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Corporate Governance

Compliance with the 2006 Combined Code

The Board considers that, throughout 2007 and up to the date of approval of the financial statements, the company has complied with the principles set out in section 1 of the Combined Code issued by the Financial Reporting Council in July 2006.

Composition and operation of the Board

The Board comprises the non-executive Chairman, two Executive Directors and two Non-Executive Directors.

The articles of association require each Director to submit himself for re-election at least every three years. Details of those Directors submitting themselves for re-election at the AGM in May 2008 appear in the Directors' report.

The Board has been established in order to give a balance of knowledge, experience and objective overview. Their experience is detailed in their biographies at http://investors.ncipher.com/biographies. The two executive Directors provide the necessary skills in management. The three non-executive Directors provide a blend of experience to enable them to bring strong independent judgement and considerable knowledge and experience to the Board.

The Board's policy is to meet at least twice a quarter (a summary of the meetings held in 2007 appears below) and is responsible for the development of business and commercial strategy, monitoring progress, the approval of major business matters and policies, operating and capital expenditure budgets, analysing risks and maintaining adequate systems of internal control and the approval of financial statements. The Board is also responsible for sanctioning significant commercial arrangements. Each Director is furnished with sufficient information to enable him to discharge his duties and responsibilities as a Director. Information is normally communicated electronically to members of the Board. The ultimate responsibility for reviewing and approving the annual report and accounts and the interim reports, and for ensuring that they present a balanced assessment of the Group's position, lies with the Board. It is standard practice for Board members to declare any interest they may have in business being discussed by the Board or one of its committees and abstain from that vote. The Board has established a number of committees.

The Executive Directors, led by the Chief Executive, have been delegated responsibility by the Board for the management of the Group within the control and authority framework set by the board.

In 2007 the Board met eleven times for meetings with a full agenda of strategic, operational and governance issues. Four of these meetings were accompanied by meetings of the audit and compensation committee. All members were present at these meetings, either physically or by conference call. Employees of the Group were invited to present to these meetings where appropriate and two of the audit committee meetings received presentations from the auditors. The Company has retained Corporate Finance advisors, brokers and legal counsel and these external advisors attended meetings by invitation. The Non-Executive Directors met without any executives being present on a number of occasions during the year and all members are also in regular informal contact.

The Board and each committee of the Board has access to the advice and services of the Company Secretary and of outside professional advisers in the furtherance of its duties.

The performance of the Board is reviewed at least annually. The review for 2007, which commenced towards the end of the year and was concluded early in 2008, was conducted by the Chairman and was supported by the use of questionnaires and individual meetings. The timing of this process recognised that one of the key board objectives during the year had been to secure the appointment of a new Chief Executive to the board to succeed Alex van Someren. This process was completed with the appointment of Geoffrey Finlay in December.

Independence of Directors

The Board considers that in order to be seen as independent, those Directors should be able to demonstrate that the following circumstances do not apply to them:

Employment by the company within the last five years;
Existence within the last three years of a material business relationship with the company;
Receipt of additional remuneration from the company, apart from a Directors' fee;
Existence of close family ties with any of the company's advisers, Directors or senior employees;
Ownership of beneficial interest in a significant shareholding; and
Service on the Board for more than nine years from the date of first election.

The Board considers the three non-executive directors to be independent directors. Some independent directors have shareholdings in the Company; however these are not considered to be significant enough to impair the independence of those directors.

On the basis of these criteria, the Board has determined that each of the non-executive Directors is independent. R Gourlay is the senior independent director.

Geoffrey Finlay also serves as a non-executive director of Life4ce Ltd. His remuneration in that capacity, which is retained, is Nil per annum. Details of the main other directorship's of the directors are contained in their biographies at http://investors.ncipher.com/biographies.

Nominations Committee

The Board has established a nominations committee comprising of the Chairman and the other two non-executive Directors. The committee is responsible for nomination of Directors, induction of new directors and officers, continuing education of Directors, and succession planning. In 2007 this committee met informally on multiple occasions during the lengthy process of appointing the new chief executive officer and reported back to the Board at the full Board meetings. The appointment of the chief marketing officer to the board was considered by the Committee, and concluded by the board, during December, following Geoffrey Finlay's appointment.

Audit Committee

The Audit Committee has adopted terms of reference, available from the Company Secretary, that are compliant with the provisions of the Combined Code. The Audit Committee has responsibility for, among other things, keeping under review the scope and results of the audit, the review of the annual report and accounts and half year interim report, the involvement of the auditors in that process, considering compliance with legal requirements, accounting standards, the rules of the Financial Services Authority and for advising the Board on the requirements to maintain an effective system of internal control. The ultimate responsibility for reviewing and approving the annual report and accounts and the half yearly reports remains with the full Board.

The Audit Committee additionally keeps under review the independence and objectivity of the Group's auditors, value for money of the audit and the nature, extent and cost-effectiveness of the non-audit services provided by the auditors.

The Audit Committee is comprised of two non-executive Directors. Richard Gourlay is Chairman and its other member is James Urquhart. The Audit Committee meets at least three times a year. The Chief Finance Officer attends meetings by invitation in order to ensure that all the information required by the Audit Committee is available for it to operate effectively. Other executive Directors may attend by invitation; however, at least once a year, the representatives of the Company's auditors meet with the Audit Committee without any executive Directors being present. The Chairman may meet with the auditors before the start of the annual audit, should it be considered necessary, to ensure the audit scope is responsive to any work identified by the committee during the year.

The Company's policy is not to offer the auditors work which might result in a conflict during their audit of the Financial Statements. Non-audit work performed during the year by other member firms of Deloitte Touche Tohmatsu related to assisting the Company in the preparation of tax computations, reporting accountant work in respect of the return of capital to shareholders and payroll processing for a small number of employees in Germany and France. The independence and objectivity of the auditors is regularly considered by the committee. The committee receives an annual statement from the auditors detailing their independence policies and safeguards and confirming their independence. The committee pre-approves any significant additional work performed by the auditors.

During 2007 the committee met three times with all members present. During the year, the committee received a report on the audit work planned by the auditors and reviewed the effectiveness of the audit and the impact of the non audit services provided in the year.

Compensation Committee

The Compensation Committee has responsibility for making recommendations to the Board, within agreed terms of reference, available from the Company Secretary, on the Company's policy on executive remuneration and the individual remuneration packages for the executive Directors including pension rights and any compensation payments. It is chaired by James Urquhart and Richard Gourlay and Robert Jeens are also members of this committee which meets as necessary. Coming from diverse backgrounds, the three non-executive Directors are able to offer a balanced view with respect to remuneration issues for the Group. The Chief Executive Officer will normally attend these meetings. The Report of the Board on Directors' Remuneration immediately follows the Corporate Governance statement. The remuneration of the non-executive Directors is decided upon by the full Board.

During 2007 the committee met 4 times with all members present. The committee has used salary surveys to assist it in its work but has not used any external consultants during 2007. No formal performance reviews of the current executive Directors were carried out in the year as the new members of the Board have not been in post for a sufficiently long period. Performance reviews of the two former executive directors were performed in conjunction with the arrangements for their respective retirements from the board.

Attendance at Board and Committee Meetings

Number convened/ attended by Directors	Board Meetings	Nominations Committee	Compensation Committee	Audit Committee
Number convened	11	3	4	3
Robert Jeens	11	3	4	n/a
Richard Gourlay	11	3	4	3
Jamie Urquhart	11	3	4	3
Geoffrey Finlay	2	n/a	n/a	n/a
Ira Zalesin	1	n/a	n/a	n/a
Alex van Someren	11	n/a	n/a	n/a
Nicko van Someren	10	n/a	n/a	n/a

Financial reporting

Detailed reviews of the financial performance and financial position of the Group and the Company are included in the Financial Review. The Board uses this, together with the Chairman's Statement, the Chief Executive Officer's Review, and the Directors' Report to present a balanced and understandable assessment of the Company's position and prospects. Any information that the Board is either obliged to announce or considers appropriate to announce to its shareholders is communicated via the RIS system as required.

Internal control

In applying the principle that the Board should maintain a sound system of internal control to safeguard shareholders' investment and the Company's assets, the Directors recognise their overall responsibility for ensuring that the Group maintains a system of internal control and their responsibility for reviewing its effectiveness.

This system of internal control is designed to provide them with reasonable assurance regarding effective and efficient operations, internal financial control and compliance with laws and regulations. The process for identifying, evaluating and managing the significant risks faced by the Group is currently being revised, following the restructure of the Board during the year. Once embedded, the new process will be regularly reviewed by the Board in accordance with the Internal Control Guidance for Directors on the Combined Code produced by the Turnbull working party. Steps continue to be taken to embed internal control and risk management further into the operations of the business and to deal with areas of improvement which come to management's and the Board's attention.

The key features of the financial controls of the Group include the system of financial reporting, budgeting and forecasting, and clearly laid down accounting policies and procedures. The organisational structure has clear lines of responsibility. Financial control for subsidiary companies is monitored centrally and authorisation of expenditure by the overseas subsidiary companies is monitored by the Group's management. Profit and loss, balance sheet and cash flow information is prepared for each entity each month and reviewed by relevant executives. The Board is furnished with financial information on a monthly basis.

As part of the intended revisions to the risk reporting process, the Board will receive regular formal reports on the major risks facing the business and how the management addresses them. This process was conducted in a less formal manner during 2007. While such a system is designed to manage rather than eliminate the risks of failing to meet the corporate objectives of a fast-moving high technology business it can only provide reasonable and not absolute assurance against material misstatement or loss.

The Company operates an anonymous suggestions system, which may be used by employees to raise concerns about possible improprieties in matters of financial reporting or other matters. In 2007, employees could raise possible improprieties in matters of financial reporting or other matters with the Chairman of the audit committee and send suggestions relating to business improvements to the Chief Executive Officer. During 2007 no concerns were raised by employees through this channel.

Given the Group's relatively small size, the Board does not consider that it would be practicable to have its own internal audit function for the present.

Relationships with shareholders

Communications with shareholders are given a high priority. The Board has established and maintains relationships with the company's institutional investors. The Company values dialogue with its institutional shareholders through regular meetings and results briefings. The Annual General Meeting and the documents sent to all shareholders prior to that meeting provide an opportunity for the Board to account to shareholders for its stewardship of the Group's business. The Board actively encourages participation at General Meetings.

Going concern

After making enquiries, the Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. For this reason, they have adopted the going concern basis in preparing the financial statements.