Sales Annual Report 2007 - Matica · 2016. 11. 25. · Hungary 3 Iceland 1 Italy 3 Luxembourg 1...

Key figures all fi gures in € thousands

2004 2005 2006 2007

Sales 8,613 11,762 14,712 18,256

Gross income 3,526 4,659 6,050 9,425

EBITDA 141 503 270 548

Write-downs – 70 – 122 – 225 – 390

EBIT 71 381 45 158

Net financial income – 13 – 18 430 129

Taxes – 4 – 73 47 – 253

Net profit for the period 54 290 522 11

Total assets 3,462 5,627 15,970 18,978

Equity 1,413 2,746 13,715 13,347

Employees (average) 28 32 42 76

Annual Report 2007

<<<DIGITAL IDENTIFICATION SOLUTIONS AG<<<WKN A0JELZ<<<ISIN DE000A0JELZ5<<<<<<<DIGITAL IDENTIFICATION SOLUTIONS AG<<<WKN A0JELZ<<<ISIN DE000A0JELZ5<<<< <<<DIGITAL IDENTIFICATION SOLUTIONS AG<<<WKN A0JELZ<<<ISIN DE000A0JE

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from 2006 IFRS

America Band

USA 3

Canada 1

Mexico 1

AMECA *) Band

Egypt 1

Kuwait 1

Iran 1

Iraq 1

Bahrain 1

South Africa 1

India 1

Yemen 1

Oman 1

Nigeria 1

Ghana 1

Zimbabwe 1

UAE 3

Sri Lanka 1

Jordan 1

Pakistan 1

Saudi Arabia 1

Kenya 1

Syria 1

Qatar 1

Asia Band

China 1

Indonesia 3

Vietnam 1

Singapore 1

Australia 2

Hong Kong 1

Korea 1

Laos 1

Malaysia 2

Philippines 1

Taiwan 1

Thailand 1

Cambodia 1

Myanmar 1

Sales range in euros

from to Band

1 500,000 1

500,001 1,000,000 2

1,000,001 3

Europe Band

Austria 1

Belgium 1

Bulgaria 1

Switzerland 1

Czech Republic 1

Germany 3

Denmark 1

Spain 2

France 2

Finland 1

United Kingdom 3

Greece 1

Hungary 3

Iceland 1

Italy 3

Luxembourg 1

Lithuania 1

The Netherlands 1

Poland 1

Romania 1

Russia 1

Sweden 1

Slovakia 1

Slovenia 1

Financial Calendar

June 30, 2008 Annual General Meeting

August 2008 Results for the fi rst half-year

November 2008 Results for the third quarter

March 2009 Provisional fi gures for 2008

Imprint

Published byDigital Identifi cation Solutions AGTeckstraße 52 D – 73734 EsslingenTel.: + 49 (0) 711 / 341689 – 0Fax: + 49 (0) 711 / 341689 – 550www.digital-identifi cation.com

Design and ProductionFIRST RABBIT GmbH, Cologne

PhotographyImage pool Digital Identifi cation Solutions AGistockphoto

PrintAMK GmbH, Wesseling

StatusMay 19, 2008

Headquarters in Germany

Subsidiary in Dubai

Subsidiary in Singapore

vps Germany

Subsidiary in Mexico

Subsidiary in China

Subsidiary in the USA

Global Reach

*) Africa, Middle East, Central Asia

CONTENTS

39 Risk Report

44 Forecast

Consolidated Financial Statements

48 Consolidated Balance Sheet

50 Consolidated Income Statement

51 Consolidated Cash Flow Statement

52 Statement of Changes in Assets

54 Consolidated Statement of Changes in Equity

56 Notes to the Consolidated

Financial Statements

110 Auditors‘ Opinion

Imprint

Contents

02 The Enterprise

03 Foreword by the Management Board

06 Report of the Supervisory Board

11 Corporate Governance

15 The Share

16 company Profi le

Management Report

22 Important Changes in the Financial Year 2007

23 Business and General Conditions

24 General Economic Conditions

26 Earnings Situation

30 Net Assets and Equity

<<<<<<ISIN DE000A0JELZ5<<<VOL. BID (STK.)<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<

// 2

THE ENTERPRISE

The Enterprise

Digital Identification Solutions AG (DISO) is a leading provider of decentralized electronic per-

sonalization solutions for the production of personal and corporate ID cards and passports. The

comprehensive DIS product portfolio positions the company ideally for the steadily rising demand

for security solutions.

The German parent company, together with its six subsidiaries located in the USA, Singapore,

the United Arab Emirates, China and Mexico (opened in the first half of 2007) and a network of

over 130 distribution partners, now serves numerous governments and Fortune-500 firms as a

provider of high-security ID documents. International sales accounted for well over 80 percent

of total sales in 2007.

Our business model hinges upon a highly experienced management team, the deployment of

innovative hardware and software solutions and repeat sales.

Digital Identification Solutions went public in May 2006. The funds this step yielded will continue

to contribute to the further growth of the Group.

<<<<<<DIGITAL IDENTIFICATION SOLUTIONS AG<<<WKN A0JELZ<<<<<<<<<<<<<<<<<<<<<

// 3

FOREWORD BY THE MANAGEMENT BOARD

Foreword by the

Management Board

Ladies and Gentlemen,

In many respects, 2007 was a remarkable year for the Digital Identification Solutions Group. In

its second year on the capital market, the company partly accelerated its development clearly at

many levels, and took numerous measures to support further growth.

First of all, mention should be made of the 100 percent investment in vps ID Systeme, an extremely

dynamic software house in Ettlingen, announced in August 2007. We are very pleased about the

good cooperation with our new colleagues, and are confident that mutually developed solutions

and joint appearances will generate considerable values and synergies.

The regional growth was forced forward by the expansion of the subsidiaries in the USA, in Singa-

pore and the United Arab Emirates, as well as by the entry into the Central and South-American

market. Like in 2006, about 90 percent of the total turnover was earned outside of Germany in

the past year 2007.

Moreover, we have taken an enormous step forward with respect to our solutions. In the third

quarter, almost the entire printer range was upgraded and introduced at approx. 20 events world-

wide. In close cooperation with leading technology partners, our Development division worked

out spectacular new security features – and therefore the most significant argument in favor of

our solutions – that were, in part, enthusiastically accepted by the market.

Gerd Schäfer, Chief Executive Officer,und Tassilo Mayer, Chief Financial Officer

<<<<<<I <<<<<<<<< <ISIN DE000

// 4

FOREWORD BY THE MANAGEMENT BOARD

These efforts were rewarded by numerous customers throughout the world. We are particularly

proud of having now gained a firm foothold in the American government market against the

strongest competition possible. We were also able to win large projects in Europe, Africa, the

Middle East, Central Asia and, for the first time, in Latin America.

Following a restrained start into 2007, we were nevertheless able to achieve new record perfor-

mances in both turnover and sales, despite material delivery delays. The organic growth was at

17 percent, the sales of printers rose by 30 percent. Net income is strained by more than € 1 million

due to a number of non-recurring effects, such as the conversion to IFRS, the delivery delays

already mentioned, and the product launch offensive.

Owing to the fact that our distribution service is increasingly dependent on the success of our

partners, we consolidated our relationship with them at a higher level in 2007. Each year, two

large partner training events take place, mostly within the scope of trade fairs. In order to ensure

continuous servicing, we set up a “DIS Academy” by which the required knowledge may now also

be obtained via the Internet.

As already announced at the occasion of the General Meeting 2007, we noticeably extended our

reporting system and converted to International Financial Reporting Standards, thus hoping to

gain a better approach to international investors.


// 5

To date, the capital market has not rewarded these steps and successes in the least, and our

share price declined by € 2.50 in 2007. We are not at all happy with this development and will,

as already announced at the IPO, continue to develop our business model in such a way that the

economic success will lead to a revaluation in the capital market.

Going into 2008, we are stronger than ever and wish to take this opportunity to express our

gratitude to our employees at home and abroad for their commitment, without which our

dynamic development would not have been possible.

Our thanks are also extended to our shareholders for their persistent confidence in our firm

and we remain

with best wishes

Yours

Gerd Schäfer Tassilo Mayer

Chief Executive Officer Chief Financial Officer


// 6

REPORT OF THE SUPERVISORY BOARD

Report of the Supervisory Board

Dear Shareholders,

In the reporting period, the Supervisory Board fulfilled its duties according to law, the statutes, and

procedural rules. The Supervisory Board advised the Management Board regularly and monitored its

activities. The Supervisory Board was directly involved in all decisions of material importance. The

Management Board reported to us regularly both in writing and verbally and comprehensively on the

corporate planning, the course of business activities, the strategic further development, and the

current position of the company. Cases where the course of business deviated from the planning

were explained to us separately. The strategic alignment of the company was discussed and agreed

with the Supervisory Board. Business transactions of material importance to the company were

discussed in detail by the Supervisory Board on the basis of the reports of the Management Board.

Important steps and growth in the course of the fiscal year 2007

In the past year, the company laid the cornerstone for an expansion of important areas such as

Research and Development, Marketing and Sales by acquiring a 100 percent stake in the German

software producer vps ID Systeme GmbH.

The largest innovation program since the founding of the company was implemented through

the worldwide introduction of numerous products. The company is continuing on its growth

course, closely accompanied by the Supervisory Board.


// 7

Meetings and focal points

The Supervisory Board met five times in fiscal 2007. Between these meetings, resolutions were

also passed by phone in three telephone conferences. In preparation for these meetings, com-

prehensive reports of the Management Board, including the draft resolutions and additional

information, were in each case sent in good time to the members of the Supervisory Board.

On the basis of this information and further information requested by the Supervisory Board

inside and outside the meetings, the Supervisory Board was able to competently conduct its

supervisory tasks.

The Management Board reported promptly and comprehensively to the Supervisory Board on

questions of corporate planning and strategy, on the course of business activities, the situation

of the company and the Group, as well as on the risk situation. The income and sales develop-

ment of the company and the Group was discussed at every meeting of the Supervisory Board.

In the meetings, the Supervisory Board among other things dealt with, the budget for the fiscal

year 2007, the preparation of the previous year’s General Meeting, the financial statements of the

company as of December 31, 2006 and the discussion of the investor relations activities. These

consultations also dealt with the planned acquisition of a 100 percent stake in vps ID Systeme

GmbH, which the Supervisory Board approved following an examination of the strategic goals and

the presentation of informative audit reports relating to the legal, business and tax situation.

The Supervisory Board also examined the regulations in the procedural rules of the Supervisory

Board and Management Board, discussed these and adjusted them in some areas.

Dr. Christian Bosse, Chairman of the Supervisory Board

<<<<<< ISIN DE000A0JELZ5<<<VOL. BID (STK.)<<<<<<<<<<<<<<<

// 8


Reporting to the Supervisory Board was expanded in view of the projects and the rapid develop-

ments in the market.

Outside of the meetings of the Supervisory Board, the Chairman of the Supervisory Board was

in close contact with the Management Board and regularly obtained information on the current

business developments and considerations.

Changes in the constitution of the Supervisory Board and the Management Board

There were no changes in the constitution of the Management Board. The Management Board is

competently represented by Gerd Schäfer (Chairman, CEO) and Tassilo Mayer (Finance, CFO). The

members of the Management Board have succeeded in managing the company efficiently despite

a considerable workload due to the very expansive growth strategy and the increasing activities

abroad. Their work was added to by the conversion to IFRS, which tied up additional resources in

the finance area.

In the Supervisory Board, there was one change during the reporting period. Attorney-at-law

Dr. Peter Krüger has at his own request resigned from the Supervisory Board as of July 31, 2007.

The Supervisory Board expressly thanks him for his work as Chairman. By resolution of the District

Court Stuttgart dated July 31, 2007, attorney-at-law Dr. Christian Bosse, Stuttgart, was appoint-

ed to the Supervisory Board with effect from August 1, 2007. His appointment is valid to the expiry

of the remaining term of office of Dr. Krüger, i.e. up to the General Meeting, which decides on the

discharge for the fiscal year 2010.

By resolution of August 8, 2007, Dr. Bosse was elected to the post of Chairman of the Supervisory

Board. The three-person Supervisory Board is thus constituted by Dr. Helmut Rieche, Uwe Stein-

bacher (Deputy Chairman) and Dr. Christian Bosse (Chairman).


// 9

Committees of the Supervisory Board

Given the moderate size of the Supervisory Board, it has not been deemed necessary to form

committees.

Corporate Governance and Declaration of Conformity

The company’s share is currently traded in the over-the-counter (OTC) market. Although the

formal requirements for the application of Section 161 AktG (German Stock Corporation Act) do not

prevail, the Management Board and the Supervisory Board have examined the rules of the Corpo-

rate Governance Code in detail and in particular the amendments in the version of June 14, 2007.

Supervisory Board and Management Board have issued a declaration of conformity pursuant to

Section 161 AktG. Both executive bodies have thus expressly confirmed the obligation to trans-

parent, responsible and value adding management and control of the company on a voluntary

basis. The declaration of conformity will be made permanently available to the shareholders on

the Internet site of the company.

Audit of the annual and consolidated financial statements of fiscal year 2007

The previous year’s General Meeting on May 24, 2007 elected BDO Deutsche Warentreu hand AG,

accounting firm, Leonberg, as the auditors for the annual and consolidated financial state-

ments. After being awarded of the mandate by the Supervisory Board, the firm audited the

annual financial statements of Digital Identification Solutions AG, the consolidated financial

statements, and the Management Report for Digital Identification Solutions AG and the Group for

the fiscal year 2007.


// 10


The auditors took part in the balance sheet meeting on May 8, 2008 and reported in detail on

the focal points of the audit and the material results of the audit. Furthermore, the auditors were

available for providing additional information to the members of the Supervisory Board. The

documentation to the financial statements and the audit reports of the auditors were sent to the

members of the Supervisory Board in good time prior to the balance sheet meeting.

Following its own examination of the results presented by the auditors, the Supervisory Board

approved and did not raise any objections to the audit reports. After the concluding result of the

examination by the Supervisory Board, the Supervisory Board approved the annual and consoli-

dated financial statements prepared by the Management Board, at the balance sheet meet-

ing on May 8, 2008. The annual financial statements of Digital Identification Solutions AG are

thereby adopted for the fiscal year 2007.

During the examination of the Management Report and Group Management Report, the Supervi-

sory Board in its own examination determined that the statements of the reports corresponded

to those of its own estimation. No objections will be raised here either.

The Supervisory Board thanks all employees and members of the Management Board for their

commitment in 2007. The burdens imposed by the forward-looking projects have required that

the Management Board work long hours and show intense commitment.

The express thanks of the Supervisory Board are also extended to all shareholders, who have

documented their confidence in the company by investing in it.

Esslingen, May 8, 2008

Dr. Christian Bosse

Chairman of the Supervisory Board


// 11

Corporate Governance

Declaration of Conformity pursuant to Section 161 AktG (German Stock Corporation Act) with

the Recommendations of the German Corporate Governance Code

The Management Board and the Supervisory Board of Digital Identification Solutions AG resolved

the following Declaration of Conformity:

Digital Identification Solutions AG (hereinafter called “the company”) complies with and will

comply with the recommendations of the German Corporate Governance Code in its version of

June 14, 2007, with the following deviations:

Transmission of the general meeting on the Internet

It is currently not intended to broadcast the shareholders’ meeting on the Internet

(Code Item 2.3.4).

Self-retention for D&O insurances

The directors’ and officers’ liability insurance policy (D&O) does not include any self-retention

(Code Item 3.8 (2)).

Formation of committees in the Supervisory Board

Since the Supervisory Board of Digital Identification Solutions AG consists of three members only,

no committees will be formed (Code Item 5.2 sentence 2, 5.3.1 sentence 1, 5.3.2 sentence 1 and 5.3.3).


// 12

CORPORATE GOVERNANCE

Stockholder groups

Management 25 %

Brockhaus Private Equity < 25 %

Free Float > 50 %

Composition and remuneration of the Supervisory Board

The company waives the fixing of an age limit for the members of the Supervisory Board (Code

Item 5.4.1 sentence 2).

The shareholders’ meeting stipulates the remuneration of the members of the Supervisory Board.

The corporate law provides for a fixed remuneration only. The introduction of a variable remu-

neration is currently not planned (Code Item 5.4.7 (2) sentence 1).

Transparency

Since the company is not informed of any other changes in the shareholdings, it can only publish

an excess or a shortfall of 25 percent and 50 percent (Code Item 6.2).

Accounting and audit of the financial statements

Currently, the consolidated financial statements are not made public within 90 days of the end

of the fiscal year, and the interim reports are not made public within 45 days of the end of the

reporting period (Code Item 7.1.2 sentence 2).

Esslingen, April 25, 2008

The Management Board The Supervisory Board

// 13

Management Board remuneration

all fi gures in € thousands Fixed salaryNoncash/

fringe benefitsPerformance-

based

Gerd Schäfer 185 29 32

Tassilo Mayer 98 11 20

Remuneration Disclosure Report of Digital Identification Solutions AG

This Remuneration Disclosure Report provides an overview of the remuneration structures in

place for the Management Board and Supervisory Board, including compensation components

and amounts.

Management Board remuneration

Fixed base salaries, noncash / fringe benefits and performance-based components for Manage-

ment Board members were established by the Supervisory Board in February / March 2006, and are

scheduled for a first review in February 2008.

At the General Meeting 2007, a share-option program was passed which transferred 20,000 share

options for the subscription of 20,000 shares respectively for each of the two members of the

Management Board. Provided certain targets are reached, these options can be exercised until

July 31, 2012 for a price of € 10 per share.

Noncash / fringe benefits represent such items as health plan defrayment and retirement plan

contributions as well as usage of a company vehicle.

The performance-based components are derived from the operating income, adjusted for non-

recurrent factors and amount to 2 percent of the consolidated operating income for Mr. Schäfer

and 1.25 percent of the consolidated operating income for Mr. Mayer.

In its meeting on March 2, 2007 the Supervisory Board approved the granting of performance-

based remuneration in the form of shares; the underlying amount was hereby doubled to cushion

the impact of the resulting tax load.

The total remuneration of the Management Board for fiscal 2007 amounts to € 374,000, and the

breakdown is as follows:

// 14

CORPORATE GOVERNANCE

Management Board shareholdings

Number (1,000)Changes in

2007 Share in equity

Gerd Schäfer 305.5 + 3 14.3 %

Tassilo Mayer 19.0 + 4 0.9 %

In addition, no pension scheme commitments were made to members of the Management Board.

For the period of a contractually defined 12-month ban on competition, Mr. Schäfer receives a

compensation in the amount of 50 percent of the most recently drawn annual remuneration.

Advances / loans

Mr. Gerd Schäfer had a travel cost advance of € 20,500 up until December 31, 2007. Apart from

this, the members of the Management Board received no other loans from the company in 2007.

Directors of Digital Identification Solutions AG are insured against lawsuits to the extent permis-

sible through a D&O insurance policy. This policy covers the personal liability of company direc-

tors for pecuniary damages in connection with acting in their capacity as executives. Contrary to

Corporate Governance Code (Item 3.8.), DIS directors are not required to pay a self-retention, as

this measure in our view does not serve to enhance director performance or motivation.

Supervisory Board remuneration

Supervisory Board remuneration for 2007 will be decided by the General Meeting. The Manage-

ment Board and Supervisory Board suggest that the Chairman should receive € 12,000, ordinary

Supervisory Board members € 6,000.

Total remuneration for Supervisory Board members of Digital Identification Solutions AG thus

amounted to € 24,000 for fiscal 2007. No individual Supervisory Board member holds more than

1 percent of company shares.

// 15

Share price performance

| JUL || JUN |

11

10

9

8

7

6

| AUG | |SEP | | OCT | | NOV | | DEC | | JAN | | FEB | | MAR |

11.47

6.20

The Share

For most of the stock markets, 2007 was a difficult year. Following a friendly start, the sentiment

slowed down noticeably from June onwards. The term “real estate crisis” increasingly manifests

immense risks which could trigger a potential recession.

It is particularly remarkable that financial services companies – and therefore advocates of mar-

ket economy – are now demanding more government control. Moreover, the improvident dealing

with monies of government-owned institutions was accepted by the tax payers with notable

indifference.

On the back of this, the stock markets in general and small caps stocks in particular reported a

negative development. Digital Identification Solutions as well was caught by this downward trend

and lost another 25 percent in 2007. In the same period, the Entry Standard Index lost 26 percent.

Even measures such as the announcement of spectacular orders, the repurchase of treasury

stock, the commissioning of a consultancy firm to revise the “Equity Story”, the appointment

of a new designated sponsor, and the continuous communication with private and institutional

investors did not suffice to stop the decline in price.

The company is currently being analyzed by SES Research, Hamburg.

// 16

COMPANY PROFILE

Installed systems

6,000

4,500

3,000

1,500

0

6,700

| 2007 || 2006 || 2004 | | 2005 |

company Profile

Digital Identification Solutions AG sells a portfolio of high-end and entry-level printers for ID

cards, proofs of identity and passports under the brand name EDIsecure®. In the previous year,

the Group sold more than 1,800 units, thus increasing the installed base to over 6,800 systems.

These printers are typically offered together with further hardware modules, e.g. coating devices,

camera modules, fingerprint scanners and many more.

The hardware is being manufactured by several OEM suppliers according to the specifications of

Digital Identification Solutions. The most important suppliers are headquartered in Japan, the

USA and Great Britain. Subsequently, these OEM components are usually refined or equipped with

very specific features.

Digital Identification Solutions is one of the world’s largest suppliers particularly in the area

of retransfer printing. Compared to direct card printing, this technology has the advantage of

providing critical components with a considerably longer useful life. Therefore, the customers are

able to achieve noticeable advantages regarding price and quality in a TCO, especially in particu-

larly large applications.

The company’s portfolio of direct card printers enables it to offer adequate solutions also to price-

sensitive customers. They combine high-speed printing with appealing quality at attractive prices.

As announced in the AGM 2007, the Digital Identification Solutions Group replaced almost all

printers by new ones in the past year, and also introduced further models in order to answer

even more precisely to customer demands.

// 17

Printer pyramid

DCP100

Valu

e Li

nePr

ofes

sion

al L

ine

DCP240 +

DCP340 +

DCP360i

XID570ie

XID580ie

XID590ie

Consumables

The company disposes of an abundant portfolio of inked ribbons, inks, cards, holographic film

and much more, to ensure the smooth operation of the hardware. The turnover generated by this

corporate division is directly proportional to the number of the installed hardware solutions.

It should therefore not be surprising that the Consumables division will generate the highest

share in turnover and gross profit, time and again.

In 2007, the Digital Identification Solutions Group started to offer its customers plastic cards as

well, to highlight even more strongly the problem-solving approach.

A significant area of development will focus on new security features, and important progress

was made for UV and holographs.

// 18

COMPANY PROFILE

Software / Services

The company’s most important mosaic in the approach to solving a problem is a suite of software

products that enables a smooth integration in existing hardware environments, and additionally

enables the customer to achieve high performances with a minimum of training from the hard-

ware solutions of the Digital Identification Solutions Group.

This modular installation enables the customers to have their system “grow” by software upgrades,

and to protect it by investing in the hardware in the event of increasing demands on the system.

One decisive advantage of the DIS software is its international availability in, at present, nine

languages, including Chinese and Arabic alongside most European languages.

Moreover, the acquisition of the vps ID Systeme GmbH (cf. page 19 for details) is directly con-

nected with the fact that the company intended to strengthen this division, in order to have

access to critical resources on the one hand, and to benefit from proportional increases in

output, as a result of its international orientation, on the other hand.

Services are primarily provided within the scope of large government and corporate projects since

the company is able to make even the most complex applications run rather quickly, owing to its

many years of experience.

<<<<<<<DIGITAL IDENTIF <<<<<<<<<<<<<<<<<<<<

// 19

In August 2007, Digital Identification Solutions AG announced that it would take over to 100 per-

cent vps ID Systeme GmbH, Ettlingen. vps is a software developer that has been cooperating

with Digital Identification Solutions for many years.

vps was founded in 1993, the managing director, Jürgen König, will continue to manage the company.

The two companies got to know each other well from cooperating on large projects, such

as in Indonesia, and also from the development of solutions for smaller customers. When the

opportunity arose over the course of the year to acquire shares in vps, Digital Identification

Solutions took this opportunity.

vps enjoys an excellent reputation in the industry; its reference customers include international

groups such as BMW and Siemens, as well as institutions that are close to the German govern-

ment, such as the Federal Office of Employment.

This step has provided the Digital Identification Solutions Group with much better access to a

core aspect of the value-added chain. It has also provided the Group with a sustained strength-

ening of the project management area as well as noticeable synergies in areas such as marketing.

The cooperation with the new colleagues is extremely harmonious at all corporate levels and the

joint presentation at trade fairs and in contact with customers already communicate a united

front.

The most recent product developments of vps arose directly from those suggestions put forward

at strategy meetings in the Group that were defined as urgent.

The continuity within vps represents difficult to measure but important parallels to Digital Identifi-

cation Solutions: some of the key employees have been working together for more than ten years.

Jürgen König, Managing Director

vps ID Systeme GmbH

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// 20

MANAGEMENT REPORT

// Management Report

Disclaimer

This Management Report contains statements directed toward the future that are based on assumptions and estimates of the

Management of Digital Identification Solutions AG. Even allowing for the appropriate measure of commercial prudence, it is not

essentially possible to be certain with forecasts that these assumptions will actually come about in the expected scope.

Factors that could lead to a deviation are imaginable both in the field of activity of the company (e.g. change of the corporate

strategy, loss of key customers) and through external events (e.g. political occurrences, currency changes, change in the

competitive situation).

Digital Identification Solutions neither plans nor undertakes to adjust during the course of the year the forecasts made in this

Management Report.

IDENTIFICATION SOLUTIONS AG<<<<<<<BID<<<<<<<WKN A0JELZ<<<<<<<<<<<<<<<<<<<<

// 21

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// 22

MANAGEMENT REPORT

Rate of increase all figures in % 2005 2006 2007

Hardware 62 17 7

Consumables 12 33 30

Software and Services 188 23 72

Total 37 25 24

Important Changes in the Financial

Year 2007

For the Digital Identification Solutions Group (hereinafter also referred to as “DISO“), the fiscal

year 2007 represented a very important development step. With the funds from the IPO (May

2006), the organization was considerably strengthened and the international expansion pushed

forward. Previously white spaces on the sales network map, for example in Eastern Europe and

Latin America, were filled with company offices and new sales partners.

In August 2007, the takeover of vps ID Systeme GmbH in Ettlingen was completed. Through this

expansion, “DISO” has obtained a direct influence on important areas of the value chain.

// 23

Rate of increase all figures in % 2005 2006 2007

Sales 37 25 24

Gross profit 32 39 56

Business and

General Conditions

The company

Digital Identification Solutions GmbH was founded on October 1, 2003. Right from the be-

ginning, everything pointed toward expansion. An office was opened in Singapore as early as

October 2003. In 2004, a subsidiary in the USA was added; in 2005, a subsidiary was established

in the People‘s Republic of China and a branch office in the United Arab Emirates. On February

16, 2006 the legal form of the Esslingen-based company was converted from a “GmbH” (limited

company) to an “Aktiengesellschaft” (joint-stock company). With the listing on May 12, 2006,

the share was included in the “Entry Standard” sub segment of the free trading on the Frankfurt

Stock Exchange and 612,300 new shares were issued.

In the first half of 2007, the Group entered the Latin-American market with the establishment of

a subsidiary in Mexico. In the second half of 2007, vps ID Systeme GmbH was acquired.

Digital Identification Solutions AG has 100 percent shareholdings in all its subsidiaries.

Digital Identification Solutions AG, together with its subsidiaries, is one of the leading suppliers

of decentralized personalization solutions for identification cards, passports and other docu-

ments. In total, the number of systems installed already amounts to over 6,700 (December 31,

2006: 5,050).

Digital Identification Solutions AG maintains a continuously growing global network with more

than 130 sales partners that provide local implementation and support services.

// 24

MANAGEMENT REPORTECONOMIC AND TRADING CONDITIONS

Share of sales all fi gures in %

2004 2005 2006 2007

Germany 14 13 11 11

Europe (without Germany) 26 26 23 33

North / South America 9 9 12 21

AMECA 20 15 16 16

Asia 31 37 37 19

Total 100 100 100 100

General

Economic Conditions

General economic development

In 2007, the world economy continued to grow as previously even though the effects of the prop-

erty crisis in the USA slowly began to have an impact. Continuing high oil and raw material prices

were largely ignored and to some extent offset by the weakness of the US dollar in the euro

zone. China, the USA and, after a long period of stagnation, Germany and Japan contributed,

albeit to varying degrees, to global growth.

Industry trend

The market for digital identification continues to grow strongly.

The following factors are driving the demand for the solutions offered by Digital Identification

Solutions AG:

• A constantly increasing need for security solutions and

• the need for increasingly complex security solutions.

Not only the worldwide threat from terrorism and the resulting increased requirements for national

identification documents, but also the endemic ongoing social fraud in the so-called rich countries

and a significantly higher security consciousness in industrial companies have ensured double-digit

growth rates in the global security market for a long time

// 25

Share of sales all fi gures in %

2004 2005 2006 2007

Hardware 37 43 40 35

Consumables 60 49 52 55

Software and Services 4 8 8 10

Total 100 100 100 100

In the fiscal year 2007, the Digital Identification Solutions Group with a world market share of

almost 10 percent was one of the leading suppliers of decentralized high-end personalization

solutions for identification cards and documents.

Through an OEM agreement with the largest supplier in the industry, the Digital Identification

Solutions Group is also able to supply the entry-level market, which is the most important in

terms of volume, with cutting-edge solutions.

Through the sales growth in the threshold countries, particularly in Asia, the Digital

Identification Solutions Group believes it is very well positioned to participate in the further

growth in these countries.

This per se favorable development will be further accelerated as the requirements for identi-

fication documents have increased considerably. Biometric identification methods, multiple

applications on a single card and non contact solutions increase by many times the value added

per issued document.

Forgery-proof holograms are increasingly being requested for ID cards; in the area of the card

blanks PVC, which has a life of around two years, is being replaced by high-quality plastics.

// 26

MANAGEMENT REPORTBUSINESS AND GENERAL CONDITIONS

Earnings Situation

all fi gures in € thousands 2007

2006Deviation

in %

Sales revenues 18,256 14,712 24.1

Of which Hardware 6,353 5,924 7.2

Consumables 10,081 7,728 30.5

Software, Spare Parts and Services 1,822 1,060 71.9

Other operating income 288 240 20.0

Changes in inventories 72 0 > 100.0

Work performed and capitalized 306 38 > 100.0

Cost of materials – 9,497 – 8,939 6.2

Staff costs – 4,405 – 3,075 43.3

Depreciation and amortization expense – 390 – 225 73.3

Other operating expenses – 4,472 – 2,706 65.3

Earnings from operations 158 45 251.1

Net financial income 129 430 – 70.0

Earnings before income taxes 287 475 – 39.6

Taxes on income – 276 47 > 100.0

Net profit for the period 11 522 – 97.9

In the past year, the Group succeeded in completing and implementing important projects,

including passport projects in the People’s Republic of China, driving license projects in the

USA, pensioner identification cards in the UK and numerous employee identification cards for

Fortune-500 companies.

IDENTIFICATION SOLUTIONS AG<<<<<<BID <<<<<<

// 27

Business development

Orders in hand: at the balance sheet date, orders in hand were at € 2.2 million. This corresponds

to an increase of 197 percent compared to December 31, 2006 (€ 0.74 million). The relatively high

orders in hand at December 31, 2006 were due primarily to the fact that larger project orders were

received at the end of 2007 but carried out in 2008. vps GmbH contributes € 0.14 million to the

orders in hand 2007.

Sales in 2007 showed a 24.1 percent increase over 2006, reaching € 18.3 million and a new record

high. The Group generated its revenues with Hardware, Consumables, Software and Services. In

Consumables, a particularly important segment, the Group increased its sales by 30.5 percent.

The Hardware division encompasses not only card and pass printers, but also laminating devices

and camera solutions. Sales of this division have increased by 7.2 percent compared to the previ-

ous year, to € 6.4 million. A key factor in the only moderate growth of this division in 2007 was

the absence of large passport orders and the introduction of numerous new printer models. A

total of more than 1,700 printing systems (previous year 1,450) were sold in 2007. The gross mar-

gin of this division amounts to 33.3 percent (previous year 26.3 percent). The improvement in the

margin is attributable to the changed product mix, decrease in purchase prices and a weakening

of the most important purchase currencies.

As in 2006, the Consumables division generated the largest share of sales. In 2007, sales of € 10.1

million were recorded with color tapes, cards, printer ink, hologram film and similar consumables.

This corresponds to an increase of 30.5 percent. A stronger growth of this division was hindered

by delivery bottlenecks for cards at the end of 2007. The gross margin of this division amounted

even so to 49.1 percent in 2007, compared to 43.3 percent in 2006.

The Software, Spare Parts and Services division contributed 10 percent to sales in 2007. Since

the software is generally already integrated into the hardware and represents a strong sales

argument because of its high-performance, only relatively low sales are explicitly reported as

<<<WKN A0JELZ<<<<<<<<<<<<<<<<<<<<<VOL. ASK (STK.)<<<<<<<<<<<<<<<<<<<<<<<<<

// 28

MANAGEMENT REPORTBUSINESS AND GENERAL CONDITIONS

Sales by region all fi gures in € thousands

2004 2005 2006 2007

Germany 1,229 1,503 1,669 2,040

Europe (without Germany) 2,215 3,071 3,435 6,038

North / South America 775 1,066 1,765 3,798

AMECA 1,694 1,800 2,399 2,926

Asia 2,700 4,322 5,444 3,454

Total 8,613 11,762 14,712 18,256

software – pure software sales are, for example, recorded with customers who purchase the

Software Development Kit (SDK) separately and develop their own solutions. The main reported

services are installation and training services within the scope of large projects, as well as

revenues from training services that the DISO regularly furnishes to its sales partners. Sales

with spare parts are also reported in this division. The sales of this division amounted to € 1.8

million in 2007, compared to € 1,1 million in 2006. The gross margin rose to 93.2 percent in 2007,

compared to 81.6 percent in 2006.

This division was further strengthened by the takeover of vps GmbH, which generates its sales

primarily with software and services. vps GmbH contributed € 1.0 million to the sales of this

division in 2007.

The regional breakdown of the sales was as follows in 2007: Germany 11.2 percent, other European

countries 33.1 percent, North America 20.8 percent, Middle East 16.0 percent, Asia 18.5 percent

and Other 0.4 percent.

The operating gross income rose by 51.3 percent to € 8.6 million, the gross income rate from

39.2 percent to 48.0 %.

Other operating income includes earnings from currency fluctuations and inflows from noncash

remunerations.

The notable fall in the cost of material ratio is attributable to lower purchase prices, a favorable

exchange rate trend and a changed product mix.

Personnel expenses rose as expected – on the back of an increase in the average number of

employees from 42 to 76 – by 43.3 percent to € 4.4 million.

// 29

Sales by divisions all fi gures in € thousands

2004 2005 2006 2007

Hardware 3,149 5,099 5,924 6,353

Consumables 5,145 5,745 7,728 10,081

Software and Services 319 918 1,060 1,822

Total 8,613 11,762 14,712 18,256

Depreciation and amortization relate, among other things, to amortization on intangible assets in

the amount of € 84,000 (previous year € 24,000) and depreciation on property, plant and equip-

ment € 306,000 (previous year € 187,000). The purchase of a property in Singapore was a major

addition to the property, plant and equipment in 2007. This property is one floor of an office

building, which was purchased for € 116,000 and is used as business premises by DIS.

The main components of the other operating expenses are sales, travel and marketing costs in

the amount of € 1,918,000 (previous year € 1,166,000), general administrative costs € 1,422,000

(previous year € 810), exchange rate losses relating to currency transactions € 326,000 (previous

year € 250,000), and the costs of the plant in Dubai € 219,000 (previous year € 107,000).

The increase in sales, travel and marketing costs is attributable to the participation at 38 trade

fairs and events worldwide (previous year 30), providing training courses and marketing events

for customers and business associates, the production of a company brochure and product

sheets, as well as extensive advertising and marketing campaigns in the USA.

The general administrative costs contain as notable items for the first time the expenses for a

“large” General Meeting and the financial statements in the amount of € 202,000.

The main items of the net financial income are income from securities in the amount of € 113,000

(previous year € 453,000, reported under “Other operating income”), interest income in the amount

of € 4,000 (previous year 17,000), and interest expense in the amount of € 20,000 (previous year

€ 41,000).

Earnings after taxes amounted to € 11,000. Earnings per share was at € 0.01 (previous year € 0.24).

The sales share of foreign subsidiaries rose from 24.5 percent in 2006 to 29.4 percent in 2007. The

subsidiaries already contribute 27.6 percent to the gross margin, compared to 23.3 percent in the

previous year.

// 30

MANAGEMENT REPORTNET ASSETS AND EQUITY

Net Assets and Equity

all fi gures in € thousands Dec. 31, 2007

Dec. 31, 2006 %

Noncurrent assets 6,391 737 > 100.0

of which available-for-sale financial assets 1,996 0 > 100.0

Current assets 12,587 15,233 – 17.4

of which inventories 4,169 2,315 80.1

Operating receivables 5,692 2,282 > 100.0

Cash and cash equivalents 1,356 9,859 – 86.3

Total assets 18,978 15,970 18.8

Equity 13,347 13,715 – 2.7

Equity ratio 70.3 % 85.9 %

Borrowed capital 5,631 2,255 > 100.0

of which trade payables 3,177 1,690 87.9

Other current liabilities 1,521 280 > 100.0

Total assets 18,978 15,970 18.8

The total assets of the Group as of December 31, 2007 were 18.8 percent higher than for the pre-

vious year. An increase of € 5,654,000 in noncurrent assets was offset by decline of € 2,646,000

in current assets. While the takeover of vps ID Systeme GmbH in Ettlingen had an impact on non-

current assets, the strong decrease in liquid assets was decisive despite a significant increase in

trade receivables.


// 31

all fi gures in € thousands

Investments2007

Write-downs 2007

Investments2006

Write-downs2006

Intangible assets 2,673 84 166 52

Property, plant and equipment 543 306 308 173

Financial assets 2,304 0 0 0

The cash and cash equivalents as at December 31 of the previous year in the amount of € 9.9 million

were used to finance business operations. The decrease in the cash and cash equivalents is mainly

due to the € 3.1 million increase in tangible assets, the acquisition of financial assets available

for sale with an amount of € 2.0 million, the increase of € 3.4 million in trade receivables, and the

increase of € 1.9 million in stocks in hand.

The main items on the liabilities side were the increase (of € 1.5 million) in trade payables and the

(€ 1.2 million) increase in other current liabilities.

Noncurrent assets

In the reporting period, the property, plant and equipment increased from € 0.5 million to € 0.9 mil-

lion. This was due primarily to the extended scope of business and the increase in the number of

staff, as well as to the acquisition of property (one floor of a commercial building) used by the

Singaporean subsidiary as an office space.

The financial assets available for sale increased from € 0 to € 2.0 million. This increase is attribut-

able to the purchase of long term securities.

The intangible assets rose from € 0.2 million to 3.3 million. This increase was due mainly to the

goodwill from the acquisition of vps ID Systeme GmbH, Ettlingen, in the amount of € 2.3 million

and to the capitalization of self-created intangible assets at vps GmbH and DISO AG.

The securities in the noncurrent assets were measured with the rate at the balance sheet date. The

rate of the securities followed the general downward trend of the second half of 2007 and led to a

valuation allowance in the amount of € 206,000, which was reported in the shareholders‘ equity.

The Group‘s investments totaled € 5.6 million (previous year € 0.5 million).

<<<<VO ASK (STK.)<<<<<<<<<<

// 32


The investment volumes are made up of the goodwill in the amount of € 2.3 million arising out

of the acquisition of vps ID Systeme GmbH, Ettlingen, for € 3.1 million, the purchase of securities

in the amount of € 2.3 million, and property, plant and equipment, and intangible assets in the

amount of € 1.0 million.

Current assets

Inventories increased notably from € 2,3 million to € 4.2 million, also due mainly to the expansion

of business activities.

Trade receivables and receivables from production orders have increased from € 2.3 million to

€ 5.9 million. This increase was mainly attributable to the increase in receivables owing to the

strong fourth quarter of 2007.

The portfolio of liquid assets fell from € 9.9 million to € 1.4 million by the end of the reporting

year 2007.

Equity, current and noncurrent liabilities

The net equity base of the company is extremely comfortable. At the reporting date, the net equity

base amounted to € 13.3 million (previous year € 13.7 million).

Provisions are largely unchanged, at € 0.3 million, and primarily contain commitments from

accrued vacation and warranty claims.

The liabilities amount to € 4.9 million (previous year € 2.0 million), € 3.2 million of which consist

of trade payables.

L IDENTIFICATION SOLUTIONS AG<<<<<<BID<<<<<<<WKN A0JELZ<<<<<<<<<<<<<<<<<<<<

// 33

Financial situation

The objectives of the financial management are the safeguarding and maintenance of the liquidity

of the Group and the economic and profit-bearing use of liquid assets.

The funds obtained from the IPO in 2006 were used to intensify the expansion of the office and

sales network and to acquire vps ID Systeme GmbH, Ettlingen, an important link in the value-added

chain of the Group.

Stock in hand was built up with the objective of being in a position to deliver all important

products at all times. The other current assets in the amount of € 8.4 million (previous year € 12.9

million) were offset by current liabilities in the amount of € 5.1 million (previous year € 2.2 million)

and show a comfortable overhang of current assets over liabilities.

Noncurrent receivables and liabilities (> 1 year) did not exist.

At the balance sheet date, the Group had no liabilities to banks and had not needed to borrow

any liquid funds in the reporting year.

The Deutsche Bank AG granted the Group an operating line of credit of more than € 150,000 to

cover peak requirements for liquidity.

<<<<VOL. ASK (STK.)<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<INDEX ENTRY ALL S

// 34


Off-balance sheet there is a payment guarantee of the Deutsche Bank AG to a Japanese supplier

in the amount of € 2.2 million. The current realizable securities of the Group in the custody

account of the Deutsche Bank AG, which are reported in the balance sheet as noncurrent assets

in the amount of € 2.0 million, serve the bank as collateral for this payment guarantee. The Group

can only avail of these securities with the approval of the Deutsche Bank AG.

Off-balance sheet financial instruments (rate-hedging and similar transactions) did not exist at

the balance sheet date and were not employed by the Group during the financial year.

Cash and cash equivalents at the end of the reporting period amounted to € 1.4 million.

At the balance sheet date and also in the future, the company is in a position to meet its payment

obligations. Liquidity bottlenecks have neither occurred nor are any expected.

Summary assessment of the financial position and result of operations

Overall, the financial position and the results of operations can be described as satisfactory and

appropriate for a group that is growing.

The net equity base of the Group is extremely comfortable. At the reporting date, the net equity

base amounted to € 13.3 million (previous year € 13.7 million).

Research and development

With the financial leverage provided by the IPO, it was possible to push ahead quicker than

previously with the development of hardware and software solutions. Between March and

September 2007 alone, ten new products were launched. Research and development expenditures

are distributed among the hardware and software areas.


// 35

The acquisition of vps ID Systeme GmbH has provided the Group with access to the development

of industry-specific software that opens new product design and development vistas.

In specific cases, the Group uses third-party services for development tasks relating to the

software and hardware area. The Group employs one freelance programmer in the development

of printer drivers.

The Group does not have any patents of its own.

Personnel and human resources development

In the reporting period, the Group had an average of 86 employees (previous year 53). The two

trainees (previous year 1) and the two members of the Management Board are not included in this

figure. The increase is attributable to the stocking up of personnel in key areas of the Group, in

particular in the support of subsidiaries in the marketing and sales division, in the strengthening of

the development and services division, and in the expansion of the Dubai office to a fully func-

tioning business unit. Through the takeover of vps GmbH, 26 employees came into the Group.

A systematic training and personnel development plan is imperative to safeguard the long term

competitiveness of the Group. One major focus of the personnel policy is that of supporting and

promoting the employees and helping them gain new qualifications, as a good training and further

training are essential for the success of the Digital Identification Solutions Group.

The Group‘s employees have the possibility of taking part in external training courses and

keeping up-to-date with the latest developments in their area. In addition, internal trainings

and seminars on various subjects are held regularly.


// 36


Care is taken to ensure that new positions are occupied with well-trained employees who are

competent and professional, and to ensure that key employees are bound to the company in

the long term.

Through incentive-compatible forms of remuneration, we attempt to bind our employees to

our company in the long term. A share option plan was drawn up in the past year for the members

of the Management Board and other senior executives, in order to allow them to participate in

any increase in the value of the company.

Group companies

Digital Identification Solutions AG is the parent company of the Digital Identification Solutions

Group, which has five subsidiaries all of which are 100 percent owned by the parent company.

The Group companies have their headquarters in the USA, Singapore, the People‘s Republic of

China, Mexico, and in Ettlingen.

company name Size of share

Shareholders‘equity

in €

Shareholders‘equity in for-eign currency

Net income 2007 in €

Net income 2007 in foreign

currency

Digital Identification Solutions Pte., Singapore 100 506,672 1,079,616 SGD 234,641 484,383 SGD

Digital Identification Solutions LLC, Greenville, S.C., USA 100 495,862 730,355 USD 236,335 323,954 USD

Digital Identification Solutions (Beijing) Co. Ltd., Beijing, PR China 100 1,366 14,711 CNY 4,182 43,641 CNY

vps ID Systeme GmbH, Ettlingen, Germany 100 259,038 — – 49,132 —

Digital Identification Solutions, Mexico 100 38,090 610,127 MX$ – 32,430 – 484,529 MX$


// 37

vps ID Systeme GmbH, Ettlingen, is a supplier of software solutions for the personalization and

management of ID card systems. The investment in vps ID Systeme GmbH was acquired with a

purchase and assignment agreement of August 14, 2007. vps ID Systeme GmbH was integrated

into the consolidated accounting at the acquisition date.

The subsidiaries follow the Group‘s business model in their regional markets.

Whereas the subsidiary in the USA succeeded in generating above-average increases in sales and

income, the growth in Singapore was more moderate.

Since its founding in 2005, the subsidiary in Beijing (People‘s Republic of China) has been en-

gaged in market development and market research. With the expected award of the full trading

license in the second quarter of 2008, the subsidiary will commence regular business operations

in full. In 2007, the staff was increased from two to six.

The subsidiary in Mexico was founded in the second half of 2007 and was still in the start-up

phase at the balance sheet date. Through the participation at trade fairs and conferences

in Latin and South America, the market was explored and the brand “Digital Identification

Solutions” introduced. Through the cooperation of the subsidiary, it was possible to land a large

order from a Mexican federal state in 2007. This order will be completed in the first half of 2008.

Regular business operations were commenced in the first quarter of 2008. At the balance sheet

date, the subsidiary had a staff of three people.


// 38


Events of material importance after the balance sheet date

An additional contribution to the shareholders‘ equity of the subsidiary in the People‘s Republic of

China was made in April 2008 and an increased effort put into obtaining the full trading license,

the granting of which has been approved for the second quarter of 2008. After the granting of

the license, the subsidiary will commence with the full scope of its business operations.

The exchange rate trend of the main purchasing currency, the Japanese yen, was characterized by

rate movements in a range of approx. 14 percent in the first quarter of 2008. The recent sustained

favorable exchange rate of € 1 = approx. JPY 160 made it possible for the Group to generate an

additional margin by means of the exchange rate in the first quarter of 2008.

At the CeBIT trade fair in March 2008, the Group presented two new printers and the software

“SmartACT” newly developed by vps ID Systeme GmbH.

In spring 2008, the Digital Identification Solutions Academy was launched. This academy provides

the Group‘s sales partners with Internet access to learning modules and information about the

company, the products and technical issues.


// 39

RISK REPORT

Risk Report

Risk management system

The risk management system is an integral part of our management information system and is

subject to a continuous and ongoing development, adapting it to the steadily changing setting of

operations with the aim of recognizing, assessing, monitoring and controlling potential risks as

early as possible.

The risk management system was established to recognize developments endangering the

ongoing existence of Digital Identification Solutions at an early stage, and to enable the Group

to react accordingly. During the past business year, we have further developed procedures and

instruments within risk management, thus improving the early detection of risks and our capa-

bility of response.

Risks that may occur on account of internal and external factors are identified on a continuous

basis, and analyzed for possible damages and probability of event. The Management Board and

the respective branch managers, departmental heads and employees continuously discuss the

risk scenario of the Group, in order to sharpen the perception for potential risks and develop

common defensive measures. The effectiveness of the measures taken and possibly required

corrections thereof are also part of the discussion.

The external and internal risks mentioned below are significant for the Group and are subject

to persistent observation for negative developments. Their list is not final and is governed by

continuous updating and supplementing.


// 40

MANAGEMENT REPORTRISK REPORT

External factors

Change in the competitive environment

Like in any other strongly growing industry, digital personal identification has to expect additional

market participants as well. Moreover, some strong competitors attempt to win market shares

and squeeze out the existing providers in an outright ruinous predatory competition.

Digital Identification Solutions participates in over 30 trade fairs and events annually, thus

gaining update information on developments in the competitive environment that could have

an influence on the operations of DISO.

Technological change

Digital Identification Solutions is permanently endeavoring to create increased customer

benefit by product innovations, thus deepening existing relations and / or establishing new

ones. However, a revolutionary technological innovation could lead to the fact that in the

short term considerable losses in sales and earnings have to be absorbed. The company is not

aware of any such current developments and is anxious to establish further access barriers by

aggressive innovations of its own.

The product development staff regularly test new developments in the print and card sector and

examine if these are durable and can be integrated profitably into the portfolio of the Group.

Acceptance of biometric identifi cation

In some of the OECD countries, there are considerable reservations about the collection of

biometric data. But since the growth in mature markets is primarily limited to the private eco-

nomic sector, society as a whole is hardly affected by these problems. Projects with government

agencies largely take place in threshold markets which show much less restraint with respect to

this subject.

IDENTIFICATION SOLUT <<<<<<<<<<<<<<<<<<<<<

// 41

Legal stipulations and export restrictions

Of course, Digital Identification Solutions complies with all applicable export restrictions in

countries that are on the embargo lists. Since not even a rough evaluation of the future political

development and the resulting security situation is possible, an impact on sales and profits might

have to be factored in.

The logistics staff regularly participate in training courses to become acquainted with and apply

the current developments in export restrictions. A special software is implemented to examine,

on a continuous basis, whether the address inventory includes customer or supplier data that is

subject to embargo.

Product piracy with respect to consumables

Even if an increasing share of the Digital Identification Solutions Systems is protected against

product piracy by the implementation of RFID technology, it cannot be excluded that individual

customers will be diverted by cut-price competitors.

Internal factors

Corporate Governancee

All Group employees were informed of the binding Corporate Governance Standards even prior

to the IPO in May 2006. Especially the supervisors were enjoined to guarantee the complete

implementation of this code of conduct since a possible violation thereof could trigger a

considerable financial damage and loss of image for the company.

Distribution of sales during the year

The Digital Identification Solutions Group sales are not distributed on a straight-line basis

throughout the fiscal year; owing to customers from the public sector, they strongly concentrate

on the year-end period. The liquidity requirements are therefore subject to considerable fluctua-

tions as well, even though the constantly increasing installed base tends to offset this effect

somewhat. The influence of individual projects, which had still been considerable in 2006, is also

expected to keep on decreasing while sales continue to grow. Owing to the funds generated by

the IPO, however, the current liquidity is given at all times, and is abundantly substantiated.

<<<VOL. ASK (STK.)<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<INDEX ENTRY ALL SH

// 42

MANAGEMENT REPORTRISK REPORT

Risks of default

The risk of default is the risk of a loss suffered if a contractual party does not fulfil its contractual

commitments. The insufficient enforceability of contractual receivables in individual threshold

markets has to be accepted. Digital Identification Solutions benefits from a certain mutual de-

pendency because, as a rule, the customers depend on the consumables of the company, which

will be retained in the event of a considerable delay of payment. In addition, the customers will

only be able to buy openly, i.e. against invoice after a business relationship of several years. At

the beginning of a business relationship with new customers, the company delivers against ad-

vance payment only, so as to eliminate the risk of default in case of unknown purchasers. Owing

to the comparatively small market served by the Group and the mutual dependencies, there has

only been a minimum of defaults in the past years.

Dependence on employees in key positions

There is a certain dependence on executives, the Management Board and the heads of subsid-

iaries, so that one or more losses could lead to a noticeable decline in sales and profits. Digital

Identification Solutions is consistently striving to weaken this factor by an active personnel

policy, well-targeted new recruitments and the development of junior executives.

Dependence on individual customers

The five key customers of Digital Identification Solutions are responsible for more than 52.3

percent of the AG’s sales in 2007; therefore, the falling away of one or more of these customers

could lead to a noticeable decrease in sales and profits. Owing to the strong growth of the Digital

Identification Solutions Group, the dependency on some customers is scheduled to decline in the

coming years.

Dependency on individual sales partners

The business model of the Digital Identification Solutions Group is based on the fact that ex-

tensively trained sales partners implement product solutions with the end customer. Despite

the fact that some sales partners were responsible for more than 5 percent of the Group’s sales,

the accelerated expansion of the sales partner network will reduce the dependency of individual

companies as scheduled.


// 43

Dependence on individual suppliers

Digital Identification Solutions is pegged to a number of suppliers delivering hardware, consum-

ables and software. In the past, the company made sure that access to equivalent alternative

products was guaranteed when dealing with all essential suppliers. In the first quarter 2007, the

most important OEM agreement by far was extended until April 2010.

Liquidity risk

One of our main financial objectives is to secure a sufficient liquidity supply at all times. Apart

from the long term and medium-term planning, the Group is engaged in a short-term liquidity

management by regular dunning activities, the regular preparation and analysis of short-term

liquidity forecasts, and the short-term reaction to perceivable bottlenecks.

Interest rate risks

Since no fixed-interest or floating-rate funds were recorded at the balance sheet date or during

the year, we are not exposed to any interest rate risks.

Currency exposure

The Group minimizes its currency exposure in sales by invoicing the major part of its customers in

euros, and receiving payments in euros.

Supplies to a major customer in Indonesia are invoiced in US dollars or Japanese yen, depending

on the origin of the supplied goods. The customer pays in foreign currency. This natural hedging

minimizes the currency risk in connection with such high-volume sales.

As far as purchases are concerned, Digital Identification Solutions depends very strongly on the

rate of the Japanese yen and the US dollar. The price development of the two currencies is

monitored and analyzed on a continuous basis, in order to be able to take timely rate-hedging

measures. In 2006, the Group hedged its purchase volume in yen at a fixed price, whereas in 2007

the rate of the yen noticeably developed in a comfortable direction which no longer required

rate-hedging transactions.


// 44

FORECAST

MANAGEMENT REPORT

Forecast

General economic conditions

Most of the economic research institutes expect worldwide economic growth for 2008 to be

below the level of 2007. Around 1.7 percent is expected for Germany. Main macroeconomic fac-

tors of influence for the economic growth in the USA are the continuing high level of debt, the

continuing weak US dollar and, if the key interest rate is increased, the crisis in the property

sector. The boom in Asia is expected to continue in 2007 as well.

Industrial environment

The outlook for the security market in general and personal identification in particular continues

to be extremely favorable. In the more mature markets, a sustained growth of at least 5 percent

is expected; in newly industrialized countries, the growth rate is likely to be at least twice as high.

Digital Identifi cation Solutions Group

In 2008, the growth of the Group will continue to be positive on the back of product innovations,

regional expansion and the full consolidation of vps ID Systeme GmbH.

In the project area, the Group is participating in numerous tenders, even if a concrete plan-

ning of government projects does not at present seem firmly on the cards owing to numerous

external factors.

A considerable part of the business can be considered very likely to materialize thanks to recur-

rent sales of consumables from the installed base of more than 6,500 systems, and the migration

of existing customers to more modern hardware solutions.

Given the fact that international activities account for 85 percent of the Group‘s business, cur-

rency influences must constantly be kept in view. Although a similar development of the two

main foreign currencies has a dampening effect on sales growth, this development will however

Software Entwicklung

MarkterfahrungForschung und Entwicklung Projekt Management

Technologie


// 45

help the operating income. Planning is based on an average exchange rate of 1.45 for the US

dollar and 155 for the Japanese yen. To safeguard against currency risk, the Group will consider

conducting safe hedging transactions for the financial year 2008.

In the procurement sector, we expect acquisition costs to remain flat or even fall in view of the

weakening economic growth. Renegotiations with existing hardware suppliers will contribute to

this trend. To obtain cost advantages, we are expanding our international purchases.

The planning for 2008 envisages an investment volume similar to that in the past year. The slight

decline in investments in property, plant and equipment will be offset by increasing investments

in tangible assets, in particular the acquisition of a new consolidation software.

The number of employees will increase slightly in 2008 as well. At present, we expect the work-

force to number around 100 at December 31, 2008 (compared to 96 at the same time last year).

For the future as well, we estimate that our business environment will be largely positive. In North

America in particular, we expect an ongoing demand for passport and card printer systems.

The forecast for 2008 should also, of course, include the competition, as there are numerous

financially sound companies that want to participate in this growing market. Even if Digital

Identification Solutions offers cutting-edge technology solutions at extremely attractive prices,

it must be assumed that cutthroat predatory competition in some areas will affect the margins.

Even taking into account these negative factors, a noticeable improvement is expected in op-

erating income, not least owing to the fact that the established fixed costs can be distributed

on a higher sales volume. For the consolidated financial year 2008, we expect sales of between

€ 22 million and € 24 million.

IT meets ID


// 46

FINANCIAL STATEMENTS

IDENTIFICATION SOLUTIONS AG<<<<<<<BID<<<<<<<WKN A0JELZ<<<<<<<<<<<<<<<<<<<

// Financial Statements

of Digital Identification Solutions AG as of December 31, 2007

// 47

<<<VOL. ASK (STK.)<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<INDEX ENTRY ALL

// 48


Assets

all fi gures in € thousands Note

Dec. 31, 2007 Dec. 31, 2006

Noncurrent assets

Intangible assets 7.1 3,322 228

Property, plant and equipment 7.2 934 509

Noncurrent assets classified as held for sale 7.3 1,996 0

Other noncurrent assets 7.4 139 0

6,391 737

Current assets

Inventories 7.5 4,169 2,315

Receivables from manufacturing orders 7.6 210 0

Trade receivables 7.6 5,692 2,282

Tax assets 8.3 360 39

Other current assets 7.7 800 738

Cash and cash equivalents 1,356 9,859

12,587 15,233

18,978 15,970

Consolidated Balance Sheet of Digital Identification Solutions AG, Esslingen, for the period ended December 31, 2007

(according to IFRS)

// 49

Equity and liabilities


Dec. 31, 2007 Dec. 31, 2006

Equity 7.8

Issued capital 2,143 2,143

Capital reserves 10,859 10,859

Deduction items for treasury shares – 229 – 125

Retained earnings 137 117

Other recognized gains and losses – 292 3

Net retained profits 729 718

13,347 13,715

Noncurrent liabilities

Provisions for pensions 7.9 19 0

Other noncurrent liabilities 140 0

Deferred tax liabilities 8.2 345 48

504 48

Current liabilities

Provisions 7.10 268 177

Trade payables 7.11 3,177 1,690

Tax liabilities 8.3 161 60

Other current liabilities 7.12 1,521 280

5,127 2,207

18,978 15,970

// 50



2007

2006

Revenue 6.1 18,256 14,712

Other operating income 6.2 288 240

Inventory changes 72 0

Work performed and capitalized 306 38

Cost of materials 6.4 – 9,497 – 8,939

Employee benefits expense 6.5 – 4,405 – 3,075

Depreciation and amortization expense 6.6 – 390 – 225

Other operating expenses 6.3 – 4,472 – 2,706

Operating profit / loss for the period 158 45

Other interest and similar income 4 17

Other interest and similar expenses – 20 – 41

Other income from financial assets 145 454

Financial profit / loss for the period 6.7 129 430

Earnings before income taxes 287 475

Income tax expense / income 8.2 – 276 47

Net profit for the period 11 522

Earnings per share in euros (basic and diluted) 6.8 0.01 0.24

Weighted average shares outstanding (basic and diluted) 6.8 2,133,978 2,140,983

Consolidated Income Statement of Digital Identification Solutions AG, Esslingen, for the financial year 2007 (acc. to IFRS)

// 51

No. all fi gures in € thousands

1 – 12 / 2007 1 – 12 / 2006

1 Profit / loss for the period 11 522

2 + / –Write-downs 390 225

3 + / – Increase / decrease in provisions – 283 146

4 + / – Expenses for share-based remuneration 32 0

5 + / – Other noncash expenses / income 125 0

6 + / – Deferred taxes 124 – 69

7+ / –Profit / loss from the disposal of assets 2 0

Change to net current assets:

8

+ / – Increase / decrease in inventories, trade receivables and other assets that are not allocated to investment or financing activity – 5,147 – 1,466

9

+ / – Increase / decrease in trade payables and other liabilities that are not allocated to investment or financing activity 2,539 – 642

10 = Cash fl ow from operating activities (1 to 9) – 2,207 – 1,284

11 – Cash payments for investments in property, plant and equipment – 543 – 317

12– Cash payments for investments in intangible assets – 334 – 47

13 – Payments for investments in financial assets – 2,304 0

14– Cash payments for the purchase of consolidated

companies and other business units – 2,833 0

15 – Cash payments for the acquisition of minority interest 0 – 137

16 = Cash fl ow from investment activities (11 to 15) – 6,014 – 501

17+ Cash receipts from additions to equity (capital increases etc.) 0 11,633

18 – Transaction costs for the issuing of shares 0 – 1,132

19 – Cash payments for the acquisition of own shares – 228 – 126

20 = Cash fl ow from fi nancing activities (17 to 19) – 228 10,375

21 Change to cash and cash equivalents from cash-relevant transactions (Total 10, 16 and 20) – 8,449

8,590

22 + / –Exchange-rate-based changes in cash and cash equivalents – 54 – 29

23 + Cash and cash equivalents at the start of the period 9,859 1,298

24 = Cash and cash equivalents at the end of the period (21 to 23) 1,356 9,859

Consolidated Cash Flow Statement

Cash and cash equivalents are made up as follows: all fi gures in € thousands

Dec. 31, 2007 Dec. 31, 2006

Cash *) 1,356 9,859

1,356 9,859 *) Cash includes cash on hand, cash in banks, and checks.

// 52


Costs of acquisition and production


Jan. 1, 2007

Changes in the scope of

consolidation of the Group Additions (+) Disposals (–) Dec. 31, 2007

I. Intangible assets

1. Industrial property rights and similar values 166 510 334 0 1,010

2. Goodwill from capital consolidation 120 0 2,339 0 2,459

286 510 2,673 0 3,469

II. Property, plant and equipment

1. Land and buildings 0 0 116 0 116

2. Other equipment, operating and office equipment 821 198 427 – 6 1,440

821 198 543 – 6 1556

III. Other assets

1. Financial assets available for sale 0 0 2,201 0 2,201

2. Other noncurrent assets 0 36 103 0 139

0 36 2,304 0 2,340

Total noncurrent assets 1,107 744 5,520 – 6 7,365

Statement of Changes to Assets in the DISO Groupin fiscal year 2007

Costs of acquisition and production


Jan. 1, 2006 Additions (+) Disposals (–) Transfers Jan. 1, 2006

I. Intangible assets

1. Industrial property rights and similar values 119 47 0 0 166

2. Goodwill from capital consolidation 0 120 0 0 120

119 167 0 0 286

II. Property, plant and equipment

1. Other equipment, operating and office equipment 514 308 – 11 0 821

2. Advance payments made and assets under production 10 0 0 – 10 0

524 308 – 11 0 821

Total noncurrent assets 643 475 – 11 0 1,107

in fiscal year 2006

// 53

Accumulated amortizations

Jan. 1, 2007

Changes in the scope of con-

solidated finan-cial statements Additions (+) Disposals (–)

Impairment not affecting profit or loss

Currencychange Dec. 31, 2007

58 0 84 0 0 4 146

0 0 0 0 0 0 0

58 0 84 0 0 4 146

0 0 2 0 0 0 2

312 0 304 – 3 0 7 620

312 0 306 – 3 0 7 622

0 0 0 0 205 0 205

0 0 0 0 0 0 0

0 0 0 0 205 0 205

370 0 390 – 3 205 11 973

Net carrying amounts

Jan. 1, 2007 Dec. 31, 2007

864 108

2,459 120

3,323 228

114 0

820 509

934 509

1,996 0

139 0

2,135 0

6,392 737

Accumulated amortizations

Jan. 1, 2006 Additions (+)

Currencychange Dec. 31, 2006

6 52 0 58

0 0 0

6 52 0 58

139 173 0 312

0 0 0 0

139 173 0 312

145 225 0 370

Net carrying amounts

Dec. 31, 2006 Dec. 31, 2005

108 113

120 0

228 113

509 354

0 10

509 364

737 477

// 54


Parent company


Issued capital Share premium

Other capital reserves

Valuation items for own shares Retained earnings

As of December 31, 2005 HGB 1,021 0 1,480 0 0

IFRS restatement 127

As of January 1, 2006 IFRS 1,021 0 1,480 0 127

Foreign currency translation 0 0 0 0 – 1

Net income and expense for the year recognized directly in equity 0 0 0 0 – 1

Net profit /loss for the period 0 0 0 0 0

Total income / loss for the period 0 0 0 0 – 1

Issued capital 612 11,021 0 0 0

Transaction costs (issuing costs) 0 – 1,132 0 0 0

Acquisition of own shares 0 0 0 – 125 0

Acquisition of minority interests 0 0 0 0 0

Other changes 510 0 – 510 0 – 9

As of December 31, 2006 IFRS 2,143 9,889 970 – 125 117

As of January 1, 2007 IFRS 2,143 9,889 970 – 125 117

Change in market values 0 0 0 0 0

Deferred taxes recognized directly in equity 0 0 0 0 0

Foreign currency translation 0 0 0 0 20

Net income and expense for the year recognized directly in equity 0 0 0 0 20

Net profit / loss for the period 0 0 0 0 0

Total income / loss for the period 0 0 0 0 20

Issue of own shares 0 0 0 125 0

Acquisition / calling-in of own shares 0 0 0 – 229 0

Other changes 0 0 0 0 0

As of December 31, 2007 IFRS 2,143 9,889 970 – 229 137

Consolidated Statement of Changes in Equity in fiscal year 2007

// 55

Parent company Minority interests

Accumulated other equity / changes at fair value in equity

Foreign exchange dif-

ferences

Unrealized gains / losses

from the disposal of available se-

curities

Accumulated changes in

equity at fair value

Net retained profits

Equity without minority interests

Minority interests

Minority interests in net retained profits

Minorityinterests Group equity

4 0 4 156 2,661 31 54 85 2,746

3 0 3 – 15 115 3 3 118

7 0 7 141 2,776 34 54 88 2,864

– 24 0 – 24 0 – 25 0 0 0 – 25

– 24 0 – 24 0 – 25 0 0 0 – 25

0 0 0 522 522 0 0 0 522

– 24 0 – 24 522 497 0 0 0 497

0 0 0 0 11,633 0 0 0 11,633

0 0 0 0 – 1,132 0 0 0 – 1,132

0 0 0 0 – 125 0 0 0 – 125

0 0 0 0 0 – 34 – 54 – 88 – 88

20 0 20 55 66 0 0 0 66

3 0 3 718 13,715 0 0 0 13,715

3 0 3 718 13,715 0 0 0 13,715

0 – 206 – 206 0 – 206 0 0 0 – 206

0 – 3 – 3 0 – 3 0 0 0 – 3

– 66 0 – 66 0 – 46 0 0 0 – 46

– 66 – 209 – 275 0 – 255 0 0 0 – 255

0 0 0 11 11 11

– 66 – 209 – 275 11 – 244 0 0 0 – 244

0 0 0 0 125 0 0 0 125

0 0 0 0 – 229 0 0 0 – 229

– 20 0 – 20 0 – 20 0 0 0 – 20

– 83 – 209 – 292 729 13,347 0 0 0 13,347

// 56


Digital Identification Solutions AG (hereinafter also referred to as the “company” or “Group”) is

an international supplier of modular solutions for optical and electronic personalization of

identification solutions (“ID cards”) and other identification documents. The product range

covers on the one hand hardware and software components for personalization systems for

the purpose of personal identification and verification, as well as consumables for ID cards and

passport / visa printers.

Based on a resolution of the General Meeting (transformation resolution) of February 16, 2006,

entered in the commercial register on February 28, 2006, the parent company (previously Digital

Identification Solutions GmbH, a limited company) was transformed into a stock corporation

(“Aktiengesellschaft”).

With the listing on May 12, 2006, the share was included in the “Entry Standard” subsegment of

the free trading on the Frankfurt Stock Exchange and 612,300 new shares were issued.

In the previous reporting periods, including the financial year up to December 31, 2006, the Group

prepared its consolidated financial statements in accordance with German national law (HGB

– German Commercial Code). With the consolidated financial statements for the financial year

ending December 31, 2007, the Group for the first time prepared its financial statements in com-

pliance with International Financial Reporting Standards (IFRS).

The consolidated financial statements comply with all IFRS standards and interpretations that

are to be applied for reporting periods beginning on or after January 1, 2007. The application

of specific IFRS declarations is explained in more detail under Accounting Policies. For reasons of

comparability, the Group’s opening balance sheet as of January 1, 2006, the date of the transition

to IFRS, was prepared as well.

2.1. Effects of new accounting standards and interpretations

The following new accounting standards and interpretations were applied in the

financial year 2007:

Standard / interpretationEffective

date 1)

Endorsement 2)

(on Dec. 31, 2007)

Change IAS 1Presentation of the Financial State-ments – Disclosures Jan. 1, 2007 yes

New IFRS 7 Financial Instruments: Disclosures Jan. 1, 2007 yes

New IFRIC 8 Scope of Application of IFRS 2 May 1, 2006 yes

1) Application on the first reporting period of the fiscal year, which begins on this day or thereafter2) Acceptance of the IFRS standards and interpretations by the EU Commission

2. Application of New and

Changed Standards

2. Application of New and

Changed Standards

1. Information about the

company

// 57

IAS 1 “Presentation of the Financial Statements – Disclosures on Shareholders’ Equity”

The change of IAS 1 leads to extended disclosure obligations in relation to the objectives and

methods of capital management.

IFRS 7 “Financial Instruments: Disclosures”

IFRS 7 has the objective of providing readers of the balance sheet with a better insight into the

financial instruments of an entity. To achieve this, there are extended Notes disclosures on both

the significance of the financial instruments and on the risks resulting from these instruments.

IFRIC 8 “Scope of Application of IFRS 2”

IFRIC 8 specifies the scope of the IFRS 2 “Share-based Payment“. According to this, the IFRS 2

shall also apply if the share-based remunerations are not directly offset by any identifiable coun-

terbenefit or the received counterbenefit is lower than the fair value of the granted equity in-

struments. IFRIC 8 has no effects on the consolidated financial statements 2007 of the company.

2.2. Accounting standards and interpretations that are new and not yet applied

The following accounting standards and interpretations were published by the IASB up until the

balance sheet date; the company is not obliged to apply these until a later date.

Standard / interpretation Effective date 1)

Endorsement 2)

(on Dec. 31, 2007)

Change IAS 1Presentation of the Financial State-ments – Disclosures Jan. 1, 2009 no

Change IAS 23 Borrowing Costs Jan. 1, 2009 no

New IFRS 8 Business Segments Jan. 1, 2009 yes

New IFRIC 11IFRS 2 – Transactions with Own Shares and Shares of Group Companies Mar. 1, 2007 yes

New IFRIC 12Service Concession Arrangements Jan. 1, 2008 no

New IFRIC 13 Customer Loyalty Programs Jul. 1, 2008 no

New IFRIC 14

IAS 19 – The Limit on a Defi ned Benefi t Asset, Minimum Funding Requirements Jan. 1, 2008 no

1) Application on the first reporting period of the fiscal year, which begins on this day or thereafter2) Acceptance of the IFRS standards and interpretations by the EU Commission

// 58


IAS 1 “Presentation of the Financial Statements – Disclosures”

The changed IAS 1 has the objective of making it easier for the reader of the balance sheet to an-

alyze the financial statements. One of the steps toward achieving this objective is, e.g., through

a modified statement of changes in equity and through a more comprehensive overall statement

of results. The effects of the changes to IAS 1 on the consolidated financial statements of the

company are classified by the company as not material.

IAS 23 “Borrowing Costs”

The change to IAS 23 stipulates that borrowing costs that are directly allocated to the building

or the production of what are referred to as qualified assets, are in future to be capitalized. The

current option relating to the recognition of borrowing costs as an expense is discarded. The

effects of the changes to IAS 23 on the consolidated financial statements of the company are

classified as not material.

IFRS 8 “Business Segments”

IFRS 8 replaces the previously valid IAS 14 “Segment Reporting”. A business segment is defined

as an operating area of an entity whose operating results are regularly presented to the people

responsible for decision-making on the further allocation of resources. Accordingly, the repre-

sentation of the segments is principally oriented to the internal reporting structure of the finance

information. The effects of IFRS 8 on the consolidated financial statements of the company are

classified as not material.

IFRIC 11 “IFRS 2 – Transactions with Own Shares and Shares of Group Companies”

IFRIC 11 stipulates when specific share-based remunerations are treated as cash settlement or

transactions with settlement through equity instruments. IFRIC 11 has, from the present view-

point, no effects on the consolidated financial statements of the company.

IFRIC 12 “Service Concession Arrangements”

IFRIC 12 regulates the reporting in the balance sheet of concessions that are awarded by govern-

ments or other official bodies to private operators in order to provide public services. IFRIC 12 has,

from the present viewpoint, no effects on the consolidated financial statements of the company.

IFRIC 13 “Customer Loyalty Programs”

IFRIC 13 covers programs in which the customers are granted bonuses for the purchase of products

or services; these bonuses can be exchanged later for free or reduced-price goods. The effects of

IFRIC 13 on the consolidated financial statements of the company are classified as not material.

// 59

IFRIC 14 “IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and

their Interaction”

IFRIC 14 deals with the case of an overcoverage of pension obligations through externally formed

plan assets. Criteria are defined for when this overcoverage of the entity is available as commercial

benefit and therefore has to be capitalized as asset value. IFRIC 14 has, from the present viewpoint,

no effects on the consolidated financial statements of the company.

Digital Identification Solutions AG will not be making use of the voluntary pre-mature

application of the described accounting standards and interpretations. The Management Board

expects no effects on the consolidated financial statements from the application of these stan-

dards in future reporting periods, with the following exceptions:

IAS 1: The revised standard IAS 1 requires additional disclosures of the company regarding objec-

tives, strategies and processes in the area of capital management. In addition, the company must

disclose quantitative data on the scope of the financial resources and information relating to its

capital requirements.

IFRS 7: This standard requires disclosures that make it possible for the reader of the financial

statements to evaluate the importance of the financial instruments for the financial position

and financial performance of the Group and the type and extent of the risks resulting from these

financial instruments. The new disclosures resulting from this affect all the financial statements.

The following standards were not applied as they were not relevant:

• IFRS 4 “Insurance Contracts”

• IFRS 5 “Noncurrent Assets Held for Sale and Discontinued Operations”

• IFRS 6 “Exploration for and Evaluation of Mineral Resources”

• IAS 26 “Accounting and Reporting by Retirement Benefit Plans”

• IAS 28 “Investments in Associates”

• IAS 29 “Financial Reporting in Hyperinflationary Economies”

• IAS 30 “Disclosures in the Financial Statements of Banks and Similar Financial Institutions”

• IAS 40 “Investment Property”

• IAS 41 “Agriculture”

These standards would have been applied to the extent that they were relevant.

// 60


3.1. Principles for preparing financial statements

The parent company, Digital Identification Solutions AG, Esslingen, is exempted, owing to its

size in acc. with Section 293 (1) of the German Commercial Code (HGB), from the obligation of

having to prepare consolidated financial statements. The financial statements of the company

for 2007 were prepared in acc. with Section 315a (1) in conjunction with Section 3 HGB in compli-

ance with the rules of the International Financial Reporting Standards (IFRS) and the commercial

legal regulations to be applied in addition in acc. with Section 315a (1) HGB.

The consolidated financial statements were prepared on the basis of the application of the

historical cost system. Exempted from this are the financial investments held for sale, which

were measured at fair value.

According to IAS 1, a differentiation is made between noncurrent and current assets and non-

current and current liabilities in the representation of the Balance Sheet. Assets, liabilities and

provisions are regarded as current if they are marketable or due within one year.

The Income Statement was prepared according to the nature of expense method. Insofar as the

items of the Balance Sheet and Income Statement were grouped together for purposes of clarity

of representation, this was explained in the Notes.

The consolidated financial statements are presented in euros. Unless otherwise indicated, all

values are rounded up or down to thousand (€ thousand) in standard commercial method.

3.2. Declaration of conformity

The consolidated financial statements of Digital Identification Solutions AG and its subsidiaries

(“Group”) were presented in conformity with the International Financial Reporting Standards (IFRS),

as they are to be applied in the EU.

3.3. Principles of consolidation

The consolidated financial statements comprise the financial statements of Digital Identification

Solutions AG and its subsidiaries for the period ending December 31 of each financial year.

Subsidiaries are fully consolidated from the date of acquisition, i.e. from the date on which the Group

obtained control. The consolidation ends as soon as the control by the parent company ceases.

3. Material Accounting

Policies

3. Material Accounting

Policies

// 61

The consolidated financial statements include Digital Identification Solutions AG and its direct

subsidiaries. The financial statements of the Group companies are presented using uniform

accounting policies as of the same balance sheet date as the parent company.

The capital is consolidated according to the purchase method. The costs of purchase of the

acquired investments are set off against the parent company’s pro-rata share in the revalued

equity. The assets and liabilities of the acquired subsidiaries are hereby recognized with their

respective fair values. Any difference arising on the assets side is capitalized and subjected to

an annual impairment test, no difference arose on the liabilities side during the consolidation.

Receivables, liabilities and provisions as well as income and expenses between the included

entities are eliminated during the consolidation of liabilities or during the consolidation of

expenses and earnings.

There are no non-Group shares of equity or of net income of the Group companies.

Group companies and scope of consolidation

As of December 31, 2007, the Group included Digital Identification Solutions AG as the parent

company and the following other companies (disclosed figures according to local accounting):

company nameSize of share

in %Equity

in €Equity in foreign

currencyResult 2007

in €Result 2007 in

foreign currency

Digital Identifica-tion Solutions Pte., Singapore 100 % 506,672 1,079,616 SGD 234,641 484,383 SGD

Digital Identifica-tion Solutions LLC, Greenville, S.C., USA 100 % 495,862 730,355 USD 236,335 323,954 USD

Digital Identifica-tion Solutions (Beijing) Co. Ltd., Beijing, PR China 100 % 1,366 14,711 CNY 4,182 43,641 CNY

Digital Identifica-tion Solutions, Mexico 100 % 38,090 610,127 MX$ – 32,430 – 484,529 MX$

vps GmbH, Ettlin-gen, Germany 100 % 259,038 — – 49,132 —

// 62


The parent company also has a plant in Dubai (United Arab Emirates); the parent company is

responsible for the accounting.

The scope of consolidation includes all subsidiaries of Digital Identification Solutions AG with the

exception of the subsidiary in Mexico. The subsidiary is currently being established and had no

material assets or business operations in the period up until the balance sheet date. The expenses

of the subsidiary are mostly charged to the parent company and thus contained in the consolidated

financial statements. The shares of the subsidiary in Mexico are reported under other noncurrent

assets and measured at depreciated cost in accordance with IAS 39.

3.4. Foreign currency translation

The financial statements of the consolidated subsidiaries prepared in foreign currencies are

translated on the basis of the concept of the functional currency in accordance with IAS 21

(“The Effects of Changes in Foreign Exchange Rates”) in euros.

The financial statements of the various entities in the Group are prepared using a different

functional currency, being the currency of the primary economic environment in which the

entity operates. For the purpose of the consolidated financial statements, the net assets,

financial position and results of operations of each entity are to be presented in euros, which

is the functional currency of the parent company and the presentation currency of the con-

solidated statements.

In the preparation of the financial statements of the various entities of the Group, related-party

transactions in currencies other than the functional currency of the Group (foreign currencies)

are translated with the valid exchange rate on the date of the transaction. On each balance

sheet date, monetary items in foreign currency are translated with the valid reporting date

rate. Nonmonetary items in foreign currency measured at the fair value shall be translated

at fair value at the exchange rates prevailing at the date of the measurement. Non-monetary

items measured at cost will be translated with the exchange rates at the time of the first-time

recording in the Balance Sheet. Net exchange differences shall be recognized in income in the

period in which they occur.

For the preparation of the consolidated financial statements, the assets and liabilities of the

foreign entities of the Group are translated into euros using the applicable exchange rate on

the balance sheet date. Income and expenses are translated at the average exchange rate of

the period, unless the exchange rates fluctuated strongly during the period. In this case, the

exchange rates at the time of the transaction shall be applied. Insofar as such exchange rate

differences arise, these shall be allocated as part of the equity in the reserve from the currency

translation. In the event that a foreign entity is sold, these amounts are recognized in income.

// 63

The following exchange rates are applied to the Group currency, euros:

2007Currency Average rate Closing rate

USD 1.37074 1.47290

JPY 161.30828 165.41600

SGD 2.06436 2.13080

RMB (PR China) 10.43471 10.77260

2006Currency Average rate Closing rate

USD 1.25622 1.32030

JPY 146.09592 157.19900

SGD 1.99563 2.02600

RMB (PR China) 10.02488 10.32120

3.5. Business combinations

Business combinations are accounted for by applying the purchase method. The cost of the

business combination is measured as the aggregate of the fair value, at the date of exchange, of

assets given, liabilities incurred or assumed, and the equity instruments issued by the Group, in

exchange for the control of the other combining entity, plus any costs attributable to the busi-

ness combination. The identifiable assets, liabilities and contingent liabilities of the acquired

entity that satisfy the recognition criteria of IFRS 3 “Business Combinations”, are recognized at

fair value from the date of acquisition, with the exception of noncurrent assets (or disposal

groups) which were classified as non-current assets and discontinued operations held for sale

according to IFRS 5, that were recognized and measured at fair value minus selling costs.

Goodwill from the acquisition of entities is initially measured at cost, being the excess of the

cost of the business combination over the Group’s interest in the net fair value of the identifiable

assets, liabilities and contingent liabilities of the acquired entity, and which are not depreciated

as scheduled according to IFRS 3 in conjunction with IAS 36 and IAS 38.

// 64


3.6. Intangible assets

Intangible assets are licenses, industrial property rights and similar rights, capitalized research

costs or goodwill, respectively. Provided their acquisition is not effected within a business

combination, their initial recognition will be measured at cost (IAS 38). The cost of acquisition

of an intangible asset acquired in a business combination corresponds to the fair value at the

acquisition date. Differentiation is made between intangible assets with a limited and those with

an indefinite useful life. After initial recognition, intangible assets are carried at cost or manu-

facture, minus any accumulated amortization and any accumulated impairment losses. Costs of

manufacture encompass all expenses directly attributable to the manufacturing process. Costs of

financing are not capitalized. Intangible assets are only recognized if, in all probability, they will

generate a future benefit for the company, and the costs can be measured reliably. Intangible

assets are depreciated over the contractual or useful life of three to ten years.

Research and development expenditure

Research expenditures and development costs not treatable as addition to assets are recognized

as expenses in the period in which they are incurred. For this purpose, those development costs

will be recognized as expenses for which there is no certainty regarding the technical realization,

and no assessment of a future economic benefit from the existing intangible asset can be made.

Costs of development incurred for software internally produced by the parent company and vps

ID Systeme GmbH are capitalized at cost of manufacture, to the extent that a definite allocation

of costs is possible, and both the technical realization and the marketing or internal benefit are

guaranteed. Furthermore, the development activities have to lead to corresponding future inflow

of funds or cost savings in all probability. Only cost elements that can be attributed directly or

indirectly to the process of development are subject to capitalization.

Following their initial recognition, the costs of development are carried in the Balance Sheet at

the historical cost system, i.e. at cost of acquisition less accumulated depreciation and accumulated

impairment losses. Depreciation starts upon completion of the development stage and from the

point onward at which the asset can be utilized. Depreciation is effected over the period in which

the future use of the asset can be expected.

// 65

3.7. Goodwill

Goodwill created by the acquisition of a subsidiary or an entity under common management,

corresponds to the excess of the cost of acquisition over the interest of the Group in the net

fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or the

entity under common management at acquisition date. Goodwill is shown in the Balance Sheet

at cost at the time of acquisition, and in the following periods at cost of acquisition less all

accumulated impairment losses.

For the purpose of testing goodwill for impairment, it is allocated to the respective cash gen-

erating unit of the group (individual shareholding). Units generating cash are to be tested for

impairment annually. In the event of indications for an impairment of an entity, it will be tested

more frequently. If the achievable amount of a cash generating unit is smaller than the carrying

amount of the entity, the impairment losses are to be allocated first to the carrying amount of

any goodwill attributed to the entity, and subsequently to the other assets on the basis of the

carrying amounts of each asset on a pro-rata basis within the entity. An impairment loss recog-

nized for the goodwill cannot be made up for in future periods.

On the occasion of the disposal of a subsidiary or an entity under common management, the

attributable goodwill is taken into account when determining the success of the sale.

3.8. Property, plant and equipment

According to IAS 16, property, plant and equipment is capitalized at cost of acquisition or manu-

facture, and is subject to scheduled straight-line depreciation over the assumed economic life.

Scheduled depreciation of property, plant and equipment is based on a useful life of two to

48 years; they correspond to the expected useful lives in the Group. The useful life of property,

plant and equipment is usually three years, in case of furniture and other durable equipment

between four and 14 years. No depreciation based exclusively on tax regulations is used for

recognition.

The useful lives, the method of depreciation and the carrying amounts of property, plant and

equipment are tested on an annual basis to guarantee that the method and period of deprecia-

tion corresponds to the expected economic benefit of the assets.

In case of disposal or retirement of property, plant and equipment, its cost of acquisition and

accumulated depreciation are eliminated from the Balance Sheet, and the gains or losses from

their disposal is recognized in the Income Statement in other operating income or other operat-

ing expenses in the period in which the asset is derecognized. The gain or loss is determined as

the difference between the net revenue and the carrying amount of the asset.

// 66


3.9. Borrowing costs

Borrowing costs are recognized as an expense in the period in which they are incurred.

3.10. Inventories

In accordance with IAS 2, inventories are recognized at the lower of cost or market, plus incidental

cost of acquisition and the net realizable value. Inventory risks arising from the storage period or

reduced marketability will – if necessary – be accounted for by devaluation.

3.11. Production contracts

Specifically negotiated production contracts arise within the Group from interrelated project

and installation services, the pro-rata realization of gains of which is made according to the

percentage-of-completion method (PoC method). When the outcome of a production contract

can be estimated reliably, contract revenues and contract costs associated with the production

contract should be recognized as revenue and expenses respectively by reference to the stage

of completion of the contract activity at the balance sheet date, unless this method would not

reflect the stage of completion.

Changes in the contracted work, the claims and output bonuses are included to the extent

negotiated with the customer.

If the outcome of a production contract cannot be estimated reliably, the contract revenues can

only be recognized to the amount of the contract costs incurred, which are likely to be achieved.

Contract costs are recognized as an expense in the period in which they are incurred.

If it is probable that total contract costs will exceed total contract revenue, the expected loss

should be recognized as an expense without delay.

// 67

3.12. Financial assets

Financial assets in the meaning of IAS 39 are classified

• as financial assets at fair value through profit or loss,

• as loans and receivables,

• as financial assets held to maturity and

• as financial assets available for sale.

At the time of their first recognition financial assets are measured with their fair value. In the case

of financial assets other than those classified at fair value through profit or loss, any transaction

costs that are directly attributable to the acquisition of the asset will be accounted for as well.

For the purpose of measurement, financial assets are classified into the categories after initial

recognition. Admissible and required reclassifications are made at the end of the fiscal year.

All purchases and sales of financial assets customary in the market are carried in the Balance

Sheet on the trading day, i.e. on the day the Group takes on the commitment to purchase or

sell the asset. Purchases and sales customary in the market are purchases or sales of financial

assets that stipulate the delivery of the assets within a given period fixed by market regula-

tions or practices.

The stake in the entity in Mexico not yet included in the scope of consolidation is classified as a

“financial asset held to maturity”. The cost of acquisition includes the transactions costs.

The securities shown under financial assets available for sale are marketable securities. These are

measured at fair value according to their classification. The securities serve as collateral for the

contingent liabilities vis-à-vis the Deutsche Bank AG. The company cannot dispose of the se-

curities without the approval of the bank. Until the disposal of the securities, changes of the fair

value are not treated as income, but recognized without affecting profit or loss in equity.

Financial assets measured at fair value through profit or loss

The group of the financial assets measured at fair value through profit or loss includes the

financial assets held for trading purposes, and financial assets measured at fair value at

initial recognition.

Financial assets are classified as held for trading purposes when they are purchased for disposal

in the near future. Derivatives including separately recognized embedded derivatives are also

classified as held for trading purposes, with the exception of derivatives classified as security or

designated as collateral, and that are effective as such. Gains and losses from financial assets

held for trading purposes are recognized in the Income Statement.

// 68


Financial assets held to maturity

Nonderivative financial assets with fixed or identifiable rates of payment and fixed maturities

are classified as financial assets held to maturity, if the Group intends and is able to hold them

to maturity. Following initial recognition, the financial assets held to maturity are measured at

depreciated cost, using the effective interest method. Gains and losses are recognized in the

result for the period in which the financial assets are derecognized or impaired.

Loans and receivables

Loans and receivables are nonderivative financial assets with fixed or identifiable payments

not listed on an active market. Following initial recognition, loans and receivables are measured

at depreciated cost of acquisition, using the effective interest method, minus possible impair-

ments. Gains and losses are recognized in the result for the period in which the financial assets

are derecognized or impaired.

Financial assets available for sale

Financial assets available for sale are nonderivative financial assets classified as available for sale,

and not allocated to one of the three above categories. After the initial recognition, financial assets

available for sale are measured at fair value. Gains or losses not realized are directly recognized in

equity. If such a financial asset is derecognized or impaired, the accumulated gain or loss previ-

ously recognized directly in equity will be recognized in the Income Statement.

Fair value

The fair value of financial assets traded on the organized markets is determined by the market

price (bid price) quoted at the balance sheet date. The fair value of financial assets for which

there is no active market is determined by using measurement methods. The measurement methods

include the use of the most recent transactions between knowledgeable, willing parties in an

arm’s length transaction, the comparison with the current fair value of another largely identi-

cal financial asset, the analysis of discounted cash flows, as well as the employment of other

methods of measurement.

Depreciated cost of acquisition

Financial assets held to maturity and loans and receivables are measured at depreciated cost of

acquisition. These are determined at purchase using the effective interest method, less possible

valuation adjustments and taking into account discounts and premiums, and include transaction

costs and fees which are an integral part of the effective interest rate.

// 69

3.13. Own shares

If the Group purchases own stock this will be deducted from equity. The purchase, sale and issue

or the inclusion of own stock are not recognized in the Income Statement.

3.14. Cash and cash equivalents

Cash and cash equivalents include cash on hand and in banks available immediately, having a

primary term of up to three months. Liquid funds are measured at their nominal value.

3.15. Provisions

According to IAS 37, provisions are made for present legal or constructive obligations as a result

of a past event linked with a probable outflow of resources, and the amount of which can be

reliably estimated. The amount recognized as a provision should be the best estimate of the

expenditure required to settle the present obligation at the balance sheet date. Provisions for

warranties are made on the basis of empirical values.

At balance sheet date, no noncurrent provisions requiring a discount are in existence.

3.16. Accounting of leasing agreements

The determination whether an arrangement contains a lease shall be based on the substance

of the arrangement at the time of conclusion, and requires an assessment of whether the

fulfillment of the arrangement is dependent on the use of a specific asset or assets, and the

arrangement conveys a right to use the asset. In accordance with the transition of IFRIC 4,

January 1, 2005 shall be regarded as the date of conclusion for leasing agreements entered into

prior to January 1, 2005.

Leasing agreements are classified according to IAS 17. Accordingly, differentiation is made

between financing leasing and operating leasing agreements. There are no financing leasing

agreements in the Group as of December 31, 2007.

Leasing agreements in which the economic ownership of the leased object remains with the

lessor, are rated as operating leasing agreements. In this case, rentals and lease payments are

recognized through profit and loss on a straight-line basis over the term of the respective

leasing agreement.

// 70


3.17. Pensions and other employee benefits following retirement

The Group has taken over a direct pension commitment vis-à-vis a managing director. It is a

defined benefit pension plan in the meaning of IAS 19.

The amount of the commitment arising from the defined benefit pension plan is generally deter-

mined by applying the projected unit credit method. Actuarial gains and losses are recognized as

profit or loss without delay.

The amount recognized as a defined benefit asset or liability encompasses the present value of

the defined benefit obligation, minus any past service cost not yet recognized, and minus the

fair value of the plan assets out of which the obligations are to be settled directly. The value

of an asset is restricted to the sum of the past service cost not yet recognized, and the present

value of a possible economic benefit in the form of a refund from the plan, or a reduction of

future contributions to the plan.

3.18. Share-based remuneration

Executives receive a share-based remuneration which is paid in cash (so-called “cash-settled”

transaction).

The costs arising from the cash-settled transaction are remeasured using a Monte-Carlo simula-

tion at fair value on every balance sheet date and performance date. Changes in the fair value are

recognized as profit or loss. The fair value will be distributed as profit or loss over the period up

to the date of the first exercising opportunity by recognizing a corresponding liability.

3.19. Expenses and revenues

Revenues are recognized when it is probable that the Group will have an economic benefit, and

the revenues can be reliably determined. Revenues are measured at the fair value of the coun-

ter-performance received. Discounts, rebates and sales tax or other levies are not taken into

account. In addition, the realization of revenues presupposes the fulfillment of the following

recognition criteria.

Product sales are recognized at the time of transfer of the prevailing risks and chances associated

with the ownership of the goods sold to the buyer and, if it is sufficiently probable that the Group

will have an economic benefit from the sale, based on the fair value of the counterperformance

received or still to be claimed.

// 71

Sales from services rendered are recognized at performance of the services, if the revenues can

be reliably measured and the inflow of the economic benefit from the business is sufficiently

probable. In case of long term service agreements, sales are generally distributed on a straight-

line basis.

Operating expenses are carried as income or expense if service is availed of or at the time it is

caused. Interest income and expenses are recognized in relation to the period earned or incurred.

3.20. Taxation

Current taxes

Current tax expenses are determined on the basis of the taxable income for the year. The taxable

income differs from the net profit for the year shown in the Income Statement as it excludes

expenses and revenues deductible in future years, or that will never be taxable or deductible. The

current tax liability of the Group is calculated on the basis of the effective tax rates, or from the

viewpoint of the balance sheet date, the tax rates that will be effective shortly.

Deferred taxes

Deferred taxes are recognized by reference to the differences between the carrying amount of

the assets and liabilities in the consolidated financial statements, and the respective tax valu-

ation within the scope of assessing the taxable income, and accounted for according to the

liability method. In general, deferred tax liabilities are shown in the Balance Sheet for all tax-

able temporary differences, and deferred tax refunds are recognized to the extent that taxable

profits are likely to be available, from which the temporary differences can be deducted. Such

assets and liabilities are not recognized if the temporary differences arise from goodwill or from

the initial recognition (with the exception of business combinations) of other assets and liabilities,

resulting from events which neither affect the taxable income nor the net profit for the year.

Deferred tax liabilities are constituted for taxable temporary differences, created from stakes

in subsidiaries, unless the Group can control the reversal of the temporary differences, and it is

probable that the temporary difference cannot reverse itself in the foreseeable future. Deferred

tax assets constituted by temporary differences in connection with investments and shares

which are only recognized if it is probable that sufficient taxable income is available for the

utilization of the temporary differences, and if it can be assumed that they will reverse in the

foreseeable future.

The carrying amount of the deferred tax assets is examined each year at the reporting date and

reduced if it is no longer likely that sufficient taxable income will be available to realize the claim

in full or in part.

// 72


Deferred tax assets and liabilities are determined on the basis of the expected tax rates (and tax

laws) that are likely to be in effect at the time of fulfillment of the liability or the realization of

the asset. The measurement of deferred tax assets and liabilities reflects the fiscal consequences

that would arise from the manner the Group expects to fulfill the liability and realize the asset,

respectively.

Deferred tax assets and liabilities are offset if a legally enforceable right to set off current tax

assets against current tax liabilities exists, and if the deferred tax assets and tax liabilities relate

to income taxes levied by the same tax authority, and the Group intends to settle its current tax

assets and liabilities on a net basis.

Current taxes and deferred taxes of the period

Current and deferred taxes are recognized as expense or revenue unless they relate to items that

were directly recognized in equity. In this case, the tax is also to be recognized directly in equity.

No recognition is made if the tax effects are the result of the initial accounting of a business

combination. In the event of a business combination, the tax effect has to be accounted for in

calculating the goodwill, or in determining the excess of the share of the buyer in the fair value of

the identifiable assets, liabilities and contingent liabilities of the acquired company over the cost

of acquisition of a business combination.

Sales tax

Revenues, expenses and assets are usually recognized after deduction of sales tax. Exceptions are

the following:

On the one hand, if at a purchase of assets or services the sales tax cannot be claimed by the

tax authorities, the sales tax paid is recognized as part of the manufacturing costs of the asset

or as part of the expenses, respectively, on the other hand, receivables and liabilities are recog-

nized together with the sales tax included therein. The sales tax refunded by or payable to the

tax authority is recognized in the Consolidated Balance Sheet under receivables or liabilities,

respectively.

3.21. Estimates in connection with preparing the consolidated financial statements

The preparation of the consolidated financial statements according to IFRS requires assumptions

and estimates for some items that will have an effect on the recognition and measurement of the

assets and liabilities in the Balance Sheet, or on the amount of revenues and expenses stated in

the Income Statement of the Group, and on the reported contingent assets and liabilities.

In addition, the assumptions and estimates refer in particular to the practicability of future tax

reliefs. The estimates regarding deferred taxes on loss carryforwards highly depend on the

development of revenues of the respective taxable entities.

// 73

Thus, the actual amounts arising in future periods may deviate from the estimates.

Impairment of non-financial assets

On each balance sheet date, the Group determines whether there are indications for an impairment

of nonfinancial assets. Goodwill and other intangible assets with an indefinite useful life are

tested for respective indications of impairment at least once a year. Other nonfinancial assets are

subject to an impairment test if the carrying amount is likely to exceed the achievable revenue.

Share-based remuneration

In the Group, the expenses of granting equity instruments to employees are measured at fair

value of the equity instruments at the respective balance sheet date. An adequate measurement

procedure must be stipulated to estimate the fair value of equity instruments granted; this will

depend on the conditions under which the equity instruments are granted. Furthermore, the

definition of appropriate data to be included in the measurement procedure, among them in

particular the estimated option period and volatility, and of respective assumptions are required.

Development costs of intangible assets

Development costs of an intangible asset are capitalized if it can be reasonably estimated that

the technical realization is guaranteed, and a future inflow of funds or cost savings can be

achieved by the marketability and internal benefit of the asset.

Receivables from production contracts

Specifically negotiated production contracts arising within the Group from customized project

and installation services, the pro-rata realization of gains of which is made according to the

percentage-of-completion method (PoC method). In general, the stage of completion is deter-

mined on the basis of the costs incurred in relation to the total expected costs.

The PoC method is based on estimates. Due to the inherent uncertainties, the estimates might

have to be adjusted on account of the applications required up to the completion of the contract,

including those for contractual penalties and warranties. Such corrections of expenses and

revenues are shown in the period in which the requirement for adjustment is ascertained.

The consolidated financial statements of Digital Identification Solutions AG as of December 31,

2007 are the first IFRS financial statements of the Group in the meaning of IFRS 1 “First-time

Adoption of IFRS”. Prior to this, the financial statements were published according to HGB (German

Commercial Code).

The transition to IFRS was made by applying IFRS “First-time Adoption of IFRS“ with retroactive

effect from January 1, 2006. The effects of the transition as of January 2006 were offset in the

IFRS opening balance sheet with revenue reserves, not affecting profit or loss.

4. First-time Adoption

of IFRS

4. First-time Adoption

of IFRS

// 74


The consolidated financial statements as of December 31, 2005 set up under previous GAAP were

reconciled with the accounting and measurement methods of IFRS.

The effects of the transition to IFRS accounting on Group equity and the net profit of the Group

for the reporting dates of January 1, 2006 and December 31, 2006, or on the consolidated profit

for the year in the consolidated fiscal year 2006 are shown in the following.

The accounting and measurement methods and the Notes to the IFRS consolidated financial

statements for the fiscal year 2007 are based on the same accounting and measurement methods

underlying the comparable figures for the fiscal year 2006. The accounting and measurement

methods are explained under item 3.

Transition of Group equity from HGB to IFRS


Jan. 1, 06 Dec. 31, 06

Equity acc. to HGB (German Commercial Code) 2,746 13,974

Capitalized start-up costs a – 40 – 195

Recognition of self-created assets b 106 97

Derecognition of provisions c 178 26

Setting-off of own shares d 0 – 91

Amortization of goodwill e 0 16

Valuation adjustments in noncurrent and current assets h 0 – 53

Deferred tax liabilities – 116 – 41

Other effects – 10 – 18

Equity in acc. with IFRS 2,864 13,715

// 75

Transition of the Group annual result 2006 from HGB to IFRS

all fi gures in € thousands Note 2006

Net loss for the period ending Dec. 31, 2006 acc. to HGB – 350

Derecognition of capitalized start-up costs a – 155

Recognition of self-created assets b 37

Impairment of self-created assets b – 46

Derecognition of provisions c – 150

Impairment of own shares d 34

Amortization of goodwill e 16

Valuation adjustments in noncurrent and current assets f – 53

Costs of acquiring own equity g 1,132

Deferred tax liability 64

Other effects – 7

Net profit for the period ending Dec. 31, 2006 acc. to IFRS 522

Notes on the transition of equity and the annual result from HGB to IFRS

a. The start-up and expansion expenses of the entities in Dubai, Beijing and Mexico were

capitalized as accounting assistance and depreciated over a period of three to four years in

the consolidated financial statements according to HGB. As such expenses do not fulfill the

recognition criteria of an asset according to IFRS, this asset was derecognized.

b. In deviation of HGB standards, internally generated intangible assets are capitalized according

to IAS 38. These predominant concern printer drivers which the company generated inter-

nally or within a production contract, and which are sold together with the printer solutions.

Depreciation is made over the estimated useful life.

c. According to IAS 37.10, provisions can only be recognized for commitments created by a legal

or constructive obligation. Provisions lacking a legal or constructive obligation were derecog-

nized in the transition from HGB to IFRS.

d. Own shares are not recognizable as assets according to IAS 32.33 but shown as an item to be

deducted in equity. The item is recognized with the purchase cost. Changes in the valutation of

the own shares acc. to HGB are to eliminated.

// 76


e. The goodwill arising from capital consolidation according to HGB is depreciated as scheduled.

According to IFRS, goodwill is not subject to scheduled depreciation, instead an impairment

test is effected on an annual basis.

f. Valuation adjustments in fixed and current assets made according to adjustments to HGB

standards are not recognizable according to IFRS.

g. According to IAS 32.37, the equity-raising measures (i.e. the costs of the IPO), recognized

as expenses in HGB, are to be reported as an item to be deducted from equity. The amount

of € 1,132,000 recognized as costs of the IPO according to HGB, was deducted from capital

reserves during the transition to IFRS.

The composition of the companies included in the consolidated financial statements has

changed during fiscal year 2007.

On August 14, 2007, a 100 percent stake in vps ID Systeme GmbH, Ettlingen (hereinafter “vps

GmbH”) was acquired with the signing of the purchasing agreement of the same date. vps

GmbH is included in the consolidated financial statements at the acquisition date.

In accordance with IFRS 3.36 et seq., the costs of acquisition were allocated to the acquirer’s

identifiable and assumed assets, liabilities and contingent liabilities at their fair values at that

date. In this connection, the hidden reserves in the balance sheet items intangible assets,

property, plant and equipment and receivables from production contracts (PoC) were disclosed;

no recognizable hidden encumbrances were identified. The capital consolidation resulted in

goodwill totaling € 2,339,000. Since a general revaluation of the assets and liabilities of the

subsidiary was made prior to capital consolidation, the difference is fully allocated to goodwill.

The fair value of the identifiable assets and liabilities of vps ID Systeme GmbH at the date of

acquisition and the respective carrying amounts immediately prior to the date of acquisition are

shown as follows:

5. Acquisitions5. Acquisitions

// 77


Fair value at acquisition

date

Previous carrying amount

Intangible assets 510 13

Property, plant and equipment 198 161

Inventories 44 462

Receivables and other assets 522 522

Receivables from production contracts 475 0

Cash and cash equivalents 222 222

Total assets 1,971 1,380

Trade payables 51 51

Other liabilities 396 396

Provisions 289 289

Deferred tax liabilities 174 0

Advances received 343 343

Borrowings 2 2

Total of the liability items 1,255 1,081

Net assets 716

Goodwill 2,339

Total costs of purchase 3,055

The goodwill of € 2,339,000 encompasses the fair value of expected synergies from the acqui-

sition of the company and the customer base, which was not recognized separately since the

recognition criteria of IAS 38 were not fulfilled.

The costs of acquisition of the business combination amounted to € 3,055,000 and also encompass

the directly allocable expenses. The cash flow arising from the acquisition of the entity is shown

as follows:

// 78


all fi gures in € thousands Dec. 31, 2006

Cash acquired with the subsidiary 222

Outflow of cash (purchase price) – 3,055

Actual outflow of cash 2,833

The acquisition of vps GmbH resulted in material changes to the Consolidated Balance Sheet

as of December 31, 2007 and the 2007 Income Statement. The effects on the Consolidated

Income Statement are the following:


Consolidated Income Statement 2007, unadjusted

Adjustments vps GmbH

Consolidated Income Statement

2007, adjusted

Sales revenues 18,256 1,058 17,198

Other operating income 288 56 232

Changes in inventories 72 72 0

Work performed and capitalized 306 65 241

Cost of materials – 9,497 – 98 – 9,399

Expenses incurred by employee benefits – 4,405 – 620 – 3,785

Depreciation and amortization expense – 390 – 82 – 308

Other operating expenses – 4,472 – 259 – 4,213

Earnings from operations 158 192 – 34

Other interest and similar income 4 3 1

Other interest and similar expenses – 20 – 3 – 17

Other income from financial assets 145 0 145

Financial performance 129 0 129

EBT – Earnings before income taxes 287 192 95

Taxes on income – 276 – 57 – 219

Net profit / loss for the period 11 135 – 124

vps GmbH contributed € 135,000 to the consolidated profit for the year since the date of

acquisition.

// 79

6.1. Sales revenues

Sales revenues according to product lines are composed as follows:

all fi gures in € thousands 2007 2006

Hardware 6,353 5,924

Consumables 10,081 7,728

Software, Spare Parts and Services 1,822 1,060

Total 18,256 14,712

The geographic allocation of sales is listed in the segment report. The disproportionate increase

in sales of software, spare parts and services is attributable to the inclusion of vps GmbH at the

date of acquisition. Sales revenues of vps GmbH from initial consolidation up to the reporting

date, at € 1,058,000, are attributable to the segments Software and Services.

6.2. Other operating income

In 2007, total other operating income of the Group was at € 288,000 (2006: € 240,000) and is

composed of currency gains at € 106,000 (2006: € 62,000), revenues from noncash income

totaling € 101,000 (2006: € 66,000), and other operating income, at € 81,000 (2006: € 112,000).

Total income of € 56,000 is included in other operating income attributable to the acquisition.

6. Notes to the Consolidated

Income Statement

6. Notes to the Consolidated

Income Statement

// 80


6.3. Other operating expenses

Other operating expenses encompass the expenses for distribution, marketing, logistics and

general administrative expenses.

Other operating expenses are composed as follows:


Travelling expenses 506 391

Trade fairs and sales costs 1,240 574

Exchange rate losses and allowances 213 137

Start-up costs 373 232

Rents and room costs 243 197

Other administrative expenses 1,571 925

Exchange differences 326 250

Total 4,472 2,706

The start-up costs include the set-up costs for the entities in Beijing and Mexico.

Of the other operating expenses, € 259,000 are attributable to vps GmbH.

// 81

6.4. Cost of materials

Cost of materials encompasses the purchased goods and services included in the compilation of

sales, and totaled € 9,497,000 in 2007 (2006: € 8,939,000). In relation to sales, the gross profit

margin is 47.98 percent (2006: 39.24 percent). Included in cost of materials are the valuation adjust-

ments on inventories totaling € 64,000 (2006: € 120,000).

6.5. Expenses incurred by employee benefits

Expenses from employee benefits include the following:


Wages and salaries 3,843 2,678

Social security contributions and retirement benefit costs 562 397

Total 4,405 3,075

The acquisition of vps GmbH contributed to the increase in expenses for employee benefits, at

€ 620,000.

The Digital Identification Solutions Group launched a share option program to promote long-

term motivation and commitment of its employees. The pro-rata expenses of € 32,000 are shown

under wages and salaries.

Average Group employees

2007 2006

Officers 12 8

Employees, commercial 34 20

Employees, technical 30 14

Total 76 42

The two members of the Management Board and the two apprentices are not included in the

annual average number of employees.

At balance sheet date, the Digital Identification Solutions Group employed 96 persons (previous

year 51 employees); there were two apprentices at year-end (previous year one apprentice). In

the regions (in particular Dubai and Asia) and in the Group headquarters the number of staff was

noticeably increased. The acquisition of vps GmbH alone contributed 26 persons.

// 82


6.6. Depreciation and amortization expense

Regarding the composition of depreciation, reference is made to the Statement of Changes to As-

sets, presented on a separate page to the Notes. A total of € 82,000 of depreciation and amortiza-

tion are attributable to vps GmbH.

6.7. Financial performance

The financial performance is shown as follows:


Income from other financial assets 145 454

Interest and similar income 4 17

Interest expense and similar costs – 20 – 41

Total 129 430

6.8. Earnings per share

Earnings per share are determined according to IAS 33. Basic earnings per share do not account

for any options and is determined by dividing the net profit or loss, after minority shares, by the

average number of shares.

2007 2006

Annual result in thousand euros 11 522

Average number of shares in circulation as of December 31, in thousand units 2,134 2,141

Average number of the shares drawn on for the calculation of the diluted result as of December 31, in thousand units 2,134 2,141

Earnings per share in euros, basic 0.01 0.24

Earnings per share in euros, diluted 0.01 0.24

// 83

The average number of shares outstanding developed as follows in 2007:

Date

Share buyback

Issued shares

Ownshares

Shares in circulation

Days

Weighted average

01 / 2007 2,143,050 9,095 2,133,955 104 / 360 616,475

04 / 2007 0 2,143,050 121 / 360 720,303

08 / 2007 1,356 1,356 2,141,694 30 / 360 178,475

09 / 2007 17,689 19,045 2,124,005 60 / 360 354,001

11 / 2007 4,730 23,775 2,119,275 29 / 360 170,719

12 / 2007 4,166 27,941 2,115,109 16 / 360 94,005

Total 2,133,978

The date of additional purchase was stated at mid-month to avoid a list of many smaller

additional purchases during the period from August to December 2007.

During the first half of 2007, 9,095 shares were issued to employees as incentives.

The average number of shares outstanding developed as follows in 2006:

Date

Share buyback

Issued shares

Ownshares

Shares in circulation

Days

Weighted average

05 / 2006 2,143,050 2,143,050 153 / 229 1,431,819

10 / 2006 3,025 3,025 2,140,025 30 / 229 280,353

11 / 2006 4,875 7,900 2,135,150 30 / 229 279,714

12 / 2006 1,195 9,095 2,133,955 16 / 229 149,097

Total 2,140,983

The date of additional purchase was stated at mid-month to avoid a list of many smaller

additional purchases.

// 84


7.1. Intangible assets

Reference is made to the Statement of Changes to Assets as annex to these Notes with respect

to the development of intangible assets.

Depreciation on intangible assets is recognized in the Income Statement under item expenses for

scheduled depreciation.

Intangible assets are composed as follows:

all fi gures in € thousands Dec. 31, 2007 Dec. 31, 2006

Goodwill 2,458 119

Internally generated intangible assets (software) 864 108

As of December 31 3,322 228

During the acquisition of vps GmbH, hidden reserves on internally generated assets of € 497,000

were disclosed. These will be depreciated as scheduled over three to ten years.

As of December 31, 2007, intangible assets amounting to € 568,000, and property, plant and

equipment of € 170,000 are attributable to vps GmbH.

Goodwill generated within the scope of first consolidation is reported under intangible assets.

Goodwill is not depreciated as scheduled, but is subject to annual impairment tests.

Goodwill developed as follows:


As of January 1 119 0

Additions 2,339 119

As of December 31 2,458 119

7. Notes to the Consoli-

dated Balance Sheet

7. Notes to the Consoli-

dated Balance Sheet

// 85

Goodwill acquired as part of a business combination is allocated to the cash-generating units,

defined as individual shareholdings, to examine its value. The computational formula is identical

for both cash-generating units since the essential parameters are the same for all shareholdings.

The amount which can be achieved is determined based on the computation of a benefit. This

computation is prepared on the footing of cash flow forecasts, based on financial projections

approved by management for a period of three years. The discounting rate (WACC) used for the

forecast lies between 13 percent and 16 percent. After a period of three years, cash flows are

extrapolated, using a growth rate of around 2 percent, which follows a conservative approach

regarding the estimated growth rate of the shareholdings.“

No requirement for impairment of goodwill arising from consolidation measures arose from the

impairment tests conducted in fiscal year 2007.

7.2. Property, plant and equipment

Among the major additions to property, plant and equipment is the acquisition of a property in

Singapore, which is being used by the subsidiary itself. It concerns one floor of an office building

purchased at SGD 248,000 (€ 116,000) in February 2007. The purchasing costs are depreciated

over a period of 48 years.

The other additions to property, plant and equipment mainly concern equipment for the furnishing

of new work places.

Property, plant and equipment amounting to € 170,000 is attributable to vps GmbH.

Reference is made to the Statement of Changes to Assets as annex to these Notes with respect

to the development of property, plant and equipment.

7.3. Financial assets available for sale

This item includes securities which serve as collateral for the credit line and a stand-by letter of

credit provided by the Deutsche Bank AG in favor of a supplier of the company. The securities

were purchased on January 5, 2007, at € 2,202,000, and reported at a fair value of € 1,996,000 at

balance sheet date. The impairment loss of € 206,000 is shown separately in equity.

// 86


7.4. Other noncurrent assets


Shares in DISO, Mexico 104 0

Other receivables 35 0

Total 139 0

This item essentially concerns the 100 percent stake in the entity Digital Identification Solutions,

Mexico. At reporting date, the company is in the formation and start-up stage and was not

included in consolidation at balance sheet date. The amount shown reflects the depreciated cost.

7.5. Inventories


Finished goods and merchandise 3,492 2,057

Goods in transit 677 258

Total 4,169 2,315

Goods in transit are essentially shipments from suppliers in the Far East to DISO AG in Esslingen

that were seaborne to Germany at balance sheet date.

The impairment of inventories recognized as expenses amount to € 64,000 (2006: € 120,000).

These expenses are recognized under cost of materials.

Inventories are distributed in percent among the following companies:

// 87

all fi gures in % Dec. 31, 2007 Dec. 31, 2006

Digital Identification Solutions AG 64.2 77.0

Digital Identification Solutions LLC, USA 22.6 14.0

Digital Identification Solutions Pte., Singapore 12.0 9.0

Digital Identification Solutions Beijing 0.0 0.0

vps GmbH, Ettlingen 1.2 n / a

Total 100 100

7.6. Trade receivables and receivables from production contracts


Receivables from production contracts (costs incurred up to the balance sheet date, plus recorded gains) 617 0

Minusprogress billings – 407 0

210 0

Trade receivables, gross 5,812 2,372

Impairments – 120 – 90

Total 5,692 2,282

Trade receivables primarily consist in the following currencies: euros, US dollars and Singapore

dollars. Trade receivables of € 457,000 are attributable to vps GmbH, which is included in the

consolidated financial statements for the first time.

Under receivables from production contracts, less payments received from progress billings,

those customized production contracts are recognized as assets when the cost of production,

including profits, exceeds the payments received. Projects in process at balance sheet date

incurred expenses of € 349,000 to date. The respective partial profits according to the stage of

completion amount to € 268,000.

Write-downs on an item-by-item basis on trade receivables were made in 2007, at € 45,000

(2006: € 49,000). Uncollectible accounts receivable of € 53,000 (2006: € 14,000) were derecognized.

// 88


€ 19,000 arising from the translation of foreign currency receivables (previous year € 43,000) with

the exchange rate of the balance sheet date are recognized under other operating expenses.

Trade receivables do not bear interest and usually have a term of 30 to 90 days.

The risk of default regarding trade receivables was accounted for by respective write-downs on

an item-by-item basis, and for accounts receivable not entailing individual risks from portfolio

adjustments. An amount of € 120,000 (previous year € 90,000) of write-downs on an item-by-

item basis is actually included in trade receivables, € 0 thereof were attributed to vps GmbH.

7.7. Other current assets

Other current assets in the amount of € 800,000 (previous year € 738,000) essentially include tax

refunds of € 457,000, as well as advance payments on expenses to be incurred in the following

year, for the most part for trade fairs, at € 137,000. A total of € 102,000 are attributable to vps GmbH.

7.8. Issued capital and reserves

The Group equity and its components are shown in detail in the Statement of Changes in Equity.

Issued capital

The capital stock of Digital Identification Solutions AG as of December 31, 2007 remains

unchanged compared to the preceding year, at € 2,143,000. It is divided into 2,143,050 no-par

bearer shares. Each share has an arithmetic interest in the capital stock of € 1 (previous year € 1).

Outstanding shares

Taking into consideration the 27,941 own stock purchased up to December 31, 2007, there are

still 2,133,978 shares of a total of 2,143,050 shares outstanding. During fiscal 2007, another 27,941

shares were purchased within the scope of the stock buyback program renewed in 2007.

// 89

Authorized capital

The Management Board is authorized, with the approval of the Supervisory Board, to increase the

capital stock of the company, once or repeatedly, until March 29, 2011, by issuing new ordinary

bearer shares against cash deposits or contributions in kind, totally or in partial amounts,

however, only up to a maximum amount of € 1,071,525.00 (authorized capital 2006 / I). The

Management Board is authorized, with the approval of the Supervisory Board, to exclude the

subscription right of the shareholders, once or repeatedly,

(a) if the shares are issued against contribution in kind;

(b) in order to exempt fractional amounts from the subscription right of the shareholders;

(c) in order to extend subscription rights to bearers of options, convertible bonds or convertible

profit-sharing certificates to be issued;

(d) if the issue price does not significantly fall below the market price in the meaning of Sec-

tions 203 (1 and 2), 186 (3) sentence 4, AktG (German Stock Corporation Act). This authorization,

however, is only valid under the proviso that the shares issued under the exclusion of the

subscription right according to Section 186 (3) sentence 4 AktG shall not exceed 10 percent in

total of the capital stock, neither at the time of effectiveness, nor at the time this authorization

is exercised. The disposal of own shares has to be counted towards this 10 percent restriction

of the capital stock, inasmuch as the disposal takes place at the time this authorization or

another authorization taking its place comes into effect, according to Section 186 (3) sentence

4 AktG, under exclusion of the subscription right. Furthermore, the shares issued or to be

issued to service debentures with conversion option or option right, respectively, have

also to be counted towards this restriction of 10 percent of the capital stock, inasmuch as the

debentures were issued on account of an authorization effective at the time this authorization

or another authorization taking its place was in effect, according to the application of Sec-

tion 186 (3) sentence 4 AktG, under exclusion of the subscription right.

The Management Board is authorized, with the approval of the Supervisory Board, to set down

the further contents of the stock rights and the conditions of the issue of the shares.

In deviation of Section 60 (2) AktG, the entitlement of new shares in profits can be specified in

case of capital increases.

// 90


Capital reserves

The capital reserves include the revenues from the IPO which exceed the par value of the shares,

as well as the costs of the IPO as valuation item from equity.

Composition and development of the capital reserves:


Other capital reserves 970 970

Shares exceeding par value (share premium) 11,021 11,021

Costs of acquiring own equity – 1,132 – 1,132

Total 10,859 10,859

Valuation items for own shares

During the period from September 2007 to December 2007, Digital Identification Solutions AG

purchased a total of 27,941 treasury shares owned by the company at balance sheet date. At

balance sheet date, the treasury shares are valued at cost, totaling € 228,703, and represent

10.7 percent of the capital stock. They are reported as valuation items of equity.

Provision for currency exchange differences

The provision for currency exchange differences serves the recognition of differences from the

currency translation of the financial statements of foreign subsidiaries.

Gains not realized

This item covers the changes of the fair value of the financial investments available for sale.

// 91

7.9. Provisions for pensions

The pension provisions represent the nonforfeitable claims of a managing director based on a

direct pension commitment. In general, defined benefit plans are determined by using the current

single-premium method. For reasons of materiality, the provision is recognized according to the

part-value procedure permitted by and common in commercial practice. An evaluation according

to IFRS was waived for reasons of materiality.

Pension commitments are valued according to the “2005 G reference tables” of Prof. Klaus Heubeck,

as of December 31, 2007.

The provision for pensions amounts to € 19,000 (2006: € 0).

The pension costs of around € 2,000 are shown as personnel expenses under social security

expenditures.

According to HGB, a discount rate of 6 percent was used. This largely corresponds to the discount

rate required by IAS 19 under consideration of the present capital market development.

7.10. Current provisions


Accrued vacation 170 107

Warranties 41 12

Internal annual financial statement costs 23 0

Other 34 58

Total 268 177

A provision for warranties for repairs and complaints was made on the basis of past empirical

values. It can be expected that the major part of these costs will be incurred within the next fiscal

year. The assumptions underlying the calculations for the warranty provision are based on the

current level of sales and the current available information on complaints for sold products within

the period of warranty.

Other provisions include amounts for overtime work and the obligations to preserve

business records.

// 92


Current provisions developed as follows:


As of Jan. 1, 2007 Availment

Changes in the scope of consolidation Additions

As of Dec. 31, 2007

Provisions 177 – 161 114 138 268

Total 177 – 161 114 138 268

The changes in the consolidated companies refer to the acquisition of vps GmbH.

7.11. Trade payables

Trade payables amounting to € 3,177,000 (previous year € 1,690,000) have a remaining term of

up to one year.

vps GmbH contributed to the trade payables, at € 79,000.

7.12. Other current liabilities

Other current liabilities totaling € 1,521,000 (previous year € 280,000) include, among other

amounts, liabilities from down-payments received from customers for goods and services pro-

vided in the following year, in the amount of € 703,000 (previous year € 23,000) of which € 72,000

are attributable to vps GmbH, and other financial liabilities of € 818,000 (previous year € 258,000)

as of December 31, 2007. Of this amount, € 72,000 as well as other financial liabilities of € 818,000

(previous year € 258,000) are attributable to vps GmbH as of December 31, 2007. The main items

include liabilities from variable remunerations, € 176,000 (previous year € 121,000), social insurance

contributions and wage tax, € 115,000 (previous year € 43,000), and fees for the preparation and

audit of the financial statements in the amount of € 94,000 (previous year € 31,000).

8.1. General

In general, Digital Identification Solutions AG and its domestic subsidiaries are subject to

corporation tax and trade tax. The corporation tax rate is 25 percent. In addition, a solidarity

surcharge of 5.5 percent is levied. The trade earnings tax amounts to approx. 15 percent of the

taxable income and is deductible from the corporation tax payable on the respective income. For

the domestic companies, this results in a tax burden of 38.3832 percent.

8. Taxes on Income8. Taxes on Income

// 93

A reduced tax rate of 29.5 percent is applied to calculate the deferred taxes for the domestic

companies in 2007. Within the scope of the business tax reform 2008, resolved in summer 2007,

the corporation tax rate of 25 percent will be reduced to 15 percent, and the index for trade

tax from 5 percent to 3.5 percent. Assuming an average tax assessment rate of 400 percent,

this leads to an income tax burden of 29.83 percent. The trade tax assessment rate in Esslingen

amounts to 390 percent, so that an average tax burden of the domestic companies of 29.5 per-

cent is assumed for the calculation of the deferred taxes as of 2007, based on the legally effec-

tive tax rates.

In the foreign companies, the tax rates effective at balance sheet date are used to calculate the

current and deferred taxes.

8.2. Income taxes recognized in the Income Statement

The income taxes are composed as follows:


Actual income taxes of the current fiscal year 165 43

Income taxes, previous years (income) – 17 – 39

Deferred taxes 128 – 51

Income tax expense / income (–) 276 – 47

The income taxes include the domestic corporation tax including the solidarity surcharge as well as

the trade tax. The comparable taxes of the foreign subsidiaries are also reported under this item.

Tax transition

The difference between the expected and the recognized income tax burden can be taken from

the following transitional statement:

// 94



Earnings before taxes 287 475

Theoretical tax expense at tax rate of 29.5 % (previous year: 38.8332 %) 85 182

Effects of non-tax-deductible expenses 48 0

Tax-free dividends (–) – 33 0

Tax-free capital gains (–) – 10 – 126

Use of previously unrecognized deferred taxes on loss carryforwards 0 – 18

Tax refund owing to loss carryback – 17 – 39

Effects of unused tax losses and set-off options not recognized as deferred tax claims 227 0

Effects of deviating tax rates on subsidiaries in other legal systems – 13 – 50

Effects of changed income tax rate from 38.3832 % to 29.5 % – 11 0

Income tax expense / income recorded in the Income Statement (–) 276 – 47

Effective tax rate (in %) 95.2 % – 9.9 %

Deferred tax assets and liabilities have to be recognized in the noncurrent items according to

IFRS, however, they also include current assets and liabilities realized within twelve months fol-

lowing the balance sheet date. At balance sheet date, the deferred taxes are composed as follows:


Consolidated Balance Sheet, Dec. 31, 2007

Consolidated Balance SheetDec. 31, 2006


2007


2006

Deferred tax liabilities

Internally generated intangible assets 241 37 57 – 3

Measurement differences property, plant and equipment 20 0 9 – 13

Financial assets available for sale 3 0 0 0

Provisions for operating expenses 2 11 – 9 – 35

Foreign currencies

Receivables from productioncontracts 79 0 62 0

Other effects 0 0 0 0

Deferred tax liabilities 345 48

Deferred tax expense / (income) 128 – 51

// 95

Deferred taxes are recognized by reference to the differences between the carrying amount of

the assets and liabilities in the consolidated financial statements, and the respective tax valua-

tion within the scope of assessing the taxable income, and accounted according to the liability

method. Deferred tax liabilities are generally accounted for all temporary differences resulting

from the various valuation policies according to the national accounting standards and IFRS.

Deferred tax liabilities of € 345,000 were reported at balance sheet date (previous year € 48,000).

The deferred tax liabilities are divided among the AG, at € 85,000, the subsidiaries in the USA, at

€ 12,000, and vps GmbH, at € 248,000.

8.3. Current tax refunds and liabilities

Current tax refunds

This item is composed of refundable prepaid taxes of the parent company in 2007, totaling

€ 146,000, and loss carrybacks for 2005 and 2006, at € 214,000.

Current tax liabilities

company all fi gures in € thousands Dec. 31, 2007 Dec. 31, 2006

Digital Identification Solutions AG, Germany 0 7

Subsidiary in the USA 126 0

Subsidiary in Singapore 35 46

Subsidiary in the People‘s Republic of China 0 7

Total 161 60

// 96


8.4. Deferred tax claims not recognized

The Group disposes of tax loss carry forwards of around € 1,830,000 (previous year € 752,000).

No deferred tax assets were recognized in this case.

The remuneration plan based on shares is shown below.

Based on the resolution of the ordinary shareholders’ meeting of Digital Identification Solutions

AG on May 24, 2007, the Management Board is authorized to launch an option plan of Digital

Identification Solutions AG according to the following conditions, and to extend options

( subscription rights) for up to 170,000 shares of Digital Identification Solutions AG to those

entitled to a subscription right. Inasmuch as members of the Management Board are affected, the

Supervisory Board will be authorized accordingly.

Each subscription right entitles to the purchase of one share of Digital Identification Solutions AG.

The group of persons with subscription rights encompasses the members of the Management

Board, the heads of the branch offices and the departmental heads of Digital Identification Solu-

tions AG, as well as the managing bodies of the companies either dependent on Digital Identifi-

cation Solutions AG, or in which DISO holds a majority. The total volume of the subscription rights

is divided among the persons so entitled as follows: 40,000 are attributable to the members of

the Management Board, 65,000 to the heads of the branch offices and the departmental heads of

Digital Identification Solutions AG, and 65,000 to the managing bodies of the companies either

dependent on Digital Identification Solutions AG, or in which DISO holds a majority.

The purchase of the shares of Digital Identification Solutions AG is carried out at the exercise

price. The exercise price corresponds to the average closing price of the voting shares of Digital

Identification Solutions AG during the ten trading days immediately preceding the time of the

allocation of the subscription rights. The trading system XETRA (or a comparable follow-up

system) will be decisive for the market price of the share of Digital Identification Solutions AG.

Section 9 AktG shall remain unaffected.

The subscription rights were offered or allocated, respectively, to the persons entitled, once or in

several tranches up to August 1, 2007.

A subscription right entitles to the purchase of one share as soon as the qualifying period for the

initial exercising opportunity is expired. The qualifying time for the first exercising is two years

from the allocation of the subscription rights. Following the expiration of the qualifying time, the

subscription rights may be exercised in full or partly during a period of five years as from the al-

location of the subscription rights. Exercising the subscription right is restricted to three exercise

9. Share-based

Remuneration

9. Share-based

Remuneration

// 97

periods in a fiscal year. Each exercise period has a duration of 15 trading days, beginning on the

sixth trading day following the day of publication of the quarterly figures of Digital Identification

Solutions AG on its website for the first, second and third quarter of the financial year. In the

event the expiration of the qualifying period falls into an exercise period, the Management Board

and the Supervisory Board may resolve corresponding measures to observe the ban of insider

transactions in advance. Inasmuch as the exercise period falls into a blocking period, the exercise

period will be curtailed. Blocking periods are the following:

(a) The period from the end of the seventh banking day up to the end of the third bank-

ing day following a shareholders’ meeting of Digital Identification Solutions AG; if the

participation at the shareholders’ meeting is linked to a deposit of the shares prior to

the shareholders’ meeting in the meaning of Section 123 (2) AktG, the period between

the end of the last day of deposit for the shares and the end of the third banking day

following the shareholders’ meeting will be decisive;

(b) a period of 15 calendar days prior to the end of the financial year of

Digital Identification Solutions AG;

(c) the period beginning with the day on which Digital Identification Solutions AG publishes an

offer for the subscription of new shares in a journal for statutory market advertisements of

a stock exchange, up to the end of the last day of the subscription period.

Subscription rights may be exercised if (alternatively)

(a) the market price of the share of Digital Identification Solutions AG in the reference

period is more than 20 percent points better than the TecDax (or a comparable follow-

up index). Decisive for the comparison of the development of the TecDax (or a compa-

rable follow-up index) and the price of the share of Digital Identification Solutions AG

is the respective difference (in percent points) between the opening and closing price

of the reference period under consideration. The opening price (100 percent points) to

determine the development of the comparable index is the value of the TecDax at the

end of the day on which the subscription rights are deemed to have been allocated. The

opening price (100 percent points) to determine the development of the price of the

share of Digital Identification Solutions AG is the closing price of the share of Digital

Identification Solutions AG on the day on which the subscription rights are deemed to

have been allocated. The closing price (in percent of the opening price) to determine

the development of the TecDax is the arithmetical mean of the values of the TecDax at

the respective end of the last 20 trading days prior to the first day of the respective ex-

ercise period. The closing price (in percent of the opening price) for the development

of the share of Digital Identification Solutions AG is the arithmetical mean of the closing

prices of the share of Digital Identification Solutions AG on the last 20 trading days prior

to the first day of the respective exercise period;

// 98


(b) at the end of the last trading day prior to the first day of the respective exercise period

of the subscription rights, the closing price of the share of Digital Identification Solu-

tions AG is at least € 16.50.

The trading system XETRA (or a comparable follow-up system) will be decisive for the market

price of the share of Digital Identification Solutions AG.

In the event the company increases its capital stock during the term of the subscription rights

by awarding a direct or indirect subscription right to the shareholders, the exercise price will be

reduced according to the option terms. No reduction will take place if the persons entitled are

granted a direct or indirect subscription right to the new shares, which will put them in a position

as though they had already exercised the subscription rights from the option plan. The option

terms can provide rules to adapt to other cases of capital, structural or comparable measures.

Section 9 AktG shall remain unaffected.

The Management Board will be authorized to stipulate further conditions of the option plan for

the employees of Digital Identification Solutions AG, and the managing bodies of its dependent

companies. Inasmuch as members of the Management Board of Digital Identification Solutions AG

are affected, the Supervisory Board will be authorized accordingly.

These further conditions of the option plan encompass, in particular, conditions regarding the

granting and exercising of the subscription rights, the day of the allocation of the subscription

rights within the set period, as well as rules and regulations concerning the treatment of sub-

scription rights in case of the termination of the employment of the person entitled thereto.

The shareholders’ meeting authorized the Management Board to convert the fulfillment of the

option plan to “cash settled”. We have resorted to this option.

In fiscal 2007, the company allocated a total of 160,000 stock options to the group of persons

entitled thereto. We assume that 128,000 of the total stock options allocated will be exercised.

The option rights expire on July 31, 2012.

The fair value of the stock options granted totals € 152,000 at balance sheet date. A pro-rateamount

of € 32,000 was shown in the Income Statement as personnel expenses. This was calculated

on the basis of an exercise price of € 10.00 per share.

All stock options were still outstanding at balance sheet date.

// 99

The segment reporting was effected according to the regulations of IAS 14. Orientated at the

internal reporting structure of the Group, individual items of the consolidated financial state-

ments are shown according to regions and segments. Segment reporting is to provide transpar-

ency regarding the profitability as well as the net worth and the financial position of the different

regions, or the individual activities of the Group, respectively.

According to the dominating organizational set-up of Digital Identification Solutions AG, the

primary reporting is applied to the geographical segments. This corresponds to the set-up of

our sales organization according to regional aspects and our internal reporting systems, and

takes into consideration the regionally differing risk and earnings structures of our business. The

secondary reporting format concerns the individual business segments of the Group.

The segment reporting is effected in agreement with the accounting and valuation methods of

the consolidated financial statements.

The figures in the table below comprise the turnover, accounts receivable and liabilities between

the segments.

Segment reporting for fiscal 2007 – primary segment –

all fi gures in € thousands Europe Middle East AsiaNorth / South

America

Other and consolida-

tion

Digital Iden-tification Solutions

Group

Segment revenue 8,187 3,008 3,548 4,067 18,810

thereof with unrelated parties 7,685 3,008 3,547 4,017 18,256

thereof with other segments 502 1 51 553

Segment result – 628 262 135 399 – 9 158

write-downs contained – 198 – 91 – 68 – 33 – 390

Segment assets 8,007 3,231 3,057 2,321 16,615

Segment liabilities 2,376 1,080 869 824 5,149

Segment investments 3,229 327 371 100 4,027

Segment write-downs – 198 – 91 – 68 – 33 – 390

10. Segment Reporting10. Segment Reporting

// 100


Segment reporting for fiscal 2006 – primary segment –

all fi gures in € thousands Europe Middle East AsiaNorth / South

America

Other and consolida-

tion

Digital Iden-tification Solutions

Group

Segment revenue 5,100 2,400 6,087 2,372 15,958

thereof with unrelated parties 3,997 24,00 5,943 2,372 14,712

thereof with other segments 1,102 144 1,246

Segment result – 350 417 – 22 20 – 17 48

write-downs contained – 71 – 54 – 77 – 23 – 225

Segment assets 6,082 2,862 5,649 1,832 16,425

Segment liabilities 734 345 863 876 2,818

Segment investments 166 78 162 78 458

Segment write-downs – 71 – 54 – 77 – 23 – 225

Notes on the primary-segment report:

The Group segments are integrated in the following segments:

Europe: DISO AG, vps GmbH

Middle East: Dubai branch

Asia: Subsidiaries in Singapore and the People’s Republic of China

North / South America: Subsidiary in the USA

The segment assets encompass the assets of the Group areas included in the segments, less tax

accruals and deferred tax assets. The segment assets for the branch in Dubai were determined

on the basis of the internal bookkeeping of the branch. In 2006, the branch did not keep any ac-

counting records of its own, therefore the segment assets 2006 and the investments in 2006 and

2007 were estimated. The accounts receivable between the individual segments are included in

the reported figures.

The segment liabilities are composed of the noncurrent and current liabilities of the individual

Group segments, less the tax liabilities and the deferred tax liabilities. The liabilities between the

individual segments are included in the reported figures.

// 101

The exchange of performance within the Group was shown by spreading the revenues and prof-

its of the segment “Europe” in percentage terms on the basis of the sales figures to the other

segments. The Group units included in the segment “Europe” provide services to customers

throughout the world, thus expenses and profits have to be distributed among the respective

segments.

The 2006 segment turnover in Asia was noticeably higher than in 2007. This is the result of sales

from projects in 2006 which did not come back in a comparable amount in 2007.

The secondary reporting format is segmented by revenue groups. Owing to the accounting system

of the Group, the allocation of assets and liabilities to the individual business segments is not

possible, so that the allocable values were assigned to the individual segments, based on the

percentage ratio of the revenues of each segment.

Segment reporting for fiscal 2007 – secondary segment –

all fi gures in € thousands Hardware Consumables Software, Spare

Parts and Services

Digital Identification

Solutions Group

Segment revenues with external customers 6,353 10,081 1,822 18,256

Segment assets 5,782 9,175 1,658 16,615

Segment investments 1,401 2,224 402 4,027

Segment reporting for fiscal 2006 – secondary segment –

all fi gures in € thousands Hardware Consumables Software, Spare

Parts and Services

Digital Identification

Solutions Group

Segment revenues with external customers 5,924 7,728 1,060 14,712

Segment assets 6,614 8,628 1,183 16,425

Segment investments 195 255 35 485

The segment revenues do not contain any inter-Group turnovers.

No values are included in the segment assets that are generated by transactions between the

Group companies.

// 102


The Cash Flow Statement provides information on the changes in financial funds of the DISO

Group on account of the inflow and outflow of funds during the year under review, and in the

preceding year. According to IAS 7, the cash flow was classified with respect to the inflows and

outflows from current business operations, investing and financing activities. The amounts

recorded by the foreign associated companies are, in general, translated at average annual rates.

In deviation thereof, the liquidity is recognized at the reporting date rate, as in the Balance Sheet.

The influence of exchange rate fluctuations on the means of payment is shown separately.

The cash flows from investing and financing activities are determined in relation to payment. On

the other hand, cash flow from current business activities is indirectly derived from the net group

profit for the year. Within the scope of the indirect determination, the changes in the balance sheet

items in connection with the current business activities are adjusted by the effects from currency

translation and the changes in the Group companies. Thus, differences are created in comparison to

the changes of the respective balance sheet items in the Consolidated Balance Sheet.

Cash flow from operating activities amounts to € – 2,207,000 (previous year € – 1,284,000). Cash

flow from investing activities of € – 6,014,000 (previous year € – 501,000) is influenced by the

takeover of vps GmbH and the purchase of securities in financial assets. Cash flow from financing

activities is € – 228,000 (previous year € + 10,375,000), and concerns primarily payments for the

purchase of own shares.

Cash and cash equivalents fund encompasses all means of payment and equivalents shown in

the Balance Sheet, provided they have an original maturity of less than three months. As of the

balance sheet date, cash and cash equivalents are composed of as follows:


Cash on hand 6 24

Cash in banks (current account balances) 1,350 9,835

Total 1,356 9,859

11. Notes to the

Cash Flow Statement

11. Notes to the

Cash Flow Statement

// 103

The objective of IFRS 7 is the disclosure of decisive information on the amount, the time and the

probability of future cash flows resulting from financial instruments, as well as an assessment of

the risks arising from financial instruments.

A financial instrument is any contract that gives rise to both a financial asset at one enterprise

and a financial liability or equity instrument at the other enterprise. Apart from the liquid funds,

financial assets encompass above all uncertificated claims, such as trade receivables, lendings

and claims arising from loans, as well as certificated claims, such as checks, bills of exchange or

debentures. Likewise, the term financial assets could also refer to financial investments held to

maturity and derivatives held for trading purposes. On the other hand, financial liabilities regu-

larly constitute a contractual commitment for the restitution of cash or other financial assets. In

particular, these include trade payables, liabilities to banks, bonds, liabilities from the acceptance

of bills of exchange, and the issue of own bills of exchange, as well as written options and deriva-

tives with negative fair value.

The Digital Identification Solutions Group did not have any derivatives in its portfolio at the

balance sheet day or at any time in 2007, and is not using such instruments. The same applies

for off-balance sheet financial instruments such as the sale of receivables, asset-backsecurities

transactions and sale-and-lease-back transactions.

The essential financial liabilities used by the Group encompass trade payables. The main pur-

pose of these financial liabilities is the financing of the Group’s business operations. The Group

disposes of various financial assets such as trade receivables, and means of payments and short-

term deposits directly resulting from the business activities.

The essential risks of the Group arising from the financial instruments comprise primarily liquidity

and currency risks as well as loan exposure. Management resolves the strategies and procedures

to control individual types of risks that are illustrated in the following.

Liquidity risk

The Group requires sufficient liquid funds to fulfill its financial commitments. Liquidity risks arise

in the event that customers are unable to fulfill possible commitments vis-à-vis the company

within the scope of the normal trading conditions. The credit standing of the Group allows the

procurement of a sufficient volume of liquid funds. In addition, there are lines of credit that have

as yet not been utilized.

12. Objectives and Methods

of Financial Risk

Management

12. Objectives and Methods

of Financial Risk

Management

// 104


Periodical assessments of the solvency of the customers are conducted to manage this risk.

On account of the comparably high liquidity and the securities marketable on every trading day,

no liquidity or refinancing risks currently exist at Group level. The IPO of Digital Identification

Solutions AG in May 2006 enabled the company to intensify the scheduled expansion within the

Group. Apart from its organic growth, the Group also opted to grow through the acquisition of a

software company. There is no material liquidity risk as of December 31, 2007.

Regarding the residual terms of the financial liabilities, reference is made to section 4.11 of the

Notes, “Liabilities”.

Currency risk

A currency risk exists when the value of a financial instrument changes due to exchange rate

fluctuations. The Group purchases the major part of its goods from Japan and the USA. Owing to

the development of the Japanese yen and the US dollar, the purchase prices for goods from both

areas have become more favorable.

The company monitors the development of both currencies and will secure its purchases by

rate-hedging transactions in case the development is negative for the company.

In 2007, no rate-hedging transactions have become necessary.

Particularly in the US dollar area, payments received and made are on the same level, so that the

currency risk is minimized by natural hedging

Credit losses

Credit losses arise when a contracting party is unable to fulfill his commitments by a financial

instrument, thus causing financial losses for the Digital Identification Solutions Group.

As a matter of principle, the Group only enters into transactions with creditworthy third parties.

All customers wishing to do business with the Group against credit are subject to a credit

analysis. In addition, the accounts receivable are continuously monitored, so that the Group is

not faced with any material credit losses.

The amount of the financial assets stipulates the maximum credit loss. In case of perceivable

credit losses in financial assets, the risks are recognized on an allowance account.

// 105

General legal risks

The Digital Identification Solutions Group is insured against the usual dangers and risks that

may occur.

Collateral

The Deutsche Bank AG, Stuttgart, issued a stand-by letter of credit in the amount of

JPY 290,000,000 (€ 2,150,000) in favor of one of the company’s suppliers. The securities in

the securities account of Digital Identification Solutions AG in the amount of € 2,150,000 serve

the bank as collateral for this letter of credit.

Deutsche Bank AG, Stuttgart, granted Digital Identification Solutions AG an operating line of

credit amounting to € 150,000 to be utilized for current account. The securities in the securities

account of Digital Identification Solutions AG in the amount of € 150,000 serve the bank as

collateral for this line of credit.

Risk management

Owing to the persistent market situation and state of the printing technology trade, the risk and

opportunity policy is targeted, in particular, at achieving or securing, respectively, lasting profit-

able growth. This policy requires early reactions to the changing market conditions.

At the Digital Identification Solutions Group, risk management consists of a number of interlacing

planning, controlling and information systems.

They encompass all segments of the company including the associated companies, and are con-

tinuously adjusted to changed settings.

Capital control and financial risk management

The paramount aim of capital control at Digital Identification Solutions AG is to provide the

Group as well as all subsidiaries with sufficient own capital, required for the support of the

current business activities and necessary investments. We attach particular importance to a high

independence from banks. If required, and particularly for purchases and investments, the capital

structure of the respective subsidiary is supported by capital measures of Digital Identification

Solutions AG. In general, we monitor the capital management of the individual subsidiaries by

means of a regular reporting system.

// 106


There are no contingent liabilities worth mentioning as of December 31, 2007.

Other financial liabilities

The Group concluded leasing agreements for office premises and company cars. The average

term of the leasing agreements is between three and five years. They do not include renewal

options. The leasing agreements do not restrict the lessee in any way.

Leases for offices and storage facilities: expenses approx. € 297,000 p.a.

Leased company cars: expenses approx. € 110,000 p.a.

The following future minimum leasing payments on account of not terminable operating leases

and from other financial commitments exist as of December 31:

all fi gures in € thousands Total Due

2008 Due

2009 – 2012 Due

ab 2013

Purchase obligation 14,000 4,000 10,000 0

Tenancy / lease agreements 1,548 297 1,251 0

Leasing contracts 620 120 500 0

Total financial obligations 16,168 4,417 11,751 0

In the preceding year, there was a purchase obligation totaling € 4,240,000, as well as commit-

ments from tenacy agreements of € 200,000 and from leasing contracts of € 96,000.

In computing the commitments from rent and leasing contracts, a gradually rising payment com-

mitment is assumed on the basis of the agreements existing or known at balance sheet date;

furthermore, it is assumed that leasing contracts will be replaced by a new contract upon expiry.

The purchase obligation is based on the contracts existing at balance sheet date. Since these

agreements have a three-year term, no reliable statements can be made on a possible renewal

and the respective conditions.

13. Contingent Liabilities

and Other Financial

Liabilities

13. Contingent Liabilities

and Other Financial

Liabilities

// 107

Group of persons

Associated persons with reference to the parent company are, among other persons, sharehold-

ers and all companies belonging to the Digital Identification Solutions Group. The Management

Board and the Supervisory Board are also deemed to be associated persons. For this reason, the

following subsidiaries and natural persons are essentially defined as associated persons:

Subsidiaries

company name Size of share in %

Digital Identification Solutions Pte., Singapore 100

Digital Identification Solutions LLC, Greenville, S.C., USA 100

Digital Identification Solutions (Beijing) Co. Ltd., Beijing, PR China 100

Digital Identification Solutions, Querétaro, Mexico 100

vps GmbH, Ettlingen, Germany 100

Natural persons:

as Management Board: Mr. Gerd Schäfer, Albershausen

Mr. Tassilo Mayer, Ostfildern

as Supervisory Board: Dr. Christian Bosse, Stuttgart

Mr. Uwe Steinbacher, Glashütten

Dr. Helmut Rieche, Markdorf

Business relations

Transactions effected in 2007 between Digital Identification Solutions AG and its subsidiaries

were eliminated within the scope of consolidation and are not commented on in these Notes.

With the exception of a travel advance (€ 21,000) for the member of the Management Board,

Mr. Gerd Schäfer, there are no claims or liabilities to associated persons that were not eliminated

within the scope of consolidation.

14. Relations to

Associated Persons

14. Relations to

Associated Persons

// 108


Management Board

The following persons were members of the Management Board of Digital Identification

Solutions AG in the past financial year:

Mr. Gerd Schäfer, Albershausen, Chairman of the Board (since February 16, 2006)

Mr. Tassilo Mayer, Ostfildern, Chief Financial Officer (since February 16, 2006)

In the year under review, the remunerations of the Management Board totaled € 374,383.

Advances granted to members of the Management Board

A travel advance of € 20,500 for the Chairman of the Board, Gerd Schäfer, was reported at

balance sheet date.

Share option program

The Management Board was authorized at the occasion of the shareholders’ meeting on May 24,

2007, to launch a share option plan and to grant options (subscription rights) of up to 170,000

shares of DISO AG to the persons entitled thereto. Inasmuch as members of the Management

Board are affected, the Supervisory Board will be authorized accordingly. The shareholders’ meet-

ing granted the Management Board an option to convert the share option plan to “cash settled”.

The Management Board resorted to this option.

At balance sheet date, the members of the Board were allotted 20,000 subscription rights each.

These subscription rights cannot be exercised before certain hurdles are taken, however, not

before August 1, 2009 at the earliest. The fair value was fixed at € 1.19 for each subscription right

at balance sheet date. The pro-rata amount of € 10,000 to be shown as liability was recognized in

personnel expenses.

Supervisory Board

At balance sheet date, the Supervisory Board is composed as follows:

Dr. Christian Bosse, Lawyer, Stuttgart, Chairman (since August 1, 2007)

Mr. Uwe Steinbacher, Managing Director, Glashütten, Deputy Chairman (since February 16, 2006)

Dr. Helmut Rieche, Legal Advisor, Markdorf, (since March 14, 2006)

The Chairman of the Supervisory Board, Dr. Christian Bosse, is also member of the Supervisory

Board of Sunways AG, Constance.

15. Statutory Bodies15. Statutory Bodies

// 109

The following persons were also members of the Supervisory Board in the past financial year:

Dr. Peter Krüger, Lawyer, Leipzig, Chairman (from March 14, 2006, as a substitute member, from

May 15, 2006, as an ordinary member, from June 2, 2006, to August 1, 2007, Chairman).

The remunerations of the Supervisory Board totaled € 12,500 in the financial year.

There were no material events subsequent to the balance sheet date which could influence the

net worth, financial and earnings position of the Group.

The Supervisory Board approved the 2007 Consolidated Financial Statements, releasing them for

publication on May 8, 2008.

Digital Identification Solutions AG

Esslingen-Berkheim, May 2, 2008

Gerd Schäfer Tassilo Mayer

Chairman of the Board Chief Financial Officer

16. Events Subsequent to

the Balance Sheet Date

December 31, 2007

16. Events Subsequent to

the Balance Sheet Date

December 31, 2007

17. Approval of the


17. Approval of the


// 110

FINANCIAL STATEMENT

Auditors’ Opinion

To Digital Identification Solutions AG

We have audited the consolidated financial statements prepared by Digital Identification

Solutions AG, Esslingen, comprising the balance sheet, the income statement, statement of

changes in equity, cash flow statement and the notes, and the group management report for the

period from January 1, 2007 to December 31, 2007. The preparation of the consolidated financial

statements and the group management report in accordance with IFRS, as adopted by the EU,

and the additional requirements of German commercial law pursuant to Section 315a (1) HGB

( German Commercial Code) are the responsibility of the legal representatives of the company.

Our responsibility is to express an opinion on the consolidated financial statements and on the

group management report based on our audit.

We conducted our audit of the consolidated financial statements in accordance with Section

317 HGB and the generally accepted auditing standards promulgated by the Institut der

Wirtschaftsprüfer (German Institute of Certified Public Accountants). Those standards require

that we plan and perform the audit to obtain reasonable assurance about whether the con-

solidated financial statements are free of material misstatements, which might significantly

affect the true and fair view of the net worth, the financial and earnings position, as shown in

the consolidated financial statements and the group management report in accordance with

generally accepted accounting standards. For the determination of our auditing procedures,

the knowledge concerning the business activities, the economic and legal environment of the

group as well as the expected potential errors are taken into consideration. Within the scope of

our audit, the effectiveness of the internal control system, pertaining to accounting, as well as

the evidence supporting the disclosures in the consolidated financial statements and the group

// 111

management report is largely examined on a test basis. The audit comprises the evaluation of

the financial statements of the entities included in consolidation, the definition of the group

companies, the implemented accounting and consolidation principles and the major evalua-

tions of the legal representatives, as well as the appreciation of the overall presentation of the

consolidated financial statements and the group management report. We believe that our audit

provides a reasonable basis for our opinion.

Our audit did not give rise to any objections.

In our opinion, based on the findings of our audit, the consolidated financial statements comply

with IFRS, as adopted by the EU, the additional requirements of German commercial law pursuant

to Section 315a (1) HGB, and give a true and fair view of the net worth, financial and earnings

position of the group in accordance with these requirements. The group management report is

consistent with the consolidated financial statements and provides an overall true and fair view of

the group’s position and accurately presents the opportunities and risks of future development.

Leonberg / Stuttgart, May 5, 2008

BDO Deutsche Warentreuhand Aktiengesellschaft

Wirtschaftsprüfungsgesellschaft

sgd. Andreas Müller sgd. ppa. Martin Helmich

Certified public accounant Certified public accounant

// 112


America Band

USA 3

Canada 1

Mexico 1

AMECA *) Band

Egypt 1

Kuwait 1

Iran 1

Iraq 1

Bahrain 1

South Africa 1

India 1

Yemen 1

Oman 1

Nigeria 1

Ghana 1

Zimbabwe 1

UAE 3

Sri Lanka 1

Jordan 1

Pakistan 1

Saudi Arabia 1

Kenya 1

Syria 1

Qatar 1

Asia Band

China 1

Indonesia 3

Vietnam 1

Singapore 1

Australia 2

Hong Kong 1

Korea 1

Laos 1

Malaysia 2

Philippines 1

Taiwan 1

Thailand 1

Cambodia 1

Myanmar 1

Sales range in euros

from to Band

1 500,000 1

500,001 1,000,000 2

1,000,001 3

Europe Band

Austria 1

Belgium 1

Bulgaria 1

Switzerland 1

Czech Republic 1

Germany 3

Denmark 1

Spain 2

France 2

Finland 1

United Kingdom 3

Greece 1

Hungary 3

Iceland 1

Italy 3

Luxembourg 1

Lithuania 1

The Netherlands 1

Poland 1

Romania 1

Russia 1

Sweden 1

Slovakia 1

Slovenia 1

Financial Calendar

June 30, 2008 Annual General Meeting

August 2008 Results for the fi rst half-year

November 2008 Results for the third quarter

March 2009 Provisional fi gures for 2008

Imprint

Published byDigital Identifi cation Solutions AGTeckstraße 52 D – 73734 EsslingenTel.: + 49 (0) 711 / 341689 – 0Fax: + 49 (0) 711 / 341689 – 550www.digital-identifi cation.com

Design and ProductionFIRST RABBIT GmbH, Cologne

PhotographyImage pool Digital Identifi cation Solutions AGistockphoto

PrintAMK GmbH, Wesseling

StatusMay 19, 2008

Headquarters in Germany

Subsidiary in Dubai

Subsidiary in Singapore

vps Germany

Subsidiary in Mexico

Subsidiary in China

Subsidiary in the USA

Global Reach

*) Africa, Middle East, Central Asia

Key figures all fi gures in € thousands

2004 2005 2006 2007

Sales 8,613 11,762 14,712 18,256

Gross income 3,526 4,659 6,050 9,425

EBITDA 141 503 270 548

Write-downs – 70 – 122 – 225 – 390

EBIT 71 381 45 158

Net financial income – 13 – 18 430 129

Taxes – 4 – 73 47 – 253

Net profit for the period 54 290 522 11

Total assets 3,462 5,627 15,970 18,978

Equity 1,413 2,746 13,715 13,347

Employees (average) 28 32 42 76

Annual Report 2007

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