Report of the Supervisory Board

Fiscal year 2007 was the most successful year in the history of the company. With strong organic sales growth of 11% to almost € 394 million, IDS Scheer AG increased its net income by 25%. These results are largely due to the impetus of the ARIS software solution and processoriented consulting focused on growth topics. Thanks to partnerships with leading providers of business software, the ARIS Platform for Process Excellence has been internationally established as an open, vendor-neutral system and as the de facto standard for business process management. Independent market analysts again confirmed the leading global position of ARIS in 2007. The further development of the solution portfolio, that the Supervisory Board supports, must now focus on generating sustainable increases in the performance of our customer companies through business process improvement. The foundations for this were created in the past fiscal year by significantly expanding the international customer base to currently 7,000 companies. We are convinced that the corporate strategy we have chosen is the right one and that IDS Scheer AG is well positioned to continue its growth course successfully.

In the year under review, the Supervisory Board performed the tasks required by law and its bylaws. We regularly advised the Executive Board on leading the company and monitored the management of the company. The Supervisory Board was directly involved in all decisions of fundamental importance.
In the year under review, the Supervisory Board performed the tasks required by law and its bylaws. We regularly advised the Executive Board on leading the company and monitored the management of the company. The Supervisory Board was directly involved in all decisions of fundamental importance. The Executive Board reported to us regularly, promptly and comprehensively, both orally and in writing, on all key issues of company planning and development, the progress of the business activities, the situation of the IDS Scheer Group including the risk situation and risk management. Deviations in business developments from planning and goals were presented to us in detail. The Executive Board consulted us about the strategic orientation of the company and the necessary measures this entailed. We discussed all business transactions of significance to the company in the Supervisory Board using reports from the Executive Board.

The good cooperation between the Executive Board and the Supervisory Board was not limited to formal meetings. The Chairman and Deputy Chairman of the Supervisory Board maintained close contact with the Executive Board, particularly with its Chairman, in order to be informed early on key business developments and forthcoming decisions. In separate strategy talks we discussed the prospects and the direction of the business areas with the Executive Board. Furthermore, the Chairman of the Supervisory Board gained a strong insight into the development of the foreign companies through his work as a speaker at international events.

Three ordinary Supervisory Board meetings took place in fiscal year 2007. The meeting planned for the fourth quarter was postponed to January 2008 owing to the scheduling difficulties for one member of the Supervisory Board. The necessary resolutions on current topics were discussed by telephone and made promptly in writing. All members of the Supervisory Board took part in all meetings. Also between meetings, the Executive Board informed us in detail of key projects and plans. Where necessary and for urgent topics, the Supervisory Board passed resolutions by way of written procedure during the year.

As a midsized company, we can leverage the strengths of a lean organization, the short, fast pathways and personal contacts that contribute to constructive cooperation above and beyond formal meetings.

Consulting focus in the Supervisory Board

The main topics that we consulted on were the strategic direction of the company, the expansion of the international IDS Scheer Group and the development of the business areas. Key items in the consulting business area were the focus on the core industries and growth topics, stringent risk management for major projects and central management of the international regions with the aim of sustainably improving margins. Consulting for the products area centered on the innovative development of the ARIS Platform and the further strong expansion of the highly profitable business area. Significant individual topics were the development and intensification of strategic technology and sales partnerships with leading business software providers and the strengthening of the direct and indirect sales channel.

Other topics consulted on included business planning and the attainability of the company’s targets, improving operating cash flow, implementing a globally standardized controlling system and the guidelines for the expansion of the internal risk management system.

In the first meeting of the Supervisory Board on February 2, 2007 we discussed business development in the fourth quarter and the full year 2006, the key data of the annual financial statements and the increase of the dividend payment. Furthermore, we discussed and approved corporate planning for the fiscal year 2007 and medium-term planning.

At the Supervisory Board meeting on March 29, 2007 we extensively discussed the annual financial statements and the consolidated financial statements for 2006 and approved them. The auditors reported in the Supervisory Board meeting on the findings of their audits of the annual and consolidated financial statements. Furthermore, the Supervisory Board approved the disposal of the activities of the IT operations business area in Austria.

The Supervisory Board meeting on August 24, 2007 discussed business developments in the first half of the year and the holdings structure of the company. In particular, we resolved the merger of IDS Scheer Radermacher GmbH with IDS Scheer AG and the founding of a branch in Australia.

Work of the Committees

In order to perform its activities efficiently, the Supervisory Board established a total of three Committees. These Committees specifically prepare the topics to be discussed in the plenary session of the Supervisory Board. In the year under review, the Committee members regularly reported to the Supervisory Board on their work.

The Audit Committee is led by Dr. Pocsay and met five times in the fiscal year 2007. The auditors of the consolidated financial statements from PricewaterhouseCoopers (PwC) took part in all the meetings of this Committee. In particular, the Audit Committee dealt with issues of accounting and compliance, issued the audit mandate, stipulated the focus of the audit, the audit fee and the audit process and monitored the impartiality of the auditors. The Audit Committee also discussed the key risks monitored by the risk management system and the related measures resolved by the Executive Board.

The Personnel Committee, which is responsible for appointment agreements for members of the Executive Board and staff development, is led by Dr. Scheer. The key topics covered in its ongoing meetings were the prolongation and revocation of Executive Board agreements, the compensation system for the Executive Board and the expansion of the Executive Board to include a Chief Financial Officer. It discussed the development of the target system and the target agreements of the Executive Board relevant to compensation, decided on the allocation of stock options and concluded the agreements with the members of the Executive Board.

The Technology Committee chaired by Dr. Scheer met in three formal meetings and in ongoing individual talks to discuss the technological development of the ARIS product family and the orientation towards changing market requirements. The main topics it focused on were current and future developments in the areas of business software and process management, particularly with regard to the new SOA technologies, the launch of the new ARIS Solutions and the strengthening of the leading position of the ARIS Platform with the demand-driven and innovative development of the product offering.

In addition to the formal meetings, ongoing talks on current developments took place with committee members in all areas.

Compliance with corporate governance standards

The Supervisory Board observed the ongoing development of the German Corporate Governance Code on an ongoing basis. Corporate Governance represents a key guideline for IDS Scheer to anchor responsible and value-oriented management in practice. Particular attention is paid to the application, control and further development of corporate governance principles in the company.

The Executive Board reports extensively – and for the Supervisory Board in line with article 3.10 of the German Corporate Governance Code at the same time – on corporate governance at IDS Scheer in the corporate governance report of this annual report. This report is based on the new version of the Code dated June 14, 2007, with which IDS Scheer AG largely complies. In December 2007, the Executive Board and the Supervisory Board issued an updated statement of compliance in line with § 161 AktG (German Corporation Act) and made this statement available to shareholders permanently on the company’s web page www.ids-scheer.com/compliance_statement.

Annual financial statements

In line with the resolution of the annual shareholders’ meeting on May 24, 2007, the auditors of PwC were again commissioned to audit the annual financial statements, the IFRS consolidated financial statements and the group management report for 2007. We issued the audit mandate in the meeting on August 24, 2007. Before commissioning PwC, the Supervisory Board had it confirmed that there were no circumstances impairing the impartiality of the auditors.

The auditors audited the annual financial statements and management report of IDS Scheer AG, the consolidated financial statements and the management report for the group for the fiscal year 2007 and issued an unqualified audit certificate. The audit reports by PwC were presented to all members of the Supervisory Board at an early stage. They were the subject of intense discussion at the meeting of the Audit Committee on February 27, 2008 and the accounts meeting of the Supervisory Board on March 14, 2008. The auditors who signed the audit report participated in the Supervisory Board’s discussions. They reported on the findings of their audit and were available to answer the Supervisory Board’s questions. The Supervisory Board is confident that the audit was properly performed.

In the Supervisory Board meeting, the Audit Committee recommended us to approve the annual financial statements and the consolidated financial statements. The Supervisory Board agreed with the findings of the audit by the auditors and, following its own examination, raised no objections. The Supervisory Board approved the financial statements prepared by the Executive Board. The annual financial statements are thereby adopted. The Supervisory Board also examined the proposal by the Executive Board on the use of profits and the distribution of an increased dividend of € 0.22 per share and approved this proposal.

Members of the Executive Board and the Supervisory Board

There were no changes within the Supervisory Board in the year under review.

As part of the reorganization of the Executive Board in 2006, the Supervisory Board resolved to expand the Executive Board and to create the position of Chief Financial Officer. During the year under review, this position was provisionally held by Thomas Volk. Effective January 1, 2008, Jörg Vandreier was appointed to the Executive Board of IDS Scheer AG as its CFO. Jörg Vandreier is responsible for the areas of corporate finance, internal IT and investor relations.

The Supervisory Board wishes to thank the Executive Board and all the employees for their keen personal commitment in the fiscal year 2007. Their work and their motivation are the guarantee for the ongoing success of IDS Scheer AG.

Saarbruecken, March 14, 2008

Dr. August-Wilhelm Scheer
Chairman of the Supervisory Board

Source: Annual Report 2007, page 42-46