Notes

Year Ended

31/12/08

Year Ended

31/12/07

Year Ended

31/12/08

Year Ended 

31/12/07

JPY'000

JPY'000

STG

STG

Revenue

2/23

25,455

269,755

193,087

2,046,230

Cost of sales

4

(102,175)

(154,211)

(775,049)

(1,169,769)

Gross profit

(76,720)

115,544

(581,962)

876,461

Other operating income

4,123

27,337

31,279

207,368

Sales and marketing expenses

4

(131,250)

(357,652)

(995,604)

(2,712,985)

General and administrative expenses

4

(160,900)

(215,619)

(1,220,511)

(1,635,580)

Research and development expenses

4

(131,768)

(215,025)

(999,531)

(1,631,075)

Loss from operations

4

(496,515)

(645,415)

(3,766,329)

(4,895,811)

Finance income

6

3,092

259

23,460

7,896

Finance costs

5

(25,016)

(623)

(189,762)

(10,659)

Net finance costs

(21,924)

(364)

(166,302)

(2,763)

Share of loss of equity accounted investee

13

(19,484)

(3,180)

(147,799)

(24,119)

Loss before tax

(537,923)

(648,959)

(4,080,430)

(4,922,693)

Income tax expense

18

-

-

-

-

Loss for the year

(537,923)

(648,959)

(4,080,430)

(4,922,693)

Loss per share

JPY

JPY

STG

STG

Basic

7

(11.51)

(19.58)

(0.09)

(0.15)

Diluted

7

(11.51)

(19.58)

(0.09)

(0.15)

Attributable to equity holder of the Company 

Notes

2008

2007

2008

2007

JPY'000

JPY'000

STG

STG

ASSETS

Non-current assets

Property, plant and equipment

8

4,214

9,683

31,961

73,454

Investment securities

12

6,446

32,682

48,895

247,913

Investments in equity accounted investee

13

68,036

57,071

516,090

432,909

Goodwill

10

7,200

12,500

54,616

94,819

Intangible assets

11

4,858

77,518

36,850

588,019

Other non-current assets

9

4,636

4,858

35,168

36,850

95,390

194,312

723,580

1,473,964

Current assets

Inventories

14

51,727

117,469

392,376

891,063

Trade and other receivables

15/23

43,442

136,433

329,534

1,034,917

Cash and cash equivalents

15

45,237

9,515

343,146

72,173

140,406

263,417

1,065,056

1,998,153

Total assets

235,796

457,729

1,788,636

3,472,117

LIABILITIES

Current liabilities

Trade and other payables

19/23

81,246

86,220

616,293

654,027

81,246

86,220

616,293

654,027

Net current assets

59,160

177,197

448,763

1,344,126

Total liabilities

81,246

86,220

616,293

654,027

Net assets

154,550

371,509

1,172,343

2,818,090

EQUITY 

Share capital

16

873,460

713,614

6,625,656

5,413,139

Share premium

16

619,318

472,255

4,697,848

3,582,301

Fair value reserve

12

-

(425)

-

(3,220)

Share option reserve

16

25,967

12,337

196,979

93,581

Deficit

17

(1,364,195) 

(826,272)

(10,348,140)

(6,267,711)

Total equity

154,550

371,509

1,172,343

2,818,090

Notes

Year Ended

31/12/08

Year Ended

31/12/07

Year Ended

31/12/08

Year Ended

 31/12/07

JPY'000

JPY'000

STG

STG

OPERATING ACTIVITIES

Cash used in operations

20

(225,105)

(251,331)

(1,707,543)

(1,906,073)

Interest received (paid), net

76

(623)

582

(5,132)

NET CASH USED IN OPERATING ACTIVITIES

(225,029) 

(251,954)

(1,706,961)

(1,911,205)

INVESTING ACTIVITIES

Purchases of property, plant and equipment

-

(1,101)

-

(8,351)

Expenditure on product development

(3,897)

(12,888)

(29,563)

(97,763)

Purchase of intangible assets

-

(40,500)

-

(307,214)

Acquisition of associate company

(30,450)

(60,250)

(230,979)

(457,028)

Proceeds from sales of investment securities

1,644

-

12,475

-

Increase of short-term lending

(13,400)

(35,000)

(101,646)

(265,493)

Decrease of short-term lending

-

65,000

-

493,059

NET CASH USED IN INVESTING ACTIVITIES

(46,103)

(84,739)

(349,713)

(642,790)

FINANCING ACTIVITIES

Proceeds from short-term borrowings

-

24,135

-

183,079

Repayments of short-term borrowings

-

(24,135)

-

(183,079)

Proceeds on issue of new shares, net of issuance cost

306,909

251,499

2,328,065

1,907,751

NET CASH FROM FINANCING ACTIVITIES

306,909

251,499

2,328,065

1,907,751

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

35,777 

(85,194)

271,391

(646,244)

EFFECT OF EXCHANGE RATE FLUCTUATIONS ON CASH HELD

(55)

221

(418)

1,675

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 

9,515

94,488

72,173

716,742

CASH AND CASH EQUIVALENTS AT END OF YEAR

15

45,237

9,515

343,146

72,173

BgenuineTec Inc, hereafter "the Company", is a company incorporated and domiciled in Japan. The legal form of the Company is a limited liability corporation called "Kabushiki-kaisha". The Company designs and manufactures a range of fingerprint authentication technologies and products to companies and individuals that wish to establish high levels of security in various applications using biometrics. The business activity also includes R&D and sales of fingerprint systems and components.

The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the EU. The designation "IFRSs" also includes all valid Internal Accounting Standards (IASs). All interpretations of the International Financial Reporting Interpretations Committee (IFRIC) mandatory for the financial year 2008 have also been applied. Sterling pound amounts included herein are given solely for convenience and are stated, as matter of arithmetical computation only, at the rate of JPY131.83=£1, the approximate exchange rate at 31 December 2008. The translation should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into Sterling pound.

The principal accounting policies adopted are set out below.

Going-concern

These consolidated financial statements have been prepared by management on the basis of generally accepted accounting principles applicable to a "going concern", which assumes the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations.

The Company posted a net loss of JPY538 million in the year ended 31 December 2008, due to poor sales of JPY 25 million, valuation loss for inventories of JPY 87 million and fixed assets of JPY 34 million. The poor sales were resulted from restructuring of both sales and development division internally, decreased and deferred order from the main clients influenced by worldwide recession externally. 

To enable the Company to rectify the continued loss-making, the Company is either in the process of or going to carry out following actions in 2009;

• Readjust the product mix by introducing technologies and products from the associated company "Beyond LSI Inc".

• Change sales channel from direct sales to sales through agents and distributors.

• Change of management structure, as already announced

• Penetration of the Chinese market.

It is anticipated that in the fiscal year of 2010, distribution of fingerprint authentication products for mobile phone, (shipments of such products have been subsequent to 31 December 2008) and related security products will begin to take full effect to the Company and if projections are achieved will enable the Company to be cash flow positive. 

To expand its business, the Company needs additional fund of JPY 250 million in 2009 from the date of signing of these accounts.. Fund raising of JPY 100 million is planned in the 1st half of 2009, rest of JPY 150 million in 2nd half of 2009. Fundamental to the Going Concern assumption is a belief by the Board that it can raise such equity.

These consolidated financial statements do not reflect adjustments that would be necessary if the going concern was not appropriate because the Company has a firm conviction to achieve sales and operating profits in 2009 and 2010 by execution of above actions, and the fund raising in 2009 as mentioned above.

If the going concern assumption were not appropriate for the consolidated financial statements, then adjustment would be necessary to the carrying value of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used.

Basis of consolidation

Equity method

Associates are those entities in which the Company has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Company holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method (equity accounted investees) according to IAS28 (Investments In Associates). The consolidated financial statements include the Company's share of the income and expenses of equity accounted investees, after adjustments to align the accounting policies with those of the Company, from the date that significant influence commences until the date that significant influence ceases. When the Company's share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Company has an obligation or has made payments on behalf of the investee.

Goodwill

Goodwill arising on business combination represents the excess of the cost of acquisition over the fair value of the identifiable assets and liabilities of a transferor at the date of acquisition. In respect of equity method investees, the carrying amount of goodwill is included in the carrying amount of the investment. 

Goodwill is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed.

The Company has only a single cash generating unit for the purpose of impairment testing. 

Revenue recognition

Revenue arises from sales of goods.

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and consumption taxes.

Sales of goods are recognised when goods are delivered and title has passed.

Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. There were no assets under finance lease as of the balance sheet date.

Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.

Foreign currencies

The Company's functional and presentational currency is Japanese Yen ("JPY").

Transactions in currencies other than Japanese Yen are recorded at the rates of exchange prevailing on the dates of the transactions. At the balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Gains and losses arising on retranslation are included in the income statement for the year.

Taxation

The tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated by using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill on the initial recognition of goodwill or an asset or liability which is not part of a business combination and at the time of recognition did not affect accounting or taxable profit.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss.

Depreciation is charged so as to write off the cost or valuation of assets, other than land and properties under construction, over their estimated useful lives, using the straight-line method, on the following basis:

Leasehold improvement 0%-17%

Machinery 25%-50% 

Fixtures and equipment 17%-50%

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is included in the income statement for the year.

Other non-current assets

Other non-current assets consist of lease deposits for office premises and long-term prepaid expenses, which are stated at historical cost minus unrefunded amounts. 

Development costs

Development costs concerning software programs developed externally are capitalised and measured initially at purchase cost and amortised on a straight-line basis over their estimated useful lives (3 years).

An internally-generated intangible asset arising from the Company's biometric technology business development is recognised only if all of the following conditions are met:

• an asset is created that can be identified (such as software and new processes);

• it is probable that the asset created will generate future economic benefits; and

• the development cost of the asset can be measured reliably.

Internally-generated intangible assets are amortised on a straight-line basis over their useful lives.

Expenditure on research activities is recognised as an expense in the period in which it is incurred.  

Patents, exclusive sales rights and trademarks

Patents and trademarks are measured initially at purchase cost and amortised on a straight-line basis over their estimated useful lives (8 years). Exclusive sales rights are not amortised since there is substantially no period for termination in the agreement. 

Impairment of tangible and intangible assets excluding goodwill

At each balance sheet date, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is already carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials, transportation and any other incidental costs incurred for purchase. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs to completion and costs to be incurred in marketing, selling and distribution.

Financial instruments 

Financial assets and financial liabilities are recognised on the Company's balance sheet when the Company has become a party to the contractual provisions of the instrument.

Trade receivables

Trade receivables are recognised at fair value and subsequently measured at amortised cost and are classified as loans and receivables in accordance with IAS 39 Financial Instruments: Recognition and Measurement.  

Assessments are made regularly as to whether there is any objective evidence that trade receivables may be impaired. Where there is objective evidence of impairment, the recoverable amount is calculated by estimating the present value of the future cash flows discounted using the effective interest rate. Any impairment losses identified from the impairment test are recognised as an expense in the income statement. 

Investments securities

Investments are recognised and derecognised on a trade date where a purchase or sale of an investment is under a contract whose terms require delivery of the investment within the time frame established by the market concerned, and are initially measured at cost, including transaction costs.

Investment securities classified as available-for-sale are remeasured to fair value.  Gains and losses arising from the changes in the fair values of available-for-sale investments are recognised directly in the fair value reserve in equity, until the investment is sold or otherwise disposed of or until it is determined to be impaired. The fair value of an available-for-sale investment is based on its quoted bid price in an active market at the balance sheet date. The fair value of available-for-sale investment with no quoted bid price is based on the future cash flows expected on the instrument and discounted using the market rate of interest.

In accordance with IAS 39, assessments are made regularly as to whether there is any objective evidence that investments securities may be impaired. Cumulative losses identified after carrying out an impairment test are removed from the fair value reserve in equity and recognised as an expense in the income statement.  

Trade payables

Trade payables are classified as other liabilities in accordance with IAS 30, initially recognised at fair value and subsequently measured at amortised cost using the effective interest method.

Equity instruments

Ordinary shares are classified as equity instruments and are recorded at the fair value, net of direct issue costs. Equity instruments are not subsequently remeasured.  

In accordance with IAS39 (Financial Instruments: Recognition and Measurement), assessments are made regularly as to whether there is any objective evidence that a financial asset or group of assets may be impaired. Impairment losses identified after carrying out an impairment test are recognised as an expense. Gains and losses on available-for-sale investments are recognised directly in equity until the financial asset is disposed of or is determined to be impaired, at which time the cumulative loss previously recognised in equity is included in loss for the year.

Share-based payments

The Company operates an equity-settled share-based payment scheme. Equity-settled share-based payments are measured at fair value of the share options at the date of grant. The fair value determined at the grant date is expensed on a straight-line basis over the vesting period with a corresponding increase in equity, based on the Company's estimate of the number of options that will eventually vest.

Fair value is measured by use of a Black-Scholes model, taking into account the terms and conditions upon which the options were granted.  

Critical accounting estimates and judgments

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Critical accounting estimates and assumptions

The Company makes estimates and assumptions concerning the future. The resulting accounting estimates and assumptions will, by definition, seldom equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

The Company is subject to income taxes at city and national level within Japan. Significant judgement is required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.  

Amendments to IFRS standards and interpretations 

Standards applied for the first time

IFRIC 11 (IFRS 2 - Group and Treasury Share Transactions) deals with the issue of how group share-based remuneration should be reported, which are the effects of staff changes within a group and how share-based payment should be treated when the company issues its own shares or needs to acquire shares from a third party. IFRIC 11 was published in November 2006 and adopted by the European Union in June 2007. IFRIC 11 has no impact on the consolidated financial statements of the Company.

The IFRIC also published interpretation IFRIC 12 (Service Concession Arrangements) in November 2006. This guideline addresses the issue of reporting on service concession arrangements by companies with government or similar grant contracts for the supply of public services, such as the construction of roads, airports, prisons or energy distribution infrastructure. IFRIC 12 clarifies how companies are to report the rights and responsibilities arising from such contractual obligations. IFRIC 12 has no impact on the consolidated financial statements of the Company.

In October 2008, IASB published revisions to IAS 39 (Financial Instruments: Recognition and Measurement) and an amendment to IFRS 7 (Financial Instruments: Disclosures), called "Reclassification of Financial Assets". The changes to IAS 39 not only allow some reclassifications of non-derivative financial assets (except for those "measured at fair value" on the basis of the fair value option) from the category "financial assets measured at fair value", but also the reclassification of "available for sale financial assets" in the category "loans and receivables". The revisions made to IFRS 7 also prescribe additional disclosure requirements for companies which have carried out reclassifications of financial assets in accordance with the revised stipulations contained in IAS 39. The changes made to IAS 39 and IFRS 7 took effect retroactively to July 1, 2008, and are binding as of December 31, 2008. These amendments are described in the accounting policy on financial instruments above.

IFRIC 14 (IAS 19- The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction). IFRIC 14 provides general guidance on how to assess the limit in IAS 19 on the amount of the surplus that can be recognized as an asset and explains how the pension asset or liability may be affected when there is a statutory or contractual minimum funding requirement.

The Company has no pension plan and therefore the amendment is not related to the Company.

Standards which are not yet effective

As a result of IFRS 8 (Operating Segments), segment reporting has switched from what was known as the "risk and reward approach" to the "management approach" in terms of segment identification under IAS 14. Here the information regularly made available to the "chief operating decision maker" for decision-making purposes is the decisive factor. At the same time, the valuation of the segments has been switched from the "risk and reward approach" to the "management approach". IFRS 8 was published in November 2006 and adopted by the European Union in November 2007. The standard is binding for financial years starting on or after January 1, 2009. Early application is permitted. So far, the Company has only a single segment and this regulation will have no impact to the Company.

IFRIC 13 (Customer Loyalty Programmes) which was published in June 2007, addresses the accounting policies of companies that grant loyalty award credits (e.g. "bonus points") to customers, who buy other goods or services. In particular, IFRIC 13 explains how these companies should account for their obligations to provide free or discounted goods or services to customers who redeem such award credits. The interpretation is to be applied for financial years starting on or after July 1, 2008. The Company does not make use of any such customer loyalty programmes. Therefore, IFRIC 13 is not expected to be related to the Company.

IFRIC15 (Agreements for the Construction of Real Estate), published in July 2008, provides guidance on the accounting practice in respect to the recognition of revenue for real estate sales before construction has been completed. The interpretation is to be applied for financial years starting on or after January 1, 2009. The construction of real estate is not part of the business operations of the Company. For this reason, the revisions in IFRIC 13 will not have any impact on the consolidated financial statements of the Company.

IFRIC also published IFRIC 16 (Hedges of a Net Investment in a Foreign Operation) in July 2008 , which is designated to clarify issues arousing from the application of IAS 39 (Financial Instruments: Recognition and Measurement) and IAS 21 (The Effects of Changes in Foreign Exchanges Rates) in respect to the accounting for the hedging of foreign currency risks within a company and its foreign entities. The Company does not make use of any hedging transactions. Therefore, IFRIC 16 is not expected to be related to the Company.

In September 2007 the IASB published a revised version of the IAS 1 (Presentation of Financial Statements: A revised Presentation), which is intended to make it easier for users to analyze and compare financial statements. Under this, all non-equity holders related changes in equity have to be shown in one single "statement of comprehensive income" or in two separate reporting components with an income statement taken from the previous statement of comprehensive income. The corresponding income tax effect is to be shown for the individual components of other comprehensive income. The new version of IAS 1 is to be applied to financial years starting on or after January 1, 2009. Adoption by the European Union is currently outstanding. The presentation of changes in equity will be amended accordingly by the Company in line with the requirements of IAS 1. 

In February 2008 in a document entitled "Puttable Financial Instruments and Obligations Arising on Liquidation", the IASB published the amendments to IAS 32 (Financial Instruments: Presentation) and IAS 1 (Presentation of Financial Statements). The amendments relate essentially to questions relating to the demarcation between equity and liability. In particular, the revision now permits, under certain circumstances, the option of classifying puttable instruments as equity. The amendments are to be applied to financial years starting on or after January 1, 2009. Early application is permitted. Adoption by the European Union is currently outstanding. This regulation will have no impact on the Company.

The main change to IAS 23 (Borrowing Cost) , which was revised in April 2007, pertains to the elimination of the option to immediately expense borrowing cost that can be classified as directly related to the acquisition, construction or production of qualifying assets. In this case, qualifying asset is considered to exist if a substantial period of time is required to ready the particular asset for use or sale. The Company is currently evaluating how the application of this regulation will impact the consolidated financial statements.

Through the publication of the revised version of IFRS 3 (Business Combinations) and the amendments to IAS 27 (Consolidated and Separate Financial Statements) in January 2008, IASB completed the second phase of the "Business Combinations" project. The main changes include the accounting treatment of minority interests and the re-measurement, through profit or loss, of already existing shares at the time control was gained for successive company acquisitions. Changes in the participation quota without loss of control are to be recorded solely as equity transactions. In future, acquisition-related costs are to be recognized as expenses. For possible adjustments to acquisition costs, as a result of future events which are to be recognized as liabilities at the time of acquisition, no adjustment to goodwill in subsequent valuations is possible. The new version of IFRS 3 is to be applied to company mergers commencing on or after July 1, 2009. Early application is permitted, but is limited to reporting periods beginning on or after June 30, 2007. The amendments to IAS 27 are to be applied to financial years which start on or after July 1, 2009, whereby early application is permitted. However, early application of one of the two standards is contingent on the simultaneous early application of the respective other standard. Adoption by the European Union is currently outstanding. The Company expects that the treatment of acquisition-related costs in the event of company acquisitions as expenses will lead to additional expense, the level of which depends on several factors, including the size of the acquisition. The impact of reporting adjustments in acquisition costs contingent on future events, which at the time of acquisition are to be treated as liabilities in the income statement, depends on the individual case. 

IASB published the most recent revisions to IAS 39 (Financial Instruments: Recognition and Measurement) in July 2008. In addition to existing regulations, which enable a company to encompass the entire risk, part of it, or certain risks in connection with an underlying financial instrument in a hedge, it is now possible under certain circumstances to include inflation risks or one-sided risks in a hedge. The amendments are to be applied to financial years starting on or after January 1, 2009. The Company has no hedging transactions and therefore the application of this regulation will have no impact the consolidated financial statements

In January 2008, the IASB published the amendment to IFRS 2 (Share-based Payment: Vesting Conditions and Cancellations). The amendments clarify that exercise conditions are only service and goal fulfillment conditions. As a result of the changes in the definition of exercise conditions, non-exercise conditions are now to be taken into account when measuring the fair value of the equity instruments granted. The changes are to be applied for financial years starting on or after January 1, 2009. Early application is permitted where indicated. Adoption by the European Union is currently outstanding. Application will not have a material impact on the earnings position of the Company. 

1

PRESENTATION OF FINANCIAL STATEMENTS

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, as adopted by the EU.

These consolidated financial statements are presented in Japanese Yen since that is the currency in which the majority of the Company's transactions are denominated.  

2

REVENUE

An analysis of the Company's revenue is as follows:

  JPY'000

Year ended

 31/12/08

Year ended

 31/12/07

Continuing operations - sale of goods:

25,455

269,755

Total revenue

25,455

269,755

3

BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

For management reporting purposes, the Company is currently organised as a single operating division, that is, biometric technology. This division is the basis for segment information.  

Principal activity is to be engaged in research and development and sales of biometric technology products including biometric certification and authentication services, physical access systems, fingerprint image sensors and relating software.

Due to the single segment, the segment information is not reported here.

Geographical segments

The Company's operations are located only in Japan and there was no exportation from Japan.  

4

LOSS FROM OPERATIONS

Loss from operations has been arrived at after charging:

NUMBER OF STAFF

The average monthly number of employees including executive directors for the year for each of the Company's principal functions was as follows:

  Number

Year ended

31/12/08

Year ended

31/12/07

Engineers

2

3

Head office and administration

4

5

6

8

5

FINANCE COSTS

  JPY'000

Year ended

31/12/08

Year ended

31/12/07

Interest on borrowings, net of interest earned 

-

623

Loss on sale of investment security

1,724

-

Loss on devaluation of investment security (Note 12)

23,292

-

25,016

623

6

FINANCE INCOME

  JPY'000

Year ended

31/12/08

Year ended

31/12/07

Interest earned, net of interest incurred

77

-

Foreign exchange gain, net

3,015

259

3,092

259

7

EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share is based on the following data:

Earnings

  JPY'000

Year ended

31/12/08

Year ended

31/12/07

Earnings for the purposes of basic earnings per share (net loss for the year attributable to equity holders)

(537,923)

(648,959)

Effect of dilutive potential ordinary shares

(note 1, described below)

-

-

Earnings for the purposes of diluted earnings per share

(537,923)

(648,959)

Number of shares

Year ended

31/12/08

Year ended

31/12/07

Weighted average number of ordinary shares for the purposes of basic earnings per share

46,753,624

33,147,161

Effect of dilutive potential ordinary shares:

 - share option (note 1, described below)

-

-

Weighted average number of ordinary shares for the purposes of diluted earnings per share

46,753,624

33,147,161

(note 1)  Share options which the Company and the associated company held have anti-dilutive effect on earnings per share for the years.

8

PROPERTY, PLANT AND EQUIPMENT

JPY'000

Leasehold Improvement

Plant & Machinery

Fixtures & Equipment

Total

COST OR VALUATION

At 1 January 2007

8,835

171

17,320

26,326

Additions

1,487

-

614

2,101

Disposal

(6,565)

-

-

(6,565)

At 1 January 2008

3,757

171

17,934

21,862

Additions

-

-

-

-

Deductions

-disposal

-impairment

 (note 1, described below)

-

-

-

(37)

-

(1,892)

-

(1,929)

At 31 December 2008

3,757

134

16,042

19,933

ACCUMULATED DEPRECIATION 

At 1 January 2007

3,141

49

5,130

8,320

Charge for the year

1,722

44

6,647

8,413

Disposal

(4,554)

-

-

(4,554)

At 1 January 2008

309

93

11,777

12,179

Charge for the year

399

41

3,100

3,540

Disposal

-

-

-

-

At 31 December 2008

708

134

14,877

15,719

NET BOOK VALUE

At 31 December 2008

3,049

-

1,165

4,214

At 31 December 2007

3,448

78

6,157

9,683

(note 1) A part of property, plant and equipment relating to specific research and development has been impaired by estimating future cash flows since they were considered not to be recoverable.

9

 OTHER NON-CURRENT ASSETS

  JPY'000

Year ended

31/12/08

Year ended

31/12/07

Lease deposit for office premises

Beginning balance

4,673

24,725

Addition

270

4,673

Disposal

(369)

(24,725)

Ending balance

4,574

4,673

Long-term prepaid expense

Beginning balance

185

250

Addition

-

246

Amortisation

(123)

(311)

Ending balance

62

185

Total

4,636

4,858

10

GOODWILL

JPY'000

COST

At 1 January 2007

14,400

Additions

-

Deductions

- impairment (note 1, described below)

(1,900)

At 1 January 2008

12,500

Additions

-

Deductions

- impairment (note 1, described below)

(5,300)

At 31 December 2008

7,200

(note 1) A part of goodwill representing a certain customer relationship has been impaired by estimating future cash flows since the Company has lost them .

11

INTANGIBLE ASSETS

JPY'000

Development costs

Patents & trademarks

Exclusive sales right

Total

COST 

At 1 January 2007

55,805

9,818

3,429

69,052

Additions

12,888

40,500

-

53,388

At 1 January 2008

68,693

50,318

3,429

122,440

Additions

3,897

-

-

3,897

Deductions

-impairment (note 1)

-other (returned)

(7,385)

-

(18,489)

(20,400)

(3,429)

-

(29,303) 

(20,400)

At 31 December 2008

65,205

11,429

-

76,634 

AMORTISATION

At 1 January 2007

19,809

1,284

-

21,093

Charge for the year

20,113

3,716

-

23,829

At 1 January 2008

39,922

5,000

-

44,922

Charge for the year

21,602

5,252

-

26,854

At 31 December 2008

61,524

10,252

-

71,776

CARRYING AMOUNT

At 31 December 2008

3,681

1,177

-

4,858

At 31 December 2007

28,771

45,318

3,429

77,518

(note 1) A part of intangible assets relating to specific research and development has been impaired by estimating future cash flows since they were considered not to be recoverable. A part of intangible assets relating to patents& trademarks and exclusive sales right has been impaird by estimating future cash flows since they were no more used or existent. 

12

INVESTMENT SECURITIES

Available-for-sale investments

JPY'000

At 1 January 2007

2,794

Acquired

29,738

Disposed

-

Increase in fair value

150

At 1 January 2008

32,682

Acquired

-

Disposed

(2,944)

Impairment

(23,292)

Increase in fair value

-

At 31 December 2008

6,446

Available-for-sale investments represent shares in Fingerprint Cards AB (Sweden) and Secure Generation Ltd. (Japan, non-listed). Fingerprint Cards AB is one of the related parties of the Company (see Note 23). The Company directly owns 0.07% of Fingerprint Cards AB as of 31 December 2007 and the Company sold all shares in 2008. Losses arisen from the revaluation to the fair values are recognised directly in the fair value reserve in equity amounting to JPY425 thousand for the year ended 31 December 2007 and it was reversed for the year ended 31 December 2008.  

The Company acquired shares in Secure Generation Ltd. through the take-up of 86,700 newly issued ordinary shares in 2007. The Company owns 6.5% of Secure Generation Ltd. at the balance sheet date. The Company determined to record JPY 23,292 thousand of impairment loss for the investment for the year ended 31 December 2008 remeasured at fair value of future cash flows discounted using the market rate of interest.

13

EQUITY ACCOUNTED INVESTEE

The Company acquired 40.1% of share of Beyond LSI, Ltd ("investee") in December 2007, 8.54% shares in June 2008 and 11.84% in December 2008. Although the Company's ownership at 31 December 2008 was 60.49% in aggregate, taking into account the potential voting rights, i.e. share options of the investee, which are held by other entities and exercisable at the date, the ownership would be reduced to 48.62% when assessing whether the Company has the power to govern the financial and operating policies of the investee (IAS27, paragraph 14). Based on an evaluation of the extent of control over the investee mentioned above, it is not consolidated but accounted for using the equity method by the Company. 

The Company's share of loss in its equity accounted investee for the year ended 31 December 2008 was JPY 19,484 thousand (2007: JPY 3,180 thousand).  

Summary financial information for equity accounted investees, not adjusted for the percentage ownership held by the Company:

2008

Owner-

ship

Current

Assets

Non-

current assets

Total assets

Current liabilities

Non-

current liabilities

Total liabilities

(Unit: JPY'000)

Beyond LSI Ltd.

60.49%

13,929

14,919

28,848

78,815

162,972

241,787

Revenues

Expenses

Loss

11,767

54,722

42,955

2007

Owner-

ship

Current

Assets

Non-

current assets

Total assets

Current liabilities

Non-

current liabilities

Total liabilities

(Unit: JPY'000)

Beyond LSI Ltd.

40%

19,885

30,971

50,856

72,319

167,901

240,220

Revenues

Expenses

Loss

13,297

46,038

32,741

14

INVENTORIES

  JPY'000

Year ended

31/12/08

Year ended

31/12/07

Raw Materials (note 1, described below)

26,063

84,883

Finished goods (note 2, described below)

25,664

32,586

51,727

117,469

15

TRADE AND OTHER RECEIVABLES

Trade and other receivables comprise following items.

JPY'000

Year ended

31/12/08

Year ended

31/12/07

Trade accounts receivable

6,516

123,761

Prepaid expenses

2,697

1,414

Advances to employees

-

1,512

Advance payments to third party

3,119

-

Short-term lending to related party (Note 23)

13,400

-

Other receivables 

2,060

5,112

Consumption tax recoverable

15,650

4,634

Total

43,442

136,433

Cash and cash equivalents comprise cash and short-term deposits held by the Company treasury function. The carrying amount of these assets approximates to their fair value.

Credit risk - The Company's principal financial assets are bank balances and cash, investment securities, and trade and other receivables, which represent the Company's maximum exposure to credit risk in relation to financial assets.

The Company's credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are recognised at fair value and subsequently measured by estimating the present value of cash flows discounted using the effective interest rate if impaired. The Company analyzes default risks and customer relations regularly in order to minimize credit risk of trade receivables.  

The credit risk on liquid funds is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.

The Company has a concentration of credit risk, with exposure spread over only several counterparties and customers.  

Financial risk - The Company has no significant interest risk. The Company is exposed to transactions in currencies other than Japanese Yen. The Company has a liquidity risk, which is described at Going Concern in the summary of significant accounting policies.  

The balances under foreign currencies as at 31 December 2008 and 2007 were bank deposits of JPY 120 thousand (SEK 10,276.19) and JPY 236 thousand (SEK 13,420.19), receivables of JPY 2,185 thousand (USD 24,000) and nil, investment securities of nil and JPY 2,944 thousand (SEK 165,240), and payables of JPY 1,239 thousand (USD 9,000.00 and STG 3,150.00) and JPY 2,598 thousand (STG 11,402.17). There were no formal risk management policies in place other than management monitoring the level of transactions denominated in foreign currencies.  

16

SHARE CAPITAL

2008

Number

2008

JPY'000

2007

Number

2007

JPY'000

Ordinary shares with no nominal value

Authorised: 

125,600,000

N/A 

125,600,000

N/A 

Issued and fully paid: 

20,531,595

159,846

6,330,000

96,120

Issued in exchange for shares of the equity accounted investee

-

-

1,585,526

30,125

Balance at the year end

59,983,821

873,460

39,452,226

713,614

On 30 October 2007, the Company issued 5,080,000 shares and allocated them to some institutional investors and individuals outside the Company by a resolution in writing of the shareholders' meeting. After such issuance, the aggregate number of issued shares was 36,616,700. 50% of the total paid amount of JPY 142,240 thousand was allocated to share capital and the rest was allocated to share premium.  

On 26 November 2007, the Company issued 1,250,000 shares and allocated them to some institutional investors and individuals outside the Company by a resolution in writing of the shareholders' meeting. After such issuance, the aggregate number of issued shares was 37,866,700. 50% of the total paid amount of JPY 50,000 thousand was allocated to share capital and the rest was allocated to share premium.  

On 28 December 2007, the Company issued 1,585,526 shares and allocated to the shareholders of Beyond LSI Ltd (Japan) by a Board resolution. After such issuance, the aggregate number of issued shares was 39,452,226. For consideration of such issuance of shares, the Company acquired 40% of total shares of Beyond LSI Ltd (Japan). 50% of the total consideration value of JPY 60,250 thousand was allocated to share capital and the rest was allocated to share premium.

On 5 March 2008, the Company issued 1,500,000 shares and allocated them to the management by a Board resolution. After such issuance, the aggregate number of issued shares was 40,952,226. 50% of the total paid amount of JPY 15,000 thousand was allocated to share capital and the rest was allocated to share premium.  

On 26 June 2008, the Company issued 6,625,000 shares and allocated them to an institutional investor and the management by a Board resolution. After such issuance, the aggregate number of issued shares was 47,577,226. 50% of the total paid amount of JPY 53,000 thousand was allocated to share capital and the rest was allocated to share premium.  

On 25 September 2008, the Company issued 714,285 shares and allocated them to the management by a Board resolution. After such issuance, the aggregate number of issued shares was 48,291,511. 50% of the total paid amount of JPY 10,000 thousand was allocated to share capital and the rest was allocated to share premium.

On 21 November 2008, the Company issued 11,692,310 shares and allocated them to the some institutional investors and management by a Board resolution. After such issuance, the aggregate number of issued shares was 59,983,821. 53.85% of the total paid amount of JPY 81,846 thousand was allocated to share capital and the rest was allocated to share premium.

The Company has one class of ordinary shares, which carry no right to fixed income. 

The ordinary shares rank equally for voting and rights to dividends.  

EQUITY-SETTLED SHARE-BASED COMPENSATION

The shareholders' meeting authorised the share option plan as at 31 January 2006. 2,000 options in total equivalent to the 1,000 shares per option were granted to all directors, employees and Company's consultants for no consideration. The options can be exercised commencing from January 31, 2008 to January 30, 2016 at JPY 10 per share. Of 2,000 options, 1,820 options were actually allotted to the eligible persons.  

In addition, shareholders' meeting authorised the share option plan as at 29 June 2007. 1,500 options in total equivalent to the 750 shares per option were granted to all directors, employees and Company's consultants for no consideration. The options can be exercised commencing from June 30, 2009 to June 29, 2010 at JPY 107 per share. Of 1,500 options, 1,460 options were actually allotted to the eligible persons. 

Share-based compensation was measured at fair value of the share options at the date of grant. The fair value determined at the grant date was expensed on a straight-line basis over the vesting period, based on the Company's estimate of shares that will eventually vest. Fair value was measured by use of the Black-Scholes model, taking into account the terms and conditions upon which the options were granted.

Details of share options granted during the year ended 31 December 2006, and the assumptions used in the Black-Scholes model are as follows:

Number of 

Options 

Number of shares 

Number of share options as of 31 December 2007

1,360

1,360,000

Exercised during the year

0

0

Forfeited during the year

(460)

(460,000)

Outstanding at December 31, 2008

900

9,00,000

Fair value of share at measurement date

10

JPY/share

Equity-settled share-based payment fair value

3.14

JPY/share

Exercise price

10

JPY/share

Weighted average exercise price

10

JPY/share

Expected volatility

23.26

% p.a.

Option life

120

Month

Expected dividends

Nil

Risk-free interest rate

0.8

%

The expected volatility is based on historical volatility of similar listed entities since the Company was not listed when the options were granted. The options are granted under a service condition. There are no market conditions associated with the option granted.  

Details of share options granted during the year ended 31 December 2007 and the assumptions used in the Black-Scholes model are as follows:

Number of 

Options 

Number of 

shares 

Number of share options as of 31 December 2007

1,160

1,160,000

Forfeited during the year

(340)

(340,000)

Outstanding at December 31, 2008

820

820,000

Fair value of share at measurement date

53.8

JPY/share

Equity-settled share-based payment fair value

31.0313

JPY/share

Exercise price

107

JPY/share

Weighted average exercise price

107

JPY/share

Expected volatility

128.6

% p.a.

Option life

30

Month

Expected dividends

Nil

Risk-free interest rate

1.0

%

The options are granted under a service condition. There are no market conditions associated with the option granted.  

At the balance sheet date, the Company has unused tax losses of JPY 975,061 thousand available to offset against future profits. No deferred tax asset has been recognised in respect of such unused tax losses due to the unpredictability of future profit streams. The unrecognised tax losses of JPY8,742 thousand, JPY 137,271 thousand, JPY319,834 thousand and JPY 509,214 thousand will expire in 2013, 2014, 2015 and 2016, respectively.

Details of deferred tax assets and liabilities are as follows:

   JPY'000

Year ended

31/12/08

Year ended

31/12/07

Tax loss carry forward

393,998

183,444

Impairment loss on receivables

58,848

101,796

Impairment loss on investment securities

9,480

-

Impairment loss on tangible assets

770

-

Impairment loss and loss on disposal of intangible assets

11,754

-

Inventory write-down

35,206

-

Differences in depreciation and amortization for tax purposes

1,994

5,814

Liabilities for expenses disallowed until paid

3,450

8,855

Equity-settled share-based transactions 

7,211

5,021

Loss of share of equity method investee

9,224

1,294

Others

70

1,973

Deferred tax assets total

532,005

308,197

Share issuance costs

14,827

9,499

Deferred tax liabilities total

14,827

9,499

Net of deferred tax assets and liabilities

517,178

298,698

Valuation allowance

(517,178)

(298,698)

Deferred tax assets on balance sheet

-

-

Tax reconciliation: 

Reported loss before taxation

(537,923)

(648,959)

Tax rate at 40.7%

(218,934)

(264,126)

Impact of non-deductible expenses

445

31,372

Impact of prior year's reported loss before taxation

(298,698)

(65,944)

Valuation allowance

517,178

298,698

Tax charge for the period

-

-

19

OTHER FINANCIAL LIABILITIES

Trade and other payables comprise the following items.

JPY'000

Year ended

31/12/08

Year ended

31/12/07

Trade accounts payable

979

7,457

Accrued expenses

8,844

14,551

Withholding income tax for employees

3,295

3,440

Deferred revenue

-

3,150

Miscellaneous tax payable

2,886

3,011

Due to employees and directors (Note 23)

4,929

4,890

Other payables (Note 23)

60,313

49,721