Annual report 2006 Fingerprint Cards AB (publ)

Annual report 2006

Fingerprint Cards AB (publ)

Contents

2006 – A Summary . . . 4

Statement by the President . . . 5

Commercial concept . . . 7

Market and Sales . . . 8

Technology and Development . . . 10

Patent Issues . . . 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

Auditor’s report . . . 33

Five-year summary . . . 34

Board, Management, The Auditor . . . 35

Annual general meeting

The Annual General Meeting will be held on Thursday May 31, 2007, at 17.30 hrs, in the Västerhavet room at the Radisson SAS Scandinavia Hotel, Södra Hamngatan 59–65 in Gothenburg. Those share- holders registered in the VPC-maintained shareholders’ register as at Thursday May 24, 2007, 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 Thursday May 24 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 2007, May 10, 2007 Quarterly report for the period: January – June 2007, August 16, 2007 Quarterly report for the period: January – September 2007, October 26, 2007 Press release on annual accounts for 2007, February 2008

2007 Annual report, April 2008

At the beginning of the year the Sales & Marketing organisation was strengthened with the appointment of a sales manager responsible for North America and EMEA.

In February the Company received an order valued at MSEK 1 from its distributor in South Korea, Camos Tech Co. Ltd. The technology will be used in access systems for hotels, bank premises and offices, and the order was for embedded fingerprint systems.

A further order from Hardware & Software Technologies Co. Ltd in Taiwan was received in March. This concerned an IT security system for Chinese banks being developed by a Chinese customer, and an automobile application with another Chinese partner. The order value was MSEK 7.3 and delivery was made during 2006.

In April Camos Tech Co Ltd placed a second order, this time valued at MSEK 3.1 for complete identification systems. These were directed towards the physical access control markets in a product developed by Camos Tech’s parent company. The main areas of use are the leisure, banking, and office property sectors.

In May the Annual General Meeting of shareholders authorised the Board to issue three million new B shares with deviation from share- holders’ pre-emption rights.

In August the company received its largest systems order to date – valued at MSEK 9 and with delivery before the year-end – from Secure Design KK, its distributor in Japan.

As a result of the Company’s expanding sales strategy a new US distributor was appointed in August. Component Distributors Inc (CDI) signed a distributor licence agreement for the US market. CDI is based in Florida, and has more than ten offices located throughout the USA.

In October the board decided to go ahead with a new stock issue amounting to MSEK 70.1 before issue expenses. The subscription price was set at SEK 25 and the prescription period to 15 November – 1 December.

The issue was fully subscribed to and the Company’s major shareholder, Technoimagia Sweden AB had subscribed for its full share of the issue. On the closing payment day Technoimagia had not made payment. The board decided to prolong the time for payment with the final payment due by 20 December.

Circumstances related to Technoimagia made the board apply for a temporary attachment upon Technoimagia’s assets, and this was obtained at the municipal court in Stockholm on 12 December.

On the 20 December Technoimagia completed payment for its new issue shares following heavy sales of existing shares in Fingerprint Cards.

After the full new issue had been registered Technoimagia´s share was down to 28 % of the total votes and 12% of the capital. The attachment upon Technoimagia´s assets was lifted.

At the close of the year the Company had to conclude that Secure Design had not completed on the order worth MSEK 9 with respect to delivery before the year-end. Only a part delivery, corresponding to approximately 8 % of the order value was made in December 2006. The parties are discussing a solution to the problem.

Operations for the year showed a loss of MSEK –19.7 (-17.5). Operating income for the financial year totalled MSEK 11.1 (2.7) for the group.

Net financial items were MSEK 0.3 (0.5). Internal and external technology developments amounted to MSEK 9.5 (6.2)

Available liquid funds at the year-end amounted to MSEK 71.1 (40.0)

Events after the end of the financial year

In January Hardware & Software Technologies Co. Ltd (HST) placed a sensor order valued at MSEK 22. The sensors will be delivered from the first quarter of 2007 to the first quarter of 2008, and will follow earlier deliveries from HST to its banking applications customers in China.

In late February HST placed a further volume order for sensors worth MSEK 21. Deliveries will continue until the first quarter of 2008 and the sensors will be used in IT security products.

Early in April a further part delivery was made to Secure Design KK corresponding to approximately 16 % of the total order value of MSEK 9.

2006 – A Summary

4 2006 – A Summary

A few major factors have influenced the Company’s direction this year: in particular a successful new rights issue and a cluster of our biggest orders to date. While these have been clearly visible it is also important to know that behind the scenes we have been working efficiently on a series of carefully defined and timed projects in the preparation for important changes in 2007. The year therefore saw the affirmation of some key opportunities with respect to our sales and marketing direction, and it has put us in a strategically useful position.

Capitalising

We began the year with a new, major owner, which brought with it new capital at the end of 2005; however, by the end of this year a further preferential rights issue to our stockholders resulted in significantly greater capital inflow of MSEK 70.1 before costs were accounted for, and by the end of the share issue our major owner had greatly reduced its stake. All this puts us in a sound financial position for the coming years, giving us a degree of freedom and most importantly it allows us to progress with the plans made and prepared for. In connection with this new issue the Board has decided that this two year period should see a considerable increase in sales and production with the aim of achieving a positive operating result on an annual basis.

Market entries

Of cumulative importance this year has been our strengthening access to Asian markets, where our technology performs well and where there are very real and substantial opportunities for biome- trics in the commercial sector. Our Sales and Marketing team has worked hard to achieve this, working through what have proved to be effective distributor channels. This marks an important turning point because the opportunities being serviced by the development partners using our technology are commercial ones in the fields of IT, physical access, and banking security. Government sponsored projects have also continued to grow impressively in the USA, where we also secured a new distributor during the year.

Improving our delivery position

We have developed an innovative technology including a sensor giving superior image quality. However, this is only one step in the process of reaching commercial success. During the year substantial resour- ces were devoted to building up production capacity at sub-contractor level concerning packaging of the sensor component. These efforts were successful and by the year-end the production capacity was significantly increased and with sustained quality level. Our delivery position is now satisfactory and will be further improved throughout the coming period.

Better margins

In parallel with the efforts to increasing production volume impor- tant development projects were in progress aimed at improving our sales margins. We are developing a new packaging solution for the sensor; one that can be produced in very high volumes and to a con- siderably lower cost, which together with the new processor ASIC we design will give us significantly improved sales margins. These production cost reducing measures will have progressive effects during the coming year noticeable in our accounts above all from the second half of the year.

We have an exciting time ahead of us, where we can look forward to considerably increased sales and production volumes and to much improved sales margins. Our aim is to build up a strong foun- dation for future profitability.

Gothenburg, April 2007

Lennart Carlson President

Fingerprint Cards AB

Statement by the President

Statement by the President 5

Fingerprint Cards is a technology company with a strong intellectual property portfolio. Its customers are mainly developers of end-user products or solutions in which the Company’s technology can be integrated. These are reached directly or through the Company’s global distributor/reseller network.

Central concepts

Technical development is essential to the Company’s position, where it is particularly strong in the arena of small and cost effective embedded systems. The silicon technology and the biometric met- hodologies at the core of the Company’s offering are not only inno- vative, but well-protected, offering a trustworthy foundation for pro- gressive business development. The central business concept is to deliver both components and complete systems of FPC original finger- print technology from within a variable framework of licence agree- ments. While this approach extends ultimately to well-developed customer projects where only royalties are gained and the licensing customer manages all hardware production issues, the Company has found increasing degrees of success in the supply of sensors and embedded systems components, and as a result has become well-adapted to current as well as future market needs. Just as the market for biometrics continues its growth in depth and diversity, then so the Company will benefit from the reach and flexibility of its business model.

Image and system level views

Historically there have been two views on approaching biometric technologies: the image processing level and the wider system’s deployment. Fingerprint Cards has a development approach to en- compass both levels. At the core technology level, dealing with image capture and processing, it 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 met- hodologies and software for both area and swipe sensors, extending this to identification matching for products where the biometric sys- tems use no identification cards or tokens.

Designed from the outset as a compact, low-power, efficient approach to fingerprint capture and matching, this portfolio positions Fingerprint Cards as a leader in the development of complete bio- metric 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 techno- logy; whether this is for logical, physical, or a particular combination of identity authentication.

Using its ownership of an approach and a platform to biometric matching that are compatible with the widest range of product dep- loyments Fingerprint Cards can benefit from a flexible business model centred on licensing but extending to the provision of components with competitive profit margins.

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. This has previously been evidenced by the commitment made to a low cost swipe sensor and its software processes which have now received full patent protection. More recently, this year, the Company has taken great strides in developing the next generation of its ASIC pro- cessor. This offers an easily interfaced processing platform, with more functionality, at a dramatically lower cost than previous models.

The design of this processor will enable customers to build new functionality, security, and privacy into their products at a highly competitive level that will be seen at all stages in the value chain.

The future of the market

The current reality of the market for biometrics is that it has yet to reach the volume that will make a purely IP licensing business model run by itself, although the availability of proven low cost technology designs is a major, positive step in that direction. Those capable of supplying strong fingerprint IP, from the fingerprint imaging tech- nology through to the image processing algorithms, and the silicon platforms for these, need in the interim to fight for a strong position in the supply of components and systems sub-assemblies. While the Company seeks to position itself for the streamlined licensing activities inherent to high volume product opportunities, it has seen a successful year in the consolidation of its distributor based sales and marketing model, and this offers the most effective base for sales activities in the coming period.

Commercial Concept

Commercial Concept 7

Business value is the guide

The overall trend of the year was already evident by its mid-point, when it was clear that biometric technologies had become well es- tablished and familiar worldwide. The year represented a consolida- tion of the momentum gained by the industry over the previous five years, and it testified to the high level of acceptance reached in all walks of life, whether large government projects featuring identity card or passports, or more local uses of biometrics such as physical access control.

Throughout it was clear that biometrics were being deployed for the value they can bring, and not for fashionable or sensational rea- sons. Price and functionality continue to be the two determining fac- tors in success. Whether they are used by governments, businesses, or individuals, their use was indicative of better preparation and under- standing of the technology, and this was balanced by a more rigorous technology selection process that has become global in its outlook.

Three themes

There were three prominent themes to the growing biometrics market this year. First is the importance of sales partners such as regional distributors and channel partners such as computer manu- facturers. The second is the emergence of a select number of tech- nologies that are sought after globally for their performance, effec- tiveness, and value for money. The third is the number of systems integrators who are gaining real experience in the deployment of biometrics to large systems. The first two of these have been particu- larly relevant to Fingerprint Cards.

Geographical presence

Distributors play a crucial role in identifying sales opportunities, and in supporting these throughout the pre-sales and after-sales pro- cesses. Through these the Company reaches a large number of end customers without any extensive expansion of its own sales organi- sation. Growing markets such as China show the importance of having

a local presence, even when the technology selection process is firmly rooted in a global view of value for money. During the last five years a network of distributors has been built up and the Company is now well represented in market regions such as South Korea, Taiwan, China, Singapore/Malaysia and USA.

Finding the global opportunity now relies upon a distributor who understands the local market and has a strong understanding of the biometric technology. There are common aspects to the use of biome- trics, such as the reduction of identity fraud, but regional distributors are best positioned to respond to different market drivers. For ex- ample, in China banking legislation holds executives responsible for fraud, and this prompts the adoption of more rigorous authentication solutions. In the United States both health insurance information and data accountability legislation have been contributing to the demand for integrated biometric solutions. On the other hand, for the ePassport inclusion of biometrics the drivers have been both global and European compliance programmes.

Product development with biometrics

The end use cost of biometrics continued to drop throughout the period, making this more attractive to product developers in all mar- ket segments. There are very few of the mainstream providers of physical access control and time and attendance equipment who have not taken on biometrics as a part of their product lines. During the year the markets for these products were shifting in favour of lower cost equipment and towards added functionality such as card- free operation to realise end-user savings.

The lower cost of biometrics has also widened the adoption of biometrics to the IT sector. The year saw the adoption of fingerprint sensors as standard equipment to new notebook computers rea- ching as high as ten percent of all machines sold worldwide. The advantages of these have been strengthened by improved software packages for managing identity at the client level, and by parallel hardware initiatives such as the Trusted Computing Group’s

specifi-

Market and Sales

8 Market and Sales

Market Sales 9

1http:// www. Trustedcomputinggroup.org

2The Company’s non-exclusive distributor in Japan, Secure Design KK, placed an order in August worth MSEK 9 for technology delivery by the end of 2006. Secure Design KK never completed on the order. The parties are discussing a solution to the problem. In early April a part delivery was made to Secure Design KK corresponding to approximately 16 % of the total order value.

cation for more secure computer hardware environments. Within this segment the opportunities have been taken by silicon sensors, with optical sensors being at a clear disadvantage in size as well as cost.

Revisiting the financial sector

Opportunities in the financial sector have long been suggested as having the greatest potential spread for biometric deployment, but North American and European banks have been slow to adopt these.

Instead, during the year, there was a move by banks in China and South America to bring greater security accountability to their rapid growth by using biometrics. These applications tend towards the security and control of bank employees in the first instance, but bank customer usage of the technology has also been increasing.

The Company’s experience of these opportunities is that they are being delivered by way of integrated computer or network access control solutions, but we can expect an increase in solutions com- bining biometrics with smart cards and electronic signatures.

Sales and marketing

The Company did not engage in any marketing activities during 2006 and this led to fewer new contacts. The year’s activity was centred on a stable approach to meeting existing commitments and suppor- ting distributors and reseller partners. One important achievement however was the appointment of a new distributor for USA, head- quartered in Florida and covering the North-American continent through ten branch offices. In 2007 the Company will engage in a new marketing programme, working in partnership with its distri- butors, and profiling itself at a number of regional events.

The Company has developed two sets of technology for reading, storing and matching of finger patterns. One set is based on a swipe sensor and the other on a larger area sensor for the reading of finger patterns. The swipe sensor technology is not yet generating any continuous sales. However, the technology is being delivered to interesting projects which aim to integrate the complete fingerprint

system in cards intended for use in large payment systems. The area sensor technology showed, on the other hand, very positive sales growth. The demand for this technology exceeded the Company’s ability to deliver throughout the year due to problems with raising production volume at the packaging stage of the sensor component;

however capacity in that respect had improved considerably by the year-end.

The regions accounting for the major part of the revenues for the year were South Korea, Taiwan, Japan and China. The applications in which the technology were used were, access control systems for banks and offices; safe boxes for offices and hotels; a biometric auto- mobile security product; and most of all, IT security products for logon to computer networks. It is the Company’s opinion that the IT security product segment has the greatest potential for future sales, with this being particularly valid for the Chinese market.

Company sales during the year

The total revenue for the year amounted to MSEK 11. The sales mar- gin was clearly insufficient and considerable measures have been taken to lower production costs progressively and thereby raise the sales margin to an acceptable level. The aim is to achieve a sales margin of 30 to 35 per cent for the foreseeable product mix. In addi- tion to the year’s revenue, the cumulative order value, discounting an order from Japanese Secure Design KK

and worth MSEK 9, amounted to MSEK 4 at the end of December.

Shortly after the year end the Company received two orders from

its distributor in China, totalling MSEK 43.

Supporting the business model

The FPC technology development programme is there to support the business model and the Company’s customers. A period of ori- ginal investment, strong innovation and patent protection has been followed during the last year with a series of discrete projects, all with a view to better yields in component production, and better pro- cess integration through the technical steps of component supply.

It has been possible to pursue these strategic projects in the anti- cipation of further investment; and with the influx of new capital at the end of the year, the Company will now move to act on the results of its projects.

A popular technical fit

The popularity of FPC sensor technology amongst developers – among those in the Asian marketplace in particular – is largely at- tributable to the quality of the image generated. This is a feature of FPC’s reflective capacitive silicon design – producing a sensor that is sensitive and robust. This quality image provides a good starting point for developers with their own algorithm approach, looking to add a level of their own value to the end product, and with a strong local connection to the market. The standalone functionality of the sensor is therefore acting as a key to market entry in these areas, where many other sensor and combined sensor/algorithm packages are less successful.

Improving on production

The approach taken by the technical team is well-established. The Technical Director heads a team of specialists in Gothenburg, each of whom is responsible for specific development areas. Added to this are project teams comprised of external specialists, and with the specific role of taking the Company to its next strategic milestone.

Throughout the year the technical team was looking in general at new technical production solutions and new suppliers.

Most of the work done in 2006 was designed with the final aim of realising strong customer order benefits in 2007, and instrumentally, to satisfy planning for investment on completion of the new rights issue at the close of 2006. Significant production improvements were already achieved within 2006: monthly sensor production had increa- sed five-fold by the close of the year compared with the opening months. The volume increase is a result of investments made in pro- duction equipment, and from an intensified cooperation between the Company and its suppliers. Progressive benefits are expected from

this strategy as the Company moves to satisfy its existing orders in 2007.

Along with the further development of the present packaging solu- tion, work was in progress on developing a completely new pack- aging for the sensor. The market demands greater volumes at a lower cost, and it is critical for the Company to be able to meet these demands. New technical solutions may require investments in spe- cific production equipment in order to achieve a cost effective pro- duction process. Such investments may be made either by the Com- pany or by its contracted sub-contractors.

Another key development project has been the design and testing of a new coating together with different ways of applying this. This will be a better production fit and will bring some product improve- ments, including even greater scratch resistance.

Value at the embedded processing level

Technical work has contributed greatly to the development of the processing platform architectures as a valuable area of opportunity for FPC technology. This extended during the year to design work on a new ASIC, which reached its final stages by the end of 2006.

This will be faster and use much less power than the Company’s current ASIC processor. The new processor is designed basically for the area sensor family, including the use of this 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 the present processor.

Significant leap

The new ASIC represents a significant leap forwards in the delivery of value for money to FPC customers. With a 75 percent reduction in the silicon area using a more advanced process the chip price will be reduced by 80 percent and the design of the chip will encapsu- late all of the FPC algorithm and matching software revisions made since the last processor 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 al- ready future compatible with the swipe sensor, providing in effect a dual algorithm platform. The FPC principle of high-performance at low cost will therefore be carried forward on different technical le- vels. Deliveries of the new processor to the market are planned for the third calendar quarter 2007.

Technology

10 Technology

Sensor patent, architecture: Sweden: No. 511543, valid until Feb 2018. PCT: Application No. PCT/SE99/00195. USA: No. 6,778,686, valid until Feb 2019.

EP: No. 1 055 188, valid until Feb 2019. Registered in Germany and France. Japan: Application No. 2000-531806.

Sensor patent, pixel element: PCT: Application No. PCT/SE2004/000985. EP: Application No. 04749024.8. USA: Application No. to follow.

Japan: Application No. to follow.

Algorithm patent: EP: No 1 208 528 valid until August 2020. Registered in Germany and France. Sweden: No. 514091, valid until August 2019 PCT: Application No. PCT/SE00/01623. USA: Application No. 10/069240 (Granted: Patent No. to follow) 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: Application No. 10/398 172. Japan: Application No. 2004-524625.

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

Intellectual property strategy and approach

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 de- signs 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 pro- file 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 ope- rations 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 patent 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 examina- tion report from the PCT the Company has filed patent applications in Japan and the USA.

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.

Business progress in 2007 is forecast to be mostly independent of the wider market’s growth. The current status of orders and distributor arrangements puts the Company on a good footing with reference to its business growth plans, and allows the operational focus to conclude work on the matters of production and volume delivery capability.

Expectations

Most expectations are linked with the Company’s area sensor pro- duct, and with the next iteration of its ASIC processor, however, there are a number of market developments taking shape that might con- tinue to move favourably in opening opportunities for the Company’s swipe sensor. The question of unit price continues to remain at the forefront for volume markets and there is still the possibility in the coming period that the Company will be able to realise its more purely defined licensing and royalty strategy in respect of this sensor.

The enhancement of this is achieved both by the overall production and packaging reforms currently undertaken, but also by the multi- functionality of the new ASIC which will provide an operational plat- form for the swipe sensor algorithm methodology as well as the area sensor’s verification and identification modes.

Importance of IP protection

The importance of IP protection in the silicon sensor and algorithm domain is likely to become more relevant to business viability. Some

recent developments, whose outcomes are not yet determined, are legal challenges between competitor swipe sensor products. There are currently three competitor products in the swipe sensor market where there has been a reasonable developer uptake with products in circulation. However, two of these have been challenged on the grounds of their Intellectual property rights either in the core sensor design or the algorithm methodologies deployed, and the outcome of these challenges could have strong negative impacts on their commercial viability. Fingerprint Cards on the other hand has a well-founded patent protection in respect of its sensor design and its algorithm methodology; it thus offers a stable route to the con- tinuing development of a low-cost solution.

Diversity

A healthy diversity continues to be a part of the Company’s sales activities in the coming period. Orders and sales for sensors and embedded systems components are strong, but there is also a good uptake in interest for FPC sub-systems modules, which became available in 2005. These cater for early development interest in the technology, and for developers of more specialised high-value pro- ducts. While the Company does not anticipate high volume sales of these, it maintains its competitive position in the market and benefits from a larger share of the added value through its provision of comp- lete modules, along with technical support. The modules also provide

Outlook

12 Outlook

a lead in continuity for future sales as well as diverse validation of the Company’s core technology and its real-world performance.

Sales and marketing business base

The search for new distributors in new geographical markets such as India, South America, and parts of Europe are also central to the broadening of the Company’s business base in the next few years, and the development of these will form an important part of the coming year’s activities. Developments in the Chinese marketplace are also likely, based on the generally positive market conditions there and the momentum apparent from the last eighteen months’ activity.

The outlook for a return on sales and marketing activities pro- mises to be a positive one, moreover given that it was not possible during 2006 to commit to any extensive investment with short or longer-term view. The expansion of the distributor network, as described above, along with a tighter collaborative plan for exhibiting alongside distributors where their local knowledge will lead the stra- tegy, is a proven approach that already brings benefits for the Company.

Cost of ownership

The market introduction of the new ASIC processor will serve a num- ber of purposes. It will provide for a state-of-the-art embedded finger- print solution; it will continue to drive down quite significantly the cost of ownership of a biometric system; it will reduce the cost of im-

plementing a fingerprint system; and alongside these customer bene- fits, it will also bring better sales margins to the Company. Opportu- nities for the swipe sensor technology are also aided by this new ASIC processor which will provide an operational platform for both area and swipe sensor algorithm methodologies.

Outlook 13

Fingerprint Cards supplies components and licences to its geograp- hical distributor and reseller partners who in turn sell these to pro- duct developers who understand the many different applications calling for biometrics. In some cases the Company also enters di- rectly 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. Such is the case with swipe sensor projects.

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 mar- keting by the end-developer of the technology. The fingerprint might be deployed to reduce identity fraud or password management pro- blems; it might be in the lowest cost device to meet a simple secu- rity requirement; or it might form an essential part of a revolutionary product idea.

Established applications for biometrics include physical access con- trol, where biometrics provides a higher level of identity security and assurance against collaborative fraud, such as key sharing. During the year access control products featuring FPC technology have been introduced in Singapore and in Japan.

Geography plays an important 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 mana- gement 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 proposition, and pro- ducts using FPC were introduced this in Sweden for this purpose.

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 implemen- ting 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 biome- trics 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 indepen- dent use of biometrics into many new areas. 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 sa- fety boxes were introduced in the USA and Italy. Professional envi- ronments where access to sophisticated equipment or materials, such as in medical applications, is another effective use for standa- lone biometric solutions, and FPC technology was deployed in this area by an Italian developer.

Applications and solutions development will continue to thrive ac- cording to geographical and business needs, and where developers in diverse markets can harness the great potential of the Company’s technology.

Products and applications

14 Products and applications

Organisation

The new major owner brought in by the Company late in 2005 has had very little impact on the organisational structure, but the recent share issue completed in the fourth quarter of 2006 did enable the technical department to progress with its management plan by appo- inting two new engineers with specific responsibilities. At the begin- ning of the year the Company had also appointed a new regional sales manager but, other than these additions, the year was otherwise very stable with no new requirement for re-organisational change.

Ultimate responsibility for the daily operation lies with the Presi- dent, 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 im- portant 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, and leads a team giving technical support and assisting customers in projects integrating the technology to particular end

products. The front-line of this team was strengthened at the begin- ning of the year when a new Sales Manager was appointed to con- centrate on the development of EMEA and North American markets, which resulted in the appointment of a new US distributor. Marketing activities during the year favoured direct customer approaches rather than generalised activities such as exhibition attendance, although new activities planned for 2007 will include such attendance in col- laboration with the Company’s regional distributors. The sales orga- nisation complemented and supported the Company’s distributor and reseller network, which is capable of handling regional customers more effectively. Collaboration with distributors will continue to strengthen in the coming year.

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 retai- ned 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 2006 was handled in this way with minimal impact on the organisational structure.

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

16 Organisation

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 200 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, 2006, Fingerprint Cards share capital totalled SEK 2,224,487 allocated among 11,122,434 shares made up of 300,000 shares in Series A and 10,822,434 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.

As at December 29, 2006, the B share was traded to the price of SEK 16.20.

Allocation of the share capital as at december 31, 2006

Share of Share of

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

Series A 300,000 3,000,000 2,7 21,7

Series B 10,822,434 10,822,434 97,3 78,3

Total 11,122 434 13,822 434 100,0 100,0

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 New share issue 0,20 1,774,176 11,122,434 354,835 2,224,486

Owner structure as at december 31, 2006

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

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

Technoimagia Sweden AB 300,000 200,000 500,000 3,200,000 4,5 23,2

Lennart Carlson 719,950 719,950 719,950 6,5 5,2

Non-Swedish owners 3,132,037 3,132,037 3,132,037 28,1 22,7

of which Finn Larsen 490,000 490,000 490,000 4,4 3,5

other non-Swedish owners 2,642,037 2 642,037 2,642,037 23,8 19,1

Others 6,770,447 6,770,447 6,770,447 60,9 48,9

Total 300,000 10,822,434 11,122,434 13,822,434 100,0 100,0

Number of shareholders as at December 29, 2006: 7,188

Administration report

The Board and President of Fingerprint Cards AB (publ), company registration number 556154-2381, hereby present the annual ac- counts and consolidated accounts for the fiscal year 2006. The com- pany 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 per- sonal identity by analysing the unique fingertip patterns of individuals.

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 algo- rithms 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

In the latter part of the year the Company carried through a new stock issue directed to the existing shareholders. This issue comprised approximately 2.8 million shares of series B and brought MESK 70.1 before issues costs to the Company. The motive for the new issue was to provide the Company with sufficient capital for its continuing ope- ration; to cover the increased need for working capital that will follow from a planned business expansion; and finally to finance necessary measures that will be taken in order to make production of the sensor component more effective at the supplier level.

The Company’s principal shareholder, Technoimagia Sweden AB, fully subscribed to for its share in the new issue. Before the new issue it held 50.3 percent of the total votes and 35.9 percent of the capital. Following large sales of shares this ownership has now been reduced, and after the new issue was registered in early 2007, Tech- noimagia’s share of the total votes was down to approximately 28 percent, and its share of the capital approximately 12 percent.

During the year the Company’s area sensor technology showed very positive sales growth, giving strong grounds for optimism from the future completion of current development in production and de- livery capabilities, and clearing the bottleneck restrictions in supply to customers.

At sales level the distributor strategy was broadened and conso- lidated. The appointment of a new sales manager was followed by the licensing of a new distributor for the USA, and orders through the year showed that continuous efforts to build distributor and de- veloper relationships in the Asian market were paying off.

Expectations of future developments

The Company expects that the healthy demand for its products in 2006 will continue well into 2007 based on current market developments alone.

Considering this positive situation, the plan is to increase production, and thereby sales considerably. The recently carried through new issue has brought the Company the necessary financial resources for this ex- pansion. A further condition for achieving a higher business volume is

that the Company can participate in the competition for larger orders, which in turn requires that the Company can offer competitive prices.

Future developments in the Company’s technology offering are centred on competitive market pricing and improved sales margins.

The coming year will see the first deliveries of the Company’s new ASIC processor which has been redesigned to be considerably smal- ler than the present processor, and will have greater capacity, new functions, and better power efficiency. This new ASIC will bring an eighty percent reduction in production costs. Production of the Com- pany’ sensor component – the most complex from the production point of view – is being improved to meet the expectation of volume orders and to deliver a more competitive market price along with better sales margins during the course of the year.

Research and development operations

Work within technology development and production focused for the most part on raising the production capacity of area sensors at the Company’s sub-contractors, and on the development of new techni- cal solutions within the areas of packaging and processor technology.

During the year the ASIC processor was redesigned to take ad- vantage of more advanced production processes as well as to de- liver better performance and lower power consumption, both of which are in line with the Company’s commitment to delivering in- creasing value at the embedded solutions level. This ASIC develop- ment will also benefit performance of the Company’s identification algorithm operation.

Sensor development work during 2006 was conducted with a view to improving the production process, and this showed results even within the year, achieving a five-fold increase in production vo- lumes. Other developments in sensor packaging were investigated and developed with the view to new investments in specific produc- tion equipment.

During the year the internal and external technology develop- ment costs amounted to MSEK 9.5 (6.2). Of these expenses MSEK 2.2 (0) have been set up as an asset in accordance with the recom- mendation and statements of the Swedish Financial Accounting Standards Council, RR15 Intangible assets.

Financial position

Equity, as of December 31, 2006, amounted to MSEK 100.9 (58.7). During the year the new issue brought MSEK 62 after issue costs. The con- solidated equity/assets ratio was 93.1 % (96.2). Consolidated available liquid assets including current investments as at December 31, 2006, totaled MSEK 71.1 (40). Other current receivables amounted to MSEK 6.7 (1.0). The consolidated working capital amounted as at December 31 to MSEK 86.9 (44.3).

The parent company’s available liquid assets up to 31 December 2006, short term investments included, amounted to MSEK 71 (39.9).

Fixed assets, capital expenditure and depreciation

During the year, MSEK 0.1 (0.0) was invested in equipment. Deve- lopment costs set up as an asset during the period were MSEK 2.2 (0.0).

Depreciation

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

18 Administration report

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 2007 Fingerprint Cards´ Chinese distributor Hardware &

Software Technology Co. placed an order for the Company’s finger- print sensors worth MSEK 22. The sensors will be used in IT security products and will follow up deliveries on previous orders that began in the end of 2005 and continued throughout 2006. Later on in February the Company received a further order worth MSEK 21 from the same customer.

The board and its work

The Company Board consists of four members with solid experience of entrepreneurial and board activities in listed companies. The Pre- sident is part of the Board, which held sixteen meetings during the year. The board member Mr Kashiwabara has attended three board meetings while the other board members have attended all meetings.

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. Furthermore, 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) - 136,938,119

Loss for the year (SEK) - 19,757,662

Total accumulated loss (SEK) - 156,695,781 The Board and the President propose that the total accumulated loss of SEK -156 695 781 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 2006 for Fingerprint Cards AB (publ) were approved for publication by the Board in its decision of 16 April 2006. It is proposed that the annual accounts and consolidated accounts be adopted by the Annual General Meeting to be held on 31 May 2007.

Gothenburg, April 19, 2007

Perc Brodén Chairman

Taketoshi Kashiwabara

Gunnar Liljegren Lennart Carlson

CEO & President

My auditor´s report was submitted on April 19, 2007 KPMG Bohlins AB

Jan Malm

Authorised Public Accountant

Administration report 19

THE GROUP THE PARENT COMPANY

Amount in SEK Not 2006 2005 2006 2005

Net sales 3 11,064,201 2,714,862 11,064,201 2,714,862

Cost of goods sold -10,848,588 -2,760,968 -10,848,588 -2,760,968

Gross profit/loss 215,613 -46,106 215,613 -46,106

Selling expenses -4,341,449 -4,079,502 -4,341,449 -4,079,502

Administrative expenses -6,332,440 -6,473,649 -6,351,190 -6,492,399

Research and development costs 7 -9,525,046 -7,451,851 -9,525,046 -7,451,851

Operating profit/loss 3,4,5,6,8 -19,983,322 -18,051,108 -20,002,072 -18,069,858

Result from financial items

Financial income 9 542,953 530,992 542,936 530,992

Financial costs 9 -298,526 -586 -298,526 -586

Profit/loss after financial items -19,738,895 -17,520,702 -19,757,662 -17,539,452

Tax on profit for the year 10 0 0 0 0

Profit/loss of the year -19,738,895 -17,520,702 -19,757,662 -17,539,452

Attributable to

Parent company´s shareholders -19,738,895 -17,520,702

Minority interest – –

Earnings per share, SEK

Before dilution -2.07 -2.56

After dilution -2.07 -2.56

Income statement

20 Income statement

THE GROUP THE PARENT COMPANY

Amount in SEK 2006 2005 2006 2005

Source of funds

Operating Profit/loss -19,738,895 -17,520,702 -19,757,662 -17,539,452

Adjustments for items not included in the cash flow

Depreciation 2,758,652 2,834,402 2,758,652 2,834,402

Disbursments of tangible assets 0 5,846 0 5,846

Other items not included in the cash flow 21,885 35,449 21,885 35,449

-16,958,358 -14,645,005 -16,977,125 -14,663,755

Taxes paid -389,988 -407,715 -389,988 -407,715

Cash flow from current operations before changes in

working capital -17,348,346 -15,052,720 -17,367,113 -15,071,470

Change in working capital (excl. liquid funds)

Increase (-)/Decrease (+) of inventory -12,512,772 1,692,832 -12,512,772 1,692,832

Increase (-)/ Decrease (+) in current receivables -3,772,978 112,127 -3,772,978 112,127

Increase (+)/ Decrease (-) in current liabilities 5,118,662 -334,657 5,138,662 -299,157

Cash flow from current operations -28,515,434 -13,582,418 -28,514,201 -13,565,668

Capital expenditure operations

Investment in intangible assets -2,210,160 0 -2,210,160 0

Investment in tangible assets -90,110 0 -90,110 0

Cash flow from capital expenditure operations -2,300,270 0 -2,300,270 0

Financial operations

Redeemed options premiums 0 -9,500 0 0

Issue of new shares and other owner contributions 62,000,223 22,500,000 62,000,223 22,500,000

Total application of funds 62,000,223 22,490,500 62,000,223 22,500,000

Cash flow for the year 31,184,519 8,908,082 31,185,752 8,934,332

Liquid funds and current investments at the start of the year 39,957,806 31,049,724 39,835,067 30,900,735 Liquid funds and current investments at the end of the year 71,142,325 39,957,806 71,020,819 39,835,067

Liquid funds are: cash and bank and current investments.

Cash flow statement

Cash flow statement 21

22 Balance sheet

THE GROUP THE PARENT COMPANY

Amount in SEK Not 20061231 20051231 20061231 20051231

Assets

Fixed assets Intangible assets

Capitalised expenditure for development 11 13,693,426 14,035,103 13,693,426 14,035,103

Tangible assets

Equipment, fixtures and fittings 12 297,329 414,035 297,329 414,035

Financial assets

Participations in group companies 13 0 0 0 0

Total fixed assets 13,990,755 14,449,138 13,990,755 14,449,138

Current assets

Inventory 16,573,399 4,060,627 16,573,399 4,060,627

Advance payments to suppliers 3,729,723 1,571,072 3,729,723 1,571,072

Accounts receivables – trade 1,081,339 81,635 1,081,339 81,635

Other receivables 1,376,455 339,733 1,376,455 339,733

Prepaid expenses and accrued income 14 533,765 587,760 533,765 587,760

Current investments 15 34,843,592 29,921,068 34,843,592 29,921,068

Cash and bank balances 36,298,733 10,036,738 36,177,227 9,913,999

Total current assets 94,437,006 46,598,633 94,315,500 46,475,894

Total assets 108,427,761 61,047,771 108,306,255 60,925,032

Balance sheet

THE GROUP THE PARENT COMPANY

Amount in SEK Not 20061231 20051231 20061231 20051231

Equity and liabilities

Equity

Share capital 2,224,487 1,869,651 2,224,487 1,869,651

Other contributed capital/Statutory reserves 229,760,619 229,760,619 229,121,232 229,121,232

On-going new share issue 25,757,475 0 25,757,475 0

Profit/loss brought forward -137,069,598 -155,436,808 -136,938,119 -155,305,279

Profit/loss for the year -19,738,895 -17,520,702 -19,757,662 -17,539,452

Total equity 100,934,088 58,672,760 100,407,413 58,146,152

Current liabilities

Accounts payable – trade 4,859,651 469,025 4,859,651 469,025

Liabilities to group companies 0 0 410,169 408,869

Other liabilities 710,956 407,154 705,956 402,154

Accrued expenses and prepaid income 16 1,923,066 1,498,832 1,923,066 1,498,832

Total current liabilities 7,493,673 2,375,011 7,898,842 2,778,880

Total equity and liabilities 108,427,761 61,047,771 108,306,255 60,925,032

Pledged assets and contingent liabilities Amount in SEK

Pledged assets None None None None

Contingent liabilities None None None None

Balance sheet 23

24 Changes in equity

Proftit/loss brought Other capital forward including

The Group Share capital contribution profit/loss for the year Total

At the start of the year 2005 1,269,651 207,870,119 -155,436,808 53,702,962

Profit/loss for the year -17,520,702 -17,520,702

Total change in assets excl transactions

with the company´s shareholders 1,269,651 207,870,119 -172,957,510 36,182,260

New share issue 600,000 21,900,000 22,500,000

Redeemed options premiums -9,500 -9,500

At the end of the year 2005 1,869,651 229,760,619 -172,957,510 58,672,760

At the start of the year 2006 1,869,651 229,760,619 -172,957,510 58,672,760

Profit/loss for the year -19,738,895 -19,738,895

Total change in assets excl transactions

with the company´s shareholders 1,869,651 229,760,619 -192,696,405 38,933,865

New share issue 1) 354,836 35,887,912 36,242,748

On-going new share issue 25,757,475 25,757,475

At the end of the year 2006 2,224,487 255,518,094 -156,808,493 100,934,088

Changes in equity

RESTRICTED EQUITY NON-RESTRICTED EQUITY

Restricted On-going new Non-restricted Profit/loss

Parent company Share capital reserves share issue reserves for the year Total

At the start of the year 2005 1,269,651 207,221,232 0 -133,622,541 -21,697,938 53,170,404

2004 loss brought forward -21,697,938 21,697,938

New share issue 15,200 15,200

Profit/loss for the year -17,539,452 -17,539,452

Total change in assets excl transactions

with the company´s shareholders 1,269,651 207,221,232 0 -155,305,279 -17.539,452 35,646,152

New share issue 600,000 21,900,000 22,500,000

At the end of the year 2005 1,869,651 229,121,232 0 -155,305,279 -17,539,452 58,146,152

At the start of the year 2006 1,869,651 229,121,232 0 -155,305,279 -17,539,452 58,146,152

2005 loss brought forward -17,539,452 17,539,452

Effects of Group contribution 18,700 18,700

Profit/loss for the year -19,757,662 -19,757,662

Total change in assets excl transactions

with the company´s shareholders 1,869,651 229,121,232 0 -172,826,031 -19,757,662 38,407,190

New share issue 1) 354,836 35,887,912 36,242,748

On-going new share issue 25,757,475 25,757,475

At the end of the year 2006 2,224,487 229,121,232 25,757,475 -136,938,119 -19 757,662 100,407,413

1) New share issue costs balanced against equity totaled SEK 8 111 652.

Restricted reserves

It is not permitted to reduce restricted reserve by distribution of profit.

Other capital contribution/share premium reserve

From 1 January 2006 premium reserve is included in non-restricted equity.

Non-restricted equity Retained earnings

This item consists of the previous year´s non-restricted equity and after payment of dividend, if any.

2006 years premium reserve is booked against retained earnings. Together with the profit/loss for the year

and non-restriced equity, this makes up the amount that is available for distribution to shareholders.

NOTE 1

Accounting principles’ compliance with standards and statutory requirements

The consolidated financial statements are made up in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (ISAB) and the interpretative recommendations issued by the International Financial Reporting Interpretations Committee (IFRIC), which have been approved by the European Commission for application within the EU. The Swedish Financial Accounting Standards Council’s recommendation RR 30 Complementary Accounting Rules for The Group has been applied.

The parent company applies the same accounting principles as the Group and the accounts are made up in accordance with RR 32.

Principles applied in the making of the parent company’s financial statements and those of the Group

The parent company’s operative currency is the Swedish krona, which is also the reporting currency of the parent company and the Group. This means that the financial reports of the parent company and the Group are made up in Swedish kronor.

Assets and liabilities are stated at their historic acquisition value, except for certain financial assets. The financial assets that are valued at fair value are classified as financial assets valued at fair value via the income statement.

Classifications

Fixed assets, long-term liabilities and provisions consist in all essen- tials solely of amounts that are expected to be recovered or paid more than 12 months after the closing date. Current assets and short- term liabilities consist in all essentials solely of amounts that are expected to be recovered or paid within 12 months of the closing date.

Reporting by segment

The primary criterion for classification of the Group’s segments is geographic areas. The secondary criterion is their line of business.

Consolidated financial statements

The consolidated financial statements relate to the parent company and those companies in which the parent company directly or indi- rectly controls more than half the votes, or exercises control in some other way.

The consolidated financial statements are made up using the acquisition method.

Income

Sales of products are stated after the Group has transferred to the buyer the critical risks and utility associated with ownership of the sold goods, and has no remaining right or possibility to retain actual control over the sold goods.

Revenue recognition from services is recorded when the economic outcome of accomplished service can be reliably calculated and where the economic benefits will fall to the Company’s share.

Intangible fixed assets

Research costs are taken into the profit and loss account when they occur. Development costs are capitalised to the extent they are ex- pected to generate financial benefits in the future. The stated value

includes expenditure on material, direct labour, and indirect costs that can be attributed to the asset. Other development expenditure is taken into the profit and loss account as a cost when it is occurred.

Development costs capitalised in the balance sheet are stated at their acquisition value less accumulated depreciation and write-downs.

Tangible fixed assets

Tangible fixed assets are stated at their historical acquisition cost after deduction of accumulated depreciation and any write-downs.

Repair and maintenance costs are taken into profit and loss account when they incurred. The Group does not capitalise the interest com- ponent on the acquisition value of fixed assets.

Depreciation according to plan and write-downs

Depreciation according to plan is based on original acquisition values and estimated useful economic life.

Depreciation according to plan has been undertaken as follows:

Capitalised expenditure for R&D and similar 15 % Equipment, tools, fixtures and fittings 20 %

Personal computers 20 %

Group contributions and shareholder contributions legal entities Group contributions and shareholder contributions are stated in accor- dance with the interpretations by the emerging issues task force of the Swedish Accounting Financial Standards Council. Shareholder contributions are taken direct against equity by the donor to the extent that no write-down in value is required. Group contributions are stated on the basis of their financial implications. This means that Group contributions paid in order to minimise the Group’s total tax pay- ments are taken direct against retained earnings after deduction of their actual tax effect.

Taxes

Total tax as stated in the profit and loss account comprises current tax and deferred tax. Current tax is the tax to be paid or received for the year in question. This also includes any adjustment to current tax for previous periods. Deferred tax is calculated using the balance sheet method on the basis of temporary differences between stated values and values for tax purposes of assets and liabilities, applying the tax rates and rules that have been approved or announced as of the closing date. Temporary differences are not taken into account in goodwill arising upon consolidation, nor in differences attribu- table to interests in subsidiary and associate companies that are not expected to become liable to taxation in the foreseeable future.

Deferred tax assets in respect of tax-deductible temporary diffe- rences and loss allowances are stated only to the extent that they are likely to be utilised and entail lower tax payments in the future.

Valuation of inventories

Inventories are valued at the lower of acquisition value or production cost after allowing for necessary obsolescence or at net selling price.

Write-downs

The book values of the Group´s assets are subjected to impairment tests at each balance sheet date. Exceptions apply to assets for in- ventory and deferred tax assets. If an indication of a need for write-

Notes and supplementary disclosures

Notes and supplementary disclosures 25