Statement by the President

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Annual report 2007 Fingerprint Cards AB (publ)

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Contents

2007 – A Summary . . . 4

Statement by the President . . . 5

Commercial concept . . . 7

Market and Sales . . . 8

Technology and Development . . . 10

Intellectual property strategy and approach . . . . 11

Outlook . . . 12

Products and Applications . . . 14

Organisation . . . 16

Share data and Ownership structure . . . 17

Administration report . . . 18

Income statement . . . 20

Cash flow statement . . . 21

Balance sheet . . . 22

Changes in equity . . . 24

Notes and supplementary disclosures . . . . 25

Audit report . . . 33

Five-year summary . . . 34

Board, Management, The Auditor . . . 35

Annual general meeting

The Annual General Meeting will be held on Friday May 23, 2008, at 17.30 hrs, in room Västerhavet at the Radisson SAS Scandinavia Hotel, Södra Hamngatan 59–65 in Gothenburg. Those shareholders registered in the VPC-maintained shareholders’ register as at Friday May 16, 2008, are entitled to attend. Notification of attendance should reach the company at this address: Fingerprint Cards AB, P.O. Box 2412, SE-403 16 Gothenburg, or by fax +46 31 13 73 85, or by e-mail: investrel@fingerprints.com no later than Friday May 16 at 16.00 hrs.

Dividend

The board proposes a dividend of zero (0) SEK to the AGM.

Date(s) of financial information

Quarterly report for the period: January – March 2008, April 22, 2008 Quarterly report for the period: January – June 2008, August 15, 2008 Quarterly report for the period: January – September 2008, October 24, 2008 Press release on annual accounts for 2008, February 2009

2008 Annual report, April 2009

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In January Hardware & Software Technologies Co. Ltd (HST) placed a sensor order valued at MSEK 22. The order plan was for sensor delivery from the first quarter of 2007 through to the first quarter of 2008. This follows earlier deliveries to HST for its banking applications customers in China.

In late February HST placed a further volume order for sensors worth MSEK 21. Deliveries against this order were to continue until the second quarter of 2008 with the sensors to be used in IT security products.

A part delivery worth MSEK 1.5 was made to Secure Design KK, Japan, representing the order worth MSEK 9 placed by that company August 2006.

In May Deutsche Bank, Global Markets Equity Trading, London, acquired all of Technoimagia Sweden AB’s B shares in the Company. It now holds 1,141,700 shares in Fingerprint Cards AB, which represents 9.4% of the capital and 7.7% of the total votes.

In May, the Annual General Meeting of shareholders resolved to launch a share options scheme for the Company’s employees excluding the CEO. An amount of 370,000 shares will be issued by this, with options current for a period of 3 years from the day of the AGM’s decision.

Also at the AGM in May, a new board member, Mr Jan Burénius was elected, and board members Mr Gunnar Liljegren and Mr Taketoshi Kashiwabara declined re-election.

A distributor licence was signed in June, for the German, Austrian, and Swiss markets. Admatec GmbH is an independent specialised component distributor headquartered in Hamburg, Germany.

In the USA the US Patents Office granted the Company’s patent application for its swipe sensor methodology.

In November Fingerprint Cards’ third generation biometric processor ASIC was released. The FPC2020 is a completely new, extremely small, fast, and low-cost fingerprint processor platform. Compatible with Fingerprint Cards´ area and swipe sensor the FPC2020 is the most power efficient biometric processor available.

Operations for the year showed a loss of MSEK -34.2 (-19.7). Operating income for the financial year totalled MSEK 20.7 (11.1) for the group.

Net financial items were MSEK 1.3 (0.3). Internal and external technology developments amounted to MSEK 15.6 (9.5)

Available liquid funds at the year-end amounted to MSEK 33.8 (71.1)

Events after the end of the financial year

In January the Company’s complete systems technology based on the FPC swipe sensor was chosen by CardLab ApS for a new on-card verification approach that has been designed to work with ISO standard magnetic stripe bank cards. The choice of FPC technology was driven by the need for a dramatically low power biometric system that uses battery technology internal to the card, with a forecast card lifespan of up to two years.

2007 – A Summary

The target market for companies such as Fingerprint Cards does not stand still for long: we service a wide variety of customers and markets. Our product developer customers compete in a fast growing but demanding market; one where the growth of trust and prevention of identity fraud become more important year on year. For them to meet this challenge, and for us to have access in turn to their markets, then we must be ready to take bold steps in pursuit of an advantage.

Reducing the cost

The market demand to reduce the cost of biometric deployments has a direct effect on our business. The markets where low cost has become the determining factor are those with the volume opportunities most suited to a business model such as ours, and our interim objective throughout 2007 has been to ensure our supply position for these markets. We have been consistent over the last few years in optimising our portfolio in the face of volume markets and we continue to believe that the endgame for volume biometric markets will have the strongest possible fit with our comprehensive technology offerings and licensing models.

Strategic delivery position

In the medium term the move to volume markets has some particular pressures: and the most pressing of these is to develop market share and maintain a healthy supply chain position. The market for compact fingerprint recognition systems is clearly growing fast with room for several suppliers. It is driven mainly by the IT products sectors, and participation in these requires the ability to compete effectively on price above other considerations.

At the end of 2006 we said that our increasing success in component and sub-systems sales was an important and emergent phase in our business growth, and that this involved staged work on production improvement. By the close of 2007 we have completed an essential part of this work, in partnership with our sub-contractors, necessary for this to grow into a strategic mainstay of our business in the period to come. This work was targeted at reducing our sensor production and packaging costs significantly, thereby making us both more competitive and able to deliver healthy profit margins that would allow sales to take us to a break-even point.

Technology refreshment

The technical initiatives involved have allowed us to take the double advantage of completing a refresh programme. Our new ASIC processor has enhanced functionality, is faster, is cost efficiently produced, and is above all extremely power efficient. The new strategic value of this is clear from the announcement at the year-end concerning our selection for an on-card bank card security project; a healthy indication that technology suppliers like Fingerprint Cards are not just evolving with the market but innovating new possibilities using proven technology under continuous improvement.

Quality, Functionality, and Price

Quality, functionality, and competitive price, together provide a recipe for long-term viability and stability. In our view the market will con- cern itself with all of these when price is more evenly competed.

The talents and efforts of our business and technical team this year has strengthened our position and our ability to compete in these respects. This year´s annual accounts have been charged with high costs for production reorganization and for the development of new solutions that will lead to a substantially lower production cost also for our sensor component. The last step in this process is planned to be completed by mid-2008.

We have good reason to believe that this step will also be successfully completed. It puts in place for us an effective subcontractor structure, providing production adapted to high volumes and competitive prices. Taken together with the information we have from our most important markets and customers, which points to strongly increased sales volumes for both 2008 and 2009, then we now are heading for an exciting time.

Gothenburg, April 2008

Lennart Carlson President

Statement by the President

4 2007 – A Summary Statement by the President 5

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Fingerprint Cards is a technology company that combines a strong intellectual property portfolio with a vigorous approach to the in- dustrialisation of its low-cost technology. Its customers are mainly developers of end-user products or solutions in which the Company’s technology can be integrated. These developers are reached directly or through the Company’s global distributor/reseller network. Just as the market for biometrics continues its growth in depth and diversity, then so the Company will benefit from the range of its technology and flexibility of its business model.

Dual business model

The Company operates a dual business model. The first side of this is a variable IP licensing framework; reflected either in a licence to Fingerprint Cards’ technology where the customer takes care of the production logistics, or by an arrangement with the customer where Fingerprint Cards takes care of production and logistics, with the potential to include customer specific IP to the final biometric product. In the first of these cases the licensee pays a royalty to the Company and in both cases the licensee takes care of marketing and sales. This is complemented by the actual sale of components, either directly to customers or through the Company’s growing reseller network. The Company has been increasingly successful in the sale of sensors and embedded systems components, and the strategic development of this component delivery concept has included significant technical and production work during 2007. This work will greatly advance the Company’s ability to deliver components at competitive and profitable prices into volume market opportunities and to compete at a wider level.

Price, Functionality, Quality

For volume markets biometric components and sub-systems have to compete in three areas: price, functionality, and quality. Customer value for money is a combination of all of these, and priorities are led by growing market segments. The Company has no difficulty in competing on quality or the functionality of its technology; its existing customers strongly affirm both of these. It took innovative technical development to bring the Company to this strong technology position. The most powerful market driver in the last two years has been supply price, particularly in relation to the volume opportunities that the Company wishes to win. To strengthen its competitiveness with regards to price the Company ran three essential projects during the year of which two were successfully completed by the mid-year and the third is planned to be completed by

mid-2008. All of these projects aim at drastically lower production cost for the Company´s components.

Technology and function

At the core technology level, dealing with image capture and processing, Fingerprint Cards has a leading imaging technology in both area and swipe sensor form factors, supported by an intellectual property portfolio. At the systems level it offers the algorithm methodologies and software for both area and swipe sensors, extending this to identification matching for products where the biometric systems use no identification cards or tokens.

Designed from the outset as a compact, low-power, efficient approach to fingerprint capture and matching, this portfolio posi- tions Fingerprint Cards as a leader in the development of low-cost biometric systems. The customer opportunity to use all or some of these components is therefore led, first and foremost, by the value that the Company’s development customers expect from their final biometric products. Development partners find their value by looking at the applications’ requirements set by the end-user of the technology;

whether this is for logical, physical, or a particular combination of identity authentication.

Continuous value improvement

In addressing the market the Company has seen the need to stay responsive to the changing expectation for the final shape and form of authentication products, in particular to their size and cost. In the first place this was shown by the commitment to a low cost swipe sensor and its software processes which have now received full patent protection. During 2007 the next generation of ASIC processor was delivered. This offers an easily interfaced processing platform, with more functionality, at a dramatically lower cost. By the end of 2007 radical revisions of the area sensor silicon fabrication and packaging processes were nearing completion, greatly improving the competitive price of the Company’s main sensor product, and bringing healthier margins.

IP licensing

As the volume of low-cost biometric technology delivered continues to rise then the prospects for a pure IP licensing business model improve. Fingerprint Cards holds strong IP rights within the fields for sensor technology, algorithm and matching methodologies. The Company continuously evaluates the prospects and possibilities for business arrangements based on IP licensing.

Commercial Concept

Commercial Concept 7

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The year was one of healthy market development in several sectors.

There was little in the way of negative market disruption to distract the industry from fulfilling its growing potential to combat identity fraud in its various aspects; and there was an overall market optimism, from large solutions providers such as the systems integrators providing national ID programmes, to the core technology developers including Fingerprint Cards, who are finding a greater, and a widening market interest in their products. The trend supporting the conso- lidation around key technology and solutions players continued, and customers continued to bring high expectations and more rigorous evaluation to the selection of biometric technologies presented.

Market dynamic

The market dynamic for biometrics is dominated by the revenue stream from government systems such as those deployed for electronic passports and national identity schemes, and such systems deliver a healthy stream of revenue to various parts of the biometrics industry (software, hardware, and integration). A different dynamic is evident in other markets; such as physical access control, logical access control for network and data security, and standalone products such as USB keys and personal safes. These have been growing steadily based on the value that such products are now able to deliver, and while they represent far smaller units of value than entire government identity systems, they have the growing advantage of delivering low cost technology to millions of end-users, some of whom might already own more than one biometric device.

Such devices have included laptop computers for secure logon, in USB keys for data privacy, fingerprint sensors in cell phones, and in personal safes for use at home. The year strongly underlined the growing accessibility and usefulness of low cost biometric technology solutions. The booming market for electronic products shows all the signs of continuing, with tighter integration of biometrics to protect assets, access, data, and transactions. Fingerprint technology con-

tinued during the year to show its value for money dominance at the levels of performance, product fit and integration, and affordability.

Cost reduction driving volume markets

During the year all of the leading technology players continued to deliver products to the market that demonstrate a series of customer- led refinements. Most of these were led exclusively by the need to deliver lower cost competitive product to the product developer market. This is a natural part of the market dynamic in this sector, making it quite different from the government market for biometric identification systems where performance and interoperability are of highest importance.

The need to reduce costs around biometric deployment has become central to volume product markets and the business stra- tegies of the developers in these spaces. It also continues to show that fingerprint technology is the most promising for these markets because of its ability to deliver acceptable performance at the right cost. The market for fingerprint technology has also proven that it can work to a customer expectation cycle of reducing costs over time. The Company believes this will evolve to include the use of low cost embedded systems and not just sensor components.

Diversification of opportunities

The diversification of product opportunities has been driven by ad- vances in technology as well as the lowering cost of entry to biometric functionality. This was evident in the selection of Fingerprint Cards as the embedded systems provider for a debit card payment solution developed by CardLab. Such a fully functional system deployed in a ISO standard credit or debit card, and powered by its own internal battery, was simply not attainable until recently, and depends heavily on the design properties of technology such as the FPC sensor and processor chips. Such cards are expected to have a lifetime com- parable with bank cards currently in use. They are aimed at large

Market and Sales

8 Market and Sales Market and Sales 9

financial services markets reliant upon magnetic stripe technology, where the move to on card biometrics offers privacy and a technology leap beyond the security brought by chip & pin-code bank cards.

Careful control of technology development and ownership of intellectual property continued to play a vital part in the continued prospects for technology in these product segments and the conse- quences of inadequate IP ownership in the sector are continuing to affect the strategy of some players although this might not be felt in the near term.

Sales and marketing

Sales are organized mainly via distributors/resellers. At present the Company has resellers covering twelve countries and these are spread from North America over Europe and to the Far East. Direct sales are also made to end customers in countries where the Company lacks representatives.

The Company´s biggest market is China where its reseller Hard- ware & Software Technologies (HST), as a result of well focused marketing work, has built up a strong position for the Company´s sensor technology. Headquartered in Taiwan and with a number of branch offices in China, HST has established strong connections with five of the biggest suppliers of IT security products to the Chinese banks, which means that the Company´s sensor technology is now being used in more than 75% of all the biometric IT security products that are now being delivered to the banking sector in China. The majority of products are for the biometric log-on of bank personnel to the bank computers and networks; this is potentially a very big market. Other products in China fall mainly into the categories of physical access control, such as door locks, safety boxes and safes.

The Company´s business situation

Fingerprint Cards has developed complete fingerprint systems comprising sensors, processor ASICs and algorithms for matching

of finger patterns. The most important component is the sensor reading the finger pattern but it is also the most complex component from the production point of view. Not until 2006 did the Com- pany begin to see sales results from its efforts; it has now received orders that are indicative both of the commercial acceptance of its technology and of the fact that growth of a customer base is under- way that could generate substantial and rising volumes. At that point, in 2006, the Company´s production capacity for the packaging of its sensors was very limited, and the packaging design itself was a low volume solution with many manual production steps that make production comparatively expensive. A cost efficient production solution requires high volumes and involves highly specialised subcontractors that can only be engaged by the commitment to these high volumes. This commitment and the conversion to high volume production were achieved largely in 2007, and will be completed by mid-2008.

Sales during the year

Sales in the past year increased by 88% compared with the previous year, amounting to MSEK 20.7. The majority of the deliveries were made up by the Company´s sensor components of which 130,000 were delivered compared with 30,000 in the previous year. Sales of sensors accounted for 75% of the total sales value, while biometric modules and the Company´s older processor ASIC accounted for the remainder. During the first two quarters the Company received two orders amounting to MSEK 43 for deliveries to the Chinese market. By the year end 40% of the order volume on this had been delivered. The remaining part of the year´s deliveries went mainly to Argentina, Japan, Italy, France and USA, directed to products including USB keys, safety boxes and cupboards, time & attendance systems and Point of Sale terminals. The order value as at 31 Decem- ber 2007 amounted to MSEK 24.7.

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The year has seen the successful achievement of strategic technical development work. The driver for this is the realisation of competitive advantage in the form of high quality and product functionality delivered at significantly lower cost. This includes improved margins to the Company as well as greater value for money to Fingerprint Cards’

customers. These changes are fundamental to the nature of the Company’s business; they require investment and long term planning.

Production driven by orders

The orders received by the Company toward the end of 2006 and in early 2007 made it necessary to increase production output considerably on a monthly basis.The bottleneck to this increase was the packaging of the area sensor. The available product solution and the production capacity available at the Company´s previous subcontractor were not designed for such high volumes, but by the year-end the production ramp-up was secured albeit at a high cost. Quality requirements on the finished product are high, and tuning the production to achieve an acceptable yield was both complicated and costly. The Company has had to absorb the main part of these costs to meet its order commitments independently of parallel work on a completely new sensor packaging solution.

The new packaging solution

Alongside this production effort to ensure orders were met, essential work for the technology team progressed in 2007 for the development of a new packaging solution for the sensor. This solution is suitable for high order volumes and can be produced at a much lower cost.

The subcontractor with whom the Company is running this project specialises in this type of solution and production, and is the largest in its market. The negotiated price means that packaging cost per sensor will be halved compared to the present situation. A first prototype production was completed by the year-end with a good result and the project now continues according to plan with tests, qualification of the product, pre-series production and production quality assurance.

Volume production is planned to commence round the mid-year point in 2008.

Component value redesign

During the year two other projects were completed that will deliver major customer value increases. The production of silicon was moved to a new foundry, radically reducing the cost for the area sensor component. The lower cost will have an impact on sensors assembled

during the fourth quarter of the year. A further project replaced the Company´s older processor ASIC (FPC2000) with a new processor compatible with both the area and the swipe sensor. Power consumption has been reduced enormously; product functionality enhanced;

and production cost has been reduced by as much as 80%. This constitutes a significant improvement in functionality and value available to those developers building embedded biometric systems where Fingerprint Cards’ sensor, processor, and algorithm com- bine to form a secure and independent system. The announcement by CardLab after the close of the year demonstrates that the FPC embedded system can meet the most strenuous of technical requirements, winning access to significant new market opportunities.

Functionality increase at lower cost

The new ASIC encapsulates all of the FPC algorithm and matching software revisions made since the last design. While the Company expects its swipe sensor technology to be delivered to large-scale customers in a different way than the area sensor, its new processor ASIC is already future compatible with the swipe sensor, providing in effect a dual algorithm platform for enrolment and matching. Also included is the use of this processor for identification matching (1:N) solutions. This identification matching allows the end-use application to dispense with cards or tokens for storage or identification of the stored biometric record, and the new ASIC will handle five hundred users, more than twice the number of users in this operating mode than its predecessor. The FPC principle of high-performance at low cost will therefore be carried forward on different technical levels.

Quality fit

Cost concerns will continue to drive all markets for biometric products, but the quality threshold for certain markets continues to pose problems for many suppliers who focus only on cost-defined products.

Fingerprint Cards technology will continue to succeed where performance characteristics are foremost. The Company’ success in the Asian marketplace in particular is largely attributable to the quality of the image generated by the sensor. This is a feature of FPC’s reflective capacitive silicon design – producing a sensor that is sensitive and robust. Support of the IP extends both to better value for money deployment across silicon platforms, and to the protection of this in international markets. During the year the Company received its US Patent award for its swipe sensor methodology, consolidating its position as one of extremely few viable swipe technology providers globally.

Technology development

Sensor patent, architecture:Sweden: No. 511543, valid until Feb 2018. EP: No. 1 055 188, valid until Feb 2019. Registered in Germany and France.

USA: No. 6,778,686, valid until Feb 2019. Japan: Application No. 2000-531806.

Sensor patent, pixel element:PCT: Application No. PCT/SE2004/000985. EP: Application No. 04749024.8. USA: Application No. 11/629 328.

Japan: Application No. to follow.

Algorithm patent:Sweden: No. 514091, valid until August 2019. EP: No 1 208 528 valid until August 2020. Registered in Germany and France.

USA: No. 7 003 142, valid until March 2022.

Swipe sensor methodology patent:EP: No. 1 330 185, valid until March 2022. Registered in Sweden, UK, Italy, Germany, and France.

PCT: Application No. PCT/SE02/00505. USA: No. 7330571, valid until March 2022. Japan: Application No. 2004-524625.

Packaging patent:Sweden: No. 519304, valid until May 2021.

Intellectual property strategy and approach

10 Technology development Intellectual property strategy and approach 11

Intellectual property is central to the Company’s strategy so a close eye is kept on the market for possible infringement of the patents listed; this includes control of any patent rights arising through co- operative work. FPC core technology is now very well supported by patents granted, and a robust strategy is proposed for the protection of future property in value-added technology development. Project design work for customers’ technical solutions will be embedded in different ‘IP-blocks’ to which the sensor or algorithm is integrated, making it impossible for customers to copy and further develop designs without the Company’s involvement.

Sensor patent, architecture

The sensor architecture covers the method of real time programming of sensor matrix function. This solution for the sensor architecture allows each pixel element to be set into different modes of operation while obtaining the fingerprint image. By alternating the operation mode of the pixel elements the image measurement technique and image readout procedure can be optimised to obtain best image quality for the identification and verification of the fingerprint. The PCT, US and European patent applications for sensor architecture have been granted by 2004.

Sensor patent, pixel element

The main claims of this application focus on the physical design of the pixel elements in the sensor ASIC and the readout conversion.

The design of the sensor pixel element and associated conversion principle results in an extremely sensitive sensor amplifier with low internal noise generation. The advantages are that the dynamic profile of a fingerprint can be measured with high sensitivity, accurate contrast resolution, and at a high readout speed. It also becomes possible to coat the sensor with a thick, protective coating, and this is a great advantage in the sensor package integration, when the environmental and durability requirements are demanding. These fundamental design features make possible a robust and user-

friendly biometric solution. The Company has received a positive result in the international examination report on its PCT application.

Algorithm patent

The software used in registration and verification contains mathema- tical descriptions – known as algorithms – by which millions of operations can be carried out in a split second. In order for this to be done in the most secure and effective manner the algorithm code has also been written for the Company’s own microprocessors. The algorithms are based on details in the entire fingerprint pattern using a method adapted from the science of image processing, but one original to this application. A patent application for these algorithms was filed at the Swedish Patent and Registration Office and was granted in November 2000. An international PCT application has also been filed. In 2005 the European Patent Office granted the algorithm patent.

An application filed in the USA during 2004 was also granted in 2005.

Swipe sensor methodology patent

The granted European and US patents for the swipe sensor methodology describes a system based on a sensor that reads partial images from a moving fingerprint, and where the sensor surface is considerably smaller than the fingerprint itself. The information extracted from each partial fingerprint image is read for later verification then erased from memory. This method makes it possible to store the individual’s biometric identity without building up the complete image of the fingerprint. Following a positive result in the international examination report from the PCT the Company has filed patent applications in Japan.

Packaging patent

The approved packaging patent describes a way to use the same coating for protection of the sensor surface and the bond wires used for the electrical interconnection with respect to ESD, environmental conditions and mechanical abrasion.

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The outlook at the beginning of 2007 was that the Company would be able to concentrate on marketing and sales in parallel with concluding work on essential matters of production and volume delivery capability. This work will conclude mid- 2008 and there will be a shift during the year towards greater shared marketing with regional reseller and distributor partners. The Company plans to further extend its distributor base during the coming year.

Positive impact on margins

Deliveries of sensors with the present packaging solution will continue for at least the coming half year for the Chinese orders in hand and where the price is fixed in US dollars. With the stock write- down that has now been made, and provided the US dollar does not fall further, then these deliveries can be made without any further losses. Moreover, as the lower silicon price will now have a positive impact on all new production then even the remaining new production, based on the old packaging solution, should come out at a price not exceeding the selling price for the Chinese orders. On all other sales the Company has positive margins, even on the sensor component, however, a solid sales margin for the sensor will not be attained until production and deliveries based on the new packaging solution will be done. The Company´s goal is to reach at least a 35%

margin on all component sales.

Final steps to production

Toward the end of 2006 a new stock issue was carried through providing the Company with the capital necessary to its general operations and for carrying through projects essential to bring about production for high volumes and at low enough unit costs to make the Company competitive while giving acceptable sales margins. The major project work on a new packaging solution has now come so far that a first prototype production was run toward the end of the year, and the first prototypes of the new solution have been delivered to the Company.

These prototypes are now going through extensive tests, and product qualification will run during the first quarter of 2008. In parallel a process for production quality assurance will be started. This process might take up the whole of the second quarter, and would be one or two months longer than was anticipated in the Company’s report last autumn. Consequently, volume production is now planned to commence round the mid-year point of ‘08. The packaging cost of the sensor with this new solution and production method will be 50% lower compared to the old solution.

Volume increase forecast

It is evident from the Company’s accounts that the measures taken to improve production have been both time consuming and very costly. However, they were unavoidable, and with two heavy projects

Outlook

already successfully completed and a third with planned completion in the next half-year, the Company will have built a much stronger platform for a future profitable expansion. The information the Company receives from its customer base indicates a continuously strong volume increase both for 2008 and thereafter and 2007’s efforts will ensure a strong competitive position in this.

Financial goal

The financial goal that has been communicated thus far, to reach a break-even point calculated on a yearly basis by the fourth quarter of 2008, may be difficult to achieve. Factors that have influenced this are the rate at which production cost reductions will have an effect on sales and deliveries; at what rate sales and deliveries will increase;

and, furthermore any currency development. Even if production in the near future is to be paid mainly in the same dollar currency as sales the Company still has other operational cost in Swedish kronor. The Company´s assessment is that the financial goal, to reach a break-even point calculated on a yearly basis, should be achiavable some time during the later part of 2008 or at the beginning of 2009.

Continued IP protection

The market is approaching a point where large players with mass market access and manufacturing capabilities wish to take closer

control of biometric functionality. The closer integration of fingerprint authentication to laptop computers continues to be an example where the integration of the hardware on the one hand will be closely developed with that of the host platform and biometric software methodologies on the other. This underlines the importance of a clear IP strategy set against a flexible background of licensing cost models. The importance of IP protection in the silicon sensor and algorithm domain is likely to become more relevant to business viability, and the Company has assured itself of a strong market position in this area; one that will support different customers in their delivery of low-cost biometric solutions.

12 Outlook Outlook 13

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Fingerprint Cards supplies components and licences to its geographical distributor and reseller partners who in turn sell these to product developers who understand the many different applications calling for biometrics. In some cases the Company also enters directly into project work with larger prospective customers where a greater understanding of the technology is required, and where the outcome is likely to be a purely licensing based arrangement.

In most applications where biometrics are deployed then there is both competition from other technologies and the common sense need for biometrics to bring a business justification. How this works in each case has a good deal to do with the end product and its marketing by the end-developer of the technology. The fingerprint might be deployed to reduce identity fraud or password management problems; it might be in the lowest cost device to meet a simple security requirement; or it might form an essential part of a revolu- tionary product idea such as a self-authenticating bank card.

The most established application for biometrics is physical access control where buildings and assets are protected. The uses for this are as diverse as door-lock products where the use of cards is remo- ved; products for the home such as personal safes where valuables or weapons can be kept; automotive applications such as recreational vehicle access; and security transportation where a completely secure solution includes the control of the driver personnel. In 2007 the Company saw such developments from Sweden, Korea, the USA, Singapore, and Taiwan.

Business needs in some applications play a critical part in developing the opportunities for technologies like the Company’s. In some regions there is a greater call for certain types of solution. In South Africa the demand for Time & Attendance solutions is strong as a labour force management tool, and products with FPC technology were introduced in 2006. Elsewhere Time & Attendance is being used as a trustworthy automated substitute for more expensive manual processes; the leisure industry has found this an attractive propo- sition, and products using FPC were introduced this in Sweden for this purpose. In India the technology is being used in mobile units

for student identification, and in Italy medical equipment is being managed using FPC fingerprint technology to protect it from misuse.

Replacement of the personal signature is beginning to emerge, with biometrics proving a more reliable tool in signing for valuable goods:

one of the Company developers in China has produced a battery driven unit that supports the secure delivery logistics business.

Some applications are responding to urgent needs, often driven by new regulations and industry practices. Changes in the financial industry are happening all over the world and banks in places like China are seeing the advantages of responding to this by implementing biometrics in a widespread way. In most of these cases the solution is an application developed around the use of biometrics as an IT security tool, although some also take advantage of biometrics for physical access. The Company’s end developers in China have pursued a number of successful product opportunities here during the year. In the Asian market, where product fabrication is a major commercial activity, the Company also has end developers using its embedded technology in micro-products like USB security and data tokens.

Reliable embedded solutions take the non-networked and independent use of biometrics into many new areas. In Denmark, but with a view to the market opportunity where magnetic stripe bank cards dominate (which is more than 80% of the bank card market) then CardLab is building a solution for on-card biometric cardholder verification. This uses the most advanced, but proven biometric and battery power technologies to deliver a secure card solution that will fit within the current lifecycle of a bank card. In the USA and France developers brought FPC technology into use for hand-held POS (Point of Sale) terminals, where the biometric substitutes for a PIN code. In the field of personal asset protection, battery powered safety boxes were introduced in the USA and Italy, demonstrating the reliability and independence of embedded systems.

It is clear that applications and solutions development will continue to thrive according to geographical and business needs, and where developers in diverse markets can harness the growing potential of FPC technology.

Products and applications

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Organisation

The requirement for organisational change during the year was driven by the additional production development work undertaken.

This led to the recruitment of two specialised and highly qualified engineers. On the business and marketing side the Company continued to maintain a lean and efficient approach.

Ultimate responsibility for the daily operation lies with the President, supported by an in-house management team that works to an established reporting and meetings structure. The main role of this team is to exchange information and make timely decisions on important issues related to technology development and the conduct of business operations. The Company administration works closely with the President. The Chief Financial Officer holds responsibility for administration, personnel, treasury, financial reporting to the board and reporting to the authorities. The President manages all investor relations matters.

The VP Sales & Marketing looks after direct marketing and sales activities. He is assisted by a sales manager responsible for the EMEA and North America regions, and leads a team giving technical support and assisting customers in projects integrating the technology to particular end products. Marketing activities during the

year favoured direct customer approaches rather than widespread exhibition attendance, but new activities planned for 2008 will include strategic exhibition attendance in collaboration with the Company’s regional distributors. The sales organisation complemented and supported the Company’s distributor and reseller network, which is capable of handling regional customers more effectively, and the marketing team worked hard during the year to create closer working relationships, something that will continue to strengthen.

The highly qualified technology team in Gothenburg, with many years expertise in biometric systems, is led by a VP Technology &

Engineering who is also responsible for the management of external expertise in a number of countries. Competent personnel are re- tained for development of the algorithm, ASICs, and the sensors, as well as for managing production, quality control, and delivery work. For larger projects involving the further development of FPC IP then project teams are assembled from FPC and customer personnel. Most technical development work in 2007 was handled in this way with minimal impact on the organisational structure, and the recruitment of two engineers with many years of experience in the fields of packaging and production logistics has delivered a direct, beneficial effect on the Company’s capabilities in these areas.

PRESIDENT

TECHNOLOGY & ENGINEERING FINANCE & ADMINISTRATION

•Accounting

•IT

•Personnel

•IR

•Sensor technology

•Algorithm development

•Processor development

•System engineering

•Patent issues

•Production issues

•Marketing

•Sales

•Technical support MARKETING

Share data and ownership structure 17

Share data and ownership structure

Shares in Fingerprint Cards were floated on the New Market list of the Stockholm Stock Exchange on May 8, 1998. Since April 19, 2000 the shares are traded on its Nordic List. One roundlot comprises 500 shares. The Company publishes quarterly reports and other share market information and otherwise complies with the rules and practices applying to share market companies in accordance with the Stockholm Stock Exchange.

The Shares

As at December 31, 2007, Fingerprint Cards share capital totalled SEK 2,430,546 allocated among 12,152,733 shares made up of 300,000 shares in Series A and 11,852,733 shares in series B, each with a quota value of SEK 0.20. All shares confer an equal right to a share in corporate profits, while the Articles of Association contain a pre- exemption clause relating to the A shares.

.

Allocation of the share capital as at december 31, 2007

Share of Share of

Type of share No. of shares No. of votes capital in % votes in %

Series A 300 000 3 000 000 2,5 20,2

Series B 11 852 733 11 852 733 97,5 79,8

Total 12 152 733 14 852 733 100,0 100,0

Changes in share capital

Quota Changes in Total No. Increase in Total

Year Event value, SEK shares of shares share capital share capital

1997 Split 500:1 0,20 249 500 250 000 0 50 000

1997 Bond issue 0,20 250 000 500 000 50 000 100 000

1997 New share issue 0,20 2 000 000 2 500 000 400 000 500 000

1997 New share issue 0,20 370 000 2 870 000 74 000 574 000

1998 New share issue 0,20 2 000 000 4 870 000 400 000 974 000

2000 New share issue 0,20 540 000 5 410 000 108 000 1 082 000

2000 New share issue 0,20 938 258 6 348 258 187 651 1 269 651

2005 New share issue 0,20 3 000 000 9 348 258 600 000 1 869 651

2006/2007 New share issue 0,20 2 804 475 12 152 733 560 895 2 430 546

Owner structure as at december 28, 2007

No. of No. of Total No. No. of Capital Votes in

Shareholder A-shares B-shares of shares votes in % in %

Technoimagia Sweden AB 300 000 0 300 000 3 000 000 2,5 20,2

Lennart Carlson 686 350 686 350 686 350 5,6 4,6

Non-Swedish owners 4 521 178 4 521 178 4 521 178 37,2 30,4

of which Deutsche Bank 483 545 483 545 483 545 4,0 3,3

other non-Swedish owners 4 037 633 4 037 633 4 037 633 33,1 27,2

Others 6 645 205 6 645 205 6 645 205 54,7 44,8

Total 300 000 11 852 733 12 152 733 14 852 733 100,0 100,0

Number of shareholders as at December 28, 2007: 7,105

16 Organisation

(10)

Administration report

The Board and President of Fingerprint Cards AB (publ), company registration number 556154-2381, hereby present the annual accounts and consolidated accounts for the fiscal year 2007. The company constitutes the parent company of the wholly owned subsidiary Fingerprint Security System Databärare AB, company registration number 556239-5938.

Operations in general

The Company has developed electronic systems that determine personal identity by analysing the unique fingertip patterns of indi- viduals. The systems comprise microchips with algorithms that scan, store and compare fingertip patterns without the help of any PC processor. Two types of capacitive sensors have been developed, an extremely small swipe sensor and a flatbed sensor. Processor ASICs and algorithms have been developed for each type of sensor.

By virtue of its smallness, low power consumption and the possibility of very low production costs, the technology can be integrated in volume products such as smart cards and mobile (cell) phones, where the requirements for such features are extremely high. Other applications for the technology include access control systems for buildings and products for log-on to computers and IT networks.

Significant events during the fiscal year

The year saw projects essential to bring about production for high volumes and at low unit costs; ones to make the Company competitive while giving acceptable sales margins. 2007 was the key period in the development of this competitive strategy: during the first quarter the Company received orders amounting to MSEK 43 for deliveries to the Chinese market that were of sufficient size to engage the app- ropriate subcontractors and the project of developing a cost efficient packaging solution in particular could be intensified.

Two other important projects were completed. A new processor ASIC was completed at a production far lower than for the older version; it is considerably more power efficient; has enhanced functionality, and works with both the Company’s sensor technologies. A further project contributing to the overall plan to halve the total production cost for the sensor component was completed in 2007. By moving wafer production to a new foundry silicon cost was reduced substantially. This will have a positive effect on margins for deliveries beginning first quarter of 2008.

The Company’s reseller in China, HST, has now established strong connections with four of the biggest suppliers of IT security products to the Chinese banks, which means that the Company´s sensor technology is now being used in more than 75% of all the biometric IT security products that are now being delivered to the banking sector in China. By the year end 40% of the Chinese order volume had been delivered and the plan is that the remaining part should be delivered during the first half of 2008. It is possible that deliveries will be stretched out further than that. The remaining part of the year´s deliveries went mainly to Argentina, Japan, Italy, France and USA, directed to products including USB keys, safety boxes and cupboards, time & attendance systems and Point of Sale terminals.

Expectations of future developments

The new ASIC development has already enabled new opportunities such as the CardLab on-card biometric system. It will also deliver value to the markets for embedded systems, including those where

identification functionality can replace tokens and cards.

New sensor packaging prototypes are now going through extensive tests, and product qualification will run during the first quarter of 2008. In parallel a process for production quality assurance will be started. Volume production is planned to commence round the mid- year point. The packaging cost of the sensor with this new solution and production method will be 50% lower compared to the old solution.

The combination of lower silicon costs, lower packaging costs and improved margins will remove the barriers to wider competitive participation in the volume markets as the year progresses.

Research and development operations

Orders received by the Company made it necessary to increase monthly production output considerably. The bottleneck to this increase was the packaging of the sensor. The available product solution and the production capacity available at the Company´s previous subcontractor were not designed for such high volumes, but by the year-end the production ramp-up was secured albeit at a high cost. Quality requirements on the finished product are high, and tuning the production to achieve an acceptable yield was both complicated and costly.

In parallel a project initiated during 2006 was in progress aimed at developing a new packaging solution for the sensor, a solution suitable for high volumes and that can be produced at a much lower cost. The subcontractor with whom the Company is running this project specialises in this type of solution and production, and is the largest in its market. New prototypes for this are being tested in the first part of 2008.

Two other projects were completed. The silicon production was moved to a new foundry leading to reduced silicon cost for the sensor component. A further project successfully delivered a new ASIC compatible with both the area and the swipe sensor. Power consumption has been reduced drastically; functionality enhanced; and at the same time production cost has been reduced considerably compared to the older component.

During the year the internal and external technology development costs amounted to MSEK 15.6 (9.5). Of these expenses MSEK 5.3 (2.2) have been set up as an asset in accordance with IAS 38.

Financial position

Equity, as of December 31, 2007, amounted to MSEK 67.1 (100.9). The consolidated equity/assets ratio was 90.7 % (93.1). Consolidated available liquid assets including current investments as at December 31, 2007, totaled MSEK 33.8 (71.1). Other current receivables amounted to MSEK 5.6 (6.7). The consolidated working capital amounted as at December 31 to MSEK 50.4 (86.9).

The parent company’s available liquid assets up to 31 December 2007, short term investments included, amounted to MSEK 33.7 (71).

Fixed assets, capital expenditure and depreciation

During the year, MSEK 0.2 (0.1) was invested in equipment. Develop- ment costs set up as an asset during the period were MSEK 5.3 (2.2).

Depreciation

Development costs were depreciated according to plan by 15 % annually. Equipment is depreciated by 20% annually.

International Financial Reporting Standards (IFRS)

With effect from 2005 Fingerprint Cards AB has been applying IFRS

in its consolidated financial statements in compliance with an EU directive that applies to all listed companies in the EU.

Significant events after the end of the fiscal year

In January 2008 the Company´s swipe sensor system was chosen by CardLab for the development of prototypes of a new biometric secure payment card: this features a magnetic stripe and is planned for the banking sector. The card is furnished with embedded leaf thin batteries as well as Fingerprint Cards´ sensor, processor ASIC and matching algorithm for on-card biometric verification.

Essential risk and uncertainty factors

Beyond the usual business risks the following risk areas could be identified for the Company and its business situation.

Personnel

A number of employees possess unique knowledge of the Company´s technology and have a long experience of its business. A loss of one or several of such key employees could for a transition period disturb operations. Replacing highly qualified members of the staff could take considerable time and could be costly.

Loss of larger customers

A large part of the Company sales goes to the Chinese market where the Company has an established reseller who has built up a strong position for the Company´s technology during a longer period. A loss of such an important reseller could incur a severe disruption of the Company´s operations.

Planning of business operations

The Company´s production of components takes place at subcontractors. Such production is both planned and ordered long in advance and with regards to wafer/silicon production up to six months before delivery is made. Binding orders with delivery plans from customers are not generally received that long in advance. Unsuccessful prognoses concerning sales and deliveries to customers can lead to overly large stock accumulation that could cause the Company liquidity problems.

Essential development projects

One essential development project run by the Company is aimed at the development of a new packaging solution for the sensor component.

The solution is designed for very high volumes at the same time as

halving the production cost of the present solution. This project is essential for the Company´s future competitiveness. The project is run in cooperation with a highly qualified subcontractor having long experience of this kind of production and is already producing similar product solutions in high volumes. A first prototype production has been carried through and the assessment is that essential risks have been reduced. Volume production is planned to start by mid-2008.

The board and its work

The Company Board consists of three members with solid experience of entrepreneurial and board activities in listed companies. The President is part of the Board, which held ten meetings during the year. Special instructions for the President describe the allocation of work and authority between the latter and the Board. In addition, the Board has adopted an operations code for its work. The latter specifies such matters as the overall tasks of the Board with regard to corporate organisation and economic administration. Further- more, it describes those matters that are to be discussed at the Board meetings and which reports are to be presented to the Board.

Financial results and the financial position are regularly compared with budgets set by the Board.

Proposed allocation regarding the Company’s loss

The following amounts in the parent company are at the disposal of the Annual General Meeting, SEK:

Accumulated loss (SEK) -130 727 890

Loss for the year (SEK) -34 193 107

Total accumulated loss (SEK) -164 920 997 The Board and President propose that the total accumulated loss of

SEK -164 920 997 be carried forward to a new account. The Board and the President propose that no dividend will be paid for the financial year. The annual accounts and consolidated accounts in respect of 2007 for Fingerprint Cards AB (publ) were approved for publication by the Board in its decision of 21 April 2008. It is proposed that the annual accounts and consolidated accounts be adopted by the Annual General Meeting to be held on 23 May 2008.

Gothenburg, April 24, 2008.

Perc Brodén Chairman Lennart Carlson

CEO & President

Jan Burenius

My auditor´s report was submitted on April 24, 2008 KPMG Bohlins AB

Jan Malm

Authorised Public Accountant

18 Administration report Administration report 19