | 46,149 | 
|                            |  |                 |        |      |   |        | 

The Company provides for the estimated costs of
product warranties when revenue is recognized.
The estimate of costs to fulfill warranty obligations is based on
historical experience and expectation of future conditions.  The change in warranty reserves for the
years ended September 30, 2006, and 2005, is as follows:

|                                                       |  |   |        |  
|------------------------------------------------------ |  | - | ------ | -
|Balance at
  September 30, 2004                        |  | $ | 13,375 |  
|Additional
  accruals for warranties during the period |  |   | 2,892  |  
|Usage during the
  period                              |  |   | (5,263 | )
|Currency
  translation                                 |  |   | (168   | )
|                                                       |  |   |        |  
|Balance at
  September 30, 2005                        |  | $ | 10,836 |  
|Additional accruals
  for warranties during the period |  |   | 6,881  |  
|Usage during the
  period                              |  |   | (6,453 | )
|Currency
  translation                                 |  |   | 490    |  
|                                                       |  |   |        |  
|Balance at
  September 30, 2006                        |  | $ | 11,754 |  
|                                                       |  |   |        |  

F-15

---



|   |               
|-- | --------------
|6. | LINE OF CREDIT

The Company maintains a $25,000 annually renewable line
of credit with Deutsche Bank AG to support its working capital needs.  As of September 30, 2006 and 2005, $3,425
and $5,352, respectively, were outstanding under this loan facility as a result
of borrowings by Rofin-Baasel Japan Corp., Rofin-Baasel Italiana S.r.l., and
Rasant at an average fixed interest rate of 2.6% for fiscal year 2006 and 2.3%
for fiscal year 2005.

In addition, the Companys non-U.S. subsidiaries have
several lines of credit, which allow them to borrow in the applicable local
currency.  At September 30, 2006 and
2005, direct borrowings under these agreements totaled $13,902 and $12,133,
respectively.  The remaining unused
portion of the lines of credit at September 30, 2006, was $50,689, in
aggregate.  Fixed interest rates vary
from 0.8% to 5.0%, depending upon the country and usage of the available
credit.

The remaining portion of the financing of the
acquisition of CBL and its existing debt ($ 2,667) was included in the caption
Line of Credit and Short-Term Borrowings in the accompanying consolidated
balance sheet as of September 30, 2005. The debt was fully repaid in 2006.

|   |               
|-- | --------------
|7. | LONG-TERM DEBT

Dilas and RSL maintain additional long-term credit
facilities of $3,420, which expire in 2008, and $3,167, which expire in
2009.  Rasant and Rofin-Baasel France
S.A. maintain long-term credit facilities of $82 and $17, respectively, which
expire in 2009 and 2008. CBL maintains long-term credit facilities of $6,335,
which expire in 2008, and $5,068 are borrowed under the credit line with Deutsche
Bank which also expire in 2008.  As of
September 30, 2006, $18,089 was borrowed under such facilities at an average
interest rate of 3.4%.  As of September
30, 2005, $20,850 was borrowed under such facilities at an average interest
rate of 3.5%.

The Company has entered into interest rate swap
agreements for a total notional amount of Euro 13,000  (equivalent to $16,470 based on the exchange rate at September
30, 2006) to minimize exposure to fluctuation of interest rates on short and
long-term debt on which the interest rate is reset every six months.

|   |                  
|-- | -----------------
|8. | LEASE COMMITMENTS

The Company leases operating facilities and equipment
under operating leases, which expire at various dates through 2017 (see note
12).  The lease agreements require
payment of real estate taxes, insurance and maintenance expenses by the
Company.

Minimum lease payments for future fiscal years under
non-cancelable operating leases as of September 30, 2006, are:

|                                   |  |       |       | 
|---------------------------------- |  | ----- | ----- | 
|Fiscal
  year ending September 30, |  | Total |      
|                                   |  |       |      
|2007                               |  | $     | 5,885 | 
|2008                               |  |       | 4,258 | 
|2009                               |  |       | 2,730 | 
|2010                               |  |       | 1,395 | 
|2011                               |  |       | 764   | 
|2012 and thereafter                |  |       | 702   | 

Rent expense charged to operations for the years ended
September 30, 2006, 2005, and 2004, approximated $6,652, $7,320, and $5,622,
respectively.

F-16

---



|   |             
|-- | ------------
|9. | INCOME TAXES

Total income taxes for the years ended September 30,
2006, 2005, and 2004, were allocated as follows:

|                                                                                |  |                             |        |      |   |        |   |   |        |  
|------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                |  | Years
  ended September 30, |       
|                                                                                |  |                             |       
|                                                                                |  | 2006                        |        | 2005 |   | 2004   |  
|                                                                                |  |                             |        |      |   |        |  
|Income taxes
  from continuing operations                                       |  | $                           | 27,041 |      | $ | 20,595 |   | $ | 17,648 |  
|Stockholders
  equity;                                                         |  |                             |        |      |   |        |   |   |        |  
|Tax benefit applicable to the exercise of stock options                         |  |                             | (323   | )    |   | (1,420 | ) |   | (1,793 | )
|Tax benefit (expense)
  applicable to the additional minimum pension obligation |  |                             | 470    |      |   | (746   | ) |   |       |  
|Tax expense
  applicable to the fair value of interest swap agreements          |  |                             | 116    |      |   | 176    |   |   | 360    |  
|                                                                                |  |                             |        |      |   |        |   |   |        |  
|Total income tax                                                                |  | $                           | 27,304 |      | $ | 18,605 |   | $ | 16,215 |  
|                                                                                |  |                             |        |      |   |        |   |   |        |  

Income before income taxes is attributable to the
following geographic regions:

|                                 |  |                             |        |      |   |        |  |   |        | 
|-------------------------------- |  | --------------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                 |  | Years
  ended September 30, |       
|                                 |  |                             |       
|                                 |  | 2006                        |        | 2005 |   | 2004   | 
|                                 |  |                             |        |      |   |        | 
|United States                    |  | $                           | 12,989 |      | $ | 12,037 |  | $ | 9,634  | 
|Germany                          |  |                             | 51,137 |      |   | 38,343 |  |   | 33,042 | 
|France                           |  |                             | 402    |      |   | 945    |  |   | 555    | 
|Italy                            |  |                             | 1,707  |      |   | 1,118  |  |   | 582    | 
|Japan                            |  |                             | 565    |      |   | 889    |  |   | 494    | 
|United Kingdom                   |  |                             | 3,373  |      |   | 1,389  |  |   | 2,395  | 
|Singapore                        |  |                             | 2,536  |      |   | 1,906  |  |   | 2,298  | 
|Other                            |  |                             | 3,955  |      |   | 1,943  |  |   | 1,078  | 
|                                 |  |                             |        |      |   |        |  |   |        | 
|Total income before income taxes |  | $                           | 76,664 |      | $ | 58,570 |  | $ | 50,078 | 
|                                 |  |                             |        |      |   |        |  |   |        | 

Income tax expense is comprised of the following
amounts:

|                           |  |                             |        |      |   |        |   |   |        |  
|-------------------------- |  | --------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                           |  | Years
  ended September 30, |       
|                           |  |                             |       
|                           |  | 2006                        |        | 2005 |   | 2004   |  
|                           |  |                             |        |      |   |        |  
|Current:                   |  |                             |        |      |   |        |   |   |        |  
|United States              |  | $                           | 5,212  |      | $ | 4,326  |   | $ | 2,126  |  
|Foreign                    |  |                             | 25,909 |      |   | 19,956 |   |   | 14,996 |  
|                           |  |                             |        |      |   |        |   |   |        |  
|Total current              |  |                             | 31,121 |      |   | 24,282 |   |   | 17,122 |  
|                           |  |                             |        |      |   |        |   |   |        |  
|Deferred:                  |  |                             |        |      |   |        |   |   |        |  
|United States              |  |                             | (2,018 | )    |   | (1,473 | ) |   | 680    |  
|Foreign                    |  |                             | (2,062 | )    |   | (2,214 | ) |   | (154   | )
|                           |  |                             |        |      |   |        |   |   |        |  
|Total deferred             |  |                             | (4,080 | )    |   | (3,687 | ) |   | 526    |  
|                           |  |                             |        |      |   |        |   |   |        |  
|Total income tax
  expense |  | $                           | 27,041 |      | $ | 20,595 |   | $ | 17,648 |  
|                           |  |                             |        |      |   |        |   |   |        |  

Statutory tax rates in the U.S., U.K., Italy, France,
Spain, Belgium, the Netherlands, Sweden, Singapore, Japan, Taiwan, South Korea,
China, and Canada approximate 35%, 30%, 37.25%, 33.33%, 35%, 33,99%, 31.19%,
28%, 20%, 40.30%, 32.50%, 25.34%, 15%, and 34%, respectively. Generally, in
Germany retained corporate income is subject to a municipal trade tax (which
approximates 17%), which is deductible for German federal corporate income tax
purposes, a federal corporate income tax of 25% and a surcharge of 5.5% on the
federal corporate income tax amount.

F-17

---



The difference between actual income tax expense and
the amount computed by applying the U.S. federal income tax rate is as follows:

|                                                    |  |                             |        |      |   |        |   |   |        |  
|--------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                    |  | Years
  ended September 30, |       
|                                                    |  |                             |       
|                                                    |  | 2006                        |        | 2005 |   | 2004   |  
|                                                    |  |                             |        |      |   |        |  
|U.S. federal statutory tax rate                     |  |                             | 35     | %    |   | 34     | % |   | 34     | %
|                                                    |  |                             |        |      |   |        |   |   |        |  
|Computed expected tax expense                     |  | $                           | 26,833 |      | $ | 19,914 |   | $ | 17,027 |  
|Difference between U.S. and foreign statutory rates |  |                             | 1,398  |      |   | 1,813  |   |   | 1,117  |  
|Minority interest and other permanent differences   |  |                             | 89     |      |   | 114    |   |   | 389    |  
|Adjustment of valuation allowance                   |  |                             | (2,112 | )    |   | (1,045 | ) |   | (740   | )
|Other                                               |  |                             | 833    |      |   | (201   | ) |   | (145   | )
|                                                    |  |                             |        |      |   |        |   |   |        |  
|Actual tax expense                                  |  | $                           | 27,041 |      | $ | 20,595 |   | $ | 17,648 |  
|                                                    |  |                             |        |      |   |        |   |   |        |  

The tax effects of temporary
differences that give rise to the net deferred taxes are as follows:

|                                        |  |                 |        |      |   |        |  
|--------------------------------------- |  | --------------- | ------ | ---- | - | ------ | -
|                                        |  | September
  30, |       
|                                        |  |                 |       
|                                        |  | 2006            |        | 2005 |  
|                                        |  |                 |        |      |  
|Deferred income tax assets:             |  |                 |        |      |   |        |  
|Foreign                                 |  |                 |        |      |   |        |  
|Net operating
  loss carryforwards      |  | $               | 521    |      | $ | 678    |  
|Pension obligations                     |  |                 | 1,150  |      |   | 1,389  |  
|Inventories                             |  |                 | 2,673  |      |   | 2,156  |  
|Accrued liabilities                     |  |                 | 283    |      |   |       |  
|Other                                   |  |                 | 342    |      |   | 346    |  
|                                        |  |                 |        |      |   |        |  
|Total Foreign                           |  |                 | 4,969  |      |   | 4,569  |  
|                                        |  |                 |        |      |   |        |  
|United States:                          |  |                 |        |      |   |        |  
|Net operating
  loss carryforwards      |  |                 | 427    |      |   | 1,988  |  
|Warranty reserve                        |  |                 | 537    |      |   | 529    |  
|Inventories                             |  |                 | 3,948  |      |   | 3,796  |  
|Allowance for
  doubtful accounts       |  |                 | 286    |      |   | 207    |  
|Accrued
  liabilities                   |  |                 | 411    |      |   |       |  
|Pension
  obligations                   |  |                 | 249    |      |   | 252    |  
|Stock-based
  compensation expense      |  |                 | 266    |      |   |       |  
|Other                                   |  |                 | 217    |      |   | 269    |  
|                                        |  |                 |        |      |   |        |  
|Total United
  States                   |  |                 | 6,341  |      |   | 7,041  |  
|                                        |  |                 |        |      |   |        |  
|Gross deferred
  income tax assets      |  |                 | 11,310 |      |   | 11,610 |  
|Less: Valuation
  allowance             |  |                 | (17    | )    |   | (2,129 | )
|                                        |  |                 |        |      |   |        |  
|Net deferred
  income tax assets        |  | $               | 11,293 |      | $ | 9,481  |  
|                                        |  |                 |        |      |   |        |  
|Deferred income tax liabilities:        |  |                 |        |      |   |        |  
|Foreign:                                |  |                 |        |      |   |        |  
|Property and
  equipment                |  |                 | (1,689 | )    |   | (1,488 | )
|Accrued
  liabilities                   |  |                 |       |      |   | (55    | )
|Accounts
  receivable                   |  |                 |       |      |   | (170   | )
|Accounts payable                        |  |                 |       |      |   | (1,613 | )
|Intangibles                             |  |                 | (1,416 | )    |   | (899   | )
|Other                                   |  |                 | (849   | )    |   | (627   | )
|                                        |  |                 |        |      |   |        |  
|                                        |  |                 |        |      |   |        |  
|Total Foreign                           |  |                 | (3,954 | )    |   | (4,852 | )
|                                        |  |                 |        |      |   |        |  
|United States:                          |  |                 |        |      |   |        |  
|Property &
  equipment                  |  |                 | (402   | )    |   | (479   | )
|Intangibles                             |  |                 | (1,366 | )    |   | (1,873 | )
|                                        |  |                 |        |      |   |        |  
|Total United
  States                   |  |                 | (1,768 | )    |   | (2,352 | )
|                                        |  |                 |        |      |   |        |  
|Gross deferred
  income tax liabilities |  |                 | (5,722 | )    |   | (7,204 | )
|                                        |  |                 |        |      |   |        |  
|Net deferred
  income tax assets        |  | $               | 5,571  |      | $ | 2,277  |  
|                                        |  |                 |        |      |   |        |  

F-18

---



The total deferred income tax assets (liabilities) are
included in the accompanying consolidated balance sheet as follows:

|                                              |  |                 |        |      |   |        |  
|--------------------------------------------- |  | --------------- | ------ | ---- | - | ------ | -
|                                              |  | September
  30, |       
|                                              |  |                 |       
|                                              |  | 2006            |        | 2005 |  
|                                              |  |                 |        |      |  
|Deferred income tax assets  current          |  | $               | 9,974  |      | $ | 8,003  |  
|Deferred income tax assets  non current      |  |                 | 1,818  |      |   | 2,949  |  
|Deferred income tax liabilities  current     |  |                 | (874   | )    |   | (3,336 | )
|Deferred income tax liabilities  non current |  |                 | (5,347 | )    |   | (5,339 | )
|                                              |  |                 |        |      |   |        |  
|Net deferred
  income tax assets              |  | $               | 5,571  |      | $ | 2,277  |  
|                                              |  |                 |        |      |   |        |  

In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences, net of
the existing valuation allowances at September 30, 2006. The Company had
established a valuation allowance related to net operating loss carryforwards
at RB Inc. due to uncertainty regarding RB Inc.s ability to generate future
taxable income required to utilize these carryforwards. The valuation allowance
decreased in fiscal years 2006 and 2005 by $2,112 and $981, respectively due to
actual profits and changes in managements assumptions about the future profitability
of RB Inc. and utilization of the net operating loss carryforward.

At September 30, 2006, the Company has federal net
operating loss carryforwards available of $899 in the United States (which
expire as follows: $898 in 2023, $1 in 2025) and $1,489 in Germany, and $141 in
Spain (which have no expiration date). The annual utilization by the Company of
its U.S. net operating loss carryforwards will be subject to certain annual
limitations under Section 382 of the Internal Revenue Code.

The Company does not provide for U.S. income taxes or
foreign withholding taxes on undistributed earnings of foreign subsidiaries
because these earnings are intended to be permanently reinvested in those
operations. Earnings may become taxable upon an actual or deemed repatriation
of assets from the subsidiaries or a sale or liquidation of the subsidiaries.
It is not practicable to estimate the amount of unrecognized deferred tax
liability for these undistributed earnings.

|    |                       
|--- | ----------------------
|10. | EMPLOYEE BENEFIT PLANS

The Company has defined benefit pension plans for the
RSL and RS Inc. employees. The Companys U.S. plan began in fiscal year 1995
and is funded. As is the normal practice with German companies, the German
pension plan is unfunded. Any new employees, hired after the acquisition of
CBL, are not eligible for the RSL pension plan. The measurement date of the
Companys pension plans is September 30.

The determination of the Companys obligation and
expense for pension is dependent on the selection of certain assumptions used
by actuaries in calculating those amounts. Assumptions are made about interest
rates, expected investment return on plan assets, total turnover rates, and
rates of future compensation increases. In addition, the Companys actuarial
consultants use subjective factors such as withdrawal rates and mortality rates
to develop their calculations of these amounts. The Company generally reviews
these assumptions at the beginning of each fiscal year. The Company is required
to consider current market conditions, including changes in interest rates, in
making these assumptions. The actuarial assumptions that the Company uses may
differ materially from actual results due to changing market and economic
conditions, higher or lower withdrawal rates or longer or shorter life spans of
participants. These differences may result in a significant impact on the
amount of pension benefits expense the Company has recorded or may record.

The discount rate enables the Company to state expected future cash
flows at a present value on the measurement date. The Company has little
latitude in selecting this rate and it must represent the market rate of
high-quality fixed income investments. A lower discount rate increases the
present value of benefit obligations and increases pension expense.

F-19

---



To determine the expected long-term rate of return on
plan assets, the Company considers the current and expected asset allocations,
as well as historical and expected returns on various categories of plan
assets.

The following table sets forth the funded status of
the plans at the balance sheet dates:

|                                                  |  |                 |         |      |   |         |  
|------------------------------------------------- |  | --------------- | ------- | ---- | - | ------- | -
|                                                  |  | September
  30, |        
|                                                  |  |                 |        
|                                                  |  | 2006            |         | 2005 |  
|                                                  |  |                 |         |      |  
|Change in benefit obligation:                     |  |                 |         |      |   |         |  
|Projected benefit obligation at beginning of year |  | $               | 16,013  |      | $ | 12,362  |  
|Service cost                                      |  |                 | 719     |      |   | 566     |  
|Interest cost                                     |  |                 | 727     |      |   | 680     |  
|Actuarial (gains) losses                          |  |                 | (1,291  | )    |   | 2,747   |  
|Amortization of unrecognized gains/losses         |  |                 | 102     |      |   |        |  
|Foreign exchange rate changes                     |  |                 | 436     |      |   | (209    | )
|Benefits paid                                     |  |                 | (210    | )    |   | (133    | )
|                                                  |  |                 |         |      |   |         |  
|Projected benefit obligation at end of year       |  |                 | 16,496  |      |   | 16,013  |  
|                                                  |  |                 |         |      |   |         |  
|Change in plan assets:                            |  |                 |         |      |   |         |  
|Fair value of plan assets at beginning of year    |  |                 | 3,649   |      |   | 3,266   |  
|Actual return on plan assets                      |  |                 | 191     |      |   | 323     |  
|Employer contributions                            |  |                 | 275     |      |   | 150     |  
|Benefits paid                                     |  |                 | (94     | )    |   | (90     | )
|                                                  |  |                 |         |      |   |         |  
|Fair value of plan assets at end of year          |  |                 | 4,021   |      |   | 3,649   |  
|                                                  |  |                 |         |      |   |         |  
|                                                 
|Funded status                                     |  |                 | (12,475 | )    |   | (12,364 | )
|Unrecognized net actuarial loss                   |  |                 | 1,959   |      |   | 3,145   |  
|Unrecognized prior service cost                   |  |                 |        |      |   | 25      |  
|Additional minimum liability                      |  |                 | (779    | )    |   | (1,932  | )
|                                                  |  |                 |         |      |   |         |  
|Accrued benefit cost                              |  | $               | (11,295 | )    | $ | (11,126 | )
|                                                  |  |                 |         |      |   |         |  

|                                              |  |               |        |      |   |        |  
|--------------------------------------------- |  | ------------- | ------ | ---- | - | ------ | -
|                                              |  | September 30, |       
|                                              |  |               |       
|                                              |  | 2006          |        | 2005 |  
|                                              |  |               |        |      |  
|                                             
|Accumulated benefit obligation at end of year |  | $             | 15,012 |      | $ | 14,192 |  
|                                              |  |               |        |      |   |        |  
|Discount rate:                                |  |               |        |      |   |        |  
|United States                                 |  |               | 5.3    | %    |   | 5.5    | %
|Foreign                                       |  |               | 4.5    | %    |   | 4      | %
|Expected return on plan assets               |  |               |        |      |   |        |  
|United States
  only                          |  |               | 8.0    | %    |   | 8.0    | %
|Rate of compensation increase                 |  |               |        |      |   |        |  
|United States                                 |  |               | 2.0    | %    |   | 3.0    | %
|Foreign                                       |  |               | 1.3    | %    |   | 1.3    | %
|                                              |  |               |        |      |   |        |  

A minimum pension liability adjustment is required when the accumulated
benefit obligation exceeds plan assets and accrued pension liabilities. The
minimum liability adjustment, net of tax benefit, is reported as a component of
other comprehensive income included in stockholders equity. The amount recorded
in other comprehensive income, net of tax benefit, was $479 at September 30,
2006, and $1,186 at September 30, 2005. The accumulated benefit obligation for
the pension plan with an accumulated benefit obligations in excess of plan
assets and accrued pension liability was $10,501 as if September 30, 2006 and
$10,331 as of September 30, 2005.

F-20

---



The following
table sets forth the components of net periodic benefit cost for the respective
fiscal years:

| |                                      |  |                           |       |      |   |       |   |   |       |  
| | ------------------------------------ |  | ------------------------- | ----- | ---- | - | ----- | - | - | ----- | -
| |                                      |  | Years ended September 30, |      
| |                                      |  |                           |      
| |                                      |  | 2006                      |       | 2005 |   | 2004  |  
| |                                      |  |                           |       |      |   |       |  
| | Service cost                         |  | $                         | 719   |      | $ | 566   |   | $ | 566   |  
| | Interest
  cost                      |  |                           | 727   |      |   | 680   |   |   | 635   |  
| | Expected
  return on plan assets     |  |                           | (297  | )    |   | (272  | ) |   | (197  | )
| | Amortization
  of prior service cost |  |                           | 25    |      |   | 63    |   |   | 63    |  
| |                                      |  |                           |       |      |   |       |   |   |       |  
| | Net periodic
  benefit cost          |  | $                         | 1,174 |      | $ | 1,037 |   | $ | 1,067 |  
| |                                      |  |                           |       |      |   |       |   |   |       |  

RS Inc. has a
minimum required contribution to its defined pension plans of approximately
$0.4 million for the fiscal 2006 plan year, which it intends to make in fiscal
year 2007. The Company has not determined whether it will make additional
voluntary contributions for this plan.

Expected benefit
payments for each of the next five fiscal years and for the five years
aggregated thereafter is as follows: $192 in 2007, $346 in 2008, $403 in 2009,
$504 in 2010, $559 in 2011, and $3,768 thereafter.

The Companys
pension plan allocations at September 30, 2006 and 2005, by asset category are
as follows:

| |                         |  |              |       |            |  |              |   |            |       |  |  |     |  
| | ----------------------- |  | ------------ | ----- | ---------- |  | ------------ | - | ---------- | ----- |  |  | --- | -
| |                         |  | 2006         |       | 2005       | 
| |                         |  |              |       |            | 
| |                         |  | Dollar Value |       | Percentage |  | Dollar Value |   | Percentage |      
| |                         |  |              |       |            |  |              |   |            |      
| | Money Market
  Funds    |  | $            | 635   |            |  | 15           | % | $          | 284   |  |  | 8   | %
| | Stocks                  |  |              | 2,646 |            |  | 65           | % |            | 2,261 |  |  | 62  | %
| | Government
  Securities |  |              | 740   |            |  | 20           | % |            | 1,104 |  |  | 30  | %
| |                         |  |              |       |            |  |              |   |            |       |  |  |     |  
| | Total plan
  assets     |  | $            | 4,021 |            |  | 100          | % | $          | 3,649 |  |  | 100 | %
| |                         |  |              |       |            |  |              |   |            |       |  |  |     |  

The Company
employs a total return investment approach whereby a mix of stocks and
government securities are used to maximize the long-term return of plan assets
for a prudent level of risk. The intent of this strategy is to minimize plan
expenses by maximizing investment returns within that prudent level of risk.
Furthermore, equity investments are diversified across U.S. and non-U.S. stocks
as well as growth, value, and small and large capitalizations. Additionally,
cash balances are maintained at levels adequate to meet near term plan expenses
and benefit payments. Investment risk is measured and monitored on an ongoing
basis through semi-annual investment portfolio reviews.

RS Inc., RB
Inc., PRC, Lee Laser, Rofin-Baasel Canada Ltd., and Dilas Diodelaser Inc. have
401(k) plans for the benefit of all eligible U.S. employees, as defined by the
plan. Participating employees may contribute up to 16% of their qualified
annual compensation. Those subsidiaries match 50% of the first 5 to 6% of the
employees compensation contributed as a salary deferral. Company contributions
for the years ended September 30, 2006, 2005, and 2004, were $374, $406, and
$246, respectively.

|    |                            
|--- | ---------------------------
|11. | EARNINGS PER
  COMMON SHARE

The
calculation of the weighted average number of common shares outstanding for
each period is as follows:

| |                                                                         |  |                           |            |      |  |            |  |  |            | 
| | ----------------------------------------------------------------------- |  | ------------------------- | ---------- | ---- |  | ---------- |  |  | ---------- | 
| |                                                                         |  | Years ended September 30, |           
| |                                                                         |  |                           |           
| |                                                                         |  | 2006                      |            | 2005 |  | 2004       | 
| |                                                                         |  |                           |            |      |  |            | 
| | Weighted number of shares for basic
  earnings per common share         |  |                           | 15,283,817 |      |  | 15,071,692 |  |  | 13,478,606 | 
| | Potential additional shares due to
  outstanding dilutive stock options |  |                           | 403,075    |      |  | 489,314    |  |  | 541,548    | 
| |                                                                         |  |                           |            |      |  |            |  |  |            | 
| | Weighted number of shares for diluted
  earnings per common share       |  |                           | 15,686,892 |      |  | 15,561,006 |  |  | 14,020,154 | 
| |                                                                         |  |                           |            |      |  |            |  |  |            | 

Excluded from
the calculation of diluted EPS for the year ended September 30, 2004, was
285,500 outstanding stock options. These options were not included in the 2004
calculations because their effect on earnings per share was anti-dilutive. No
shares were excluded from the calculation of diluted EPS for the year ended
September 30, 2005 and 2006.

F-21

---



|    |                             
|--- | ----------------------------
|12. | RELATED
  PARTY TRANSACTIONS

The Company
had sales to its minority shareholder in Japan amounting to $1,755, $1,128, and
$1,811, in fiscal years 2006, 2005, and 2004, respectively. As of September 30,
2006 and 2005, the accounts receivable with the minority shareholder in Japan
amounted to $1,157 and $882, respectively.

RSL paid
commissions to its minority shareholder of Rofin-Baasel China of $284 in fiscal
2006. No balances were outstanding as of September 30, 2006. At September 30,
2005 the company had accounts receivables of $228 from this minority
shareholder.

The Companys
sales to related parties have generally been on terms comparable to those
available in connection with sales to unaffiliated parties.

The main
facility in Starnberg is rented under a 25-year operating lease from the former
minority shareholder of CBL Mr. Baasel, who is also a member of the board of
directors of the Company, and includes a clause to terminate the lease contract
within a two-year notice period during the contract. The Company paid rent
expense of $644, $645, and $614, to Mr. Baasel during fiscal years 2006, 2005,
and 2004, respectively.

The Company
has accrued $127 and $120 at September 30, 2006 and 2005, respectively, for the
option to purchase the remaining minority interests in Optoskand AB and $135 is
accrued for accumulated interest on this obligation. In addition the Company
has accrued $31 at September 30, 2006 based on an earn-out agreement with the
minority shareholder of Optoskand. These amounts are included in accounts
payable to related party in the accompanying consolidated balance sheet.

|    |                         
|--- | ------------------------
|13. | GEOGRAPHIC
  INFORMATION

The Company
manages its business under geographic regions that are aggregated together as
one segment in the global industrial laser industry. Sales from these regions have
similar long-term financial performance and economic characteristics. The
products from these regions utilize similar manufacturing processes and use
similar production equipment, which may be interchanged from group to group.
The Company distributes, sells and services final product to the same type of
customers from all regions.

Assets,
revenues, and income before taxes, by geographic region are summarized below:

ASSETS

| |                             |  |               |          |      |   |          |  
| | --------------------------- |  | ------------- | -------- | ---- | - | -------- | -
| |                             |  | September 30, |         
| |                             |  |               |         
| |                             |  | 2006          |          | 2005 |  
| |                             |  |               |          |      |  
| | North
  America             |  | $             | 233,379  |      | $ | 219,949  |  
| | Germany                     |  |               | 309,324  |      |   | 280,047  |  
| | Other                       |  |               | 157,499  |      |   | 146,992  |  
| | Intercompany
  eliminations |  |               | (198,681 | )    |   | (218,350 | )
| |                             |  |               |          |      |   |          |  
| | Total assets                |  | $             | 501,521  |      | $ | 428,638  |  
| |                             |  |               |          |      |   |          |  

REVENUES -
TOTAL BUSINESS

| |                             |  |                           |          |      |   |          |   |   |          |  
| | --------------------------- |  | ------------------------- | -------- | ---- | - | -------- | - | - | -------- | -
| |                             |  | Years ended September 30, |         
| |                             |  |                           |         
| |                             |  | 2006                      |          | 2005 |   | 2004     |  
| |                             |  |                           |          |      |   |          |  
| | North
  America             |  | $                         | 130,374  |      | $ | 111,581  |   | $ | 74,643   |  
| | Germany                     |  |                           | 313,576  |      |   | 286,619  |   |   | 284,876  |  
| | Other                       |  |                           | 140,561  |      |   | 125,227  |   |   | 111,589  |  
| | Intercompany
  eliminations |  |                           | (163,621 | )    |   | (148,236 | ) |   | (148,480 | )
| |                             |  |                           |          |      |   |          |   |   |          |  
| |                             |  | $                         | 420,890  |      | $ | 375,191  |   | $ | 322,628  |  
| |                             |  |                           |          |      |   |          |   |   |          |  

F-22

---



INTERCOMPANY REVENUES

| |                             |  |                           |          |      |   |          |   |   |          |  
| | --------------------------- |  | ------------------------- | -------- | ---- | - | -------- | - | - | -------- | -
| |                             |  | Years ended September 30, |         
| |                             |  |                           |         
| |                             |  | 2006                      |          | 2005 |   | 2004     |  
| |                             |  |                           |          |      |   |          |  
| | North
  America             |  | $                         | 3,874    |      | $ | 3,027    |   | $ | 3,928    |  
| | Germany                     |  |                           | 125,944  |      |   | 121,118  |   |   | 117,974  |  
| | Other                       |  |                           | 33,803   |      |   | 24,091   |   |   | 26,578   |  
| | Intercompany
  eliminations |  |                           | (163,621 | )    |   | (148,236 | ) |   | (148,480 | )
| |                             |  |                           |          |      |   |          |   |   |          |  
| |                             |  | $                         |         |      | $ |         |   | $ |         |  
| |                             |  |                           |          |      |   |          |   |   |          |  

EXTERNAL REVENUES

| |                 |  |                           |         |      |   |         |  |   |         | 
| | --------------- |  | ------------------------- | ------- | ---- | - | ------- |  | - | ------- | 
| |                 |  | Years ended September 30, |        
| |                 |  |                           |        
| |                 |  | 2006                      |         | 2005 |   | 2004    | 
| |                 |  |                           |         |      |   |         | 
| | North
  America |  | $                         | 126,500 |      | $ | 108,554 |  | $ | 70,715  | 
| | Germany         |  |                           | 187,632 |      |   | 165,501 |  |   | 166,902 | 
| | Other           |  |                           | 106,758 |      |   | 101,136 |  |   | 85,011  | 
| |                 |  |                           |         |      |   |         |  |   |         | 
| |                 |  | $                         | 420,890 |      | $ | 375,191 |  | $ | 322,628 | 
| |                 |  |                           |         |      |   |         |  |   |         | 

INCOME BEFORE INCOME TAXES

| |                 |  |                           |        |      |   |        |  |   |        | 
| | --------------- |  | ------------------------- | ------ | ---- | - | ------ |  | - | ------ | 
| |                 |  | Years ended September 30, |       
| |                 |  |                           |       
| |                 |  | 2006                      |        | 2005 |   | 2004   | 
| |                 |  |                           |        |      |   |        | 
| | North
  America |  | $                         | 12,947 |      | $ | 12,037 |  | $ | 9,634  | 
| | Germany         |  |                           | 51,137 |      |   | 38,343 |  |   | 33,042 | 
| | Other           |  |                           | 12,580 |      |   | 8,190  |  |   | 7,402  | 
| |                 |  |                           |        |      |   |        |  |   |        | 
| |                 |  | $                         | 76,664 |      | $ | 58,570 |  | $ | 50,078 | 
| |                 |  |                           |        |      |   |        |  |   |        | 

|    |                                                
|--- | -----------------------------------------------
|14. | SELECTED
  QUARTERLY FINANCIAL DATA (Unaudited)

The following
represents the Companys quarterly results (millions of dollars, except per
share amounts):

| |                                |  |                 |      |                  |   |                 |  |                  |       |  |   |       | 
| | ------------------------------ |  | --------------- | ---- | ---------------- | - | --------------- |  | ---------------- | ----- |  | - | ----- | 
| |                                |  | Quarters ended  |     
| |                                |  |                 |     
| |                                |  | Dec. 31,
  2005 |      | March 31,
  2006 |   | June 30,
  2006 |  | Sept. 30,
  2006 |      
| |                                |  |                 |      |                  |   |                 |  |                  |      
| | Net sales                      |  | $               | 95.4 |                  | $ | 99.8            |  | $                | 109.6 |  | $ | 116.1 | 
| | Gross profit                   |  |                 | 40.8 |                  |   | 43.5            |  |                  | 46.9  |  |   | 47.1  | 
| | Net income                     |  |                 | 11.3 |                  |   | 11.7            |  |                  | 12.9  |  |   | 13.7  | 
| | Earnings per
  share  Basic   |  |                 | 0.75 |                  |   | 0.76            |  |                  | 0.84  |  |   | 0.89  | 
| | Earnings per
  share  Diluted |  |                 | 0.73 |                  |   | 0.75            |  |                  | 0.82  |  |   | 0.87  | 

| |                                |  |                 |      |                  |   |                 |  |                  |      |  |   |      | 
| | ------------------------------ |  | --------------- | ---- | ---------------- | - | --------------- |  | ---------------- | ---- |  | - | ---- | 
| |                                |  | Quarters ended  |     
| |                                |  |                 |     
| |                                |  | Dec. 31,
  2004 |      | March 31,
  2005 |   | June 30,
  2005 |  | Sept. 30,
  2005 |     
| |                                |  |                 |      |                  |   |                 |  |                  |     
| | Net sales                      |  | $               | 91.4 |                  | $ | 95.4            |  | $                | 89.5 |  | $ | 98.9 | 
| | Gross profit                   |  |                 | 36.2 |                  |   | 37.6            |  |                  | 36.5 |  |   | 42.7 | 
| | Net income                     |  |                 | 8.5  |                  |   | 8.7             |  |                  | 8.4  |  |   | 12.3 | 
| | Earnings per
  share  Basic   |  |                 | 0.57 |                  |   | 0.58            |  |                  | 0.56 |  |   | 0.81 | 
| | Earnings per
  share  Diluted |  |                 | 0.55 |                  |   | 0.56            |  |                  | 0.54 |  |   | 0.79 | 

F-23

---



|    |                        
|--- | -----------------------
|15. | STOCK
  INCENTIVE PLANS

Directors
Plan

The Company
has reserved 100,000 shares of common stock for the Directors Plan, which
covers non-employee members of the Board of Directors. Under this plan each
member of the Board of Directors who is not an employee of the Company and who
is elected or continues as a member of the Board of Directors is entitled to
receive an initial grant of 1,500 shares of common stock and thereafter an
annual grant of 1,500 shares of common stock. The Directors Plan also provides
that non-employee directors aged 65 or older, upon their appointment or
election to the Board of Directors, will receive, in lieu of such initial and
annual grants of shares of common stock, 7,500 shares of restricted stock which
shall vest in five equal installments on the date of grant and each of the
following four anniversaries thereof. Prior to vesting, no shares of restricted
stock may be sold, transferred, assigned, pledged, encumbered or otherwise
disposed of, subject to certain exceptions. The Company records compensation
expense based on the fair market value of the common stock, as determined by
the closing price at the date of issuance. The Directors Plan will continue in
effect until the earlier of ten years from the date of the first grant or the
termination of the Directors Plan by the Board of Directors. A total of 40,500
shares are issued and outstanding under the plan at September 30, 2006.

Equity
Incentive Plan

The Company
maintains an Equity Incentive Plan, whereby incentive and non-qualified stock
options, restricted stock and performance shares may be granted to officers and
other key employees to purchase a specified number of shares of common stock at
a price not less than the fair market value on the date of grant. The term of
the Equity Incentive Plan continues through 2011. There were no incentive stock
options, restricted stock or performance shares granted in fiscal years 2006,
2005, or 2004. Non-qualified stock options were granted to officers and other
key employees in fiscal years 2006, 2005, and 2004. Options generally vest over
five years and will expire not later than ten years after the date on which
they are granted.

In December
2004, the FASB issued SFAS No. 123R, Share-Based Payment, as a replacement to
SFAS No. 123 Accounting for Stock-Based Compensation. SFAS No. 123R
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
which allowed companies to use the intrinsic method of valuing share-based
payment transactions. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on the fair-value method as defined in SFAS No. 123.
On March 29, 2005, the SEC issued SAB No. 107 to provide guidance regarding the
adoption of SFAS No. 123R and disclosures in Managements Discussion and Analysis.
The effective date of SFAS No. 123R was modified by SAB No. 107 to begin with
the first annual reporting period of the registrants first fiscal year
beginning on or after June 15, 2005. Accordingly, the Company implemented SFAS
No. 123R effective October 1, 2005. Prior to the adoption of SFAS No. 123R,
benefits of tax deductions in excess of recognized compensation costs were
reported as operating cash flows. SFAS No. 123R requires excess tax benefits to
be reported as a financing cash inflow rather than as a reduction of taxes
paid.

Previously the
Company measured compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by APB Opinion No. 25, as
permitted by SFAS No. 123 and SFAS No. 148 Accounting for Stock-Based
Compensation - Transition and Disclosure. Had the fair value-based method
under SFAS No. 123 been applied, compensation expense would have been recorded
for the options outstanding based on their respective vesting schedules.

F-24

---



The following table illustrates the effect on net
income and earnings per share in 2005 and 2004 as if the fair value based
method under SFAS No. 123 had been applied to all outstanding vested and
unvested awards in those periods:

|                                                                                                                               |  |                           |        |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | ------ | ---- | - | ------ | -
|                                                                                                                               |  | Years ended September 30, |       
|                                                                                                                               |  |                           |       
|                                                                                                                               |  | 2005                      |        | 2004 |  
|                                                                                                                               |  |                           |        |      |  
|Net Income - as reported                                                                                                       |  | $                         | 37,975 |      | $ | 32,430 |  
|Add: Stock-based compensation expense included in
  reported income, net of related tax benefits                               |  |                           | 176    |      |   | 146    |  
|Deduct: Total
  stock compensation expense determined under the fair value method for all
  awards, net of related tax effects |  |                           | (1,521 | )    |   | (1,270 | )
|                                                                                                                               |  |                           |        |      |   |        |  
|                                                                                                                               |  | $                         | 36,630 |      | $ | 31,306 |  
|                                                                                                                               |  |                           |        |      |   |        |  
|Basic earnings per share:                                                                                                      |  |                           |        |      |   |        |  
|As reported                                                                                                                    |  | $                         | 2.52   |      | $ | 2.41   |  
|Pro-forma                                                                                                                      |  | $                         | 2.43   |      | $ | 2.32   |  
|Diluted earnings per share:                                                                                                    |  |                           |        |      |   |        |  
|As reported                                                                                                                    |  | $                         | 2.44   |      | $ | 2.31   |  
|Pro-forma                                                                                                                      |  | $                         | 2.35   |      | $ | 2.23   |  

The fair value of each option award is estimated on
the date of grant using the Black-Scholes model.

The following assumptions were used in the
determination of compensation cost under the provisions of SFAS No. 123 for the
year ended September 30, 2006:

|                                         |  |               |         |               |   |         |  
|---------------------------------------- |  | ------------- | ------- | ------------- | - | ------- | -
|                                         |  | September 30, |        
|                                         |  |               |        
|                                         |  | 2006
  Grants |         | 2005
  Grants |  
|                                         |  |               |         |               |  
|Weighted average
  grant date fair value |  | $             | 26.51   |               | $ | 15.41   |  
|Expected life                            |  |               | 5 Years |               |   | 5 Years |  
|Volatility                               |  |               | 50.0    | %             |   | 50.0    | %
|Risk-free
  interest rate                |  |               | 4.61    | %             |   | 3.74    | %
|Dividend yield                           |  |               | 0       | %             |   | 0       | %
|Annual
  forfeiture rate                 |  |               | 1.09    | %             |   | 1.09    | %

The Company uses historical data to estimate the
expected life, volatility, and estimated forfeitures of an option. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time of grant.

The balance of outstanding stock options and all
options activity for the three year period ended September 30, 2006, are as
follows:

|                                  |  |                     |           |                                     |   |                                                           |  |                                          |      |  |   |      | 
|--------------------------------- |  | ------------------- | --------- | ----------------------------------- | - | --------------------------------------------------------- |  | ---------------------------------------- | ---- |  | - | ---- | 
|                                  |  | Number of 
  Shares |           | Weighted
  Average
  Exercise Price |   | Weighted Average
  Remaining
  Contractual Term
  (Years) |  | Aggregate
  Intrinsic Value
  (Millions) |     
|                                  |  |                     |           |                                     |   |                                                           |  |                                          |     
|Balance at September 30, 2003     |  |                     | 999,600   |                                     | $ | 10 2/7                                                    |  |                                          | 7.33 |  | $ | 12.4 | 
|                                  |  |                     |           |                                     |   |                                                           |  |                                          |      |  |   |      | 
|Granted                           |  |                     | 285,500   |                                     | $ | 32 1⁄4                                                      |  |                                          |      |  |   |      | 
|Exercised                         |  |                     | (154,450  | )                                   | $ | 11                                                        |  |                                          |      |  |   |      | 
|                                  |  |                     |           |                                     |   |                                                           |  |                                          |      |  |   |      | 
|Balance at September 30, 2004     |  |                     | 1,130,650 |                                     | $ | 15 6/7                                                    |  |                                          | 7.51 |  | $ | 15.3 | 
|                                  |  |                     |           |                                     |   |                                                           |  |                                          |      |  |   |      | 
|Granted                           |  |                     | 379,000   |                                     | $ | 34 1/7                                                    |  |                                          |      |  |   |      | 
|Exercised                         |  |                     | (186,850  | )                                   | $ | 11 7/9                                                    |  |                                          |      |  |   |      | 
|Forfeited                         |  |                     | (33,200   | )                                   | $ | 16 1/6                                                    |  |                                          |      |  |   |      | 
|                                  |  |                     |           |                                     |   |                                                           |  |                                          |      |  |   |      | 
|Balance at September 30, 2005     |  |                     | 1,289,600 |                                     | $ | 21 3/5                                                    |  |                                          | 7.54 |  | $ | 21.1 | 
|                                  |  |                     |           |                                     |   |                                                           |  |                                          |      |  |   |      | 
|Granted                           |  |                     | 292,250   |                                     | $ | 52 1/5                                                    |  |                                          |      |  |   |      | 
|Exercised                         |  |                     | (249,550  | )                                   | $ | 14 7/8                                                    |  |                                          |      |  |   |      | 
|Forfeited                         |  |                     | (14,600   | )                                   | $ | 13 5/8                                                    |  |                                          |      |  |   |      | 
|                                  |  |                     |           |                                     |   |                                                           |  |                                          |      |  |   |      | 
|Balance at September 30, 2006     |  |                     | 1,317,700 |                                     | $ | 29 3⁄4                                                      |  |                                          | 7.41 |  | $ | 40.9 | 
|                                  |  |                     |           |                                     |   |                                                           |  |                                          |      |  |   |      | 
|                                  |  |                     |           |                                     |   |                                                           |  |                                          |      |  |   |      | 
|Exercisable at September 30, 2006 |  |                     | 408,500   |                                     | $ | 17 1⁄4                                                      |  |                                          | 5.66 |  | $ | 17.8 | 
|                                  |  |                     |           |                                     |   |                                                           |  |                                          |      |  |   |      | 

F-25

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As of September 30, 2006, there was $13.4 million of
total unrecognized compensation costs related to stock options. These costs are
expected to be recognized over a weighted average period of 3.62 years. The
total fair value of shares vested during the years ended September 30,
2006, 2005, and 2004 was $2.7 million, $1.7 million, and $0.9 million
respectively.

|                                                 |  |                           |     |      |   |      |  |   |     | 
|------------------------------------------------ |  | ------------------------- | --- | ---- | - | ---- |  | - | --- | 
|                                                 |  | Years ended September 30, |    
|                                                 |  |                           |    
|                                                 |  | 2006                      |     | 2005 |   | 2004 | 
|                                                 |  |                           |     |      |   |      | 
|Total intrinsic value of stock options exercised |  | $                         | 8.6 |      | $ | 4.6  |  | $ | 3.0 | 

Cash received from stock option exercises for the
years ended September 30, 2006, 2005 and 2004 was $3.7 million, $2.2 million
and $1.7 million, respectively.

F-26

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ROFIN-SINAR TECHNOLOGIES INC. AND
SUBSIDIARIESValuation and Qualifying Accounts - Allowance for Doubtful Accounts
Years ended September 30, 2006, 2005, and 2004
(dollars in thousands)

|                   |  |                                    |   |                    |  |                                   |  |                          |     |                            |  |  |   |     |   |  |  |   |      |   |  |  |   |       |  | 
|------------------ |  | ---------------------------------- | - | ------------------ |  | --------------------------------- |  | ------------------------ | --- | -------------------------- |  |  | - | --- | - |  |  | - | ---- | - |  |  | - | ----- |  | 
|                   |  | Balance at
  Beginning of
  Period |   | Acquired
  Reserve |  | Charged to
  Costs and
  Expenses |  | Additions
  (Deductions) |     | Balance at End of
  Period | 
|                   |  |                                    |   |                    |  |                                   |  |                          |     |                            | 
|                   |  |                                    |   |                    |  |                                   |  |                          |     |                            | 
|September 30, 2004 |  |                                    | $ | 2,066              |  |                                   |  | $                        | 109 |                            |  |  | $ | 230 |   |  |  | $ | 114  |   |  |  | $ | 2,519 |  | 
|                   |  |                                    |   |                    |  |                                   |  |                          |     |                            |  |  |   |     |   |  |  |   |      |   |  |  |   |       |  | 
|September 30, 2005 |  |                                    | $ | 2,519              |  |                                   |  | $                        |    |                            |  |  | $ | (29 | ) |  |  | $ | (92  | ) |  |  | $ | 2,398 |  | 
|                   |  |                                    |   |                    |  |                                   |  |                          |     |                            |  |  |   |     |   |  |  |   |      |   |  |  |   |       |  | 
|September 30, 2006 |  |                                    | $ | 2,398              |  |                                   |  | $                        |    |                            |  |  | $ | 642 |   |  |  | $ | (384 | ) |  |  | $ | 2,656 |  | 

F-27

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INDEX TO EXHIBITS

|              |  |                                                                    
|------------- |  | -------------------------------------------------------------------
|Exhibit
  No. |  | Exhibit                                                            
|              |  |                                                                    
|              |  |                                                                    
|21.1          |  | List of Subsidiaries of the Registrant                             
|              |  |                                                                    
|23.1          |  | Consent of Independent Registered Public Accounting
  Firm         
|              |  |                                                                    
|31.1          |  | Rule 13a-14(a)/15d-14(a) Certification of Chief
  Executive Officer
|              |  |                                                                    
|31.2          |  | Rule 13a-14(a)/15d-14(a) Certification of Chief
  Financial Officer
|              |  |                                                                    
|32.1          |  | Section 1350 Certification of Chief Executive
  Officer            
|              |  |                                                                    
|32.2          |  | Section 1350 Certification of Chief Financial
  Officer            

F-28

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