The Board of Directors and the President of Precise Biometrics AB (publ), CIN 556545-6596, with headquarters in Lund, Sweden, hereby submits their Annual Report and consolidated financial statements for the fiscal year 2009.

Activities

Precise Biometrics is an innovative company that offers commercial solutions based on fingerprint recognition to establish personal identity. With cutting-edge competence in fingerprint recognition, Precise Biometrics offers rapid, reliable and secure verification.

The Company’s core technology, Precise BioMatch™, can easily be integrated in many systems –such as ID, SIM and bank cards, security circuits, access to computers, networks and physical access control. The company operates in a global market and its technology is licensed to nearly 100 million users throughout the world with close to 25 million rolled-out licenses.

Precise Biometrics’ business concept is, together with strong partners and through global networks, to offer countries, public authorities, companies and organizations user-friendly and interoperable solutions to determine personal identity in a simple, cost-effective and reliable way.

Precise Biometrics' vision is to be a global leader and independent provider of interoperable and adaptable solutions based on fingerprint recognition intended for small secure platforms and more complete, end-to-end solutions for specific segments.

The group’s most important operational objectives in the coming year and beyond include:

• Continued roll out and market leading position within the important National ID card segment, with expansion into the high volume segment for smart cards, and the SIM and bank card segment
• Underpinning Precise Biometrics’ market image as a reliable supplier with core competencies and long experience of highly advanced fingerprint solutions
• In 2009, Precise Biometrics has shown continued growth including a positive result in the fourth quarter. During the year, the company has completed a rights issue in order to finance further expansion and increase market penetration in prioritized segments. The rights issue supplied the company with SEK 50.6 million after issue costs. Based on this, Precise Biometrics stands on a firm financial ground for the years to come.

The sales organization

Precise Biometrics’ marketing and sales work concentrates on the five geographical markets of Europe (including Scandinavia), North America, the Middle East & Africa, Asia and Latin America. More information about the geographical markets are to be found in the annual report under the segment “Geographical Markets” and in Note 3.

Market segments

In all card-related segments, Precise Biometrics provides its Match-on-Card technology, Precise Match-on-Card™, which enables people to confirm their identities.

National ID Cards

In this field, Precise Biometrics cooperates with companies that supply smart cards, systems integration and solutions for countries that issue ID documents to their citizens. Through the use of fingerprints and Match-on-Card technology, the company addresses such problems as identity theft and identity fraud, while the availability of services for official bodies is increasing. Match-on-Card technology can also open up for different commercial ID card applications.

Employee ID

The Employee ID area has long been an important segment for Precise Biometrics, as the first Match-on-Card installations were made by banks and official bodies in order to improve IT security and traceability in systems. Using Match-on-Card gives these types of companies and organizations wide opportunities for saving money on reduced password management.

Bank cards

Match-on-Card technology provides added value for the bank card segment, for example in regions where reading and writing difficulties present major problems. Replacing PINs with fingerprints provides a secure, and for the cardholder simple, way that leaves no room for doubt that a transaction is being performed by the right person. The technology requires minimal changes to existing EMV infrastructure and can be integrated in a simple manner.

SIM cards

SIM cards, which are used exclusively on cell phones, represent the lion’s share of smart cards. The launch of NFC (Near Field Communication) for cell phones has enabled the use of cell phones to make payments, perform ticketing and manage travel documents. Match-on-Card for SIM cards is an ideal and secure manner of performing many high value transactions using cellular phones in wireless communication with payment terminals and fingerprint readers.

Embedded

The Embedded segment includes Precise BioMatch™ technology for integration in third party fingerprint readers as handheld units or bank terminals. This technology can be provided either as software or a hardware integration for chip and circuit manufacturers.

The most important business events during the year

In 2009, Precise Biometrics received a number of major orders.

• The most important event during the year was a major order from the US government within the framework of the Cyber Security Program, which is being introduced by the US government to prevent hostile infiltration in government systems for critical infrastructures. The value of the order is over USD 6 million, and is the largest order the Company has received so far. Following an agreement with the customer, final delivery of the order will take place in the first quarter of 2010.
• • Precise Biometrics joined a partnership with the Nigerian company Interswitch aimed at developing bank application for the African market. A first project, worth 200 000 Euros in license sales, has already been initiated and invoiced.
• During the second quarter Precise Biometrics received a follow-up order of hardware and software at a value of SEK 2.1 million from an existing government customer in the Middle East.

Other important events during the year

• Together with Gemalto, the world largest smart card provider, Precise Biometrics introduced Gemalto .NET Bio, a computer logon solution for Windows.
• Precise Biometrics AB completed a rights issue with preferential rights, which supplied the Company with SEK 50.6 million after issue costs. The non-guaranteed rights issue was subscribed to 178% and is implemented to finance further expansion and increase market penetration in prioritized segments.
• The wholly owned subsidiary Precise Biometrics Solutions AB was restructured due to unfulfilled expectation in the aviation sector. As an effect Precise Biometrics AB has, during the third quarter, written down the goodwill value of SEK 5.0 million in the subsidiary. The write-down is included in Selling expenses.

Patents

The group’s overall patent strategy is based on primarily applying for patents based on innovations within the company’s Match-on-Card technology. This strategy aims at guaranteeing rights to our own technology, creating value for future business, and providing protection from competitors. New patent applications will focus on mobile applications of Precise Match-on-Card™.

Since 2001, the patent portfolio has gradually expanded to include 73 different patents and 32 patent applications within 21 different patent families at the end of 2009. Precise Biometrics has 13 different patent families for the Match-on-Card technology alone.

Brands

Precise Biometrics works actively and strategically with its trademark portfolio which contains a few carefully selected trademarks:

PRECISE BIOMETRICS™ – registered both as a device mark and as a word mark in a number of countries

PRECISE BIOMATCH™ – comprehensive trademark for the core technology. It is also used as foundation in the branding of the software products. The trademark is registered as a Community Trademark and in the USA

PRECISE MATCH-ON-CARD™ – well established and well-known trademark of Precise Biometrics that refers for the technology to save and match a fingerprint on a smart card. The trademark is registered as a Community Trademark

BIOCORE® –registered trademark among others as a Community Trademark. It refers to the technology that manages the algorithms that are natively integrated in for example chip

Sales and income

Sales during the financial year amounted to SEK 68.7 million (45.9). The gross margin was 52 percent compared with 49 percent in the previous year. The group’s net loss for the fiscal year amounted to SEK -21.8 million (-54.2).

Operating expenses for the financial year, excluding the cost of products sold and profit/loss from participations in associated companies and write-down of goodwill, amounted to SEK -51.1 million (-46.4), including depreciation and writedowns of SEK 2.7 million (2.8) and capitalized development expenditure of SEK 1.3 million (1.6).

Earnings per share (average number of shares) for the period amounted to SEK -0.19 (-0.54).

Financing and liquidity

As of 31 December 2009, equity stock amounted to SEK 45.4 million (16.0) and equity per share to SEK 0.34 (0.16).

The cash flow from current operations during the year amounted to SEK -21.2 million (-19.8). Cash and cash equivalents at the end of the financial year amounted to SEK 40.9 million (11.3).

Precise Biometrics AB completed a rights issue with preferential rights, which supplied the Company with SEK 50.6 million after issue costs. The non-guaranteed rights issue was subscribed to 178% and is implemented to finance further expansion and increase market penetration in prioritized segments.

Capitalization and depreciation of development work

Development expenditures of SEK 1.3 million (1.6) were capitalized during the financial year. During the year, depreciation and writedowns of capitalized development expenditures amounted to SEK 2.2 million (2.2), of which writedowns accounted for SEK 0.1 million (0.1).

Research and development

The R&D department works on both product development and research activities aimed at generate or further develop products, solutions and algorithms. By participating in various standardization bodies, the Company works to influence standardization development in the group’s core technology.

During 2009 Precise Biometrics submitted a fingerprint extractor to NIST - the US National Institute of Standards and Technology within the framework of the interoperability program Ongoing MINEX. Precise Biometrics’ fingerprint extractor showed the best result of all the 43 extractors that have ever been submitted to Ongoing MINEX.

During 2009 the company has also put effort into adjusting its product for Microsoft’s new operating system Windows 7 and the newly introduced Windows Biometric Framework.

Organization and personnel

Precise Biometrics has its headquarters in Lund, Sweden. The organization also consists of the subsidiaries, Precise Biometrics Inc. in Washington DC, USA, Precise Biometrics Asia Ltd. domiciled in Hong Kong and Precise Biometrics Solutions AB with offices in Karlstad. The dormant companies Precise Biometrics Services AB, and Loqware Sweden AB (in the process of liquidation) are also part of the group. During 2010 Precise Biometrics will close the subsidiary Precise Biometrics Asia Ltd. We are still positive towards the developments in the Asian market, but our Asian marketing activities will be organized from the headquarters in Lund.

There were 36 (44) employees at the end of the year, of which one is based in the US and one in Hong Kong. The reduction in the number of employees compared with the previous year may be primarily ascribed to changes in the subsidiary Precise Biometrics Solutions AB. Of the total number of employees at the end of the year, 26 (34) were men and 10 (10) were women, and more than 62 percent of the employees in the group are under 40 years old.

Absence due to illness in the parent company was low during the year, amounting to 1.7 (0.8) percent overall. Personnel turnover in the group was 21.0 percent (19.5).

Salaries and other remuneration, excluding payroll overheads, amounted to SEK 28,2 million (27.4) during the year.

The share

The Company’s stock has been listed on the O-list of the Stockholm Stock Exchange since October 3, 2000, which after October 2, 2006 was replaced by the NASDAQ OMX Nordic, where the Company is now listed on the Small Cap list.

The total number of registered shares at the end of the fourth quarter was 134,960,800, and the value of capital stock was SEK 53,984,320. During the financial year, average sales amounted to SEK 3 327 thousand per day and the share price fluctuated between SEK 0.50 and 3.72.

Proposed guidelines for the compensation of leading officials

The stockholders’ meeting decided to adopt the board of directors’ proposal for establishing guidelines for the compensation of leading officials, mainly involving remuneration and employment terms and conditions on general market and competitive terms and predetermined caps on remuneration. Bonus remuneration must not exceed 50% of the fixed annual salary for the president and 30% for other executives. Bonus remuneration for US employees must not exceed 50% of basic salary. Remuneration may also be provided in the form of options or other stock-related incentive programs. The president is subject to a mutual period of notice of 6 months and the other executives to a period of notice of 3-6 months. Severance pay for the president may not exceed 12 months’ salary if employment is terminated at the discretion of the company. Other executives are not entitled to severance pay.

Retirement age is 65; pension premiums are calculated on a scale based on age and salary, and may amount to a maximum of 25% of the fixed salary. The proposal implies a level of remuneration that basically corresponds to the previous year.

Corporate governance

Precise Biometrics has applied the Stockholm Stock Exchange’s corporate governance code (the Code) since July 1, 2008. Read more in the Corporate Governance Report in the financial statements.

Risks

See Note 31 or under the heading “Risks” in the Annual report.

Change of control clause

There are no agreements to which the company is committed that would come into effect, cause the company to be changed, or cease to be valid, if the control of the company was changed as a result of a public takeover bid, and no agreements of such a nature that nationalization would in all probability seriously damage the Company.

Parent company

Parent company sales for the financial year amounted to SEK 57.4 million (30.8). Operating loss before tax for the financial year amounted to SEK -23.8 million (-54.6).

At the end of the financial year, 25 persons were employed in the parent company.
Liquid assets at the end of the year amounted to SEK 28.5 million (9.3). Investments in property, plant and equipment amounted to SEK 0.0 million (0.2).

During the financial year, capitalized development expenditure amounted to SEK 1.1 million (1.6).

Proposed treatment of accumulated loss

Parent company

The following assets are at the disposal of the annual stockholders’ meeting:

Accumulated loss, SEK…………………………………………0
Net loss for the year, SEK.........................................-23 820 802
Total accumulated loss...........................................-23 820 802

The board of directors and the president propose managing the accumulated loss as follows:
Reduction of share premium reserve SEK.............23 820 802
Carried forward, SEK.....................................................................0
Total…............................................................................23 820 802

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