Corporate Governance Report

New version of Code published
Conformity with corporate governance suggestions
Individual disclosure of Executive Board compensation from 2007

Corporate governance means responsible and transparent management and control geared towards long-term value enhancement. The values and principles prescribed by the German Corporate Governance Code apply equally to the management and governing bodies of IDS Scheer AG and its employees. Ever since the introduction of the Code in 2002, our company has identified with its goals and worked continuously to implement its recommendations and suggestions and additions to it. In this process, corporate governance is not a fixed set of regulations but an ongoing process which is being pursued and evolved constantly. Respecting shareholder interests, close and efficient cooperation between the Supervisory Board and the Executive Board, careful accounting, comprehensive risk management and transparency in communications form the foundation for promoting trust with our investors, employees and clients.

Statement of compliance in line with § 161 of the German Corporation Act

Since being founded, IDS Scheer has operated under responsible corporate governance and widely in accordance to the recommendations of the Government Commission on the German Corporate Governance Code. Both the Executive Board and the Supervisory Board of IDS Scheer AG are committed to these internal principles. Neither the Executive Board nor the Supervisory Board is aware of any cases of breaches of these principles.

The corporate governance principles and behavior of IDS Scheer AG are and have been in conformance with the applicable German Corporate Governance Code, most recently that of June 14, 2007, with the exception of the points stated below:

Age Limitations for Executive and Supervisory Board Members
The German Corporate Governance Code recommends setting age limitations for advisory board members. IDS Scheer AG considers such a regulation to be an inappropriate restriction of the rights of the shareholders to select the members of the Supervisory Board. The corporate governance principles of IDS Scheer therefore do not contain such age limitations. Similarly, the IDS Scheer principles deviate from the corresponding recommendation of the Corporate Governance Code in not setting an age limitation for Executive Board members, as this would place a general restriction on the Supervisory Board in its selection of appropriate members of the Executive Board.

Deductible for D&O Insurance
The German Corporate Governance Code recommends that an appropriate deductible be designated for Directors and Officers (D&O) Liability Insurance purchased by a company for its Executive Board and Supervisory Board members. IDS Scheer AG is fundamentally opposed to this practice, believing that the motivation and responsibility with which the members of the Executive and Supervisory Boards approach their duties cannot be improved by such disincentives. IDS Scheer’s corporate governance principles therefore do not impose a deductible, and IDS Scheer AG plans no change to its current D&O insurance.

Former Executive Board Members on the Advisory Board
The German Corporate Governance Code recommends that no more than two former members of an executive board belong to the advisory board. IDS Scheer considers a corresponding regulation to be an inappropriate restriction of the rights of the shareholders to select the members of the Supervisory Board. The Code furthermore recommends that the chairman of the future audit committee should not be a former member of the executive board. Currently, only one former member of the Executive Board of IDS Scheer AG is serving on the Supervisory Board; this member is also the Chairman of the Audit Committee.

IDS Scheer AG considers long experience in management with the company to be quite valuable in responsibly performing the duties of the Audit Committee. The corporate governance principles of IDS Scheer AG therefore do not contain such a regulation. The current statement of compliance was published in December 2007 and has been published together with the statements of previous years on the Internet page permanently: www.ids-scheer.com/compliance_statement

Suggestions of the Code

Furthermore, IDS Scheer AG extensively follows the non-mandatory suggestions of the Corporate Governance Code as well and implements a series of guidelines that promote responsible, value-oriented corporate governance.

IDS Scheer is largely in conformance with all the suggestions of the Code with a few exceptions:

It is not intended to make it possible for shareholders to follow the entire annual shareholders’ meeting using the Internet (Code no. 2.3.4). However, the company has been broadcasting the opening of the annual shareholders’ meeting by the Chairman of the Supervisory Board and the speech by the CEO of IDS Scheer AG via the Internet for years.
Separate preparation by shareholders and employee representatives is not required for every meeting of the Supervisory Board (Code no. 3.6).
The election and re-election of members of the Supervisory Board at different dates and for different periods of office (Code no. 5.4.6) has not been implemented.
For reasons of simplicity and transparency, the compensation of the Supervisory Board does not contain components based on the long-term performance of the enterprise (Code no. 5.4.7 (2) sentence 2).

Shareholders and the annual shareholders’ meeting
The shareholders of IDS Scheer AG decide on fundamental issues affecting the company by exercising their voting rights. Each share corresponds to one vote. The annual shareholders’ meeting is generally chaired by the Chairman of the Supervisory Board.

In order to make the annual shareholders’ meeting as accommodating as possible for shareholders, IDS Scheer has resolved a number of facilities within the framework of what is legally permissible. Shareholders can exercise their voting rights through an agent of their choice or a proxy bound by instruction of the company. All the documents important for making decisions are made available to shareholders in advance on the company’s Internet page. Furthermore, it is possible for shareholders to follow the meeting via Internet connection up to the general debate.

The Executive Board
As the managing body of the IDS Scheer Group, the Executive Board has an obligation to the company’s interests and focuses on sustainably increasing its shareholder value. From January 1, 2008, the Executive Board comprises four members. The cooperation of the members of the Executive Board is governed by rules of procedure. In line with the rules of procedure, key decisions require the approval of the Supervisory Board. The Executive Board sets out the main features of corporate policy and is responsible for the ongoing strategic development of the company, its planning and adherence to the company’s budget and the control of area development. The Executive Board is responsible for the preparation of interim reports, the annual financial statements and the consolidated financial statements. In line with the rules of procedure, key decisions require the approval of the Supervisory Board.

The Supervisory Board
The Supervisory Board of IDS Scheer AG consists of six members including two employee representatives. The shareholder representatives are elected by the annual shareholders’ meeting, the employee representatives by the employees. In selecting the members of the Supervisory Board, it is ensured that they have the necessary knowledge and skills, that they are sufficiently independent and that there are no conflicts of interest. The Supervisory Board has provided itself with rules of procedure and formed three committees from within its members: the Personnel Committee, the Audit Committee and the Technology Committee. To enhance efficiency, the committees of the Supervisory Board explore key individual topics in greater depth and prepare plenary decisions in a targeted manner. The committee members regularly inform the Supervisory Board of their work.

The Supervisory Board intensively advises the Executive Board on the management of the company and regularly performs its duties of control.

Further information on the work of the Supervisory Board and its Committees can be found in the report of the Supervisory Board in this annual report.

Cooperation between the Executive Board and the Supervisory Board
The Executive Board and Supervisory Board of IDS Scheer AG have always worked together closely for the benefit of the company and seek an open and trusting dialog. The Executive Board reports to the Supervisory Board regularly, comprehensively and in a timely manner on all issues of planning, business performance, the risk situation and risk management relevant to the company. In particular, it explains and provides reasons for deviations in business performance from stated plans and targets and actively involves the Supervisory Board in discussions on key decisions. In 2007, the discussions of the Executive Board and the Supervisory Board centered on the ongoing strategic development of the company, segment development by regions and business areas, the use of profits and risk management.

In the year under review, the members of the Executive Board and the Supervisory Board had no conflicts of interests, which must be disclosed to the Supervisory Board without delay.

Transparency
IDS Scheer AG reports its investors, shareholder associations, financial analysts, the media and the interested public at large with regular, open and up-to-date communications at the same time and without favor. Personal conferences and conference calls are regularly held by the Executive Board to explain the annual accounts, the interim reports and business developments. In addition, the investor relations team maintains an intensive and open dialog with the investor community and arranges a number of roadshows, presentations and individual meetings.

In line with the increasing significance of online information and the increase in legal requirements, IDS Scheer has developed the Internet as its central communications platform. All relevant information is published as soon as possible and in detail in German and English on the company’s homepage: www.ids-scheer.com/Investor_Relations

All important investor relations dates for the new fiscal year are available in the financial calendar published in the annual report, the interim reports and on the Internet at the beginning of the year. In our reporting, we endeavor to publish our interim reports and the annual report even earlier than required by the Code and the law.

Furthermore, we take all necessary measures to comply with legal requirements in handling the company’s own securities. By using clear rules and business policies for employees, IDS Scheer AG has clearly illustrated the high demands of employee conduct, at the same time transparently presenting the integrity of its business conduct internally and externally. All persons who work for the company and have access to insider information, whether in line with regulations, on account of their profession or on a project basis, are added to an insider directory by the compliance officer and advised of the obligations based on insider law. The compliance officer monitors compliance with guidelines on an ongoing basis and regularly reports to the Executive Board and the Supervisory Board.

Shareholdings and notifications regarding share transactions
According to the requirements of the Code, the corporate governance report should also include information on the shareholdings of members of the Executive Board and the Supervisory Board. This information has been explained in detail in the consolidated financial statements and notes. Please refer to them in this annual report for further information.

According to § 15a of the German Securities Trading Act (WpHG), the members of the Executive Board and the Supervisory Board must disclose any acquisitions or disposals of shares. In the year under review, IDS Scheer published all reportable directors’ dealings on the Internet as soon as possible after receiving notification. Detailed information on reportable securities and the stock option plan can also be found in the notes to the annual report.

Risk Management, Accounting and Audits
A key component of good corporate governance is the responsible handling of corporate risks. At IDS Scheer, a systematic risk management system ensures that risks are recognized at an early stage and their impact is minimized. The procedure is updated on an ongoing basis in line with company requirements and international business growth. In particular, this applies to the development of a more stringent risk management system for international projects.

Risk management is covered by the audit of the annual financial statements by the auditors. Details of the risk management system of IDS Scheer AG can be found in the group management report of this annual report.

The Group’s accounting is in line with the International Financial Reporting Standards (IFRS). The 2007 annual shareholders’ meeting commissioned PricewaterhouseCoopers (PwC) to audit the annual financial statements, the IFRS consolidated financial statements and group management report. Before commissioning PwC, the Supervisory Board had it confirmed that there were no circumstances impairing the neutrality of the auditors.

Information on the compensation of the Executive Board and the Supervisory Board
The Code requires that detailed information on the compensation and shareholdings of members of the Executive Board and the Supervisory Board, directors’ dealings, share options and other incentive systems is presented in the corporate governance report or the compensation report included therein. The compensation report below contains all information required by the Code and the Disclosure of Board Compensation Act (VorstOG). The compensation report is an integral component of both the corporate governance report and the audited group management report. The Supervisory Board has approved the group management report including the compensation report.

The compensation report furthermore contains the information required in the management report and notes to the consolidated financial statements of IDS Scheer AG in line with §§ 285 no. 9a, 289 (2) no. 5, (4) no. 9 and 314 (1) no. 6a, 315 (2) no. 4, (4) no. 9 of the HGB.

Saarbruecken, March 14, 2008
IDS Scheer Aktiengesellschaft
The Supervisory Board
The Executive Board