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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2012

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from             to

COMMISSION FILE NUMBER: 000-29440





IDENTIVE GROUP, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|DELAWARE                                                       |  | 77-0444317                             
|(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYER IDENTIFICATION NUMBER)

1900 Carnegie Avenue, Building B

Santa Ana, California 92705

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

(949)
250-8888

(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)

N/A

(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes  x    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

At August 1, 2012, 60,042,621 shares of common stock were outstanding, excluding 618,400 shares held in treasury.









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TABLE OF CONTENTS



|                              |  |                                                                                       |    |      |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |                                                                                       |    | Page |   
|PART I. FINANCIAL INFORMATION |  |                                                                                       |    |     
|Item 1.                       |  | Financial Statements                                                                  |    |      | 3  | 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations |    |      | 28 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |    |      | 42 | 
|Item 4.                       |  | Controls and Procedures                                                               |    |      | 42 | 
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                       |    |     
|Item 1.                       |  | Legal Proceedings                                                                     |    |      | 43 | 
|Item 1A.                      |  | Risk Factors                                                                          |    |      | 43 | 
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |    |      | 60 | 
|Item 3.                       |  | Defaults Upon Senior Securities                                                       |    |      | 60 | 
|Item 4.                       |  | Mine Safety Disclosures                                                               |    |      | 60 | 
|Item 5.                       |  | Other Information                                                                     |    |      | 60 | 
|Item 6.                       |  | Exhibits                                                                              |    |      | 60 | 
|                              | 
|SIGNATURES                    |  |                                                                                       | 61 |     
|EXHIBIT INDEX                 |  |                                                                                       | 62 |     



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##### Table of Contents

PART I: FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

IDENTIVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)



|                                                                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                          |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                                                          |  | 2012                       |         |   | 2011                     |   |        | 2012 |  |   | 2011    |  
|Net revenue                                                               |  | $                          | 23,856  |   |                          | $ | 25,612 |      |  | $ | 45,062  |   |  | $ | 48,032 |  
|Cost of revenue                                                           |  |                            | 14,256  |   |                          |   | 15,398 |      |  |   | 26,724  |   |  |   | 28,438 |  
|                                                                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Gross profit                                                              |  |                            | 9,600   |   |                          |   | 10,214 |      |  |   | 18,338  |   |  |   | 19,594 |  
|                                                                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Operating expenses:                                                       |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Research and development                                                  |  |                            | 2,384   |   |                          |   | 1,379  |      |  |   | 4,875   |   |  |   | 2,537  |  
|Selling and marketing                                                     |  |                            | 6,530   |   |                          |   | 6,225  |      |  |   | 13,538  |   |  |   | 11,234 |  
|General and administrative                                                |  |                            | 4,410   |   |                          |   | 5,744  |      |  |   | 9,934   |   |  |   | 10,974 |  
|Impairment of property and equipment                                      |  |                            | 4,003   |   |                          |   |       |      |  |   | 4,003   |   |  |   |       |  
|Impairment of acquisition-related intangible assets                       |  |                            | 19,912  |   |                          |   |       |      |  |   | 19,912  |   |  |   |       |  
|Impairment of goodwill                                                    |  |                            | 21,450  |   |                          |   |       |      |  |   | 21,450  |   |  |   |       |  
|Restructuring                                                             |  |                            | 278     |   |                          |   |       |      |  |   | 278     |   |  |   |       |  
|                                                                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total operating expenses                                                  |  |                            | 58,967  |   |                          |   | 13,348 |      |  |   | 73,990  |   |  |   | 24,745 |  
|                                                                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Loss from operations                                                      |  |                            | (49,367 | ) |                          |   | (3,134 | )    |  |   | (55,652 | ) |  |   | (5,151 | )
|Re-measurement of contingent consideration                                |  |                            | 6,086   |   |                          |   | 160    |      |  |   | 5,657   |   |  |   | 134    |  
|Other (expense) income                                                    |  |                            | (158    | ) |                          |   |       |      |  |   | (158    | ) |  |   | 230    |  
|Interest expense, net                                                     |  |                            | (353    | ) |                          |   | (272   | )    |  |   | (644    | ) |  |   | (563   | )
|Foreign currency (losses) gains, net                                      |  |                            | (299    | ) |                          |   | 25     |      |  |   | (79     | ) |  |   | 224    |  
|                                                                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Loss before income taxes and noncontrolling interest                      |  |                            | (44,091 | ) |                          |   | (3,221 | )    |  |   | (50,876 | ) |  |   | (5,126 | )
|Income taxes (provision) benefit                                          |  |                            | (253    | ) |                          |   | 1,582  |      |  |   | (74     | ) |  |   | 1,604  |  
|                                                                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Consolidated net loss                                                     |  |                            | (44,344 | ) |                          |   | (1,639 | )    |  |   | (50,950 | ) |  |   | (3,522 | )
|Less: Loss attributable to noncontrolling interest                        |  |                            | 2,469   |   |                          |   | 82     |      |  |   | 2,846   |   |  |   | 103    |  
|                                                                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Net loss attributable to Identive Group, Inc.                             |  | $                          | (41,875 | ) |                          | $ | (1,557 | )    |  | $ | (48,104 | ) |  | $ | (3,419 | )
|                                                                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Basic and diluted net loss per share attributable to Identive Group, Inc. |  | $                          | (0.70   | ) |                          | $ | (0.03  | )    |  | $ | (0.81   | ) |  | $ | (0.07  | )
|                                                                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Weighted average shares used to compute basic and diluted loss per share  |  |                            | 59,686  |   |                          |   | 52,001 |      |  |   | 59,143  |   |  |   | 49,885 |  
|                                                                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  

See notes to condensed consolidated financial statements.



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IDENTIVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(unaudited)



|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|----------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                            |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                                            |  | 2012                       |         |   | 2011                     |   |        | 2012 |  |   | 2011    |  
|Consolidated net loss                                       |  |                            | (44,344 | ) |                          |   | (1,639 | )    |  |   | (50,950 | ) |  |   | (3,522 | )
|Other comprehensive income (loss), net of tax of nil:       |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Foreign currency translation adjustments                    |  |                            | (1,310  | ) |                          |   | 517    |      |  |   | (568    | ) |  |   | 2,757  |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Comprehensive loss                                          |  |                            | (45,654 | ) |                          |   | (1,122 | )    |  |   | (51,518 | ) |  |   | (765   | )
|Comprehensive loss attributable to noncontrolling interest. |  |                            | 2,667   |   |                          |   | 121    |      |  |   | 3,084   |   |  |   | 246    |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Comprehensive loss attributable to Identive Group, Inc.     |  | $                          | (42,987 | ) |                          | $ | (1,001 | )    |  | $ | (48,434 | ) |  | $ | (519   | )
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  

See notes to condensed consolidated financial statements.



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IDENTIVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(unaudited)



|                                                                                                                                                                   |  |              |          |   |                     |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ------------------- | - | -------- | -
|                                                                                                                                                                   |  | June 30,2012 |          |   | December 31,2011(A) |  
|ASSETS                                                                                                                                                             |  |              |          |   |                     |   |          |  
|Current assets:                                                                                                                                                    |  |              |          |   |                     |   |          |  
|Cash and cash equivalents                                                                                                                                          |  | $            | 6,338    |   |                     | $ | 17,239   |  
|Accounts receivable, net of allowances of $644 and $268 as of June 30, 2012 and December 31, 2011,
respectively                                                    |  |              | 13,757   |   |                     |   | 13,578   |  
|Inventories                                                                                                                                                        |  |              | 9,883    |   |                     |   | 9,263    |  
|Prepaid expenses and other current assets                                                                                                                          |  |              | 2,934    |   |                     |   | 2,426    |  
|                                                                                                                                                                   |  |              |          |   |                     |   |          |  
|Total current assets                                                                                                                                               |  |              | 32,912   |   |                     |   | 42,506   |  
|Property and equipment, net                                                                                                                                        |  |              | 3,923    |   |                     |   | 6,699    |  
|Goodwill                                                                                                                                                           |  |              | 48,950   |   |                     |   | 58,404   |  
|Intangible assets, net                                                                                                                                             |  |              | 17,660   |   |                     |   | 36,001   |  
|Other assets                                                                                                                                                       |  |              | 522      |   |                     |   | 501      |  
|                                                                                                                                                                   |  |              |          |   |                     |   |          |  
|Total assets                                                                                                                                                       |  | $            | 103,967  |   |                     | $ | 144,111  |  
|                                                                                                                                                                   |  |              |          |   |                     |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                               |  |              |          |   |                     |   |          |  
|Current liabilities:                                                                                                                                               |  |              |          |   |                     |   |          |  
|Accounts payable                                                                                                                                                   |  | $            | 11,755   |   |                     | $ | 11,941   |  
|Liability to related party                                                                                                                                         |  |              | 1,525    |   |                     |   | 1,076    |  
|Liability for consumer cards                                                                                                                                       |  |              | 4,966    |   |                     |   |         |  
|Financial liabilities                                                                                                                                              |  |              | 1,760    |   |                     |   | 884      |  
|Deferred revenue                                                                                                                                                   |  |              | 3,536    |   |                     |   | 2,085    |  
|Accrued compensation and related benefits                                                                                                                          |  |              | 3,397    |   |                     |   | 3,527    |  
|Other accrued expenses and liabilities                                                                                                                             |  |              | 6,607    |   |                     |   | 6,249    |  
|                                                                                                                                                                   |  |              |          |   |                     |   |          |  
|Total current liabilities                                                                                                                                          |  |              | 33,546   |   |                     |   | 25,762   |  
|Long-term earn-out liability                                                                                                                                       |  |              |         |   |                     |   | 5,663    |  
|Long-term liability to related party                                                                                                                               |  |              | 7,104    |   |                     |   | 7,303    |  
|Long-term financial liabilities                                                                                                                                    |  |              | 4,118    |   |                     |   | 1,189    |  
|Deferred tax liability                                                                                                                                             |  |              | 6,761    |   |                     |   | 6,094    |  
|Other long term liability                                                                                                                                          |  |              | 899      |   |                     |   | 629      |  
|                                                                                                                                                                   |  |              |          |   |                     |   |          |  
|Total liabilities                                                                                                                                                  |  |              | 52,428   |   |                     |   | 46,640   |  
|Commitments and contingencies (see Notes 14)                                                                                                                       |  |              |         |   |                     |   |         |  
|Equity:                                                                                                                                                            |  |              |          |   |                     |   |          |  
|Identive Group, Inc. stockholders equity:                                                                                                                         |  |              |          |   |                     |   |          |  
|Preferred stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding                                                                           |  |              |         |   |                     |   |         |  
|Common stock, $0.001 par value; 130,000 shares authorized; 59,838 and 58,309 shares issued and outstanding as of
June 30, 2012 and December 31, 2011, respectively |  |              | 60       |   |                     |   | 58       |  
|Additional paid-in capital                                                                                                                                         |  |              | 336,740  |   |                     |   | 331,758  |  
|Treasury stock, 618 shares as of June 30, 2012 and December 31, 2011                                                                                               |  |              | (2,777   | ) |                     |   | (2,777   | )
|Accumulated deficit                                                                                                                                                |  |              | (283,502 | ) |                     |   | (235,398 | )
|Accumulated other comprehensive income                                                                                                                             |  |              | 1,708    |   |                     |   | 2,038    |  
|                                                                                                                                                                   |  |              |          |   |                     |   |          |  
|Total Identive Group, Inc. stockholders equity                                                                                                                    |  |              | 52,229   |   |                     |   | 95,679   |  
|Noncontrolling interest                                                                                                                                            |  |              | (690     | ) |                     |   | 1,792    |  
|                                                                                                                                                                   |  |              |          |   |                     |   |          |  
|Total equity                                                                                                                                                       |  | $            | 51,539   |   |                     |   | 97,471   |  
|                                                                                                                                                                   |  |              |          |   |                     |   |          |  
|Total liabilities and stockholders equity                                                                                                                         |  | $            | 103,967  |   |                     | $ | 144,111  |  
|                                                                                                                                                                   |  |              |          |   |                     |   |          |  



|(A) | The condensed consolidated balance sheet has been derived from the audited consolidated financial statements at December 31, 2011 but does not include all the
information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See notes to condensed consolidated financial statements



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IDENTIVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

Year Ended December 31, 2011 and Six Months Ended June 30, 2012

(unaudited)



|                                                                                            |  |                                   |        |  |                          |   |    |               |  |   |                    |   |  |                                      |        |   |                        |   |          |             |  |   |       |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------- |  | --------------------------------- | ------ |  | ------------------------ | - | -- | ------------- |  | - | ------------------ | - |  | ------------------------------------ | ------ | - | ---------------------- | - | -------- | ----------- |  | - | ----- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                            |  | Identive Group, Inc. Stockholders |        |  |                          |  
|                                                                                            |  | Common Stock                      |        |  | AdditionalPaid-inCapital |   |    | TreasuryStock |  |   | AccumulatedDeficit |   |  | AccumulativeOtherComprehensiveIncome |        |   | NoncontrollingInterest |   |          | TotalEquity | 
|(In thousands)                                                                              |  | Shares                            |        |  | Amount                   |   |    |               |  |   |                    |  
|Balances, December 31, 2010                                                                 |  |                                   | 48,276 |  |                          | $ | 48 |               |  | $ | 306,203            |   |  | $                                    | (2,777 | ) |                        | $ | (225,896 | )           |  | $ | 323   |   |  | $ | 1,903  |   |  | $ | 79,804  |  
|                                                                                            |  |                                   |        |  |                          |   |    |               |  |   |                    |   |  |                                      |        |   |                        |   |          |             |  |   |       |   |  |   |        |   |  |   |         |  
|Comprehensive loss:                                                                         |  |                                   |        |  |                          |   |    |               |  |   |                    |   |  |                                      |        |   |                        |   |          |             |  |   |       |   |  |   |        |   |  |   |         |  
|Net loss                                                                                    |  |                                   |       |  |                          |   |   |               |  |   |                   |   |  |                                      |       |   |                        |   | (9,502   | )           |  |   |      |   |  |   | (468   | ) |  |   | (9,970  | )
|Foreign currency translation adjustment, net tax of nil                                     |  |                                   |       |  |                          |   |   |               |  |   |                   |   |  |                                      |       |   |                        |   |         |             |  |   | 1,715 |   |  |   | (103   | ) |  |   | 1,612   |  
|                                                                                            |  |                                   |        |  |                          |   |    |               |  |   |                    |   |  |                                      |        |   |                        |   |          |             |  |   |       |   |  |   |        |   |  |   |         |  
|Comprehensive loss                                                                          |  |                                   |       |  |                          |   |   |               |  |   |                   |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | (8,358  | )
|                                                                                            |  |                                   |        |  |                          |   |    |               |  |   |                    |   |  |                                      |        |   |                        |   |          |             |  |   |       |   |  |   |        |   |  |   |         |  
|Issuance of common stock in connection with capital raise, net of issuance costs            |  |                                   | 7,843  |  |                          |   | 8  |               |  |   | 18,204             |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 18,212  |  
|Issuance of common stock in connection with idOnDemand acquisition                          |  |                                   | 996    |  |                          |   | 1  |               |  |   | 3,023              |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 3,024   |  
|Noncontrolling interest in connection with idOnDemand acquisition                           |  |                                   |       |  |                          |   |   |               |  |   |                   |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   | 468    |   |  |   | 468     |  
|Issuance of common stock in connection with earn-out agreements                             |  |                                   | 137    |  |                          |   |   |               |  |   | 316                |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 316     |  
|Issuance of common shares to acquire additional noncontrolling interest in a subsidiary     |  |                                   | 3      |  |                          |   |   |               |  |   | 8                  |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   | (8     | ) |  |   |        |  
|Issuance of common stock in connection with stock bonus and incentive plans                 |  |                                   | 567    |  |                          |   | 1  |               |  |   | 1,461              |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 1,462   |  
|Shares issued to board members as incentive/board fees                                      |  |                                   | 60     |  |                          |   |   |               |  |   | 166                |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 166     |  
|Issuance of common stock upon exercise of warrants                                          |  |                                   | 406    |  |                          |   |   |               |  |   | 1,075              |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 1,075   |  
|Issuance of common stock upon exercise of options                                           |  |                                   | 21     |  |                          |   |   |               |  |   | 57                 |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 57      |  
|Stock options grants in connection with stock bonus and incentive plans                     |  |                                   |       |  |                          |   |   |               |  |   | 672                |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 672     |  
|Stock-based compensation expense                                                            |  |                                   |       |  |                          |   |   |               |  |   | 439                |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 439     |  
|Stock-based compensation expense for ESPP                                                   |  |                                   |       |  |                          |   |   |               |  |   | 134                |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 134     |  
|                                                                                            |  |                                   |        |  |                          |   |    |               |  |   |                    |   |  |                                      |        |   |                        |   |          |             |  |   |       |   |  |   |        |   |  |   |         |  
|Balances, December 31, 2011                                                                 |  |                                   | 58,309 |  |                          | $ | 58 |               |  | $ | 331,758            |   |  | $                                    | (2,777 | ) |                        | $ | (235,398 | )           |  | $ | 2,038 |   |  | $ | 1,792  |   |  | $ | 97,471  |  
|Comprehensive loss:                                                                         |  |                                   |        |  |                          |   |    |               |  |   |                    |   |  |                                      |        |   |                        |   |          |             |  |   |       |   |  |   |        |   |  |   |         |  
|Net loss                                                                                    |  |                                   |       |  |                          |   |   |               |  |   |                   |   |  |                                      |       |   |                        |   | (48,104  | )           |  |   |      |   |  |   | (2,846 | ) |  |   | (50,950 | )
|Foreign currency translation adjustment, net tax of nil                                     |  |                                   |       |  |                          |   |   |               |  |   |                   |   |  |                                      |       |   |                        |   |         |             |  |   | (330  | ) |  |   | (238   | ) |  |   | (568    | )
|                                                                                            |  |                                   |        |  |                          |   |    |               |  |   |                    |   |  |                                      |        |   |                        |   |          |             |  |   |       |   |  |   |        |   |  |   |         |  
|Comprehensive loss                                                                          |  |                                   |       |  |                          |   |   |               |  |   |                   |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | (51,518 | )
|                                                                                            |  |                                   |        |  |                          |   |    |               |  |   |                    |   |  |                                      |        |   |                        |   |          |             |  |   |       |   |  |   |        |   |  |   |         |  
|Issuance of common stock in connection with payment solution acquisition                    |  |                                   | 1,358  |  |                          |   | 1  |               |  |   | 3,040              |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 3,041   |  
|Noncontrolling interest in connection with payment solution acquisition                     |  |                                   |       |  |                          |   |   |               |  |   |                   |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   | 2,131  |   |  |   | 2,131   |  
|Issuance of common shares to acquire additional noncontrolling interest in payment solution |  |                                   | 548    |  |                          |   | 1  |               |  |   | 1,167              |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   | (1,168 | ) |  |   |        |  
|Acquisition of noncontrolling interest in idOnDemand                                        |  |                                   |       |  |                          |   |   |               |  |   | (139               | ) |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   | (361   | ) |  |   | (500    | )
|Issuance of common stock in connection with ESPP                                            |  |                                   | 94     |  |                          |   |   |               |  |   | 178                |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 178     |  
|Issuance of common stock in connection with stock bonus and incentive plans                 |  |                                   | 148    |  |                          |   |   |               |  |   | 241                |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 241     |  
|Stock options grants in connection with stock bonus and incentive plans                     |  |                                   |       |  |                          |   |   |               |  |   | 99                 |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 99      |  
|Shares issued to board members as incentive/board fee                                       |  |                                   | 34     |  |                          |   |   |               |  |   | 32                 |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 32      |  
|Stock-based Compensation Expense                                                            |  |                                   |       |  |                          |   |   |               |  |   | 288                |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 288     |  
|Stock-based compensation expense for ESPP                                                   |  |                                   |       |  |                          |   |   |               |  |   | 76                 |   |  |                                      |       |   |                        |   |         |             |  |   |      |   |  |   |       |   |  |   | 76      |  
|                                                                                            |  |                                   |        |  |                          |   |    |               |  |   |                    |   |  |                                      |        |   |                        |   |          |             |  |   |       |   |  |   |        |   |  |   |         |  
|Balances, June 30, 2012                                                                     |  |                                   | 60,491 |  |                          | $ | 60 |               |  | $ | 336,740            |   |  | $                                    | (2,777 | ) |                        | $ | (283,502 | )           |  | $ | 1,708 |   |  | $ | (690   | ) |  | $ | 51,539  |  
|                                                                                            |  |                                   |        |  |                          |   |    |               |  |   |                    |   |  |                                      |        |   |                        |   |          |             |  |   |       |   |  |   |        |   |  |   |         |  

See notes to condensed consolidated financial statements.



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IDENTIVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)



|                                                                              |  |                          |         |   |      |   |        |  
|----------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ | -
|                                                                              |  | Six Months EndedJune 30, |        
|                                                                              |  | 2012                     |         |   | 2011 |  
|Cash flows from operating activities:                                         |  |                          |         |   |      |   |        |  
|Net loss                                                                      |  | $                        | (50,950 | ) |      | $ | (3,522 | )
|Adjustments to reconcile net loss to net cash used in operating activities:   |  |                          |         |   |      |   |        |  
|Depreciation and amortization                                                 |  |                          | 3,540   |   |      |   | 2,422  |  
|Impairment of goodwill, intangibles and other long-lived assets               |  |                          | 45,365  |   |      |   |       |  
|Stock-based compensation expense                                              |  |                          | 325     |   |      |   | 581    |  
|Re-measurement of contingent consideration                                    |  |                          | (5,657  | ) |      |   | (134   | )
|Deferred income taxes                                                         |  |                          | (10     | ) |      |   | (1,980 | )
|Accretion of interest to related party discount                               |  |                          | 379     |   |      |   | 376    |  
|Interest on financial liabilities                                             |  |                          | 223     |   |      |   | 126    |  
|Loss on disposal of fixed assets                                              |  |                          | 19      |   |      |   |       |  
|Changes in operating assets and liabilities:                                  |  |                          |         |   |      |   |        |  
|Accounts receivable                                                           |  |                          | 57      |   |      |   | 917    |  
|Inventories                                                                   |  |                          | (770    | ) |      |   | 800    |  
|Other assets                                                                  |  |                          | (196    | ) |      |   | (99    | )
|Income taxes receivable                                                       |  |                          | (20     | ) |      |   | (114   | )
|Accounts payable                                                              |  |                          | (973    | ) |      |   | (4,340 | )
|Liability to related party                                                    |  |                          | (563    | ) |      |   | (517   | )
|Accrued expenses                                                              |  |                          | (1,377  | ) |      |   | (261   | )
|Deferred revenue                                                              |  |                          | 1,508   |   |      |   | (230   | )
|Income taxes payable                                                          |  |                          | 81      |   |      |   | 328    |  
|                                                                              |  |                          |         |   |      |   |        |  
|Net cash used in operating activities                                         |  |                          | (9,019  | ) |      |   | (5,647 | )
|                                                                              |  |                          |         |   |      |   |        |  
|Cash flows from investing activities:                                         |  |                          |         |   |      |   |        |  
|Capital expenditures                                                          |  |                          | (1,538  | ) |      |   | (691   | )
|Net cash acquired (paid) from (for) acquisitions                              |  |                          | 572     |   |      |   | (2,395 | )
|Net cash paid for acquisition of noncontrolling interest                      |  |                          | (500    | ) |      |   |       |  
|                                                                              |  |                          |         |   |      |   |        |  
|Net cash used in investing activities                                         |  |                          | (1,466  | ) |      |   | (3,086 | )
|                                                                              |  |                          |         |   |      |   |        |  
|Cash flows from financing activities:                                         |  |                          |         |   |      |   |        |  
|Proceeds from capital raise net of issuance costs                             |  |                          |        |   |      |   | 18,259 |  
|Payment for financial liabilities                                             |  |                          | (947    | ) |      |   | (1,043 | )
|Proceeds from issuance of common stock under employee stock purchase plan     |  |                          | 178     |   |      |   |       |  
|Proceeds from issuance of common stock upon option exercised                  |  |                          |        |   |      |   | 56     |  
|Proceeds from issuance of common stock upon warrant exercised                 |  |                          |        |   |      |   | 1,706  |  
|Changes in bank line of credit, net                                           |  |                          | (7      | ) |      |   |       |  
|                                                                              |  |                          |         |   |      |   |        |  
|Net cash (used in) provided by financing activities                           |  |                          | (776    | ) |      |   | 18,348 |  
|                                                                              |  |                          |         |   |      |   |        |  
|Effect of exchange rates on cash and cash equivalents                         |  |                          | 360     |   |      |   | 204    |  
|                                                                              |  |                          |         |   |      |   |        |  
|Net (decrease) increase in cash and cash equivalents                          |  |                          | (10,901 | ) |      |   | 9,819  |  
|                                                                              |  |                          |         |   |      |   |        |  
|Cash and cash equivalents at beginning of period                              |  |                          | 17,239  |   |      |   | 10,799 |  
|                                                                              |  |                          |         |   |      |   |        |  
|Cash and cash equivalents at end of period                                    |  | $                        | 6,338   |   |      | $ | 20,618 |  
|                                                                              |  |                          |         |   |      |   |        |  
|Supplemental disclosures of cash flow information:                            |  |                          |         |   |      |   |        |  
|                                                                              |  |                          |         |   |      |   |        |  
|Common stock issued in connection with business combinations                  |  | $                        | 3,041   |   |      | $ | 3,043  |  
|                                                                              |  |                          |         |   |      |   |        |  
|Common stock issued in connection with acquiring noncontrolling interest      |  | $                        | 1,168   |   |      | $ |       |  
|                                                                              |  |                          |         |   |      |   |        |  
|Common stock issued in connection with stock bonus and incentive plans        |  | $                        | 273     |   |      | $ | 1,363  |  
|                                                                              |  |                          |         |   |      |   |        |  
|Stock option grants issued in connection with stock bonus and incentive plans |  | $                        | 99      |   |      | $ | 610    |  
|                                                                              |  |                          |         |   |      |   |        |  
|Cash paid for interest expense                                                |  | $                        | 644     |   |      | $ | 502    |  
|                                                                              |  |                          |         |   |      |   |        |  
|Property and equipment subject to accounts payable                            |  | $                        | 211     |   |      | $ |       |  
|                                                                              |  |                          |         |   |      |   |        |  

See notes to condensed consolidated financial statements.



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IDENTIVE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012



|1. | Basis of Presentation
|-- | ---------------------

The accompanying unaudited condensed consolidated financial statements of Identive Group, Inc. (Identive or
the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and the rules
and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all
adjustments, including normal recurring adjustments, considered necessary for a fair presentation of Companys unaudited condensed consolidated financial statements have been included. The results of operations for the three and six months
ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any future period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction
with Managements Discussion and Analysis of Financial Condition and Results of Operations, Risk Factors, Quantitative and Qualitative Disclosures About Market Risk, and the Consolidated Financial Statements
and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2011. The preparation of unaudited condensed consolidated financial statements necessarily requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the condensed consolidated balance sheet dates and the reported amounts of revenues and expenses for the periods
presented.

On May 2, 2011, the Company acquired approximately 95.8% of the outstanding shares of idOnDemand, Inc.
(idOnDemand), a privately-held provider of identity management services based in Pleasanton, California. In January 2012, the Company acquired the remaining noncontrolling interests and idOnDemand became a 100%-owned subsidiary. The
results for the acquired idOnDemand business are included in the Companys condensed consolidated statements of operations since May 2, 2011. On July 18, 2011, Multicard AG, a subsidiary of the Company, acquired all of the outstanding
shares of polyright SA (polyright), a provider of integrated ID solutions for the Swiss education and healthcare markets. The results for the acquired polyright business are included in the Companys condensed consolidated
statements of operations since July 18, 2011. On January 30, 2012, through its majority-owned subsidiary Bluehill ID AG, the Company acquired approximately 58.8% of the outstanding shares of payment solution AG, a German-based provider of
integrated cashless payment solutions for sports stadiums, arenas, theme parks and other venues for leisure and entertainment throughout Europe (payment solution). In April 2012, the Company acquired additional noncontrolling interest
and increased its ownership to approximately 82.5% of the outstanding shares of payment solution. The results for the acquired payment solution business are included in the Companys condensed consolidated statements of operations since
January 30, 2012. As a result of the timing of these acquisitions, the Companys operating results for the periods presented are not directly comparable.

Going Concern

The accompanying condensed consolidated financial statements
have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has historically incurred
operating losses and has a total accumulated deficit of approximately $284.0 million as of June 30, 2012. These factors, among others, raise significant doubt about the Companys ability to continue as a going concern. The condensed
consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

The ability of the Company to continue as a going concern is dependent on the Company achieving expected forecasts and/or the ability to obtain adequate capital to fund operating losses until it becomes
cash flow positive. Management plans to increase capital resources by reducing discretionary operating expenses and obtain additional capital through equity and/or debt financing, if necessary. However management cannot provide any assurances that
the Company will be successful in accomplishing any of its plans.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to current period presentation. In the condensed consolidated
statements of operations, amounts related to re-measurement of contingent consideration was included in general and administrative as part of operating expenses in previous periods, which are now disclosed separately as non-operating income/loss.



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##### Table of Contents

|2. | Summary of Significant Accounting Policies
|-- | ------------------------------------------

Recently Adopted Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2011-05, Comprehensive Income, Accounting Standards Codification (ASC) Topic 220, Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income,
the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components
of other comprehensive income as part of the statement of equity.

In December 2011, the FASB issued ASU No. 2011-12,
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05(ASU 2011-12). ASU 2011-12 indefinitely
defers certain provisions of ASU 2011-05, including the requirement to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which
other comprehensive income is presented. ASU 2011-12 does not change the primary provisions of ASU 2011-05, which eliminate the option to present the components of other comprehensive income as part of the statement of equity. Both ASU 2011-12 and
ASU 2011-05 are effective in the first quarter of fiscal year 2012 and should be applied retrospectively. The Companys adoption of ASU 2011-05 in the first quarter of fiscal year 2012 had no impact on its condensed consolidated financial
statements.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards, ASU Topic 820, Fair Value Measurement(ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement
and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value
measurements. ASU 2011-04 is effective in the first quarter of fiscal year 2012. The Companys adoption of ASU 2011-04 in the first quarter of fiscal year 2012 had no significant impact on its condensed consolidated results of operations or
financial condition.



|3. | Acquisitions
|-- | ------------

Acquisition of payment solution AG

On January 30, 2012 (payment solution acquisition date), through its majority-owned subsidiary Bluehill ID AG, the Company acquired approximately 58.8% of the outstanding shares of
payment solution AG, a company organized under the laws of Germany (payment solution). The acquisition was made pursuant to the terms and conditions contained in Share Exchange Agreements, each dated January 30, 2012, and entered
into individually with 18 selling shareholders of payment solution (the Selling Shareholders) in Germany and Switzerland. In exchange for the shares of payment solution, the Company issued an aggregate of 1,357,758 shares, or
approximately 2.4% of its outstanding Common Stock, to the Selling Shareholders, having a value of approximately $3.0 million. Mountain Partners AG, a significant stockholder of the Company, was a selling shareholder and held approximately 10.0% of
payment solution. Daniel Wenzel, a director of the Company, is an affiliate of Mountain Partners AG. On April 2, 2012, the Company acquired additional noncontrolling interest and increased its ownership to approximately 82.5% of the outstanding
shares of payment solution. In exchange for the additional shares of payment solution, the Company issued 548,114 shares of its Common Stock to the selling shareholder, having a value of approximately $1.2 million. The shares were issued to
qualified investors outside the United States in reliance on the exemption provided by Regulation S under the U.S. Securities Act of 1933 from the registration requirements of such Act, as well as comparable exemptions under applicable foreign
securities laws.

payment solution is a German-based provider of integrated cashless payment solutions for sports stadiums,
arenas, theme parks and other venues for leisure and entertainment throughout Europe, and serves a number of professional football stadiums under an operator contract model. payment solutions systems enable consumers at sporting and similar
events to make quick, cashless payments for food, beverages and merchandise using contactless smart cards.

The payment
solution acquisition is accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations (ASC 805). Under the acquisition method of accounting, the total purchase consideration,
assets acquired and the liabilities assumed are measured at fair value as of the date of acquisition when control is obtained. The fair value of the consideration transferred and the assets acquired and liabilities assumed was determined by the
Company and in



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doing so relied in part upon a third-party valuation report to measure the purchase consideration, identifiable intangible assets acquired and fair value of loss contracts. During the second
fiscal quarter of 2012, the Company continued to finalize the measurement of identifiable acquired assets and assumed liabilities and as a result, the amounts of such assets and liabilities and the resulting goodwill and deferred income tax have
changed as compared to the provisionally reported amounts in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012. However, the Company is still in the process of finalizing the fair value of the liability for consumer cards.
As the Company finalizes these valuation assumptions, the provisional measurements of identifiable assets and liabilities, and the resulting goodwill and deferred income taxes are subject to change, and the final purchase price accounting could be
different from the amounts presented herein. The following table summarizes the fair value of total consideration transferred for payment solution controlling and noncontrolling interest, the total estimated fair value of net identifiable
liabilities acquired at the payment solution acquisition date and the resulting goodwill recorded (in thousands):



|                                                      |  |   |        | 
|----------------------------------------------------- |  | - | ------ | 
|Fair value of common stock                            |  | $ | 3,041  | 
|                                                      |  |   |        | 
|Fair value of total consideration transferred         |  |   | 3,041  | 
|Fair value of noncontrolling interest                 |  |   | 2,131  | 
|                                                      |  |   |        | 
|Fair value of controlling and noncontrolling interest |  |   | 5,172  | 
|Fair value of net identifiable liabilities acquired   |  |   | 7,786  | 
|                                                      |  |   |        | 
|Goodwill                                              |  | $ | 12,958 | 
|                                                      |  |   |        | 

The fair value of the shares of the Companys common stock issued in connection with the acquisition
was determined using the closing market price of the Companys common stock as of the payment solution acquisition date of $2.24 per share. The acquisition-date fair value of the noncontrolling interest is derived by determining the fair value
of the acquired business as a whole and then subtracting the consideration transferred by the Company for its controlling interest in payment solution.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the payment solution acquisition date. The estimated fair value of the identifiable assets
acquired and liabilities assumed in the acquisition is based on managements best estimates.

Assets acquired and
liabilities assumed as of January 30, 2012 (in thousands):



|                                                                       |  |   |        |  
|---------------------------------------------------------------------- |  | - | ------ | -
|Cash and cash equivalents                                              |  | $ | 572    |  
|Accounts receivable                                                    |  |   | 303    |  
|Inventory                                                              |  |   | 34     |  
|Property and equipment                                                 |  |   | 1,955  |  
|Other current assets                                                   |  |   | 287    |  
|Accounts payable                                                       |  |   | (1,746 | )
|Liabilities to related party                                           |  |   | (432   | )
|Liability for unclaimed consumer cards                                 |  |   | (5,800 | )
|Financial liabilities                                                  |  |   | (5,239 | )
|Other accrued expenses and liabilities                                 |  |   | (654   | )
|Unfavorable contracts subject to amortization                          |  |   | (538   | )
|Intangible assets subject to amortization                              |  |   |        |  
|Customer relationships                                                 |  |   | 1,323  |  
|Developed technology                                                   |  |   | 2,023  |  
|Trade names                                                            |  |   | 542    |  
|Contract backlog                                                       |  |   | 344    |  
|Deferred tax liabilities in connection with acquired intangible assets |  |   | (760   | )
|                                                                       |  |   |        |  
|Fair value of payment solution net identifable liabilities acquired    |  | $ | (7,786 | )
|                                                                       |  |   |        |  

Intangible assets of approximately $4.2 million consist primarily of customer relationships, developed
technology, trade names and contract backlog. Customer relationships relate to payment solutions ability to sell existing, in-process and future versions of its products to its existing customers. Developed technology relates to payment
solutions technology that currently generates revenue. Trade names represent future value to be derived associated with the use of existing trade names. Contract backlog represents future revenue to be derived from confirmed contracts.
Customer relationships, developed technology and contract backlog were valued using the Multiperiod Excess Earnings Method (MPEEM) and the Profit Split methodology based



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on discounted cash flows (DCF). Trade names were valued using the relief from royalty method based on DCF. Unfavorable contracts of approximately $0.5 million consist of one
unfavorable loan contract with a shareholder and various unfavorable equipment financing contracts with a shareholder. Unfavorable loan contract relates to a contract to purchase equipment and finance working capital requirements with an interest
rate above the current market rate and unfavorable equipment financing contracts relate to equipment financing with interest rates that were above current market rates. Both unfavorable loan and equipment financing contracts are measured using a
differential cash flow method. A discount rate of 14% was used to value developed technology, trade names, unfavorable loan contracts and unfavorable equipment financing contracts; a discount rate of 16% was used to value customer relationships; and
a discount rate of 10% was used to value contract backlog. The discount rate used in the present value calculation was derived from a weighted average cost of capital (WACC) analysis, adjusted to reflect additional risks related to each
assets characteristics. The intangible assets and unfavorable contracts are subject to amortization and the Company expects to amortize these intangible assets and unfavorable contracts over their expected useful lives of approximately four to
ten years.

Of the total purchase consideration, $13.0 million was recognized as goodwill, which represents the excess of the
purchase consideration of an acquired business over the fair value of the underlying net assets acquired and liabilities assumed. The goodwill arising from the payment solution acquisition is assigned to the Companys Identity Management
reportable segment in accordance with ASC 350, Intangibles  Goodwill and Other(ASC 350). None of the goodwill recorded as part of the payment solution acquisition will be deductible for income tax purposes. As noted in
Notes 8 and 9 below, the Company performed an interim goodwill and long-lived assets impairment analysis in accordance with its critical accounting policy and determined that approximately $0.9 million in property and equipment and approximately
$2.1 million in intangible assets as of June 30, 2012 are impaired and recorded an impairment charge in the 2012 second quarter financial statements. Refer to Note 8, Property and Equipment and Note 9, Goodwill and Intangible
Assets, for further information.

The Company recognized $0.2 million of acquisition-related costs that were expensed in
the six months ended June 30, 2012. These costs are included as part of general and administration costs in the condensed consolidated statement of operations.

The amounts of revenue and earnings of payment solution included in the Companys condensed consolidated statement of operations from the payment solution acquisition date through June 30, 2012
are as follows (in thousands):



|         |  |   |       | 
|-------- |  | - | ----- | 
|Revenues |  | $ | 1,894 | 
|Net loss |  | $ | 1,679 | 

Acquisition of polyright SA

Multicard AG, a subsidiary of the Company, acquired all of the outstanding shares of polyright SA (polyright), on
July 18, 2011 (polyright acquisition date), for a combination of cash and payment of outstanding indebtedness in the aggregate amount of CHF 2.55 million (or approximately $3.1 million). The sellers may receive aggregate
potential earn-out payments (contingent consideration) payable in shares of the Companys common stock over the 30-month period following the closing of the acquisition, subject to achievement of specific financial and sales
performance targets over such period. The number of such shares, if any, issued under the earn-out will be based on the average share price during the month preceding the date of announcement of the Companys annual results, and will be subject
to a two-year lockup.

The fair value of the consideration transferred, which included contingent consideration, was
determined to be $3.4 million at the polyright acquisition date. The fair value of the contingent consideration was classified as liability in accordance with ASC Topic 480, Distinguishing Liabilities from Equity (ASC 480). As of
June 30, 2012, there were significant reductions in the forecast such that the $0.3 million in contingent consideration for the earn-out liability recognized as of the acquisition date was no longer a reasonable estimate based on the revised
forecasts. As a result, the earn-out liability was reduced to $0.1 million in accordance with ASC 480. The re-measurement of contingent consideration is reflected as a credit in the condensed consolidated statements of operations. Refer to Note 4,
Fair Value Measurements, for further information.

The company recognized identifiable intangible assets of $1.5
million and goodwill of $2.7 million related to the acquisition of polyright. The intangible assets are subject to amortization and the Company is amortizing these intangible assets over their expected useful lives of approximately one to six years.
As noted in Notes 8 and 9 below, the Company performed an interim goodwill and long-lived assets impairment analysis in accordance with its critical accounting policy and determined that approximately $50,000 in property and equipment, approximately
$0.6 million in intangible assets and approximately $1.0 million in goodwill as of June 30, 2012 are impaired and recorded an impairment charge in the 2012 second quarter financial statements. The goodwill impairment charge is an estimate and
subject to change during the third quarter of 2012 upon completion of the impairment analysis. Refer to Note 8, Property and Equipment and Note 9, Goodwill and Intangible Assets, for further information.



11



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##### Table of Contents

Acquisition of idOnDemand, Inc.

The Company completed the acquisition of idOnDemand, Inc. (idOnDemand) on May 2, 2011 (the idOnDemand acquisition
date), pursuant to a Stock Purchase Agreement dated April 29, 2011 between the Company and certain shareholders (the Selling Shareholders) of idOnDemand, under which the Company acquired approximately 95.8% of the shares of
idOnDemand in exchange for cash and shares of the Companys common stock. In addition, Selling Shareholders may receive potential earn-out payments (contingent consideration) over a period of three years and eight months from the
idOnDemand acquisition date, payable in shares of the Companys common stock and subject to achievement of specific financial and sales performance targets. Any shares issued in connection with the earn-out will be subject to a 12-month lock-up
from date of issuance. In January 2012, the Company acquired the remaining noncontrolling interests and idOnDemand became a 100%-owned subsidiary.

Subsequent to the filing of the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, the Company obtained additional information related to idOnDemands customer
base and product offerings which impacted the preliminary purchase price allocation and measurement of contingent consideration. The following table summarizes the remeasured fair value of total consideration for idOnDemand controlling and
noncontrolling interest, the total fair value of net identifiable assets acquired at the idOnDemand acquisition date and the resulting goodwill recorded (in thousands):



|                                                      |  |   |        |  
|----------------------------------------------------- |  | - | ------ | -
|Cash consideration                                    |  | $ | 2,396  |  
|Fair value of common stock                            |  |   | 3,024  |  
|Fair value of contingent consideration                |  |   | 4,758  |  
|                                                      |  |   |        |  
|Fair value of total consideration transferred         |  |   | 10,178 |  
|Fair value of noncontrolling interest                 |  |   | 468    |  
|                                                      |  |   |        |  
|Fair value of controlling and noncontrolling interest |  |   | 10,646 |  
|Fair value of net identifiable assets acquired        |  |   | (2,847 | )
|                                                      |  |   |        |  
|Goodwill                                              |  | $ | 7,799  |  
|                                                      |  |   |        |  

The fair value of the contingent consideration is classified as a liability in accordance with ASC 480.
As of June 30, 2012, there were significant changes in the range of outcomes for the contingent consideration recognized as of the acquisition date and the contingent consideration was determined to be no longer payable due to reduced
forecasts. As a result, the earn-out liability of $5.5 million was reduced to zero as there is no future expectation of an earn-out payment in accordance with ASC 480. The re-measurement of contingent consideration is reflected as a credit in the
condensed consolidated statements of operations. Refer to Note 4, Fair Value Measurements, for further information.

The Company recognized identifiable intangible assets of $4.3 million and goodwill of $7.8 million related to the acquisition of
idOnDemand. The Company is amortizing the intangible assets over their expected useful lives of approximately one to six years. As noted in Notes 8 and 9 below, the Company performed an interim goodwill and long-lived assets impairment analysis in
accordance with its critical accounting policy and determined that approximately $0.1 million in property and equipment, approximately $3.3 in intangible assets and approximately $7.0 million in goodwill as of June 30, 2012 are impaired and
recorded an impairment charge in the 2012 second quarter financial statements. The goodwill impairment charge is an estimate and subject to change during the third quarter of 2012 upon completion of the impairment analysis. Refer to Note 8,
Property and Equipment and Note 9, Goodwill and Intangible Assets, for further information.

Deferred tax assets
and liabilities resulting from the acquisition of idOnDemand have been netted, where applicable. Following the idOnDemand acquisition, idOnDemand became part of the U.S. tax group of the Companys entities. Accordingly, the deferred tax
liability of $1.5 million which was recognized in the purchase price accounting has been netted with the Companys existing deferred tax assets. As a result, there was a $1.5 million reversal of the Companys valuation allowance which was
recorded as a tax benefit in the 2011 second quarter financial statements.

Pro forma financial information:

The results for the acquired payment solution, polyright and idOnDemand businesses are included in the Companys
condensed consolidated statements of operations since their respective acquisition dates. As a result of the timing of these acquisitions, the Companys condensed consolidated results for the periods presented are not directly comparable. The
unaudited pro forma financial information in the table below summarizes the results of operations of the combined entity, as though the



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acquisitions had occurred as of the beginning of the comparable prior annual reporting period. The pro forma financial information is presented for informational purposes only and is not intended
to represent or be indicative of the results of operations that would have been achieved if the payment solution, polyright and idOnDemand acquisitions had been completed as of the date indicated, and should not be taken as representative of the
Companys future consolidated results of operations or financial condition. Preparation of the pro forma financial information for all periods presented required management to make certain judgments and estimates to determine the pro forma
adjustments such as purchase accounting adjustments, which include, among others, amortization charges from acquired intangible assets, and income tax effects.

Pro forma results of operations for the three and six months ended June 30, 2012 and 2011 are as follows (in thousands):



|                                                                                                              |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                              |  | Three Months EndedJune 30, |         |   | Six Months
EndedJune 30, |  
|                                                                                                              |  | 2012                       |         |   | 2011                     |   |        | 2012 |  |   | 2011    |  
|Revenues                                                                                                      |  | $                          | 23,856  |   |                          | $ | 28,194 |      |  | $ | 45,435  |   |  | $ | 53,233 |  
|Net loss attributable to Identive Group, Inc.                                                                 |  |                            | (41,875 | ) |                          |   | (2,704 | )    |  |   | (48,248 | ) |  |   | (6,258 | )
|Weighted average common shares outstanding used in loss per common share attributable to Identive Group, Inc. |  |                            | 59,686  |   |                          |   | 54,355 |      |  |   | 59,143  |   |  |   | 52,239 |  
|Net loss per common share attributable to Identive Group, Inc.                                                |  | $                          | (0.70   | ) |                          | $ | (0.05  | )    |  | $ | (0.82   | ) |  | $ | (0.12  | )



|4. | Fair Value Measurements
|-- | -----------------------

The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an
entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant
to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value: ASC Topic 820  Fair Value Measurement and Disclosures (ASC 820):



| |  |  | Level 1  Quoted prices for identical instruments in active markets;
| | - |  | --------------------------------------------------------------------



| |  |  | Level 2  Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not
active and model-derived valuations, in which all significant inputs are observable in active markets; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Valuations derived from valuation techniques, in which one or more significant inputs are unobservable.
| | - |  | -----------------------------------------------------------------------------------------------------------------

The Company uses the following classifications to measure different financial instruments at fair value, including an indication of the
level in the fair value hierarchy in which each instrument is generally classified:

Cash equivalents

Cash equivalents include money market fund deposits with maturities of three months or less at the date of
acquisition. These financial instruments are classified in Level 1 of the fair value hierarchy.



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##### Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities that are measured and recognized at fair value on a recurring basis have been classified under the appropriate
level of the fair value hierarchy as of June 30, 2012 and December 31, 2011 are as follows (in thousands):



|                           |  |               |   |  |                   |   |   |         |  |   |       |  |  |         |     |  |         |   |       |         |  |   |       |  |  |   |       |  |  |   |       | 
|-------------------------- |  | ------------- | - |  | ----------------- | - | - | ------- |  | - | ----- |  |  | ------- | --- |  | ------- | - | ----- | ------- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                           |  | June 30, 2012 |   |  | December 31, 2011 |  
|                           |  | Level 1       |   |  | Level 2           |   |   | Level 3 |  |   | Total |  |  | Level 1 |     |  | Level 2 |   |       | Level 3 |  |   | Total | 
|Assets:                    |  |               |   |  |                   |   |   |         |  |   |       |  |  |         |     |  |         |   |       |         |  |   |       |  |  |   |       |  |  |   |       | 
|Money market fund deposits |  | $             | 7 |  |                   | $ |  |         |  | $ |      |  |  | $       | 7   |  |         | $ | 1,506 |         |  | $ |      |  |  | $ |      |  |  | $ | 1,506 | 
|Liabilities:               |  |               |   |  |                   |   |   |         |  |   |       |  |  |         |     |  |         |   |       |         |  |   |       |  |  |   |       |  |  |   |       | 
|Contingent consideration   |  | $             |  |  |                   | $ |  |         |  | $ | 108   |  |  | $       | 108 |  |         | $ |      |         |  | $ |      |  |  | $ | 5,765 |  |  | $ | 5,765 | 

Money market fund deposits are included in cash and cash equivalents on the Companys condensed
consolidated balance sheets.

Below is the summary of contingent consideration by acquisition (in thousands):



|                          |  |                      |        |  |               |   |   |                                                   |  |   |                   |   |  |                      |     |  |            |   |        |                                                   |  |   |                   |  |  |   |      |   |  |   |       | 
|------------------------- |  | -------------------- | ------ |  | ------------- | - | - | ------------------------------------------------- |  | - | ----------------- | - |  | -------------------- | --- |  | ---------- | - | ------ | ------------------------------------------------- |  | - | ----------------- |  |  | - | ---- | - |  | - | ----- | 
|                          |  | June 2012            |        |  | December 2011 |  
|                          |  | Maximumamountpayable |        |  | Amountpaid    |   |   | Expense(income)recognized forchanges in fairvalue |  |   | Amountoutstanding |   |  | Maximumamountpayable |     |  | Amountpaid |   |        | Expense(income)recognized forchanges in fairvalue |  |   | Amountoutstanding | 
|Contingent consideration: |  |                      |        |  |               |   |   |                                                   |  |   |                   |   |  |                      |     |  |            |   |        |                                                   |  |   |                   |  |  |   |      |   |  |   |       | 
|RockWest                  |  | $                    |       |  |               | $ |  |                                                   |  | $ |                  |   |  | $                    |    |  |            | $ | 960    |                                                   |  | $ | 281               |  |  | $ | (238 | ) |  | $ |      | 
|idOnDemand                |  |                      | 21,000 |  |               |   |  |                                                   |  |   | (5,463            | ) |  |                      |    |  |            |   | 21,000 |                                                   |  |   |                  |  |  |   | 706  |   |  |   | 5,463 | 
|polyright                 |  |                      | 737    |  |               |   |  |                                                   |  |   | (194              | ) |  |                      | 108 |  |            |   | 737    |                                                   |  |   |                  |  |  |   | 42   |   |  |   | 302   | 
|                          |  |                      |        |  |               |   |   |                                                   |  |   |                   |   |  |                      |     |  |            |   |        |                                                   |  |   |                   |  |  |   |      |   |  |   |       | 
|                          |  | $                    | 21,737 |  |               | $ |  |                                                   |  | $ | (5,657            | ) |  | $                    | 108 |  |            | $ | 22,697 |                                                   |  | $ | 281               |  |  | $ | 510  |   |  | $ | 5,765 | 
|                          |  |                      |        |  |               |   |   |                                                   |  |   |                   |   |  |                      |     |  |            |   |        |                                                   |  |   |                   |  |  |   |      |   |  |   |       | 

As discussed in Note 3 above, under the terms of their respective acquisition agreements, the sellers of
polyright and idOnDemand are eligible to receive limited earn-out payments (contingent consideration) in the form of shares of common stock subject to certain lock-up periods. The fair value of the contingent consideration is based on
achieving certain revenue and profit targets as defined under the applicable acquisition agreement. These contingent payments are probability weighted and are discounted to reflect the restriction on the resale or transfer of such shares. The
valuation of the contingent consideration is classified as a Level 3 measurement, because it is based on significant unobservable inputs and involves management judgment and assumptions about achieving revenue and profits targets and discount rates.
The unobservable inputs used in the measurement of contingent consideration are highly sensitive to fluctuations and any changes in the inputs or the probability weightage thereof could significantly change the measured value of the contingent
considerations at each reporting period. The fair value of the contingent consideration is classified as liability and is remeasured each reporting period in accordance with ASC 480. As of June 30, 2012, there were significant changes in the
range of outcomes for the contingent consideration recognized as of the acquisition date for polyright and idOnDemand and it was determined that there is no future expectation of earn-out payments, except for $0.1 million related to polyright. As a
result, the total earn-out liability of $5.8 million was reduced to $0.1 million in accordance with ASC 480. The contingent consideration shown in the table above as of June 30, 2012 and December 31, 2011 includes $0.1 million and $0.1
million, respectively, related to the earn-out liability related to the polyright acquisition, and is included in the other accrued expenses and liabilities in the condensed consolidated balance sheets. The contingent consideration above as of
December 31, 2011 included $5.5 million related to the idOnDemand acquisition and is shown as long-term earn-out liability in the condensed consolidated balance sheet. The re-measurement of contingent consideration is reflected as a credit in
the condensed consolidated statements of operations. Amounts shown in the table above for RockWest refer to contingent consideration related to the acquisition of RockWest Technology Group in April 2010.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

As of June 30, 2012 and December 31, 2011, there were no assets or liabilities that are measured and recognized at fair value on
a non-recurring basis.



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##### Table of Contents

|5. | Stockholders Equity of Identive Group, Inc.
|-- | --------------------------------------------

Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock, 40,000 of which have been designated as Series A Participating Preferred Stock, par value $0.001 per share. No shares of the
Companys preferred stock, including the Series A Participating Preferred Stock, were outstanding as of June 30, 2012. Upon the affirmative vote of Board of Directors, without stockholder approval or further action, Board of Directors may
from time to time, direct the issuance of shares of preferred stock in series and may, at the time of issuance, determine the rights, preferences and limitations of each series, including voting rights, dividend rights and redemption and liquidation
preferences. Such issuances of preferred stock could adversely affect the holders of shares of the Companys common stock.

Public Offering

In May 2011, the Company issued 7,843,137 shares of common stock at a price of $2.55 per share in an underwritten public offering, for a net consideration of approximately $18.2 million
after incurring approximately $0.4 million in underwriting discounts and commissions and issuance costs related to the offering.

2011 Employee Stock Purchase Plan

In June 2011, Identives
stockholders approved the 2011 Employee Stock Purchase Plan (the ESPP or Plan). Initially, 2.0 million shares of common stock were reserved for issuance over the term of the ESPP, which is ten years. In addition, on the
first day of each fiscal year commencing with fiscal year 2012, the aggregate number of shares reserved for issuance under the ESPP is automatically increased by a number equal to the lowest of (i) 750,000 shares, (ii) two percent of all
shares outstanding at the end of the previous year, or (iii) an amount determined by the Board. If any option granted under the ESPP expires or terminates for any reason without having been exercised in full, the unpurchased shares subject to
that option will again be available for issuance under the ESPP. Under the ESPP, eligible employees may purchase shares of common stock at 85% of the lesser of the fair market value of the Companys common stock at the beginning of or end of
the applicable offering period. Each offering period lasts for six months. The first six-month exercise period under the ESPP commenced on July 1, 2011. The plan contains an automatic reset feature under which if the fair market value of a
share of common stock on any exercise date (except the final scheduled exercise date of any offering period) is lower than the fair market value of a share of common stock on the first trading day of the offering period in progress, then the
offering period in progress shall end immediately following the close of trading on such exercise date, and a new offering period shall begin on the next subsequent January 1 or July 1, as applicable, and shall extend for a 24-month period
ending on December 31 or June 30, as applicable. Subsequent offering periods shall commence on January 1 or July 1, as applicable, immediately following the end of the previous offering period and shall extend for a 24-month
period ending on December 31 or June 30, as applicable. As of June 30, 2012 and December 31, 2011, the plan automatically reset and a new offering period began on July 1, 2012 and January 1, 2012, respectively. There
were 93,871 shares of common stock issued under the ESPP during the six months ended June 30, 2012. The following table illustrates the stock-based compensation expense resulting from the ESPP included in the condensed consolidated statements
of operations for the three and six months ended June 30, 2012 and 2011 (in thousands):



|                           |  |                            |    |  |                          |   |   |      |  |   |      |  |  |   |   | 
|-------------------------- |  | -------------------------- | -- |  | ------------------------ | - | - | ---- |  | - | ---- |  |  | - | - | 
|                           |  | Three Months EndedJune 30, |    |  | Six Months EndedJune 30, |  
|                           |  | 2012                       |    |  | 2011                     |   |   | 2012 |  |   | 2011 | 
|Cost of revenue            |  | $                          | 9  |  |                          | $ |  |      |  | $ | 14   |  |  | $ |  | 
|Research and development   |  |                            | 11 |  |                          |   |  |      |  |   | 16   |  |  |   |  | 
|Selling and marketing      |  |                            | 15 |  |                          |   |  |      |  |   | 24   |  |  |   |  | 
|General and administrative |  |                            | 15 |  |                          |   |  |      |  |   | 22   |  |  |   |  | 
|                           |  |                            |    |  |                          |   |   |      |  |   |      |  |  |   |   | 
|Total                      |  | $                          | 50 |  |                          | $ |  |      |  | $ | 76   |  |  | $ |  | 
|                           |  |                            |    |  |                          |   |   |      |  |   |      |  |  |   |   | 

As of June 30, 2012, there was $0.6 million of total unrecognized compensation cost related to the
ESPP that is expected to be recognized on a straight-line basis over the remaining vesting periods.

Stock-Based
Compensation Plans

The Company has various stock-based compensation plans to attract, motivate, retain and reward
employees, directors and consultants by providing its Board of Directors (the Board) or a committee thereof the discretion to award equity incentives to these persons. The Companys stock-based compensation plans, the majority of
which are stockholder approved, consist of the



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Director Option Plan, 1997 Stock Option Plan, 2000 Stock Option Plan, 2007 Stock Option Plan (the 2007 Plan), the Bluehill ID AG Executive Bonus Plan and Share Option Plan (the
Bluehill Plans), the 2010 Bonus and Incentive Plan (the 2010 Plan), and the 2011 Incentive Compensation Plan (the 2011 Plan).

Stock Bonus and Incentive Plans

In connection with its acquisition of
Bluehill ID AG in January 2010, the Company assumed the Bluehill Plans, pursuant to which options to purchase 2.0 million shares of the Companys common stock may be granted to executives, key employees and other service providers,
including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), based upon the achievement of certain performance targets or other terms and conditions as determined by the administrator of the plans. No grants
have been made under these plans since the date of assumption.

In June 2010, Identives stockholders approved the 2010
Plan, under which cash and equity-based awards may be granted to executive officers, including the CEO and CFO, and other key employees (Participants) of the Company and its subsidiaries and members of the Companys Board, as
designated from time to time by the Compensation Committee of the Board. An aggregate of 3.0 million shares of the Companys common stock was reserved for issuance under the 2010 Plan as equity-based awards, including shares, nonqualified
stock options, restricted stock or deferred stock awards. These awards provide the executives and employees with the opportunity to earn shares of common stock depending on the extent to which certain performance goals are met. For services
rendered, the executives shall be paid an incentive bonus to be received in cash and shares of the Companys common stock with certain lock-up periods. In addition, the executives and employees are entitled to receive a grant of non-qualified
stock options in an amount equal to 20% of the number of U.S. dollars in the participants base salary. The Compensation Committee may make incentive awards based on such terms, conditions and criteria as it considers appropriate, including
awards that are subject to the achievement of certain performance criteria. Stock awards are generally fully vested at the time of grant, but subject to a 24-month lock-up from the date of grant. Since the award of share-based payments described
above represents an obligation to issue a variable number of Companys shares determined on the basis of a monetary value derived solely on variations in an operating performance measure (and not on the basis of variations in the fair value of
the entitys equity shares), the award is considered a share-based liability in accordance with ASC 480 and is remeasured to fair value each reporting period. While the Company will maintain its current 2010 Plan for making performance-based
awards to Participants, all future equity awards granted under the 2010 Plan will be issued pursuant to the 2011 Plan (described below). As of June 30, 2012, a total of 0.9 million shares have been issued pursuant to the 2011 Plan, of
which 0.2 million shares were issued during the six months ended June 30, 2012 as disclosed in the condensed consolidated statements of equity.

On June 6, 2011, Identives stockholders approved the 2011 Plan, which is administered by the Compensation Committee of the Companys Board of Directors. The plan provides stock options,
stock units, restricted shares, and stock appreciation rights to be granted to officers, directors, employees, consultants, and other persons who provide services to the Company or any related entity. The 2011 Plan serves as a successor plan to the
Companys 2007 Plan. The Company reserved 4.0 million shares of common stock plus any remaining common stock available for delivery under the 2007 Plan and the 2010 Plan as of June 6, 2011. In aggregate, as of June 6, 2011,
8.6 million shares were available for future grants under the 2011 Plan, including shares rolled over from 2007 Plan and 2010 Plan. From June 6, 2011 through June 30, 2012, a total of 1.6 million options have been granted
pursuant to the 2011 Plan, of which 1.3 million were granted during the six months ended June 30, 2012.

Stock-Based Compensation Expense (Stock Bonus and Incentive Plans)

The following table illustrates the stock-based compensation expense resulting from stock bonus and incentive plans included in the
condensed consolidated statements of operations for the three and six months ended June 30, 2012 and 2011 (in thousands):



|                           |  |                            |      |   |                          |   |     |      |  |   |      |   |  |   |     | 
|-------------------------- |  | -------------------------- | ---- | - | ------------------------ | - | --- | ---- |  | - | ---- | - |  | - | --- | 
|                           |  | Three Months EndedJune 30, |      |   | Six Months EndedJune 30, |  
|                           |  | 2012                       |      |   | 2011                     |   |     | 2012 |  |   | 2011 |  
|Cost of revenue            |  | $                          |     |   |                          | $ | 2   |      |  | $ | 1    |   |  | $ | 2   | 
|Research and development   |  |                            | 1    |   |                          |   | 6   |      |  |   | 9    |   |  |   | 10  | 
|Selling and marketing      |  |                            | (51  | ) |                          |   | 65  |      |  |   | 42   |   |  |   | 125 | 
|General and administrative |  |                            | (384 | ) |                          |   | 239 |      |  |   | (124 | ) |  |   | 296 | 
|                           |  |                            |      |   |                          |   |     |      |  |   |      |   |  |   |     | 
|Total                      |  | $                          | (434 | ) |                          | $ | 312 |      |  | $ | (72  | ) |  | $ | 433 | 
|                           |  |                            |      |   |                          |   |     |      |  |   |      |   |  |   |     | 



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During the three months ended June 30, 2012, the Companys outlook for the
remainder of 2012 deteriorated due to macroeconomic uncertainty and associated softness in demand for the Companys products, and the Company reduced its forecasted revenue, gross margin and operating profit. This resulted in a significant
reduction in the expected amount for annual bonus payouts compared with the amounts expected to be paid as of the end of the previous quarter. In addition, one employee left the Company during the second quarter and did not accept the bonus awarded
to him for 2011. As a result, the Company recorded a net credit of $0.4 million for bonus accruals in its condensed consolidated statements of operations during the three-months ended June 30, 2012. As of June 30, 2012 and 2011, $0.1
million and $0.4 million, respectively, were accrued for share and stock option bonuses and included in accrued compensation and related benefits in the condensed consolidated balance sheets.

Stock Option Plans

The Companys stock options plans are generally time-based and expire seven to ten years from the date of grant. Vesting varies, with some options vesting 25% each year over four years; some vesting
1/12thper month over one year; some vesting 100%
after one year; and some vesting 1/12thper month,
commencing four years from the date of grant. The Director Option Plan and 1997 Stock Option Plan each expired in March 2007. The 2000 Stock Option Plan expired in December 2010 and as noted above, the 2007 Plan was discontinued in June 2011 in
connection with the approval of the 2011 Plan. As a result, options will no longer be granted under any of these plans.

As of
June 30, 2012, an aggregate of approximately 0.3 million granted options were outstanding under the Director Option Plan and the 1997 Stock Option Plan, 0.3 million granted options were outstanding under the 2000 Stock Option Plan,
1.2 million granted options were outstanding under the 2007 Plan, and 1.6 million granted options were outstanding under the 2011 Plan. These outstanding options remain exercisable in accordance with the terms of the original grant
agreements under the respective plans.

A summary of the activity under the Companys stock-based compensation plans for
the six months ended June 30, 2012 and for the year ended December 31, 2011 are as follows:



|                                            |  |                          |            |   |                   |  |           |                                |  |   |                       |  |  |                                     |         |  |               |  |      |           |  |  |         |  |  |   |           | 
|------------------------------------------- |  | ------------------------ | ---------- | - | ----------------- |  | --------- | ------------------------------ |  | - | --------------------- |  |  | ----------------------------------- | ------- |  | ------------- |  | ---- | --------- |  |  | ------- |  |  | - | --------- | 
|                                            |  |                          |            |   | Stock Options     |  |           | Stock Awards                   | 
|                                            |  | SharesAvailablefor
Grant |            |   | NumberOutstanding |  |           | AverageExercise Priceper share |  |   | AverageIntrinsicValue |  |  | RemainingContractualLife (in years) |         |  | NumberGranted |  |      | FairValue | 
|Balance at December 31, 2010                |  |                          | 7,542,277  |   |                   |  | 1,810,188 |                                |  | $ | 3.56                  |  |  | $                                   | 128,300 |  |               |  | 4.66 |           |  |  |         |  |  |   |           | 
|                                            |  |                          |            |   |                   |  |           |                                |  |   |                       |  |  |                                     |         |  |               |  |      |           |  |  |         |  |  |   |           | 
|Authorized                                  |  |                          | 4,000,000  |   |                   |  |           |                                |  |   |                       |  |  |                                     |         |  |               |  |      |           |  |  |         |  |  |   |           | 
|Granted                                     |  |                          | (1,447,980 | ) |                   |  | 820,716   |                                |  |   | 2.53                  |  |  |                                     |         |  |               |  |      |           |  |  | 627,264 |  |  | $ | 1,627,969 | 
|Cancelled or Expired                        |  |                          | 20,035     |   |                   |  | (343,081  | )                              |  |   | 7.27                  |  |  |                                     |         |  |               |  |      |           |  |  |         |  |  |   |           | 
|Exercised                                   |  |                          |            |   |                   |  | (21,001   | )                              |  |   | 2.36                  |  |  |                                     |         |  |               |  |      |           |  |  |         |  |  |   |           | 
|                                            |  |                          |            |   |                   |  |           |                                |  |   |                       |  |  |                                     |         |  |               |  |      |           |  |  |         |  |  |   |           | 
|Balance at December 31, 2011                |  |                          | 10,114,332 |   |                   |  | 2,266,822 |                                |  |   | 2.86                  |  |  | $                                   | 49,298  |  |               |  | 5.90 |           |  |  |         |  |  |   |           | 
|                                            |  |                          |            |   |                   |  |           |                                |  |   |                       |  |  |                                     |         |  |               |  |      |           |  |  |         |  |  |   |           | 
|Granted                                     |  |                          | (1,467,745 | ) |                   |  | 1,286,110 |                                |  |   | 1.33                  |  |  |                                     |         |  |               |  |      |           |  |  | 181,635 |  |  | $ | 272,655   | 
|Cancelled or Expired                        |  |                          | 59,626     |   |                   |  | (282,985  | )                              |  |   | 2.79                  |  |  |                                     |         |  |               |  |      |           |  |  |         |  |  |   |           | 
|                                            |  |                          |            |   |                   |  |           |                                |  |   |                       |  |  |                                     |         |  |               |  |      |           |  |  |         |  |  |   |           | 
|Balance at June 30, 2012                    |  |                          | 8,706,213  |   |                   |  | 3,269,947 |                                |  |   | 2.26                  |  |  | $                                   |        |  |               |  | 7.08 |           |  |  |         |  |  |   |           | 
|                                            |  |                          |            |   |                   |  |           |                                |  |   |                       |  |  |                                     |         |  |               |  |      |           |  |  |         |  |  |   |           | 
|Vested or expected to vest at June 30, 2012 |  |                          |            |   |                   |  | 3,121,589 |                                |  | $ | 2.29                  |  |  | $                                   |        |  |               |  | 6.98 |           |  |  |         |  |  |   |           | 
|                                            |  |                          |            |   |                   |  |           |                                |  |   |                       |  |  |                                     |         |  |               |  |      |           |  |  |         |  |  |   |           | 

The following table summarizes information about options outstanding as of June 30, 2012:



|                         |  |                     |           |  |                                                 |  |      |                              |  |   |                   |  |  |                               |           |  |  |   |      | 
|------------------------ |  | ------------------- | --------- |  | ----------------------------------------------- |  | ---- | ---------------------------- |  | - | ----------------- |  |  | ----------------------------- | --------- |  |  | - | ---- | 
|                         |  | Options Outstanding |           |  | Options Exercisable                             | 
|Range of Exercise Prices |  | NumberOutstanding   |           |  | WeightedAverageRemainingContractualLife (Years) |  |      | WeightedAverageExercisePrice |  |   | NumberExercisable |  |  | WeightedAverageExercise
Price |          
|$ 0.94 - $ 1.05          |  |                     | 104,000   |  |                                                 |  | 9.95 |                              |  | $ | 1.05              |  |  |                               |          |  |  | $ | 0.00 | 
|$ 1.06 - $ 1.20          |  |                     | 943,533   |  |                                                 |  | 9.92 |                              |  |   | 1.20              |  |  |                               |          |  |  |   |     | 
|$ 1.21 - $ 2.40          |  |                     | 746,644   |  |                                                 |  | 5.93 |                              |  |   | 2.17              |  |  |                               | 527,107   |  |  |   | 2.23 | 
|$ 2.41 - $ 2.63          |  |                     | 734,712   |  |                                                 |  | 7.93 |                              |  |   | 2.55              |  |  |                               | 543,343   |  |  |   | 2.60 | 
|$ 2.64 - $ 10.74         |  |                     | 741,058   |  |                                                 |  | 3.42 |                              |  |   | 3.59              |  |  |                               | 711,552   |  |  |   | 3.61 | 
|                         |  |                     |           |  |                                                 |  |      |                              |  |   |                   |  |  |                               |           |  |  |   |      | 
|$ 0.94 - $ 10.74         |  |                     | 3,269,947 |  |                                                 |  | 7.08 |                              |  | $ | 2.26              |  |  |                               | 1,782,002 |  |  | $ | 2.89 | 
|                         |  |                     |           |  |                                                 |  |      |                              |  |   |                   |  |  |                               |           |  |  |   |      | 



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##### Table of Contents

The weighted-average grant date fair value per option for options granted during the three
and six months ended June 30, 2012 was $1.20 and $1.33, respectively. The weighted-average grant date fair value per option for options granted during the three and six months ended June 30, 2011 was $2.92 and $2.67, respectively. During
the three and six months ended June 30, 2012, no options were exercised. During the three and six months ended June 30, 2011, 16,539 and 21,001 options, respectively. were exercised. Cash proceeds from the exercise of stock options were
$44,543 and $56,591 during the three and six months ended June 30, 2011, respectively.

Stock-Based Compensation
Expense (Stock Options)

The following table illustrates the stock-based compensation expense resulting from stock options
included in the condensed consolidated statements of operations for the three and six months ended June 30, 2012 and 2011 (in thousands):



|                                                     |  |                            |     |  |                           |   |    |      |  |   |      |  |  |   |     |  
|---------------------------------------------------- |  | -------------------------- | --- |  | ------------------------- | - | -- | ---- |  | - | ---- |  |  | - | --- | -
|                                                     |  | Three Months EndedJune 30, |     |  | Six Months 
EndedJune 30, |  
|                                                     |  | 2012                       |     |  | 2011                      |   |    | 2012 |  |   | 2011 | 
|Cost of revenue                                      |  | $                          | 2   |  |                           | $ | 5  |      |  | $ | 5    |  |  | $ | 8   |  
|Research and development                             |  |                            | 12  |  |                           |   | (5 | )    |  |   | 20   |  |  |   | 65  |  
|Selling and marketing                                |  |                            | 72  |  |                           |   | 81 |      |  |   | 132  |  |  |   | 117 |  
|General and administrative                           |  |                            | 86  |  |                           |   | (7 | )    |  |   | 131  |  |  |   | (42 | )
|                                                     |  |                            |     |  |                           |   |    |      |  |   |      |  |  |   |     |  
|Stock-based compensation expense before income taxes |  |                            | 172 |  |                           |   | 74 |      |  |   | 288  |  |  |   | 148 |  
|Income tax benefit                                   |  |                            |    |  |                           |   |   |      |  |   |     |  |  |   |    |  
|                                                     |  |                            |     |  |                           |   |    |      |  |   |      |  |  |   |     |  
|Stock-based compensation expense after income taxes  |  | $                          | 172 |  |                           | $ | 74 |      |  | $ | 288  |  |  | $ | 148 |  
|                                                     |  |                            |     |  |                           |   |    |      |  |   |      |  |  |   |     |  

At June 30, 2012, there was $1.1 million of unrecognized stock-based compensation expense, net of
estimated forfeitures related to non-vested options, that is expected to be recognized over a weighted-average period of 1.4 years.

Common Stock Reserved for Future Issuance

As of June 30, 2012,
the Company has reserved an aggregate of approximately 13.8 million shares of its common stock for future issuance under its various equity incentive plans, of which approximately 6.6 million shares are reserved for future grants under the
2011 Plan and 2010 Plan, approximately 3.3 million shares are reserved for future issuance pursuant to outstanding options under all stock options and incentive plans, 1.9 million shares are reserved for future issuance under the ESPP and
approximately 2.0 million shares are reserved for future issuance under the Bluehill Plans.

As of June 30, 2012,
the Company has reserved an aggregate of approximately 3.3 million shares of common stock for future issuance in connection with its acquisition of Bluehill ID, consisting of approximately 2.0 million shares for the outstanding options
assumed at the closing of the Bluehill ID acquisition and approximately 1.3 million shares for the noncontrolling shareholders of Bluehill ID.

As of June 30, 2012, 0.1 million shares are reserved for future issuance in connection with the acquisition of polyright for the earn-outs in consideration of meeting 2011 targets.

As of June 30, 2012, the Company has reserved an aggregate of approximately 8.6 million shares of common stock for future
issuance pursuant to outstanding warrants, consisting of approximately 3.7 million shares pursuant to outstanding warrants in connection with its November 2010 private placement and approximately 4.9 million shares pursuant to outstanding
warrants in connection with its April 2009 acquisition of Hirsch Electronics Corporation (Hirsch).



|6. | Net Loss per Common Share Attributable to Identive Group, Inc.
|-- | --------------------------------------------------------------

Basic and diluted net loss per share is based upon the weighted average number of common shares outstanding during the
period. For the three and six months ended June 30, 2012 and 2011, common stock equivalents consisting of outstanding stock options and warrants were excluded from the calculation of diluted loss per share because these securities were
anti-dilutive due to the net loss in the respective period. For the six months ended June 30, 2012 and 2011, the total number of shares excluded from diluted loss per share relating to these securities was 4,000 and 2,130,341, respectively.



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##### Table of Contents

|7. | Inventories
|-- | -----------

The Companys inventories are stated at the lower of cost or market. Inventories consist of (in thousands):



|                |  |              |       |  |                  |   |       | 
|--------------- |  | ------------ | ----- |  | ---------------- | - | ----- | 
|                |  | June 30,2012 |       |  | December 31,2011 |  
|Raw materials   |  | $            | 3,539 |  |                  | $ | 4,243 | 
|Work-in-process |  |              | 721   |  |                  |   | 160   | 
|Finished goods  |  |              | 5,623 |  |                  |   | 4,860 | 
|                |  |              |       |  |                  |   |       | 
|Total           |  | $            | 9,883 |  |                  | $ | 9,263 | 
|                |  |              |       |  |                  |   |       | 



|8. | Property and Equipment
|-- | ----------------------

Property and equipment, net consists of (in thousands):



|                                          |  |              |        |   |                  |   |        |  
|----------------------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                          |  | June 30,2012 |        |   | December 31,2011 |  
|Land, building and leasehold improvements |  | $            | 1,842  |   |                  | $ | 2,277  |  
|Furniture, fixtures and office equipment  |  |              | 3,507  |   |                  |   | 5,755  |  
|Plant and machinery                       |  |              | 3,300  |   |                  |   | 5,255  |  
|Purchased software                        |  |              | 719    |   |                  |   | 1,299  |  
|                                          |  |              |        |   |                  |   |        |  
|Total (1)                                 |  |              | 9,368  |   |                  |   | 14,586 |  
|Accumulated depreciation (2)              |  |              | (5,445 | ) |                  |   | (7,887 | )
|                                          |  |              |        |   |                  |   |        |  
|Property and equipment, net               |  | $            | 3,923  |   |                  | $ | 6,699  |  
|                                          |  |              |        |   |                  |   |        |  



|(1) | Amounts shown are net of $0.4 million for land, building and leasehold improvements, $2.6 million for furniture, fixture and office equipment, $3.6 million for plant
and machinery and $0.5million for purchased software, which were impaired during the second quarter of 2012.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Amounts shown in accumulated depreciation are net of reversal of amounts of accumulated depreciation totaling $3.1 million related to assets impaired. Additional
information is provided below.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As described below in Note 9, the Company performed an interim goodwill
impairment analysis as of June 30, 2012. In conjunction with its goodwill impairment test, the Company also performed an impairment analysis for its long-lived assets in accordance with its accounting policy for reviewing long-lived assets for
impairment. Management determined the estimated undiscounted cash flows and the fair value of the identified long-lived assets to measure the impairment loss and in doing so relied in part upon an independent third-party valuation report. The
impairment analysis for long-lived assets indicated that some of the long-lived assets are not recoverable as the sum of estimated future undiscounted cash flows were below the assets carrying value. Accordingly, the Company estimated the fair
value of these long-lived assets using a discounted cash flow analysis to measure the impairment loss. The discounted cash flow analysis requires estimates of items such as expected revenue, gross margin and operating expenses in order to discount
the sum of future independent cash flows, using discount rates which were determined based on an analysis of each individual long-lived asset group and consideration of the aggregate business of the Company. The discount rates used in the present
value calculations were in the range of 16% to 20%, except for one asset group where it was 50%. The discount rates were derived from a weighted average cost of capital (WACC) analysis, adjusted to reflect additional risks related to
each assets characteristics. The Company tested the reasonableness of the inputs and outcomes of its discounted cash flow analysis by comparing these items to available market data. As a result of this analysis, the Company concluded that
certain of its long-lived assets, specifically property and equipment, were impaired as of June 30, 2012, and recorded an impairment charge of $4.0 million, which is included as part of operating expenses in the condensed consolidated
statements of operations for the three and six months ended June 30, 2012. Based on this analysis, the Company expects to recover the remaining balance of property and equipment of $3.9 million.

The Company recorded depreciation expense, including amortization expense on capitalized leased assets, in the amount of approximately
$0.6 million and $1.1 million during the three and six months ended June 30, 2012, respectively. The net decrease of $2.4 million in accumulated depreciation is due to reversal of amounts of accumulated depreciation totaling $3.1 million
related to assets impaired, reduction in accumulated depreciation of $0.2 million related to fixed assets disposed during the six months ended June 30, 2012, reduction in accumulated depreciation of $0.2 million for the change in foreign
exchange rates between the balance sheet dates, offset by depreciation expense of $1.1 million recorded during the six months ended June 30, 2012.



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##### Table of Contents

|9. | Goodwill and Intangible Assets
|-- | ------------------------------

Goodwill

The following table presents goodwill and changes in the carrying amount of goodwill for each of the Companys business segments as of June 30, 2012, and December 31, 2011 (in thousands):



|                                       |  |       |         |   |                    |   |         |             |  |   |        |  
|-------------------------------------- |  | ----- | ------- | - | ------------------ | - | ------- | ----------- |  | - | ------ | -
|                                       |  | Total |         |   | IdentityManagement |   |         | ID Products | 
|Balance at December 31, 2010           |  | $     | 47,126  |   |                    | $ | 37,955  |             |  | $ | 9,171  |  
|Goodwill acquired during the period    |  |       | 10,518  |   |                    |   | 10,518  |             |  |   |       |  
|Goodwill measurement period adjustment |  |       | 118     |   |                    |   |        |             |  |   | 118    |  
|Currency translation adjustment        |  |       | 642     |   |                    |   | 365     |             |  |   | 277    |  
|                                       |  |       |         |   |                    |   |         |             |  |   |        |  
|Balance at December 31, 2011           |  |       | 58,404  |   |                    |   | 48,838  |             |  |   | 9,566  |  
|Goodwill acquired during the period    |  |       | 12,958  |   |                    |   | 12,958  |             |  |   |       |  
|Goodwill impaired during the period    |  |       | (21,450 | ) |                    |   | (15,613 | )           |  |   | (5,837 | )
|Currency translation adjustment        |  |       | (962    | ) |                    |   | (943    | )           |  |   | (19    | )
|                                       |  |       |         |   |                    |   |         |             |  |   |        |  
|Balance at June 30, 2012               |  | $     | 48,950  |   |                    | $ | 45,240  |             |  | $ | 3,710  |  
|                                       |  |       |         |   |                    |   |         |             |  |   |        |  

During the six months ended June 30, 2012, the Company recorded goodwill of $13.0 million in
connection with its acquisition of payment solution. During the year ended December 31, 2011, the Company recorded goodwill of $10.5 million in connection with its acquisition of idOnDemand and polyright. Of the total goodwill, a certain amount
of goodwill is designated in a currency other than United States Dollars and is adjusted at each reporting period for the change in foreign exchange rates between the balance sheet dates. In accordance with its accounting policy and ASC 350, the
Company tests its goodwill and any other intangibles with indefinite lives annually for impairment and assesses whether there are any indicators of impairment on an interim basis. The Company had performed its annual impairment test for all
reporting units on December 1, 2011 in accordance with its accounting policy and concluded that there was no impairment to goodwill during the year ended December 31, 2011.

Beginning in May 2012, the Company experienced a significant decline in its stock price, resulting in the Companys market
capitalization falling significantly below its net book value. In addition, during the second quarter of 2012, the Companys demand outlook deteriorated due to macroeconomic uncertainty and associated softness in the demand for the
Companys offerings. As a result, the Company reduced its forecasted revenue, gross margin and operating profit for future periods. These factors are considered indicators of potential impairment under the Companys critical accounting
policy, and as a result, the Company performed an interim goodwill impairment analysis as part of its quarterly close as of June 30, 2012. The interim impairment of goodwill was primarily triggered due to decline in the Companys market
capitalization that occurred after the filing of 2012 first fiscal quarter Form 10-Q and, to a lesser extent, a decrease in the forecasted future cash flows used in the income approach. Prior to its goodwill impairment test, the Company first tested
its long-lived assets, including property and equipment and intangible assets for impairment and adjusted the carrying value of each asset group to its fair value and recorded the associated impairment charge in its condensed consolidated financial
statements. ASC 350 requires a two-step method for determining goodwill impairment. The first step of the impairment test compared the fair value of each reporting unit to its carrying value, including the goodwill related to the respective
reporting units. At the time the impairment test was performed, the Company determined that it had six reporting units consisting of Hirsch, Multicard, payment solution and idOnDemand, which are the four components of the Identity Management
segment, and ID Infrastructure and Transponders, which are the two components of the ID Products segment. The Company calculated the fair value of the reporting units using a combination of the market and income approaches and in doing so relied in
part upon an independent third-party valuation report. The market approach estimates the fair value of a business based on a comparison of the Company to comparable firms in similar lines of business that are publicly traded or which are part of a
public or private transaction. The income approach requires estimates of expected revenue, gross margin and operating expenses in order to discount the sum of future cash flows using each particular reporting units weighted average cost of
capital. The Companys growth estimates were based on historical data and internal estimates developed as part of its long-term planning process. The Company tested the reasonableness of the inputs and outcomes of its discounted cash flow
analysis by comparing these items to available market data. Based on the preliminary results of step one of the goodwill impairment analysis, it was determined that the Companys net adjusted carrying value exceeded its estimated fair value for
the idOnDemand, Transponder and Multicard reporting units. As a result, the Company proceeded to the second step of the impairment test for these three reporting units to determine the implied fair value of goodwill and compare it to the carrying
amount of that goodwill to determine impairment loss.



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##### Table of Contents

During the second step of the goodwill impairment review, management estimated the fair
value of the Companys tangible and intangible net assets and in doing so relied in part upon an independent third-party valuation report. Identified intangible assets were valued specifically for each reporting unit tested. The difference
between the estimated fair value of each reporting unit and the sum of the fair value of the identified net assets results in the implied value of goodwill. Due to the length of time necessary to measure impairment of goodwill relating to these
three reporting units, the goodwill impairment analysis was not completed as of the time of the filing of this Quarterly Report on Form 10-Q and is subject to change. Based on the preliminary results of step two of the goodwill impairment analysis,
the Company concluded that the carrying value of goodwill for the idOnDemand, Transponder and Multicard reporting units was impaired and recorded a preliminary goodwill impairment charge of $21.4 million, which is included in the Companys
condensed consolidated statements of operations for the three and six months ended June 30, 2012. The Company expects to complete its analysis prior to reporting its financial results for the third quarter of 2012 and will record any
adjustments to this preliminary estimate at that time. Future impairment indicators, including further declines in the Companys market capitalization or changes in forecasted future cash flows, could require additional impairment charges.
There was no goodwill impairment during the three and six months ended June 30, 2011.

Intangible Assets

The following table summarizes the gross carrying amount and accumulated amortization for the intangible assets resulting
from acquisitions (in thousands):



|                                                   |  |               |              |   |              |   |            |         |  |   |                    |   |  |                      |             |   |            |   |             |       |  |   |                          |   |  |   |         |  
|-------------------------------------------------- |  | ------------- | ------------ | - | ------------ | - | ---------- | ------- |  | - | ------------------ | - |  | -------------------- | ----------- | - | ---------- | - | ----------- | ----- |  | - | ------------------------ | - |  | - | ------- | -
|                                                   |  | Order Backlog |              |   | TradeSecrets |   |            | Patents |  |   | ExistingTechnology |   |  | CustomerRelationship |             |   | Trade Name |   |             | Total | 
|Cost:                                              |  |               |              |   |              |   |            |         |  |   |                    |   |  |                      |             |   |            |   |             |       |  |   |                          |   |  |   |         |  
|Amortization period                                |  |               | 0.25 -1 year |   |              |   | 1 -2 years |         |  |   | 12 years           |   |  |                      | 6 -15 years |   |            |   | 4 -15 years |       |  |   | 1 -10 yearsandIndefinite |   |  |   | Total   |  
|                                                   |  |               |              |   |              |   |            |         |  |   |                    |   |  |                      |             |   |            |   |             |       |  |   |                          |   |  |   |         |  
|Balance at December 31, 2010                       |  | $             | 724          |   |              | $ |           |         |  | $ |                   |   |  | $                    | 5,462       |   |            | $ | 22,742      |       |  | $ | 9,221                    |   |  | $ | 38,149  |  
|Acquired as a part of idOnDemand acquisition       |  |               | 17           |   |              |   | 300        |         |  |   | 790                |   |  |                      | 2,700       |   |            |   | 390         |       |  |   | 60                       |   |  |   | 4,257   |  
|Acquired as a part of polyright acquisition        |  |               | 246          |   |              |   |           |         |  |   |                   |   |  |                      |            |   |            |   | 1,290       |       |  |   |                         |   |  |   | 1,536   |  
|Currency translation adjustment                    |  |               | (39          | ) |              |   |           |         |  |   |                   |   |  |                      | 8           |   |            |   | 373         |       |  |   | 86                       |   |  |   | 428     |  
|                                                   |  |               |              |   |              |   |            |         |  |   |                    |   |  |                      |             |   |            |   |             |       |  |   |                          |   |  |   |         |  
|Balance at December 31, 2011                       |  | $             | 948          |   |              | $ | 300        |         |  | $ | 790                |   |  | $                    | 8,170       |   |            | $ | 24,795      |       |  | $ | 9,367                    |   |  | $ | 44,370  |  
|Acquired as a part of payment solution acquisition |  |               | 344          |   |              |   |           |         |  |   |                   |   |  |                      | 2,023       |   |            |   | 1,323       |       |  |   | 542                      |   |  |   | 4,232   |  
|Impairment of intangible assets                    |  |               | (841         | ) |              |   | (300       | )       |  |   | (790               | ) |  |                      | (4,359      | ) |            |   | (10,540     | )     |  |   | (8,507                   | ) |  |   | (25,337 | )
|Currency translation adjustment                    |  |               | (22          | ) |              |   |           |         |  |   |                   |   |  |                      | (88         | ) |            |   | (156        | )     |  |   | (37                      | ) |  |   | (303    | )
|                                                   |  |               |              |   |              |   |            |         |  |   |                    |   |  |                      |             |   |            |   |             |       |  |   |                          |   |  |   |         |  
|Balance at June 30, 2012                           |  | $             | 429          |   |              |   |            |         |  |   |                    |   |  | $                    | 5,746       |   |            | $ | 15,422      |       |  | $ | 1,365                    |   |  | $ | 22,962  |  
|                                                   |  |               |              |   |              |   |            |         |  |   |                    |   |  |                      |             |   |            |   |             |       |  |   |                          |   |  |   |         |  
|Accumulated Amortization                           |  |               |              |   |              |   |            |         |  |   |                    |   |  |                      |             |   |            |   |             |       |  |   |                          |   |  |   |         |  
|Balance at December 31, 2010                       |  |               | (718         | ) |              |   |           |         |  |   |                   |   |  |                      | (595        | ) |            |   | (2,970      | )     |  |   | (1                       | ) |  |   | (4,284  | )
|Amortization expense                               |  |               | (235         | ) |              |   | (120       | )       |  |   | (44                | ) |  |                      | (715        | ) |            |   | (2,946      | )     |  |   | (37                      | ) |  |   | (4,097  | )
|Currency translation adjustment                    |  |               | 5            |   |              |   |           |         |  |   |                   |   |  |                      | 15          |   |            |   | (8          | )     |  |   |                         |   |  |   | 12      |  
|                                                   |  |               |              |   |              |   |            |         |  |   |                    |   |  |                      |             |   |            |   |             |       |  |   |                          |   |  |   |         |  
|Balance at December 31, 2011                       |  | $             | (948         | ) |              | $ | (120       | )       |  | $ | (44                | ) |  | $                    | (1,295      | ) |            | $ | (5,924      | )     |  | $ | (38                      | ) |  | $ | (8,369  | )
|Amortization expense                               |  |               | (37          | ) |              |   | (90        | )       |  |   | (33                | ) |  |                      | (550        | ) |            |   | (1,661      | )     |  |   | (49                      | ) |  |   | (2,420  | )
|Impairment of intangible assets                    |  |               | 677          |   |              |   | 210        |         |  |   | 77                 |   |  |                      | 743         |   |            |   | 3,644       |       |  |   | 74                       |   |  |   | 5,425   |  
|Currency translation adjustment                    |  |               | 10           |   |              |   |           |         |  |   |                   |   |  |                      | 7           |   |            |   | 45          |       |  |   |                         |   |  |   | 62      |  
|                                                   |  |               |              |   |              |   |            |         |  |   |                    |   |  |                      |             |   |            |   |             |       |  |   |                          |   |  |   |         |  
|Balance at June 30, 2012                           |  | $             | (298         | ) |              | $ |           |         |  | $ |                   |   |  | $                    | (1,095      | ) |            | $ | (3,896      | )     |  | $ | (13                      | ) |  | $ | (5,302  | )
|                                                   |  |               |              |   |              |   |            |         |  |   |                    |   |  |                      |             |   |            |   |             |       |  |   |                          |   |  |   |         |  
|Intangible Assets, net at June 30, 2012            |  | $             | 131          |   |              | $ |           |         |  | $ |                   |   |  | $                    | 4,651       |   |            | $ | 11,526      |       |  | $ | 1,352                    |   |  | $ | 17,660  |  
|                                                   |  |               |              |   |              |   |            |         |  |   |                    |   |  |                      |             |   |            |   |             |       |  |   |                          |   |  |   |         |  
|Intangible Assets, net at December 31, 2011        |  | $             |             |   |              | $ | 180        |         |  | $ | 746                |   |  | $                    | 6,875       |   |            | $ | 18,871      |       |  | $ | 9,329                    |   |  | $ | 36,001  |  
|                                                   |  |               |              |   |              |   |            |         |  |   |                    |   |  |                      |             |   |            |   |             |       |  |   |                          |   |  |   |         |  

During the six months ended June 30, 2012, the Company recorded intangible assets of $4.2 million in
connection with its acquisition of payment solution as described in Note 3 above. Of the total intangible assets, certain acquired intangible assets are designated in a currency other than United States Dollars and are adjusted each reporting period
for the change in foreign exchange rates between the balance sheet dates.



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As noted above, beginning in May 2012, the Company experienced a significant decline in its
stock price and during the 2012 second quarter experienced deterioration in its demand outlook as a result of macroeconomic uncertainty. Consequently, the Company performed an interim goodwill impairment analysis as of June 30, 2012. In
conjunction with its goodwill impairment test, the Company also performed an impairment analysis for intangible assets in accordance with its accounting policy for reviewing long-lived assets for impairment. Management determined the estimated
undiscounted cash flows and the fair value of the identified intangible assets to measure the impairment loss and in doing so relied in part upon an independent third-party valuation report. The impairment analysis for intangible assets indicated
that some of the identified intangible assets are not recoverable as the sum of its estimated future undiscounted cash flows were below the assets carrying value and accordingly, the Company estimated the fair value of these identified
intangible assets using a discounted cash flow analysis to measure the impairment loss. The discounted cash flow analysis requires estimates such as, expected revenue, gross margin and operating expenses, in order to discount the sum of future
independent cash flows using discount rates which were determined based on an analysis of each individual identified intangible asset group and consideration of the aggregate business of the Company. The discount rates used in the present value
calculations were in the range of 16% to 20%, except for one asset group where it was 50%. The discount rates were derived from a weighted average cost of capital (WACC) analysis, adjusted to reflect additional risks related to each
assets characteristics. The Company tested the reasonableness of the inputs and outcomes of its discounted cash flow analysis by comparing these items to available market data. As a result of this analysis, the Company concluded that certain
of its intangible assets were impaired as of June 30, 2012 and recorded an impairment charge of $19.9 million, which is included as part of operating expenses in the condensed consolidated statements of operations for the three and six months
ended June 30, 2012. Based on this analysis, the Company expects to recover the remaining balance of identified intangible assets of $17.7 million.

Intangible assets of $36.0 million as of December 31, 2011 include intangible assets of $9.3 million that are not subject to amortization. As of June 30, 2012, the Company
evaluated the reasonableness of useful lives of its indefinite-lived intangible assets and determined that these assets useful lives are no longer indefinite. As a result, the Company will begin to amortize these assets over their useful
lives. The impairment charge of $19.9 million above includes $8.1 million related to intangible assets which were classified as indefinite-lived intangible assets as of December 31, 2011. Intangible assets subject to amortization are amortized
over their useful lives as shown in the table above. The Company had performed its annual impairment test for intangible assets with indefinite useful lives in accordance with its accounting policy as of December 1, 2011 and concluded that
there was no impairment to unamortizable intangible assets during the year ended December 31, 2011.

The following table
illustrates the amortization expense included in the condensed consolidated statements of operations for the three and six months ended June 30, 2012 and 2011 (in thousands):



|                      |  |                            |       |  |                          |   |     |      |  |   |       |  |  |   |       | 
|--------------------- |  | -------------------------- | ----- |  | ------------------------ | - | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                      |  | Three MonthsEnded June 30, |       |  | Six MonthsEnded
June 30, |  
|                      |  | 2012                       |       |  | 2011                     |   |     | 2012 |  |   | 2011  | 
|Cost of revenue       |  | $                          | 366   |  |                          | $ | 225 |      |  | $ | 703   |  |  | $ | 346   | 
|Selling and marketing |  |                            | 893   |  |                          |   | 724 |      |  |   | 1,717 |  |  |   | 1,390 | 
|                      |  |                            |       |  |                          |   |     |      |  |   |       |  |  |   |       | 
|Total                 |  | $                          | 1,259 |  |                          | $ | 949 |      |  | $ | 2,420 |  |  | $ | 1,736 | 
|                      |  |                            |       |  |                          |   |     |      |  |   |       |  |  |   |       | 



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The estimated future amortization expense of purchased intangible assets with definite lives
for the next five years is as follows (in thousands):



|                            |  |   |        | 
|--------------------------- |  | - | ------ | 
|June 30, 2012:              |  |   |       
|2012 (remaining six months) |  | $ | 1,561  | 
|2013                        |  |   | 2,558  | 
|2014                        |  |   | 1,685  | 
|2015                        |  |   | 1,668  | 
|2016                        |  |   | 1,488  | 
|2017 and thereafter         |  |   | 8,700  | 
|                            |  |   |        | 
|Total                       |  | $ | 17,660 | 
|                            |  |   |        | 



|10. | Related-Party Transactions
|--- | --------------------------

Prior to the acquisition of Hirsch by the Company, effective November 1994, Hirsch had entered into a settlement
agreement (the 1994 Settlement Agreement) with two limited partnerships: Secure Keyboards, Ltd. (Secure Keyboards) and Secure Networks, Ltd. (Secure Networks). Secure Keyboards and Secure Networks were related to
Hirsch through certain common shareholders and limited partners, including Hirschs then President Lawrence Midland, who is now a Senior Vice President and a director of the Company. Following the acquisition of Hirsch, Mr. Midland
continues to own 30% of Secure Keyboards and 9% of Secure Networks.

On April 8, 2009, Secure Keyboards, Secure Networks
and Hirsch amended and restated the 1994 Settlement Agreement to replace the royalty-based payment arrangement under the 1994 Settlement Agreement with a new, definitive installment payment schedule with contractual payments to be made in future
periods through 2020 (the 2009 Settlement Agreement). Prior to the acquisition of Hirsch by the Company, the Company was not a party to the 2009 Settlement Agreement. The Company has, however, provided Secure Keyboards and Secure
Networks with a limited guarantee of Hirschs payment obligations under the 2009 Settlement Agreement (the Guarantee). The 2009 Settlement Agreement and the Guarantee became effective upon the acquisition of Hirsch on April 30,
2009. Hirschs annual payment to Secure Keyboards and Secure Networks in any given year under the 2009 Settlement Agreement is subject to increase based on the percentage increase in the Consumer Price Index during the prior calendar year.

The final payment to Secure Networks was due on January 30, 2012 and the final payment to Secure Keyboards is due on
January 30, 2021. Hirschs payment obligations under the 2009 Settlement Agreement will continue through the calendar year period ending December 31, 2020, unless Hirsch elects at any time on or after January 1, 2012 to earlier
satisfy its obligations by making a lump-sum payment to Secure Keyboards.

The Company recognized $0.2 million and $0.4
million of expense during the three and six months ended June 30, 2012, respectively, and $0.2 million and $0.4 million of expense during the three and six months ended June 30, 2011, respectively, in its condensed consolidated statements
of operations for the interest accreted on the discounted liability amount.

The payment amounts for related-party liability
in connection with the Hirsch acquisition for the next five years are as follows (in thousands):



|                              |  |   |        |  
|----------------------------- |  | - | ------ | -
|June 30, 2012:                |  |   |       
|2012 (remaining six months)   |  | $ | 545    |  
|2013                          |  |   | 1,131  |  
|2014                          |  |   | 1,187  |  
|2015                          |  |   | 1,247  |  
|2016                          |  |   | 1,309  |  
|2017 and thereafter           |  |   | 6,454  |  
|Present value discount factor |  |   | (3,665 | )
|                              |  |   |        |  
|Total                         |  | $ | 8,208  |  
|                              |  |   |        |  

In connection with its acquisition of payment solution, through its majority-owned subsidiary Bluehill ID
AG, the Company assumed an unsecured loan payable to Mountain Partners AG, a significant shareholder of the Company. At the inception of the loan agreement, an amount of 250,000 was provided for working capital needs. An amount of
327,000, or approximately $0.4 million, was outstanding as of the payment solution acquisition date of January 30, 2012. The loan carries an interest rate of 8%



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per year. There are no specific payment terms and the amount outstanding under the loan agreement, including accrued interest, is due to be paid upon demand by Mountain Partners AG. The Company
recorded interest expense on the loan of $6,600 and $11,000 during the three and six months ended June 30, 2012, respectively. As of June 30, 2012, approximately $0.4 million was outstanding under the loan, which is shown as a current
liability on the condensed consolidated balance sheets.



|11. | Financial Liabilities
|--- | ---------------------

Financial liabilities consist of (in thousands):



|                                |  |              |       |  |                  |   |       | 
|------------------------------- |  | ------------ | ----- |  | ---------------- | - | ----- | 
|                                |  | June 30,2012 |       |  | December 31,2011 |  
|Current liability:              |  |              |       |  |                  |   |       | 
|Equipment financing liabilities |  | $            | 547   |  |                  | $ |      | 
|Bank loan                       |  |              | 325   |  |                  |   |      | 
|Debt note                       |  |              | 835   |  |                  |   | 829   | 
|Mortgage loan payable to bank   |  |              | 53    |  |                  |   | 55    | 
|                                |  |              |       |  |                  |   |       | 
|Total current liability         |  | $            | 1,760 |  |                  | $ | 884   | 
|                                |  |              |       |  |                  |   |       | 
|Non-current liability:          |  |              |       |  |                  |   |       | 
|Equipment financing liabilities |  | $            | 2,019 |  |                  | $ |      | 
|Bank loan                       |  |              | 1,383 |  |                  |   |      | 
|Debt note                       |  |              |      |  |                  |   | 423   | 
|Mortgage loan payable to bank   |  |              | 716   |  |                  |   | 766   | 
|                                |  |              |       |  |                  |   |       | 
|Total non-current liability     |  | $            | 4,118 |  |                  | $ | 1,189 | 
|                                |  |              |       |  |                  |   |       | 
|Total                           |  | $            | 5,878 |  |                  | $ | 2,073 | 
|                                |  |              |       |  |                  |   |       | 

In connection with its acquisition of payment solution, through its majority-owned subsidiary Bluehill ID
AG, the Company acquired obligations for equipment financing liabilities and a bank loan.

The equipment financing liabilities
are partially secured by payment solutions systems installed in the stadiums to which they relate and will mature in 2014. Amounts outstanding under the equipment finance obligations accrue interest in the range of 8.6% to 18.6%, and interest
is payable quarterly. payment solution is obligated to pay a quarterly sum of approximately $0.2 million in principal and interest during 2012. The repayments increase to approximately $0.3 million per quarter in 2013, with a final payment of
approximately $0.8 million in October 2014. The Company recorded interest expense on the equipment financing obligations of approximately $0.1 million and $0.2 million during the three and six months ended June 30, 2012, respectively.

The bank loan is secured by some of payment solutions tangible assets installed in the various stadiums and will mature
in 2017. Amounts outstanding under the bank loan accrue interest at 11.15% and interest is payable quarterly. payment solution is obligated to pay a quarterly sum of approximately $0.1 million in principal and interest over the life of the loan. The
Company recorded interest expense on the bank loan of approximately $0.1 million and $0.1 million during the three and six months ended June 30, 2012, respectively.

In connection with its acquisition of Smartag Pte., Ltd. (Smartag) in November 2010, the Company issued a debt note with a face value of $2.2 million to FCI Asia Pte. Ltd. The debt note
carries an interest rate of 6% per year, compounded daily and is payable within 30 months from the closing date. The Company is obligated to pay the principal and accrued interest on a quarterly basis beginning February 19, 2011. The
Company may at any time prepay the principal amount of this debt note, in whole or in part, together with accrued interest thereon, without penalty. The discount for prepayment shall be 10% on any remaining amount outstanding under the debt note.
The debt note is secured by the grant of first-priority security interest in over all the shares and assets of Smartag. The Company recorded interest expense on the debt note of $14,000 and $32,000 during the three and six months ended June 30,
2012, respectively. The Company recorded interest expense on the debt note of $34,000 and $0.1 million during the three and six months ended June 30, 2011, respectively.

In connection with its acquisition of Bluehill ID AG (Bluehill ID) in January 2010, the Company acquired an obligation for a mortgage loan and a related revolving line of credit payable to a
bank. The mortgage loan and the revolving line of credit are related to one of the wholly-owned subsidiaries of Bluehill ID and are secured by the land and building to which it relates as well as total inventory, machinery, stock, products and raw
materials of the subsidiary. Amounts outstanding under the mortgage loan



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accrue interest at 5.50%, and interest is payable monthly. The mortgage loan will mature in 2026. The Company is obligated to pay a monthly amount of approximately $4,600 over the life of the
mortgage loan towards the principal amount in addition to monthly interest payments. The total amount that can be advanced under the line of credit is approximately $0.1 million. The advances on the revolving line of credit accrue interest at a base
rate determined by the bank plus 2%, payable quarterly. Any advances over the limit will accrue interest at 10.75%. The revolving line of credit is ongoing with no specific end date. The Company recorded interest expense on the mortgage loan and
line of credit of approximately $13,000 and $29,000 during the three and six months ended June 30, 2012, respectively. The Company recorded interest expense on the mortgage loan and line of credit of approximately $19,000 and $38,000 during the
three and six months ended June 30, 2011, respectively. As of June 30, 2012 and December 31, 2011, outstanding balances under the revolving line of credit were zero.



|12. | Segment Reporting, Geographic Information and Major Customers
|--- | -------------------------------------------------------------

ASC Topic 280  Segment Reporting(ASC 280) establishes standards for the reporting by public
business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the operating segments
within the Company for making operating decisions and assessing financial performance. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses and about
which separate financial information is available. The Companys chief operating decision makers (CODM) are considered to be its CEO and CFO.

The Company operates in two business segments that reflect its current organizational structure and focus on providing secure identification solutions. The Companys reportable segments are
Identity Management Solutions & Services (Identity Management) and Identification Products & Components (ID Products).



| |  |  | In the Identity Management segment the Company designs, supplies and manages solutions, systems and services that enable the secure management of
credentials in diverse markets. These credentials are used for the identification of people and the granting of rights and privileges based on defined policies. The Companys Identity Management offerings include integrated physical and logical
(i.e., PC, network or cyber) access systems, integrated ID solutions, cashless payment solutions and cloud-based credential management systems, all of which are designed to enable organizations to enhance security and better meet compliance and
regulatory requirements while providing the benefits of ease of use and convenience. The Company sells its Identity Management solutions under the Hirsch Identive, idOnDemand and Multicard brands, as well as additional country or market specific
brands. The Companys Identity Management end customers operate in the government, education, enterprise and commercial markets and can be found in multiple vertical market segments including healthcare, banking, industrial, retail and
critical infrastructure. Business units in the Identity Management segment include Hirsch Identive, idOnDemand and Multicard (which includes payment solution) and these business units were aggregated based on similar economic characteristics and
products offerings as well as type of customers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the ID Products segment the Company designs and manufactures both standard and highly specialized radio frequency identification (RFID)
and smart card technology-based products and components, including NFC products and components, that are used in the government, enterprise and consumer markets for a number of identity-based and related applications, including logical access,
physical access, eHealth, eGovernment, citizen ID, mobile payments, loyalty schemes, and transportation and event ticketing. The Companys ID Infrastructure products include readers and terminals based on both contact and contactless smart card
technology and its Transponder products include RFID inlays, inlay-based RFID tags, labels, stickers and cards. The ID Products segment includes the results of the Companys ID Infrastructure (formerly SCM Microsystems) and Transponder business
units and these business units were aggregated based on similar economic characteristics and distribution channels as well as type of customers. The Companys ID Infrastructure and Transponder products are primarily sold under the Identive
brand.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The CODM reviews financial information and business performance for each operating segment and also
at the Identity Management and ID Products reportable segment. The Company evaluates the performance of its segments at the revenue and gross margin level. The CODM does not review operating expenses or asset information for purposes of assessing
performance or allocating resources.



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Summary information by segment is as follows (in thousands):



|                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------ |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                     |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                     |  | 2012                       |        |   | 2011                     |   |        | 2012 |  |   | 2011   |  
|Identity Management:                 |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Revenues from external customers     |  | $                          | 14,183 |   |                          | $ | 14,476 |      |  | $ | 26,888 |   |  | $ | 27,100 |  
|Intersegment revenue                 |  |                            | 16     |   |                          |   | 259    |      |  |   | 3      |   |  |   | 317    |  
|                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total Identity Management revenue    |  |                            | 14,199 |   |                          |   | 14,735 |      |  |   | 26,891 |   |  |   | 27,417 |  
|Elimination of intersegment revenues |  |                            | (16    | ) |                          |   | (259   | )    |  |   | (3     | ) |  |   | (317   | )
|                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total revenue                        |  | $                          | 14,183 |   |                          | $ | 14,476 |      |  | $ | 26,888 |   |  | $ | 27,100 |  
|                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                         |  | $                          | 6,294  |   |                          | $ | 6,329  |      |  | $ | 12,181 |   |  | $ | 12,155 |  
|                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Gross profit %                       |  |                            | 44     | % |                          |   | 44     | %    |  |   | 45     | % |  |   | 45     | %
|ID Products:                         |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Revenues from external customers     |  | $                          | 9,673  |   |                          | $ | 11,136 |      |  | $ | 18,174 |   |  | $ | 20,932 |  
|Intersegment revenue                 |  |                            | 161    |   |                          |   | 1,690  |      |  |   | 174    |   |  |   | 3,709  |  
|                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total ID Products revenue            |  |                            | 9,834  |   |                          |   | 12,826 |      |  |   | 18,348 |   |  |   | 24,641 |  
|Elimination of intersegment revenues |  |                            | (161   | ) |                          |   | (1,690 | )    |  |   | (174   | ) |  |   | (3,709 | )
|                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total revenue                        |  | $                          | 9,673  |   |                          | $ | 11,136 |      |  | $ | 18,174 |   |  | $ | 20,932 |  
|                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                         |  | $                          | 3,306  |   |                          | $ | 3,885  |      |  | $ | 6,157  |   |  | $ | 7,439  |  
|                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Gross profit %                       |  |                            | 34     | % |                          |   | 35     | %    |  |   | 34     | % |  |   | 36     | %
|Total:                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net revenue                          |  | $                          | 23,856 |   |                          | $ | 25,612 |      |  | $ | 45,062 |   |  | $ | 48,032 |  
|Gross profit                         |  | $                          | 9,600  |   |                          | $ | 10,214 |      |  | $ | 18,338 |   |  | $ | 19,594 |  
|Gross profit %                       |  |                            | 40     | % |                          |   | 40     | %    |  |   | 41     | % |  |   | 41     | %



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Geographic net revenue is based on selling location. Information regarding net revenue by
geographic region is as follows (in thousands):



|                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|------------------ |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                   |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                   |  | 2012                       |        |   | 2011                     |   |        | 2012 |  |   | 2011   |  
|Net Revenues:      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Americas           |  | $                          | 12,619 |   |                          | $ | 12,058 |      |  | $ | 22,825 |   |  | $ | 21,792 |  
|Europe             |  |                            | 7,842  |   |                          |   | 9,113  |      |  |   | 15,374 |   |  |   | 18,645 |  
|Asia-Pacific       |  |                            | 3,395  |   |                          |   | 4,441  |      |  |   | 6,863  |   |  |   | 7,595  |  
|                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total              |  | $                          | 23,856 |   |                          | $ | 25,612 |      |  | $ | 45,062 |   |  | $ | 48,032 |  
|                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|% of net Revenues: |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Americas           |  |                            | 53     | % |                          |   | 47     | %    |  |   | 51     | % |  |   | 45     | %
|Europe             |  |                            | 33     | % |                          |   | 36     | %    |  |   | 34     | % |  |   | 39     | %
|Asia-Pacific       |  |                            | 14     | % |                          |   | 17     | %    |  |   | 15     | % |  |   | 16     | %
|                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total              |  |                            | 100    | % |                          |   | 100    | %    |  |   | 100    | % |  |   | 100    | %
|                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

No customers exceeded 10% of total revenue during the three or six months ended June 30, 2012 or
2011. One customer in the ID Management segment accounted for $1.7 million, or 12.1% of the Companys accounts receivable balance at June 30, 2012. No customer represented 10% of the Companys accounts receivable balance at
December 31, 2011.

The Company tracks assets by physical location. Long-lived assets by geographic location are as
follows (in thousands):



|                             |  |              |       |  |                  |   |       | 
|---------------------------- |  | ------------ | ----- |  | ---------------- | - | ----- | 
|                             |  | June 30,2012 |       |  | December 31,2011 |  
|Property and equipment, net: |  |              |       |  |                  |   |       | 
|Americas                     |  | $            | 622   |  |                  | $ | 656   | 
|Europe                       |  |              | 2,695 |  |                  |   | 3,970 | 
|Asia-Pacific                 |  |              | 606   |  |                  |   | 2,073 | 
|                             |  |              |       |  |                  |   |       | 
|Total (1)                    |  | $            | 3,923 |  |                  | $ | 6,699 | 
|                             |  |              |       |  |                  |   |       | 



|(1) | Amounts shown are net of impairment charges.
|--- | --------------------------------------------



|13. | Restructuring
|--- | -------------

In 2012, the Company implemented a restructuring plan (the 2012 Restructuring Plan) in an effort to better
align its business operations with the current market and macroeconomic conditions. The 2012 Restructuring Plan included a worldwide workforce reduction and restructuring of certain business functions. The Company incurred restructuring charges of
$0.3 million and paid $0.2 million for severance charges associated with the 2012 Restructuring Plan during the three and six months ended June 30, 2012. As of June 30, 2012, approximately $0.1 million was outstanding related to
restructuring actions and is included in other accrued expenses and liabilities in the condensed consolidated balance sheet.



|14. | Commitments
|--- | -----------

The Company leases its facilities, certain equipment, and automobiles under non-cancelable operating lease agreements.
Those lease agreements existing as of June 30, 2012 expire at various dates during the next five years.

The Company
recognized rent expense of $0.5 million and $1.1 million for the three and six months ended June 30, 2012, respectively, and recognized rent expense of $0.5 million and $1.0 million for the three and six months ended June 30, 2011,
respectively, in its condensed consolidated statements of operations.



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Purchases for inventories are highly dependent upon forecasts of customer demand. Due to the
uncertainty in demand from its customers, the Company may have to change, reschedule, or cancel purchases or purchase orders from its suppliers. These changes may lead to vendor cancellation charges on these purchases or contractual commitments. The
following table summarizes the Companys principal contractual obligations as of June 30, 2012 (in thousands):



|                            |  |                |       |  |                     |   |        |                             |  |   |       |  |  |   |        | 
|--------------------------- |  | -------------- | ----- |  | ------------------- | - | ------ | --------------------------- |  | - | ----- |  |  | - | ------ | 
|                            |  | OperatingLease |       |  | PurchaseCommitments |   |        | OtherContractualObligations |  |   | Total | 
|2012 (remaining six months) |  | $              | 1,468 |  |                     | $ | 10,872 |                             |  | $ | 396   |  |  | $ | 12,736 | 
|2013                        |  |                | 1,555 |  |                     |   | 363    |                             |  |   | 66    |  |  |   | 1,984  | 
|2014                        |  |                | 710   |  |                     |   |       |                             |  |   | 4     |  |  |   | 714    | 
|2015                        |  |                | 214   |  |                     |   |       |                             |  |   |      |  |  |   | 214    | 
|2016 and thereafter         |  |                | 156   |  |                     |   |       |                             |  |   | 24    |  |  |   | 180    | 
|                            |  |                |       |  |                     |   |        |                             |  |   |       |  |  |   |        | 
|Total                       |  | $              | 4,103 |  |                     | $ | 11,235 |                             |  | $ | 490   |  |  | $ | 15,828 | 
|                            |  |                |       |  |                     |   |        |                             |  |   |       |  |  |   |        | 

The Company provides warranties on certain product sales, which range from 12 to 24 months, and
allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under
warranty. The Company currently establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior 12 months sales activities. If actual return rates and/or repair and
replacement costs differ significantly from the Companys estimates, adjustments to recognize additional cost of sales may be required in future periods. Historically the warranty accrual and the expense amounts have been immaterial.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

This Quarterly Report on Form 10-Q contains forward-looking statements for purposes of the safe harbor provisions under
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements, other than statements of historical facts, include statements on our ability to execute our growth
strategy, expand our business, leverage our opportunities, enter new markets, capitalize on the growth in our industries, develop and improve new technology, and similar statements regarding our strategy, future operations, financial position,
projected results, estimated revenues or losses, projected costs, prospects, plans, market trends, competition and objectives of management. In some cases, you can identify forward-looking statements by terms such as will,
believe, could, should, would, may, anticipate, intend, plan, estimate, expect, project or the negative of these
terms or other similar expressions. Although we believe that our expectations reflected in or suggested by the forward-looking statements that we make in this Quarterly Report on Form 10-Q are reasonable, we cannot guarantee future results,
performance or achievements. You should not place undue reliance on these forward-looking statements. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. While we may elect to update forward-looking
statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change, whether as a result of new information, future events or otherwise.

We also caution you that such forward-looking statements are subject to risks, uncertainties and other factors, not all of which are
known to us or within our control, and that actual events or results may differ materially from those indicated by these forward-looking statements. Such factors include our ability to successfully integrate strategic businesses that we acquire, our
ability to reduce costs associated with strategic acquisitions, our ability to anticipate product demand, our ability to obtain supplies for products in a timely manner, and our ability to retain key personnel, as well as those additional factors
listed in the Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2011. These cautionary statements qualify all of the forward-looking statements included in this Quarterly Report on Form 10-Q that
are attributable to us or persons acting on our behalf.

The following information should be read in conjunction with
the unaudited condensed consolidated financial statements and notes thereto set forth in Part IItem 1 of this Quarterly Report on Form 10-Q and with the audited financial statements and notes thereto contained in our Annual Report on Form 10-K
for the year ended December 31, 2011.

Overview

Identive Group, Inc. (Identive, the Company, we or us) provides secure identification (Secure ID) solutions that combine the convenience of
radio frequency identification (RFID) with the security of smart card technology to enable people to easily and securely interact with and manage digital devices, systems and data. Our offerings include hardware products, software,
integrated systems and services to address the global markets for credential management, physical and logical/cyber



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access control, integrated ID solutions and a host of NFC and RFID-enabled applications for customers in the government, enterprise, consumer, education, healthcare and transportation sectors.
Our growth model is principally based on strong technology-driven organic growth, supported by disciplined acquisitive expansion. Our common stock is listed on the NASDAQ Global Market in the U.S. under the symbol INVE and the
Frankfurt Stock Exchange in Germany under the symbol INV.

We operate in two segments, Identity Management
Solutions & Services (Identity Management) and Identification Products & Components (ID Products):



| |  |  | In our Identity Management segment we design, supply and manage solutions, systems and services that enable the secure management of credentials in
diverse markets. These credentials are used for the identification of people and the granting of rights and privileges based on defined security policies. Our Identity Management offerings include integrated physical and logical (i.e., PC, network
or cyber) access systems, integrated ID solutions, cashless payment solutions and cloud-based credential management systems, all of which are designed to enable organizations to enhance security and better meet compliance and regulatory requirements
while providing the benefits of ease of use and convenience. We sell our Identity Management solutions under our Hirsch Identive, idOnDemand and Multicard brands, as well as additional country or market specific brands. Our Identity
Management end customers operate in the government, education, enterprise and commercial markets and can be found in multiple vertical market segments including healthcare, banking, industrial, retail and critical infrastructure.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In our ID Products segment we design and manufacture both standard and highly specialized RFID and smart card technology-based products and components,
including NFC products and components, that are used in the government, enterprise and consumer markets for a number of identity-based and related applications, including logical access, physical access, eHealth, eGovernment, citizen ID, mobile
payments, loyalty schemes, and transportation and event ticketing. Our ID Infrastructure products include readers and terminals based on both contact and contactless smart card technology and our Transponder products include RFID inlays, inlay-based
RFID tags, labels, stickers and cards. Our ID Infrastructure products and Transponders are primarily sold under the Identive brand.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each of the business units within Identive conducts its own sales and marketing activities in the markets in which it competes, primarily utilizing its own sales and marketing organization to solicit
prospective channel partners and customers, provide technical advice and support with respect to products, systems and services, and manage relationships with customers, distributors and OEMs. Increasingly, we also leverage common resources between
business units to optimize our sales and marketing efforts across multiple regions and market opportunities. The majority of our sales are made through indirect sales channels that may include dealers, systems integrators, value added resellers,
resellers or Internet sales.

Our corporate headquarters are located in Santa Ana, California and our European and operational
headquarters are located in Ismaning, Germany. We maintain facilities in Chennai, India for research and development and in Australia, Canada, Germany, Hong Kong, Japan, the Netherlands, Singapore, Switzerland and the U.S. for individual business
unit operations and sales. The Company was founded in 1990 in Munich, Germany and incorporated in 1996 under the laws of the State of Delaware.

Recent Acquisitions

On January 30, 2012, through our Bluehill ID AG
subsidiary we acquired approximately 58.8% of the outstanding shares of payment solution AG, a privately-held German company that provides cashless payment solutions for stadiums, arenas and other event venues (payment solution). In
exchange for the shares of payment solution, we issued an aggregate of 1,357,758 shares of our common stock, which had an approximate value of 2.35 million (or approximately $3.0 million), to 18 selling shareholders of payment solution.
The shares have not been, and will not be, registered under the U.S. Securities Act of 1933 and are subject to applicable restrictions on transfer. payment solutions operating results have been included in our consolidated results from the
date of acquisition. On April 2, 2012 we acquired an additional 23.7% of payment solution, bringing our total ownership of the company to 82.5%. Within the next few months, payment solution is expected to be integrated into the operations of
our existing Multicard business unit.

On July 18, 2011, through our Multicard AG subsidiary we acquired polyright SA, a
Swiss provider of identity management platforms and open-ended rights and services management solutions for higher education, healthcare and industry (polyright). The acquisition was made using a combination of cash and payment of
outstanding indebtedness in the aggregate amount of CHF 2.55 million (or approximately $3.1 million). The sellers included Securitas AG, Kudelski SA and members of polyrights management team. The sellers may receive aggregate potential
earn-out payments payable in shares of our common stock, over the 30-month period following the closing of the acquisition, subject to achievement of specific financial and sales performance targets over such period. The number of shares, if any,
issued under the earn-out will be based on the average share price during



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the month preceding the date of announcement of our annual results, and will be subject to a two-year lockup. polyrights operating results have been included in our consolidated results
since the date of acquisition. Following the acquisition, polyright was integrated into the operations of our existing Multicard business unit.

On May 2, 2011, we acquired 95.8% of the shares of idOnDemand, Inc., a privately-held provider of identity management services based in Pleasanton, California (idOnDemand). The
acquisition was pursuant to the Stock Purchase Agreement dated April 29, 2011, under which we paid the selling shareholders of idOnDemand initial consideration at closing of approximately $2.4 million in cash and 995,675 shares of our common
stock. In addition, the selling shareholders may receive aggregate potential earn-out payments payable in shares of our common stock subject to achievement of specific financial and sales performance targets over a period of three years and eight
months from the closing date of the acquisition. Any shares issued in connection with the earn-out will be subject to a 12-month lock-up from date of issuance. Shares issued as consideration to the selling shareholders at closing are subject to a
three-year lock-up from the closing date of the acquisition. Of the total initial share consideration paid to the selling shareholders, 407,289 shares were released from lock-up six months after the closing date. Beginning on the second anniversary
of the closing date, the remaining shares will be released from the lock-up in equal amounts on a monthly basis until the expiration of the lock-up period. idOnDemands operating results have been included in our consolidated results since the
date of acquisition. On December 22, 2011, we entered into an agreement to purchase the remaining outstanding shares of idOnDemand for the sum of $500,000, pursuant to an agreement among Identive, ActivIdentity Corporation and idOnDemand.
Following the completion of this share purchase on January 9, 2012, idOnDemand became a wholly-owned subsidiary of Identive.

Recent
Trends and Strategies for Growth

Identive is focused on building the worlds signature company in Secure ID by
providing products, systems and services that are interoperable, easy to integrate and easy to use. Our goal is to build a lasting business of scale and technology to both enable and capitalize on the growth of the security and RFID industries. Our
growth strategy is based both on technology-driven organic growth and disciplined acquisitive activity. We pursue investments and acquisitions with a focus on expanding our business, reinforcing our market position in targeted areas and fully
leveraging our strengths and opportunities to enter new markets, as well as driving consolidation in the rapidly growing, yet fragmented markets for identification-based technologies.



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As part of our organic growth strategy, we are focused on enhancing our ability to address
emerging growth markets and extending our product and solutions offerings through ongoing research and development programs. This included a significant update to our Hirsch Identive software and hardware platforms, which was completed in the first
quarter of 2012. Additionally, to meet increasing customer demand for RFID inlays and finished transponder products such as tags, labels and cards, we have added new manufacturing and production equipment and lines at our facilities in Germany and
Singapore, and during the second half of 2011 expanded our production capacity for these products by nearly 80%. In the first quarter of 2012 we also expanded our Transponder sales resources in the U.S.

In order to position the Company to participate in emerging, potentially very high growth market opportunities, we have invested and
continue to invest in new products and solutions in a number of areas. In anticipation of the launch of new smartphones that include NFC (near field communication) technology, in mid-2011 we created a new dedicated group focused on NFC and mobility
applications, which is responsible for guiding and coordinating our NFC product and market strategies as well as launching new software-based NFC services. We are investing in NFC product and service offerings, including NFC tags, readers,
development kits, and a cloud-based NFC tag management services platform. In late 2011 we created a new sales team focused on the market for converged access products, which provide both physical and cyber access security, and have introduced
several new converged access products to the market. Additionally, to meet the growing demand for cloud based credential issuance and management, we are investing in the development of Identity Software as a Service solutions
and capabilities.

During 2011, in order to enhance our ability to address our customers and markets on a global basis, we
consolidated our various transponder, reader and firmware product businesses into a single ID Products and Components organization and moved the majority of our product brands under a single market brand, Identive. During the fourth quarter
of 2011, our Hirsch Electronics business unit started doing business as Hirsch Identive. Currently we are implementing plans to transition our various company and products brands to the single Identive brand over time.

While we expect to continue to invest in those areas of our business that we perceive to be important future growth drivers, as described
below in Results of Operations and Liquidity and Capital Resources, our sales for the first six months of 2012 were below expectations, and we continue to incur operating losses. These factors, among others, have raised
significant doubt about our ability to continue as a going concern. As a result, we may be required to curtail our investments in the short term to address the liquidity issues described further below.

Second Quarter 2012 Impairment

As described in Notes 8 and 9 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, because of a significant decline in the Companys stock
price and market capitalization and changes in the second quarter to forecasted revenue, gross margin and operating profit, we undertook interim goodwill, intangible asset and long-lived asset impairment analyses in connection with our quarterly
close as of June 30, 2012. As a result of these analyses, we recorded a preliminary goodwill impairment charge of $21.4 million, an intangible asset impairment charge of $19.9 million and a long-lived asset impairment charge of $4.0 million in
the quarter ended June 30, 2012. While goodwill impairment charges are preliminary, they represent our best estimates as of the date of the filing of this Quarterly Report on Form 10-Q, and we expect to complete the goodwill impairment review
prior to the filing of our results for the third fiscal quarter of 2012. These charges affected our financial condition and results of operation for the second quarter ended June 30, 2012; however, they have no impact on our day-to-day
operations or liquidity and will not result in any future cash expenditures. We also expect that as a result of the impairment there will be lower non-cash charges to net earnings in future quarters, as the amount of goodwill and intangible assets
being amortized will be significantly reduced.

Trends in our Business

Sales Trends

Sales in the first six months of 2012 decreased 6% to $45.1 million compared with the first six months of 2011, reflecting a 15% decrease in organic sales, partially offset by $4.3 million of incremental
revenue from the acquired idOnDemand, polyright and payment solution businesses. In the first six months of 2012, sales were affected by seasonally weaker demand in some of our markets; a revenue gap of approximately $4.8 million caused by the
absence of new orders for secure card readers and software for the German national ID program, which had been a significant component of our revenue throughout 2011; project delays with several Transponder customers in the mobile device and
transportation sectors; and ongoing budget delays and constraints in the U.S. government and European government program sectors. These factors were partially offset by stronger sales of smart card readers and Hirsch Identive security systems to the
U.S. government market, related in part to limited improvement in activity associated with previously delayed security projects with some U.S. federal agencies.



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Sales in the Americas. Sales in the Americas were $22.8 million in the first six
months of 2012, accounting for 51% of total revenue and up 5% compared with $21.8 million in the first six months of 2011. Sales of products and systems for employee ID programs within various U.S. government agencies comprise a significant
proportion of our revenues in the Americas region, which also includes Canada and Latin America.

Sales of our Hirsch Identive
security systems in the Americas increased by approximately 9% in the first six months of 2012 compared with the same period of 2011, primarily as a result of stronger sales outside the U.S. Government sector, as well as an increase in activity with
some federal agencies, including a $1.7 million order from the Department of Justice recorded in the 2012 second quarter. As a general trend, U.S. federal agencies continue to be subject to security improvement mandates under programs such as
Homeland Security Presidential Directive-12 (HSPD-12) and reiterated in memoranda from the Office of Management and Budget (OMB M-11-11). We believe that our Hirsch Identive security systems remain among the most attractive
offerings in the market to help agencies move towards compliance with federal directives and mandates. During 2011, our sales of security systems to the U.S. Government sector were negatively impacted by budget and funding delays. While increased
project activity at some federal agencies in the first six months of 2012 is a positive development, the outlook for our U.S. Government business remains uncertain in the near term, particularly as it is uncertain how the upcoming U.S. election may
affect federal spending. To offset project and budget delays in the U.S. Government market, in recent quarters we have expanded our focus on the utility and enterprise sectors as well as on further developing our opportunities in international
markets.

Sales of our ID Infrastructure products in the Americas increased 40% in the first six months of 2012 compared with
the same period of 2011, primarily as a result of positive timing of orders for smart card readers to support cybersecurity and network access in the U.S. Government sector. This was partially offset by a 50% decrease in Transponder sales in the
Americas as various transportation projects slowed and expected orders were delayed. Revenue from our Multicard U.S. business unit also decreased 7% year over year.

Sales in Europe and the Middle East.Sales in Europe and the Middle East (EMEA) were $15.4 million in the first six months of 2012, accounting for 34% of total revenue and down 17% from $18.6
million the first six months of 2011. A primary reason for this decrease was the $4.8 million revenue gap caused by the absence of new orders for readers and software to support the German national ID program, which were a significant component of
our sales in 2011. This contributed to a 58% decrease in sales in our European Multicard business unit in the first six months of 2012. European sales of ID Infrastructure products were 31% lower in the first six months of 2012 compared with the
prior year, reflecting weakness in the market for European government programs including national ID, electronic health and other programs. Additionally, European sales of Transponder products were 13% lower in the first six months of 2012 compared
with the same period of the prior year due to softness in some of our markets. These factors were partially offset by approximately $3.9 million of incremental revenue from the acquired polyright and payment solution businesses in the first six
months of 2012.

Sales in Asia/Pacific.Sales in the Asia/Pacific region were $6.9 million in the first six months of
2012, accounting for 15% of total revenue and down 10% from $7.6 million the first six months of 2011. The decrease was primarily due to a 43% decline in sales from our Multicard business unit in Australia, which experiences significant variability
from period to period due to the timing of large program deployments for a small number of customers. Sales of Transponder products also fell 14% in the first six months of 2012 due to project delays from customers in the mobile device and
transportation sectors. These trends were partially offset by stronger sales of ID Infrastructure products, including chipsets for PC applications and smart card readers to support telecommunications applications in China and Japan, as well as $0.2
million of incremental revenue from idOnDemand.

Looking forward, we believe demand will increase across our markets for
products, systems and solutions that address emerging applications such as converged access control, NFC tag deployment and management, mobile payment schemes and ID programs for citizens, consumers and employees. The trends towards the convergence
of cyber and physical access and the marriage of contactless payment technology with mobile devices are beginning to be realized and to drive new activity from governments, enterprises and consumer applications around the world. We believe that our
unique portfolio of technology, products, solutions, systems and experience position Identive to address these emergent trends and benefit from their growth.

Seasonality and Other Factors.In our business overall, we may experience significant variations in demand for our products quarter to quarter, and overall we typically experience a stronger demand
cycle in the second half of our fiscal year. Sales of our Hirsch Identive physical access control systems are subject to U.S. government budget cycles and are generally highest in the third quarter of each year. Sales of our ID Infrastructure smart
card readers and chips for government programs are impacted by testing and compliance schedules of government bodies as well as roll-out schedules for application deployments, both of which contribute to variability in demand from quarter to
quarter. Further, sales of these products typically are subject to seasonality based on governmental budget cycles, with lowest sales in the first half, and in particular the second quarter of the year, and highest sales in the second half of each
year. In our Multicard business unit, a variety of localized market factors including government budget cycles and retail demand cycles typically result in stronger demand in the second half of the year. This pattern is also true for our payment
solutions business as sales activity in the German sports market is strongest in the second half of the year. In general, sales of our global Transponder products also are typically marginally stronger in the second half of the year.



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Operating Expense Trends

We have made and continue to make significant investments in the development of products and solutions to position the Company to benefit
from the expected growth of the emergent markets for NFC, payment and cloud-based identity management, as further described below. As these markets do not yet offer significant revenue opportunities, our sales in these areas currently are relatively
small and not yet able to compensate for the level of investment required to participate in these markets. This contributes significantly to our operational losses in recent periods.

Our base operating expenses (research and development, sales and marketing and general and administrative) increased 15% in the first six
months of 2012 compared with the same period of 2011. This increase was due both to the inclusion of $3.3 million of additional expenses from the acquired idOnDemand, polyright and payment solution businesses, which accounted for an increase of 13%
year over year, and to increased development activity in market areas that we believe hold significant growth opportunity for Identive.

Over the past several quarters, we have invested in the development of new technology, products and solutions and added sales resources to enhance our ability to address potential high-growth
opportunities of the secure identification market. We have made significant investments to develop Hirsch Identives next generation product offering of software, controllers and other products and launched these to the secure access market in
the first quarter of 2012. To address the growing opportunities for NFC-enabled systems, we have developed a cloud-based NFC tag management platform and in May 2012 launched our service to manage and provide business analytics for NFC tag
deployments. We are continuing to invest in the development of our NFC tag management offering and we also continue to invest in trusted identity solutions and capabilities for cloud-based credential issuance and management. Additionally, we
continue to make investments to enhance our cashless payment, smart city and ID software systems. In our ID Products business, we continue to invest in the development of new contactless readers, tokens and modules, new physical access readers to
enable converged physical and logical/cyber access, and in the extension our contactless platforms. In addition, we continue to invest in enhancing and broadening our Transponder inlay designs and technology in the areas of NFC, payment, tag on
metal, card manufacturing and library and pharmaceutical tracking applications. Across our business we have a significant number of new patent applications and new inventions in process. We attempt to balance our investments in new technologies,
products and services with careful management of our development resources so that our increased development activities do not result in unexpected or significant changes in our overall spending on research and development.

2012 Restructuring Plan

While we remain committed to our strategy of investment in emerging markets, in June 2012, we announced a series of cost reduction measures designed to better align our business operations with the
current market and macroeconomic conditions. Cost reduction measures include an 11% reduction in the Companys global workforce, acceleration of the elimination of duplicate expenses at newly acquired companies, reductions in other general and
administrative expenses, the consolidation of facilities, and nearly $0.5 million of temporary reductions in executive and management salaries and Board fees. Once fully implemented, we expect these measures will result in savings of $4.0 million to
$5.0 million in 2012 and $7.0 million on an annualized basis, and help to reduce our expense base to more sustainable levels. We continue to work diligently to reinforce the strength of our financial base.

Results of Operations

The comparability of our operating results in the six months ended June 30, 2012 with the six months ended June 30, 2011 is
impacted by our acquisition of idOnDemand on May 2, 2011, polyright on July 18, 2011 and payment solution on January 30, 2012. Results of the idOnDemand, polyright and payment solution businesses have been included since their
respective acquisition dates.



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Revenue

Summary information by business segment for the three and six months ended June 30, 2012 and 2011 is shown below (in thousands):



|                     |  |                             |        |   |                         |   |        |                           |  |  |                         |    |  |      |        |   |  |   |        |   |  |  |     |   
|-------------------- |  | --------------------------- | ------ | - | ----------------------- | - | ------ | ------------------------- |  |  | ----------------------- | -- |  | ---- | ------ | - |  | - | ------ | - |  |  | --- | --
|                     |  | Three Months 
EndedJune 30, |        |   | % changeperiod
toperiod |   |        | Six Months 
EndedJune 30, |  |  | % changeperiod
toperiod |   
|                     |  | 2012                        |        |   | 2011                    |   |        |                           |  |  | 2012                    |    |  | 2011 |        |   |  |  
|Identity Management: |  |                             |        |   |                         |   |        |                           |  |  |                         |    |  |      |        |   |  |   |        |   |  |  |     |   
|Revenues             |  | $                           | 14,183 |   |                         | $ | 14,476 |                           |  |  | (2                      | %) |  | $    | 26,888 |   |  | $ | 27,100 |   |  |  | (1  | %)
|% of total revenue   |  |                             | 59     | % |                         |   | 57     | %                         |  |  |                         |    |  |      | 60     | % |  |   | 56     | % |  |  |     |   
|Gross profit         |  |                             | 6,294  |   |                         |   | 6,329  |                           |  |  |                         |    |  |      | 12,181 |   |  |   | 12,155 |   |  |  |     |   
|Gross profit %       |  |                             | 44     | % |                         |   | 44     | %                         |  |  |                         |    |  |      | 45     | % |  |   | 45     | % |  |  |     |   
|                     |  |                             |        |   |                         |   |        |                           |  |  |                         |    |  |      |        |   |  |   |        |   |  |  |     |   
|ID Products:         |  |                             |        |   |                         |   |        |                           |  |  |                         |    |  |      |        |   |  |   |        |   |  |  |     |   
|Revenues             |  | $                           | 9,673  |   |                         | $ | 11,136 |                           |  |  | (13                     | %) |  | $    | 18,174 |   |  | $ | 20,932 |   |  |  | (13 | %)
|% of total revenue   |  |                             | 41     | % |                         |   | 43     | %                         |  |  |                         |    |  |      | 40     | % |  |   | 44     | % |  |  |     |   
|Gross profit         |  |                             | 3,306  |   |                         |   | 3,885  |                           |  |  |                         |    |  |      | 6,157  |   |  |   | 7,439  |   |  |  |     |   
|Gross profit %       |  |                             | 34     | % |                         |   | 35     | %                         |  |  |                         |    |  |      | 34     | % |  |   | 36     | % |  |  |     |   
|                     |  |                             |        |   |                         |   |        |                           |  |  |                         |    |  |      |        |   |  |   |        |   |  |  |     |   
|Total                |  |                             |        |   |                         |   |        |                           |  |  |                         |    |  |      |        |   |  |   |        |   |  |  |     |   
|Revenues             |  | $                           | 23,856 |   |                         | $ | 25,612 |                           |  |  | (7                      | %) |  | $    | 45,062 |   |  | $ | 48,032 |   |  |  | (6  | %)
|Gross profit         |  |                             | 9,600  |   |                         |   | 10,214 |                           |  |  |                         |    |  |      | 18,338 |   |  |   | 19,594 |   |  |  |     |   
|Gross profit %       |  |                             | 40     | % |                         |   | 40     | %                         |  |  |                         |    |  |      | 41     | % |  |   | 41     | % |  |  |     |   

Total revenue for the second quarter of 2012 was $23.9 million, down 7% compared with $25.6 million for
the second quarter of 2011. For the first six months of 2012, revenue was $45.1 million, down 6% compared with $48.0 million for the first six months of 2011. Lower revenue in both the second quarter and first six months of 2012 primarily was due to
decreased sales in our ID Products segment, and to a lesser extent lower organic sales in our Identity Management segment. Incremental revenue from acquired businesses was approximately $2.5 million and accounted for 10% of total revenue in the
second quarter and $4.3 million, accounting for 10% of total revenue in the first six months of 2012. Excluding the impact of this incremental revenue, organic revenue was 16% lower in the second quarter and 15% lower in the first six months of 2012
compared with the same periods of 2011.

In our Identity Management segment we provide solutions and services that enable the
secure management of credentials in diverse markets. Our Identity Management segment includes the operations of our Hirsch Identive, idOnDemand and Multicard business units and our recently acquired payment solution business, which specialize in the
design and manufacturing of highly secured and integrated systems that can enhance security and better meet compliance and regulatory requirements while providing users the benefits and convenience of simple and secure solutions. The majority of
sales in our Identity Management segment are made to customers in the government, education, enterprise and commercial markets and encompass vertical market segments including healthcare, banking, industrial, retail and critical infrastructure.
Currently, pricing pressure is not prevalent in our Identity Management segment.

Revenue in our Identity Management segment
was $14.2 million in the second quarter of 2012, down 2% from $14.5 million for the second quarter of 2011. For the first six months of 2012, Identity Management revenue was $26.9 million, down 1% from $27.1 million in the first six months of 2011.
Results for the Identity Management segment included incremental revenue from the acquired idOnDemand, polyright and payment solution businesses of $2.5 million in the second quarter and $4.3 in the first six months of 2012. Excluding the impact of
this incremental revenue, organic revenue was 19% lower in the second quarter and 17% lower in the first six months of 2012 compared with the same periods of the prior year. The decrease in organic revenue primarily was due to the absence of new
orders for card readers and software for the German electronic ID program in our European Multicard business unit, which had accounted for $1.9 million of sales in the second quarter and $4.8 million of sales in the first six months of 2011. Sales
in our Multicard business in Australia also declined 43% in the first six months of 2012 as a result of variability in orders from period to period to support large program deployments for a small number of customers. Sales of Hirsch Identive
security systems increased 8% in the second quarter and 9% in the first six months of 2012 compared with the same periods of the prior year, as a result of stronger sales the U.S. government and commercial sectors.

In our ID Products segment we design and manufacture RFID products and components that are used for a number of identity-based and
related applications in the government, enterprise, transportation and financial markets. Our ID Products segment includes the results of our ID Infrastructure business unit, which manufactures and sells smart card and NFC readers and terminals, and
our Transponder business unit, which manufactures and sells RFID inlays as well as inlay-based cards, tags, labels



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and stickers. The majority of sales in our ID Products segment are made to original equipment manufacturers and system integrators, although an increasing proportion are sold directly to end
customers. Sales in this segment are somewhat subject to pricing pressure, both for our transponder products and in the market for our smart card reader technology, which has been shifting away from external readers and towards lower-cost, embedded
chip sets over the last several years.

Sales in our ID Products segment were $9.7 million in the second quarter of 2012, down
13% from sales of $11.1 million in the second quarter of 2011. For the first six months of 2012, ID Products sales were $18.2 million, down 13% from $20.9 million for the first six months of 2011. Lower sales in the 2012 periods primarily were the
result of decreased sales of our Transponder products, which were down 24% in the second quarter and down 20% in the first six months of 2012 compared with the same periods of the prior year, primarily due to delays in several large mobile device
and transportation customer projects. Revenue from ID Infrastructure products were 4% lower in the second quarter and 7% lower in the first six months of 2012 compared with the same periods of the prior year, reflecting weakness in the European
government program market, partially offset by strong reader sales to the U.S. government sector and for telecommunications applications in Asia.

Gross Profit

Gross profit for the second quarter of 2012 was $9.6
million, or 40% of revenue, compared with $10.2 million, or 40% of revenue in the second quarter of 2011. For the first six months of 2012, gross profit was $18.3 million, or 41% of revenue, compared to $19.6 million, or 41% of revenue for the first
six months of 2011.

By segment, gross profit margin for our Identity Management segment was $6.3 million, or 44% of revenue
in the second quarter of 2012, compared with $6.3 million, or 44% of revenue in the second quarter of 2011. For the first six months of 2012, Identity Management gross profit margin was 45%, compared to 45% for the first six months of 2011.
Favorable product mix in our Identity Management segment in the second quarter and first six months of 2012 resulted in relatively stable gross product margin even as significant changes were experienced in the components of revenue.

Gross profit margin for our ID Products segment was $3.3 million, or 34% of revenue for the second quarter of 2012, compared to $3.9
million, or 35% of revenue in the second quarter of 2011. For the first six months of 2012, ID Products gross profit margin was 34%, compared to 36% for the first six months of 2011. Gross profit margin in our ID Products segment in the second
quarter and first six months of 2012 primarily was affected by lower sales of Transponder products, which resulted in lower absorption of overhead costs in our manufacturing facility in Singapore, as well as a less favorable mix of ID Infrastructure
products sold.

We expect there will be some variation in our gross profit from period to period, as our gross profit has been
and will continue to be affected by a variety of factors, including, without limitation, competition, the volume of sales in any given quarter, product configuration and mix, the availability of new products, product enhancements, software and
services, risk of inventory write-downs and the cost and availability of components.

Research and Development Expenses



|                             |  |                             |       |   |                         |   |       |                           |      |  |                         |      |  |   |       |   |  |   |       |   |  |  |    |  
|---------------------------- |  | --------------------------- | ----- | - | ----------------------- | - | ----- | ------------------------- | ---- |  | ----------------------- | ---- |  | - | ----- | - |  | - | ----- | - |  |  | -- | -
|(In thousands)               |  | Three months ended June 30, |       |   | % changeperiod
toperiod |   |       | Six months ended June 30, |      |  | % changeperiod
toperiod |     
|                             |  | 2012                        |       |   | 2011                    |   |       |                           | 2012 |  |                         | 2011 |  |  
|Expenses                     |  | $                           | 2,384 |   |                         | $ | 1,379 |                           |      |  | 73                      | %    |  | $ | 4,875 |   |  | $ | 2,537 |   |  |  | 92 | %
|Percentage of total revenues |  |                             | 10    | % |                         |   | 5     | %                         |      |  |                         |      |  |   | 11    | % |  |   | 5     | % |  |  |    |  

Research and development expenses consist primarily of employee compensation and fees for the development
of hardware, software and firmware products. We focus the bulk of our research and development activities on the development of products for new and emerging market opportunities. Due to the timing of their respective acquisitions, the results of
the polyright and payment solution businesses are not included in research and development expenses for the first six months of 2011 and only two months of results for 2011 (May and June) are included for idOnDemand.

Research and development expenses in the second quarter of 2012 were $2.4 million, or 10% of revenue, compared with $1.4 million, or 5%
of revenue in the second quarter of 2011, an increase of 73%. For the first six months of 2012, research and development expenses were $4.9 million, representing 11% of revenue and up 92% from $2.5 million, or 5% of revenue for the first six months
of 2011. Research and development expenses included $0.4 million and $1.1 million from the acquired idOnDemand, polyright and payment solution businesses in the second quarter and first six months of 2012, respectively. Excluding the impact of these
additional expenses, research and development expenses increased 43% in the second quarter and 52% in the first six months of 2012 compared with the same periods of 2011. Higher research and development expenses in 2012



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reflect increased investment in core technology and new products and solutions for emerging markets. Key investment areas include the development of cloud based credential issuance
and management solutions in our idOnDemand business unit, our pioneering cloud-based NFC tag management platform, next generation software and controllers in our Hirsch Identive business unit, and new contactless, NFC and RFID readers and
Transponder products.

In the next few quarters we expect to modestly reduce the dollar amount of our investment in research
and development as ongoing programs come to completion. In the future, our research and development expenses will vary according to project demands and the markets we target.

Selling and Marketing Expenses



|                             |  |                             |       |   |                         |   |       |                           |      |  |                         |      |  |   |        |   |  |   |        |   |  |  |    |  
|---------------------------- |  | --------------------------- | ----- | - | ----------------------- | - | ----- | ------------------------- | ---- |  | ----------------------- | ---- |  | - | ------ | - |  | - | ------ | - |  |  | -- | -
|(In thousands)               |  | Three months ended June 30, |       |   | % changeperiod
toperiod |   |       | Six months ended June 30, |      |  | % changeperiod
toperiod |     
|                             |  | 2012                        |       |   | 2011                    |   |       |                           | 2012 |  |                         | 2011 |  |  
|Expenses                     |  | $                           | 6,530 |   |                         | $ | 6,225 |                           |      |  | 5                       | %    |  | $ | 13,538 |   |  | $ | 11,234 |   |  |  | 21 | %
|Percentage of total revenues |  |                             | 27    | % |                         |   | 24    | %                         |      |  |                         |      |  |   | 30     | % |  |   | 23     | % |  |  |    |  

Selling and marketing expenses consist primarily of employee compensation as well as tradeshow
participation, advertising and other marketing and selling costs. We focus a significant proportion of our sales and marketing activities on new and emerging market opportunities. Due to the timing of their respective acquisitions, the results of
the polyright and payment solution businesses are not included in sales and marketing expenses for the first six months of 2011 and only two months of results for 2011 (May and June) are included for idOnDemand.

Selling and marketing expenses in the second quarter of 2012 were $6.5 million, or 27% of revenue, compared with $6.2 million, or
24% of revenue in the second quarter of 2011, an increase of 5%. For the first six months of 2012, sales and marketing expenses were $13.5 million, representing 30% of revenue, an increase of 21% from $11.2 million, or 23% of revenue for the first
six months of 2011. Sales and marketing expenses included $0.5 million and $1.0 million from the acquired idOnDemand, polyright and payment solution businesses in the second quarter and first six months of 2012, respectively. Excluding the impact of
these additional expenses, sales and marketing expenses were 3% lower in the second quarter of 2012 and 12% higher in the first six months of 2012 compared with the same periods of 2011. Higher sales and marketing expenses in the first six months of
2012 reflect investments in additional resources and programs to address existing and new market opportunities, including new sales teams focused on NFC Solutions and Converged Access products, for which we expect future sales, but minimal revenues
during 2012. Lower expenses in the second quarter of 2012 reflect initial results from the cost reduction program implemented in June 2012.

We expect modest reductions in our investment in selling and marketing as a percentage of sales in the next few quarters.

General and Administrative Expenses



|                             |  |                             |       |   |                         |   |       |                           |      |  |                         |      |  |   |       |   |  |   |        |   |  |  |    |   
|---------------------------- |  | --------------------------- | ----- | - | ----------------------- | - | ----- | ------------------------- | ---- |  | ----------------------- | ---- |  | - | ----- | - |  | - | ------ | - |  |  | -- | --
|(In thousands)               |  | Three months ended June 30, |       |   | % changeperiod
toperiod |   |       | Six months ended June 30, |      |  | % changeperiod
toperiod |     
|                             |  | 2012                        |       |   | 2011                    |   |       |                           | 2012 |  |                         | 2011 |  |  
|Expenses                     |  | $                           | 4,410 |   |                         | $ | 5,744 |                           |      |  | (23                     | )%   |  | $ | 9,934 |   |  | $ | 10,974 |   |  |  | (9 | )%
|Percentage of total revenues |  |                             | 18    | % |                         |   | 22    | %                         |      |  |                         |      |  |   | 22    | % |  |   | 23     | % |  |  |    |   

General and administrative expenses consist primarily of compensation expenses for employees performing
administrative functions, and professional fees arising from legal, auditing and other consulting services. Due to the timing of their respective acquisitions, the results of the polyright and payment solution businesses are not included in general
and administrative expenses for the first six months of 2011 and only two months of results for 2011 (May and June) are included for idOnDemand.

In the second quarter of 2012, general and administrative expenses were $4.4 million, or 18% of revenue, compared with $5.7 million, or 22% of revenue in the second quarter of 2011, a decrease of
23%. For the first six months of 2012, general and administrative expenses were $9.9 million, representing 22% of revenue and down 9% from $11.0 million, or 23% of revenue for the first six months of 2011. General and administrative expenses
included $0.7 million and $1.3 million from the acquired idOnDemand, polyright and payment solution businesses in the second quarter and first six months of 2012, respectively. Our ongoing efforts to reduce general and administrative expenses were
accelerated with our restructuring program put in place in the second quarter of 2012. Also reflected in general and administrative expenses in the first six months of 2012 were approximately $0.2 million of transaction expenses related to the
acquisition of the remaining shares of idOnDemand and acquisition of payment solution. Excluding the impact of these additional expenses and including credits of approximately $1.0 million to reverse incentive bonus accruals in the second quarter of
2012, general and administrative expenses were 18% lower in the second quarter and 15% lower in the first six months of 2012 compared with the same periods of 2011.



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With reduced incentive accruals and the benefits of accelerated restructuring programs, we
expect to continue to decrease our general and administrative expenses in absolute dollars and as a percentage of overall revenue during the remainder of 2012.

Impairment Charges

In the second quarter of 2012, as a result of a
significant decline in our stock price and changes in the second quarter to our future forecasted revenue, gross margin and operating profit, we performed interim goodwill, intangible assets and other long-lived assets impairment analyses in
connection with our quarterly close. As a result of these analyses, we recorded a preliminary goodwill impairment charge of $21.4 million, an intangible assets impairment charge of $19.9 million and a long-lived assets impairment charge of $4.0
million. Due to the length of time necessary to measure the impairment loss for goodwill, the goodwill impairment analyses was not completed as of the time of the filing of this Quarterly Report on Form 10-Q and is subject to change. We expect to
complete our goodwill impairment analyses prior to reporting our financial results of the third quarter of 2012 and will record any adjustments to these preliminary estimates at that time.

Restructuring Charges

Restructuring charges of $0.3 million in both the second quarter and six months of 2012 relate to the realignment of certain business operations under our 2012 Restructuring Plan, implemented in June
2012.

Remeasurement of Contingent Consideration

For the three and six months ended June 30, 2012 a credit of $6.1 million and $5.7 million, respectively, was recorded
for reductions to the amount of performance-based earn-outs payable related to the polyright and idOnDemand acquisitions, following the remeasurement of this contingent consideration as of June 30, 2012. Please see Note 4, Fair
value Measurements, for more detailed information.

Other (Expense) Income

Other expense of $0.2 million in the second quarter and first six months of 2012 related to the loss recognized on
sale of a subsidiary. Other income of $0.2 million in the first six months of 2011 related to a dividend distribution made by SCM PC-Card GmbH in which we had made an investment in 1998, and which investment was written off in prior periods. The
dividend distribution was made as a result of the entitys plan to close its operations.

Interest Expense, Net

Interest expense, net of $0.4 million and $0.6 million in the second quarter and first six months of 2012,
respectively, and interest expense, net of $0.3 million and $0.6 million in the second quarter and first six months of 2011, respectively, consists of interest accretion expense for a liability to a related party in the Hirsch business and interest
paid on financial liabilities, offset by interest earned on invested cash during the respective periods.

Foreign
Currency (Losses) Gains, Net

Foreign currency losses were $0.3 million and $0.1 million in the second quarter and
first six months of 2012, respectively. Foreign currency gains were $25,000 and $0.2 million in second quarter and first six months of 2011, respectively. Changes in currency valuation in the periods presented mainly were the result of exchange rate
movements between the U.S. dollar and the Euro, Swiss Franc, and the British pound and their impact on the valuation of intercompany transaction balances. Accordingly, they are predominantly non-cash items. Our foreign currency gains primarily
result from the valuation of current assets and liabilities denominated in a currency other than the functional currency of the respective entity in the local financial statements. Accordingly, these foreign currency losses are predominantly
non-cash items.

Income Taxes

We recorded a provision for income taxes of $0.3 million and $0.1 million for the three and six months ended June 30, 2012, respectively, reflecting an effective tax rate of 32.80% for the six months
ended June 30, 2012. In addition, during the second quarter of 2011, we recorded a net benefit for income taxes which resulted primarily from accounting treatment following the



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acquisition of idOnDemand. In connection with the acquisition of idOnDemand, we recorded deferred tax liabilities of $1.7 million, which were netted against the Companys existing deferred
tax assets. As a result the Company released valuation allowance of $1.7 million in the second quarter of 2011. This tax benefit was offset by estimated tax expense of $0.2 million on deemed income upon an intra-group sale of one of the
Companys subsidiaries, as the sales price was less than the fair market value of the subsidiary.

The effective tax
rates for the six-month periods ended June 30, 2012 and June 30, 2011, differ from the federal statutory rate of 34% primarily due to the benefit of earnings in foreign jurisdictions, which are subject to lower tax rates, and the ratio of
taxable earnings in foreign jurisdictions to taxable earnings in the U.S.

Liquidity and Capital Resources

As of the six months ended June 30, 2012, our working capital, which we have defined as current assets less current liabilities, was
approximately ($0.6) million, compared to approximately $16.7 million as of December 31, 2011, a decrease of approximately $17.3 million. The decrease in working capital for the six months ended June 30, 2012 reflects a $10.9 million net
decrease in cash and cash equivalents, a $5.0 million additional liability for unclaimed consumer cards from the acquired payment solution business, a $1.4 million increase in deferred revenue, an aggregate $1.3 million increase in liability to
related party and financial liabilities, and a $0.3 million increase in other accrued expenses and liabilities, offset by a $0.2 million increase in accounts receivable, a $0.2 million decrease in accounts payable, a $1.1 million increase in
inventories and prepaids and other current assets and an aggregate $0.1 million decrease in accrued compensation and related benefits.

Cash and cash equivalents were $6.3 million as of June 30, 2012, a decrease of approximately $10.9 million compared to $17.2 million as of December 31, 2011, mainly as a result of cash of $9.0
million used in operations, a cash payment of approximately $0.5 million for the acquisition of the remaining outstanding shares of idOnDemand, approximately $1.5 million spent for capital expenditures, and $1.0 million cash payments on financial
liabilities, offset by an acquired cash balance of $0.6 million from the acquisition of payment solution, $0.2 million cash proceeds from the issuance of common stock under our employee stock purchase plan and exchange rate effect of $0.3 million on
cash and cash equivalents. The following summarizes our cash flows for the six months ended June 30, 2012 and 2011 (in thousands):



|                                                             |  |                          |         |   |      |   |        |  
|------------------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------ | -
|                                                             |  | Six Months
EndedJune 30, |        
|                                                             |  | 2012                     |         |   | 2011 |  
|Cash used in operating activities from continuing operations |  | $                        | (9,019  | ) |      | $ | (5,647 | )
|Cash used in investing activities                            |  |                          | (1,466  | ) |      |   | (3,086 | )
|Cash (used in) provided by financing activities              |  |                          | (776    | ) |      |   | 18,348 |  
|Effect of exchange rate changes on cash and cash equivalents |  |                          | 360     |   |      |   | 204    |  
|                                                             |  |                          |         |   |      |   |        |  
|Increase (decrease) in cash and cash equivalents             |  |                          | (10,901 | ) |      |   | 9,819  |  
|Cash and cash equivalents at beginning of period             |  |                          | 17,239  |   |      |   | 10,799 |  
|                                                             |  |                          |         |   |      |   |        |  
|Cash and cash equivalents at end of period                   |  | $                        | 6,338   |   |      | $ | 20,618 |  
|                                                             |  |                          |         |   |      |   |        |  

Significant commitments that will require the use of cash in operating activities in future periods
include obligations under operating leases, liability to related party, inventory purchase commitments and other contractual agreements and financial liabilities, including bank loan, debt note, mortgage bank loan and equipment financing
liabilities. At June 30, 2012, gross committed lease obligations were approximately $4.1 million, equipment financing liabilities and bank loan were approximately $4.3 million, the mortgage bank loan was approximately $0.8 million, the debt
note was approximately $0.8 million, liability to related party was approximately $8.6 million and inventory purchase commitments and other purchase commitments were approximately $11.7 million. Total commitments due for the remainder of fiscal 2012
were approximately $14 million and commitments due thereafter were approximately $16.3 million at June 30, 2012.

The
cash used in investing activities primarily reflects cash payment of approximately $0.5 million for the acquisition of non-controlling interest of idOnDemand and approximately $1.5 million spent for capital expenditures, offset by $0.6 million cash
acquired from the acquisition of payment solution.

Cash used in financing activities primarily reflects $1.0 million paid for
financial liabilities, which consist of equipment financing liabilities, bank loan, and debt note, offset by $0.2 cash proceeds from issuance of common stock under employee stock purchase plan.



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We have historically incurred operating losses and negative cash flows from operating
activities. As of June 30, 2012, we have total accumulated deficit of approximately $283 million. During the six months ended June 30, 2012 and 2011, we sustained consolidated net losses of $50.4 million and $3.5 million, respectively. Our
working capital reduced significantly as of June 30, 2012 as compared to December 31, 2011. These factors, among others, raise significant doubt about the Companys ability to continue as a going concern. We expect to use a
significant amount of cash in our operations over the next twelve months for our operating activities and servicing of financial liabilities, including investment in new technologies in anticipation of future significant revenues following wider
adoption of these products and services. These investments are in the area of research and development and sales and marketing on NFC, SaaS and SmartCore. Our current plan anticipates increased revenues and improved profit margins for the twelve
month period, which we expect will reduce the levels of cash required for our operating activities as compared to historical levels of use. In addition, we are in the process of improving our working capital, including reduction in the levels of
accounts receivable and discussion with several key suppliers to further reduce the levels of inventory and improve payment terms. Based on our current projections and estimates, we believe our current capital resources, including existing cash,
cash equivalents, anticipated cash flows from operating activities, savings from our continued cost reduction activities, and available borrowings, should be sufficient to meet our operating and capital requirements through at least the next twelve
months.

Our condensed consolidated financial statements have been prepared under the assumption that the Company will
continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Our continuation as a going concern is contingent upon our ability to generate revenue and cash
flow to meet our obligations on a timely basis and our ability to raise financing or dispose of certain non-core assets as required. Our plans may be adversely impacted if we fail to realize our assumed levels of revenues and expenses or savings
from our cost reduction activities. If these events occur, we may need to delay, reduce the scope of, or eliminate one or more of our development programs or obtain funds through collaborative arrangements with others that may require us to
relinquish rights to certain of our technologies, or programs that we would otherwise seek to develop or commercialize ourselves, and to reduce personnel related costs. We may resort to contingency plans to make these needed cost reductions upon
determination that funds will not be available in a timely matter. These contingency plans include consolidating certain functions, including integration of newly acquired entities into the group and elimination of duplicate general and
administration expenses by expanding the scope of shared services in the Americas and European regions. We may also need to raise additional funds through additional debt or equity financings. The sale of additional debt or equity securities may
cause dilution to existing stockholders. However, there can be no assurance that we will be able to raise such funds if and when they are required. Failure to obtain future funding when needed or on acceptable terms would adversely affect our
ability to fund operations.

Contractual Obligations

The following summarizes expected cash requirements for contractual obligations as of June 30, 2012 (in thousands):



|                                           |  |       |        |  |                 |   |        |           |  |   |           |  |  |                   |       |  |  |   |       | 
|------------------------------------------ |  | ----- | ------ |  | --------------- | - | ------ | --------- |  | - | --------- |  |  | ----------------- | ----- |  |  | - | ----- | 
|                                           |  | Total |        |  | Less than 1Year |   |        | 1-3 Years |  |   | 3-5 Years |  |  | More Than 5 Years |      
|Operating leases                           |  | $     | 4,103  |  |                 | $ | 2,245  |           |  | $ | 1,595     |  |  | $                 | 263   |  |  | $ |      | 
|Equipment financing liabilities            |  |       | 2,566  |  |                 |   | 547    |           |  |   | 2,019     |  |  |                   |      |  |  |   |      | 
|Bank loan                                  |  |       | 1,708  |  |                 |   | 325    |           |  |   | 651       |  |  |                   | 651   |  |  |   | 81    | 
|Liability to related party                 |  |       | 8,629  |  |                 |   | 1,525  |           |  |   | 2,375     |  |  |                   | 2,619 |  |  |   | 2,110 | 
|Debt note                                  |  |       | 835    |  |                 |   | 835    |           |  |   |          |  |  |                   |      |  |  |   |      | 
|Mortgage loan payable to bank              |  |       | 769    |  |                 |   | 56     |           |  |   | 112       |  |  |                   | 112   |  |  |   | 489   | 
|Purchase commitments and other obligations |  | $     | 11,725 |  |                 |   | 11,482 |           |  |   | 219       |  |  |                   | 24    |  |  |   |      | 
|                                           |  |       |        |  |                 |   |        |           |  |   |           |  |  |                   |       |  |  |   |       | 
|Total obligations                          |  | $     | 30,335 |  |                 | $ | 17,015 |           |  | $ | 6,971     |  |  | $                 | 3,669 |  |  | $ | 2,680 | 
|                                           |  |       |        |  |                 |   |        |           |  |   |           |  |  |                   |       |  |  |   |       | 

The Company excluded of $0.9 million as it relates to uncertain tax positions from contractual
obligations table because the Company is unable to make reasonable estimates of the period of cash settlement with the respective taxing authority. See Note 14 of Notes to condensed consolidated financial statements for more information about the
contractual obligations listed in the table above.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (U.S. GAAP). The preparation of these financial statements requires management to establish accounting policies that contain estimates and assumptions that affect the amounts reported in the consolidated financial statements
and accompanying notes. These policies relate to revenue recognition, inventory, income taxes, goodwill, long-lived assets and stock-based compensation.



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We have other important accounting policies and practices; however, once adopted, these
other policies either generally do not require us to make significant estimates or assumptions or otherwise only require implementation of the adopted policy and not a judgment as to the policy itself. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Despite our intention to establish accurate estimates and assumptions, actual results may differ from these estimates under different assumptions or conditions.

During the six months ended June 30, 2012, management believes there have been no significant changes to the items that we disclosed
as our critical accounting policies and estimates in Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011, except that our revenue
recognition policy was updated to include additional information concerning our revenue recognition policy with regard to multi-functional customer cards based on RFID contactless chips. Below is our current revenue recognition policy as updated to
include this information:

Revenue Recognition  Revenue is recognized when all of the following
criteria have been met:



| |  |  | Persuasive evidence of an arrangement exists. The Company generally relies upon sales contracts or agreements, and customer purchase orders to
determine the existence of an arrangement.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Delivery has occurred. The Company uses shipping terms and related documents, or written evidence of customer acceptance, when applicable, to
verify delivery or performance.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on the payment terms and
whether the sales price is subject to refund or adjustment.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Collectability is reasonably assured. The Company assesses collectability based on creditworthiness of customers as determined by credit checks
and customer payment histories. The Company records accounts receivable net of allowance for doubtful accounts, estimated customer returns, and pricing credits.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In 2011, the Company adopted the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) No. 2009-13, Revenue Recognition (Topic 605)Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 changes the requirements for establishing separate units of accounting in a
multiple element arrangement and eliminates the residual method of allocation and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. The relative selling price method allocates any
discount in the arrangement proportionately to each deliverable on the basis of the deliverables estimated fair value. Concurrently with issuing ASU 2009-13, the FASB also issued ASU No. 2009-14, Software (Topic
985)Certain Revenue Arrangements That Include Software Elements (ASU 2009-14) which amends the scope of software revenue guidance in Accounting Standards Codification (ASC) Subtopic 985-605,
Software-Revenue Recognition (ASC 985-605),to exclude tangible products containing software and non-software components that function together to deliver the products essential functionality. ASU 2009-14 provides that
tangible products containing software components and non-software components, that function together to deliver the tangible products essential functionality, are no longer within the scope of the software revenue guidance in ASC 985-605 and
should follow the guidance in ASU 2009-13 for multiple-element arrangements. All non-essential and standalone software components will continue to be accounted for under the guidance of ASC 985-605.

ASU 2009-13 and ASU 2009-14 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. The Company prospectively adopted the provisions of ASU 2009-13 and ASU 2009-14 effective January 1, 2011. The Companys revenue is derived primarily from sales of hardware products, and to a
lesser extent, from the license of proprietary software products and software components in revenue arrangements that are considered standalone. As a result, ASU 2009-14 did not have any impact and revenues from such software products will continue
to be recognized under the guidance of ASC 985-605. The Company cannot reasonably estimate the effect of adopting these standards on future financial periods as the impact will vary depending on the nature and volume of new or materially modified
deals in any given period.



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ASU 2009-13 establishes a selling price hierarchy for determining the selling price of
a deliverable in revenue arrangements. The revenue is generated from sales to direct end-users and to distributors. When a sales arrangement contains multiple elements and software and non-software components function together to deliver the
tangible products essential functionality, the Company allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence (VSOE) if
available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. The Company then recognizes revenue on each deliverable in accordance with its policies
for product and service revenue recognition. VSOE of selling price is based on the price charged when the element is sold separately. TPE of selling price is established by evaluating largely interchangeable competitor products or services in
stand-alone sales to similarly situated customers. The best estimate of selling price is established considering multiple factors, including, but not limited to, pricing practices in different geographies and through different sales channels, gross
margin objectives, internal costs, competitor pricing strategies and industry technology lifecycles. Some of the Companys products contain a significant element of proprietary technology and its solutions offer substantially different features
and functionality; as a result, the comparable pricing of products with similar functionality typically cannot be obtained. Additionally, as the Company is unable to reliably determine what competitors products selling prices are on a
stand-alone basis, the Company is not typically able to determine TPE for such products. Therefore ESP is used for such products in the selling price hierarchy for allocating the total arrangement consideration.

The Company evaluates each deliverable in an arrangement to determine whether they represent separate units of accounting in accordance
with the provisions of ASU 2009-13. Certain sales arrangements of the Companys hardware products are bundled with its professional services and maintenance contracts, and in some cases with its software products. Professional services include
security system integration, system migration, database conversion services, etc. In such multiple element arrangements, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software
deliverables using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Allocation of the consideration is determined at arrangement inception on the basis of each
units relative selling price. The Company accounts for software sales in accordance with ASC 985-605 and hardware sales in accordance with ASU 2009-13, when all the revenue recognition criteria noted above have been met. The revenue from
professional services contracts is recognized upon completion of such services and upon acceptance from the customer, if applicable. The revenue from maintenance contracts is deferred and amortized ratably over the period of the maintenance
contracts. Certain sales arrangement contains hardware, software and professional service elements where professional services are essential to the functionality of the hardware and software system and a test of the functionality of the complete
system is required before the customer accepts the system. As a result, hardware, software and professional service elements are accounted for as one unit of accounting and revenue from these arrangements is recognized upon completion of the
project.

In certain revenue arrangements, the Company facilitates cashless payments by providing integrated payment system
for sports stadiums, arenas, theme parks and other venues for leisure and entertainment (recreational facilities) throughout Europe. For these facilities, the Company provides multi-functional customer cards based on RFID contactless
chip technology (smart cards or cards) and comprehensive management software as a part of integrated cashless payment system (the system) which ensures the seamless interaction of all relevant components such as
ticketing, access, point-of-sale, parking, etc. The system consists of comprehensive payment management software, smart cards, readers and communication infrastructure, all supplied and implemented by the Company. The Companys system enables
consumers at sporting and similar events to make quick, cashless payments for food, beverages and merchandise. The Company offers its customers the option of purchasing of a turnkey solution or entering into a multi-year contract under which the
Company continues to operate and maintain responsibility for the cashless payment system over a set period, in return for sharing in the revenue generated at various events held in the stadiums or other venues. The Company also provides cards
against a deposit fee which are used by the end consumers to buy food, beverages and merchandise during their visits to recreational facilities. Consumers load money on the cards to enable purchases and there may be an unredeemed balance on the
cards at any given time. Revenues from unredeemed balance on cards are recognized when the likelihood of the card being redeemed by the customer is remote (card breakage income). Although there are expiration dates on the cards, the
Companys practice has been to honor all cards presented for payment or redemption. The Company does not charge any service fees that cause a decrement to card balances. While the Company will continue to honor all cards presented for payment,
management may determine the likelihood of redemption to be remote for certain cards due to, among other things, long periods of inactivity. The Company determines its card breakage rate based upon historical redemption patterns. Based on its
historical information, the likelihood of a card remaining unredeemed is determined 12 months after the card is issued. At that time, the Company recognizes breakage income for those cards for which the likelihood of redemption is deemed remote.
Card breakage income is included in revenue in Companys condensed consolidated statements of operations.

Recent Accounting
Pronouncements

See Note 2, Summary of Significant Accounting Policies, in the Notes to condensed consolidated
financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, for a full description of recent accounting pronouncements, including the actual and expected dates of adoption and estimated effects on our consolidated
results of operations and financial condition, which is incorporated herein by reference.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

There has been no significant change in the Companys exposure to market risk during the six months ended June 30, 2012. For
discussion of the Companys exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, contained in our Annual Report on Form 10-K for the year ended December 31, 2011.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and Procedures

Attached as exhibits to
this report are certifications of our principal executive officer and principal financial officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This
Controls and Procedures section includes information concerning the controls and related evaluations referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the
topics presented.

As of the end of the fiscal six months ended June 30, 2012, the Company carried out an evaluation, as
required in Rule 13a-15(b) under the Exchange Act, under the supervision and with the participation of members of our senior management, including our principal executive officer and principal financial officer, of the effectiveness of the design
and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act.

Based on that
evaluation, our principal executive officer and principal financial officer concluded that, due to the material weaknesses in our control over financial reporting disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011,
our internal disclosure controls and procedures were not effective as of the end of the period covered by this report.

Based
on additional analysis and other post-closing procedures designed to ensure that the Companys consolidated financial statements will be presented in accordance with generally accepted accounting principles, management believes, notwithstanding
the material weaknesses, that the consolidated financial statements included in this report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with
accounting principles generally accepted in the U.S. (GAAP).

Remediation of Material Weaknesses

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, management identified material weaknesses in our
internal control over financial reporting as of December 31, 2011, namely that the Company had an insufficient number of accounting personnel with appropriate knowledge, experience or training in U.S. GAAP to provide effective oversight and
review of transactions and the preparation of financial statements, particularly at the subsidiary level, and that the design of controls related to revenue recognition was inadequate.

Management has developed and begun implementing a remediation plan to address these material weaknesses. Remediation efforts currently
completed, in process or expected to be implemented include the following:



| |  |  | Revising and distributing to all accounting personnel specific guidance on revenue recognition policies, including cut-off controls;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Appointing a U.S. GAAP Committee to prepare and implement U.S. GAAP training for all accounting personnel, including training specifically relating to
revenue recognition;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Hiring additional accounting personnel at the corporate level and subsidiary levels with experience in U.S. GAAP accounting; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reviewing and revising, as appropriate, the Companys internal Sarbanes-Oxley testing program and schedule.
| | - |  | -----------------------------------------------------------------------------------------------------------

Management has developed a timetable for the implementation of the foregoing remediation efforts and will monitor the implementation. In
addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of the Companys internal control environment, as well as to policies and procedures to improve the
overall effectiveness of internal control over financial reporting. Management believes the foregoing efforts will



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effectively remediate the material weaknesses. However, the material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time
and management has concluded, through testing, that these controls are operating effectively, which we expect to occur in the current fiscal year.

Changes in Internal Controls over Financial Reporting

There have been no
changes in the Companys internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting, except for the remediation efforts management commenced during the second quarter of 2012 related to the above-described material weaknesses.

A control system, no matter how well designed and operated, can only provide reasonable assurances that the objectives of the control system are met. Because there are inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected.

PART II: OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

From time to time, we could be subject to claims arising in the ordinary course of business or be a defendant in lawsuits. While the outcome of such claims or other proceedings cannot be predicted with
certainty, our management expects that any such liabilities, to the extent not provided for by insurance or otherwise, will not have a material effect on our financial condition, results of operations or cash flows.



|Item 1A. | Risk Factors
|-------- | ------------

Our business and results of operations are subject to numerous risks, uncertainties and other factors that you should be aware of, some of which are described below. The risks, uncertainties and other
factors described in these risk factors are not the only ones facing our company. Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial may also impair our business operations. Any of the
risks, uncertainties and other factors could have a materially adverse effect on our business, financial condition, results of operations, cash flows or product market share and could cause the trading price of our common stock to decline
substantially.

Business and Strategic Risks

Continuing weakness in global economic markets may adversely impact customers and customer spending patterns.

In recent times global economies have been impacted by disruptive financial events, economic uncertainty and most recently concerns about the possible breakup of the Euro Zone. Continuing weakness or
uncertainty in global economic markets may cause consumers, businesses and governments to defer purchases in response to tighter credit, decreased cash availability and low consumer confidence. Accordingly, demand for our products could fail to grow
or could decrease and differ materially from our current expectations. In addition, some of our customers may require substantial financing in order to fund their operations and make purchases from us. The inability of these customers to obtain
sufficient credit to finance purchases of our products and meet their payment obligations to us, or possible insolvencies of our customers, could result in decreased customer demand, an impaired ability for us to collect on outstanding accounts
receivable, significant delays in accounts receivable payments, and significant write-offs of accounts receivable, each of which could adversely impact our financial results.

We are exposed to credit risk on our accounts receivables.

We are exposed
to credit risk in our accounts receivable, and this risk is heightened in times of economic weakness. We distribute our products both through third-party resellers and directly to certain customers and a majority of our outstanding trade receivables
are not covered by collateral or credit insurance. We may not be able to monitor and limit our exposure to credit risk on our trade and non-trade receivables, and we may not be effective in limiting credit risk and avoiding losses.

Continuing weakness in global markets may adversely impact our suppliers.

Our ability to meet customers demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials,
parts and components or products from our suppliers. Certain of our components are available only from a single source or limited sources. If certain key suppliers were to become capacity constrained or insolvent for any reason, including a



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weak economic environment, it could result in a reduction or interruption in supplies or a significant increase in the price of supplies, each of which would adversely impact our financial
results. In addition, credit constraints at key suppliers could result in accelerated payment of accounts payable by us, impacting our cash flow.

Our markets are highly competitive and technology is rapidly evolving.

The
markets for our products are competitive and characterized by rapidly changing technology. Additionally, the demand for higher security environments, including rapid certification of identity authentication, has led to new standards, driving the
need for new technology solutions. We believe that the principal competitive factors affecting the markets for our products and solutions include:



| |  |  | the extent to which products and systems must support evolving industry standards and provide interoperability;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | the extent to which standards are widely adopted and product and system interoperability is required within industry segments;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | the extent to which products are differentiated based on technical features, quality and reliability, ease of use, strength of distribution channels
and price;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of suppliers to quickly develop new products and integrated solutions to satisfy new market and customer requirements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the total cost of ownership including installation, maintenance and expansion capability of systems; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the ability to commercialize custom solutions for common customer requests.
| | - |  | ---------------------------------------------------------------------------

We currently experience competition from a number of companies in each of our target market segments and we believe that competition in
our markets is likely to intensify as a result of anticipated increased demand for secure identification products, systems and solutions. We may not be successful in competing against offerings from other companies and could lose business as a
result.

We also experience indirect competition from certain of our customers who currently offer alternative products or
solutions or are expected to introduce competitive offerings in the future. For example, in our ID Infrastructure business, we sell our various reader products to OEMs who incorporate our products into their offerings or who resell our products in
order to provide a more complete solution to their customers. If our OEM customers develop their own products to replace ours, this would result in a loss of sales to those customers, as well as increased competition for our products in the
marketplace. In addition, these OEM customers could cancel outstanding orders for our products, which could cause us to write down inventory already designated for those customers. In our Hirsch Identive business, many of our dealer channel partners
act as system integrators, providing installation and service, and therefore carry competitive lines of products and systems. This is a common practice within the industry as the integrators need access to multiple lines in order to support all
potential service and user requirements. Depending on the technical competence of their sales forces, comfort level of their technical staff with our systems and price pressure from customers, these integrators may choose to offer a competitive
system. There is also business pressure to provide some level of sales to all vendors to maintain access to a range of products and systems.

We may, in the future, face competition from these and other parties that develop secure identification products based upon approaches similar to or different from those employed by us. In addition, the
market for secure identification products and solutions may ultimately be dominated by approaches other than the approaches marketed by us.

Many of our current and potential competitors have significantly greater financial, technical, marketing, purchasing and other resources than we do. As a result, our competitors may be able to respond
more quickly to new or emerging technologies or standards and to changes in customer requirements. Our competitors may also be able to devote greater resources to the development, promotion and sale of products or solutions and may be able to
deliver competitive products or solutions at a lower end user price. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products or
solutions to address the needs of our prospective customers. Therefore, new competitors, or alliances among competitors, may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced
operating margins and loss of market share.



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Our future success will depend on our ability to keep pace with technological change and
meet the needs of our target markets and customers. If we are unable to introduce new products and solutions, we may experience a decrease in sales or lose customers.

As noted above, the markets for our products are characterized by rapidly changing technology and the need to meet market requirements and to differentiate our products and solutions through technological
enhancements, and in some cases, price. Our customers needs change, new technologies are introduced into the market, and industry standards continue to evolve. As a result, product life cycles are often short and difficult to predict, and
frequently we must develop new products quickly in order to remain competitive in light of new market requirements. Rapid changes in technology, or the adoption of new industry standards, could render our existing products obsolete and unmarketable.
Changes in market requirements could render our existing solutions obsolete or could require us to expend more on research and development efforts.

Our future success will depend upon our ability to enhance our current products and solutions and to develop and introduce new offerings with clearly differentiated benefits that address the increasingly
sophisticated needs of our customers and that keep pace with technological developments, new competitive product offerings and emerging industry standards. In addition, in cases where we are selected to supply products or solutions based on features
or capabilities that are still under development, we must be able to complete our design, delivery and implementation process on a timely basis, or risk losing current and any future revenue from those offerings. In developing our offerings, we must
collaborate closely with our customers, suppliers and other strategic partners to ensure that critical development, marketing and distribution projects proceed in a coordinated manner. Also, this collaboration is important because these
relationships increase our exposure to information necessary to anticipate trends and plan product development. If any of our current relationships terminate or otherwise deteriorate, or if we are unable to enter into future alliances that provide
us with comparable insight into market trends, our product development and marketing efforts may be adversely affected, and we could lose sales. We expect that our product development efforts will continue to require substantial investments and we
may not have sufficient resources to make the necessary investments.

In some cases, we depend upon partners who provide one
or more components of the overall solution for a customer in conjunction with our products. If our partners do not adapt their products and technologies to new market or distribution requirements, or if their products do not work well, then we may
not be able to sell our products into certain markets.

Because we operate in markets for which industry-wide standards have
not yet been fully set, it is possible that any standards eventually adopted could prove disadvantageous to or incompatible with our business model and product lines. If any of the standards supported by us do not achieve or sustain market
acceptance, our business and operating results would be materially and adversely affected.

Our ability to remain
competitive by quickly developing new products and technologies depends on continued investment in research and development and on our ability to generate adequate capital resources to fund such development activities. If we reduce this investment,
our future financial performance could be adversely affected.

In order to remain competitive and rapidly adapt to changing
conditions in our industry and position ourselves for new market opportunities, we make ongoing investments in research and development. As noted in the Liquidity and Capital Resources section of Part I, Item 2 of this Quarterly
Report on Form 10-Q, to address liquidity issues currently facing our business we may be required to curtail investments these investments in the short term. If we are required to reduce our investment in research and development, we may be unable
to compete effectively with newer products and technologies, and our financial results could be adversely affected.

Sales
of our products depend on the widespread adoption of our products and on diversifying and expanding our customer base in new markets and geographic regions.

We sell our products, systems and services primarily to address emerging applications that have not yet reached a stage of mass adoption or deployment. For example, in our Multicard business, our
solutions are used in various identity-based programs, such as cashless payment, smart city offerings and, national and regional IDs, which are applications that are not yet widely implemented. We are also focused on sales of products
and solutions for the emerging near field communication (NFC) market, which is expected to grow as a result of the availability of NFC-enabled mobile phones. As NFC phones are not yet widely deployed, this market for our products is also still in an
early stage. Additionally, we are investing in cloud-based solutions, also known as Software as a Service (SaaS), which are also in an early phase of adoption.

Because the markets for our products and solutions are still emerging, demand for our offerings is subject to variability from period to
period. There is no assurance that demand will become more predictable as additional identity-based programs, NFC applications or SaaS solutions demonstrate success. If demand for our products and solutions does not develop further and grow



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sufficiently, our revenue and gross profit margins could decline or fail to grow. We cannot predict the future growth rate, if any, or size or composition of the market for any of our offerings.
Our target markets have not consistently grown or developed as quickly as we have expected, and we have experienced delays in the development of new products designed to take advantage of new market opportunities. Since new target markets are still
evolving, it is difficult to assess the competitive environment or the size of the market that may develop. The demand and market acceptance for our offerings, as is common for new technologies, is subject to high levels of uncertainty and risk and
may be influenced by various factors, including, but not limited to, the following:



| |  |  | our ability to demonstrate to our potential customers and partners the value and benefits of new products;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the ability of our competitors to develop and market competitive solutions for emerging applications in our target markets and our ability to win
business in advance of and against such competition;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the adoption and/or continuation of industry or government regulations or policies requiring the use of products or solutions such as our smart card
readers or access control solutions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of large scale security programs involving smart cards, RFID and related technology by governments, banks and enterprises;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of financial institutions, corporate enterprises, the U.S. government and other governments to agree on industry specifications and to
develop and deploy security applications that will drive demand for products and solutions such as ours;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the widespread availability of certain technologies, such as NFC-enabled mobile phones, required to spur demand for our products, such as our NFC tags
and readers; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general economic conditions, for example economic uncertainty.
| | - |  | --------------------------------------------------------------

Acquisitions and strategic investments expose us to significant risks.

A component of our ongoing business strategy is to seek to buy businesses, products and technologies that complement or augment our
existing businesses, products and technologies. Acquiring and integrating acquired businesses into our business exposes us to certain risks. The combination of companies is a complex, costly and time-consuming process. As a result, we must devote
significant management attention and resources to finalizing transaction terms and to integrating the diverse business practices and operations of the acquired companies. These processes may divert the attention of our executive officers and
management from day-to-day operations and disrupt our business and, if implemented ineffectively, preclude realization of the full benefits expected from the transactions. Failure to meet the challenges involved in successfully integrating another
companys operations with ours or otherwise to realize any of the anticipated benefits of an acquisition could cause an interruption of, or a loss of momentum in, the activities of our combined company and could adversely affect our results of
operations. In addition, the integration of acquired companies may result in unanticipated problems, expenses, liabilities, competitive responses and loss of customer relationships, may cause dilution of shareholder value, and may cause our stock
price to decline.

Any future acquisition could expose us to additional significant risks, including, without limitation:



| |  |  | the use of our limited cash balance or potentially dilutive stock offerings to fund such acquisitions;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | costs of any necessary financing, which may not be available on reasonable terms or at all;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | accounting charges we might incur in connection with such acquisitions, including the future write-down or write-off of goodwill or intangible assets;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the difficulty and expense of integrating personnel, technologies, customer, supplier and distributor relationships, marketing efforts and facilities
acquired through acquisitions;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | integrating internal controls over financial reporting; discovering and correcting deficiencies in internal controls and other regulatory compliance,
data adequacy and integrity, product quality and product liabilities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | diversion of management resources;
| | - |  | ----------------------------------



| |  |  | failure to realize anticipated the benefits of the acquisition;
| | - |  | ---------------------------------------------------------------



| |  |  | costly fees for legal and transaction-related services; and
| | - |  | -----------------------------------------------------------



| |  |  | the unanticipated assumption of liabilities.
| | - |  | --------------------------------------------



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Any of the foregoing could have a material adverse effect on our financial condition and
results of operations. We may not be successful with any such acquisition. Acquisitions and strategic investments may also lead to substantial increases in non-current assets, including goodwill. Write-downs of these assets due to unforeseen
business developments may materially and adversely impact our financial condition and results of operations.

Additionally, we
have in the past acquired or made, and from time to time in the future may acquire or make, investments in companies, products and technologies that we believe are complementary to our existing businesses, products and technologies. These
investments may not yield positive results.

We may not be able to secure additional financing.

We may seek or need to raise additional funds for general corporate and commercial purposes or for acquisitions. Our ability to obtain
financing depends on our historical and expected future operating and financial performance, and is also subject to prevailing economic conditions and to financial, business and other factors beyond our control. If we are unable to secure additional
financing when desired, our ability to fund our business operations, make capital expenditures, pursue additional expansion or acquisition opportunities, or make another discretionary use of cash could be limited, and this could adversely impact our
financial results.

We currently expect that our current and anticipated capital resources and available borrowings should be
sufficient to meet our operating and capital requirements at least through the next twelve months. We may, however, seek additional debt or equity financing prior to that time. There can be no assurance that additional capital will be available to
us on favorable terms or at all. The sale of additional debt or equity securities may cause dilution to existing stockholders.

We may not recognize anticipated benefits from the strategic disposition or divestiture of portions of our business.

Our business strategy may also contemplate divesting portions of our business from time to time, if and when we believe we would be able
to realize greater value for our stockholders in so doing. We have in the past sold, and may from time to time in the future sell, all or one or more portions of our business. Any divestiture or disposition could expose us to significant risks,
including, without limitation, costly fees for legal and transaction-related services; diversion of management resources; loss of key personnel; and reduction in revenue. Further, we may be required to retain or indemnify the buyer against certain
liabilities and obligations in connection with any such divestiture or disposition and we may also become subject to third-party claims arising out of such divestiture or disposition. In addition, we may not achieve the expected price in a
divestiture transaction. Failure to overcome these risks could have a material adverse effect on our financial condition and results of operations.

Operational Risks

There are doubts about our ability to continue as a
going concern. If we fail to generate revenue as forecast, improve our margins, realize anticipated savings from our cost reduction activities or are unable to obtain additional capital necessary to fund our operations, our financial results,
financial condition and our ability to continue as a going concern could be adversely affected.

As discussed in
Liquidity and Capital Resources in Part I, Item 2 of this report, as of June 30, 2012, we have a total accumulated deficit of approximately $284.0 million, and during the six months ended June 30, 2012, we sustained a
consolidated net loss of $51.0 million. These factors, among others, have created significant doubt about our ability to operate as a going concern. Our consolidated financial statements have been prepared assuming that we will continue as a going
concern. We have historically incurred operating losses and negative cash flows from operating activities, and we expect to continue to incur losses for the foreseeable future. Based on our current plans, we believe our current capital resources,
including cash, cash equivalents, anticipated cash flow from operating activities, savings from cost reduction activities and available borrowings, will be sufficient to fund our operating expenses and capital requirements through at least the next
twelve months.

However, there can be no assurance that we will be successful with our plans or that our future results of
operations will improve. If our revenue trend does not improve, our available liquidity from cash flows from operations will be adversely affected. While we have put in place a restructuring plan designed to lower our operational expense base, we
may not be able to realize the amount of savings anticipated. There can be no assurance that we will be able to improve cash flows from operations, or that we will be able to access additional capital, either through debt or equity financings, if
and when required or on acceptable terms to us. Therefore, there can be no guarantee that our existing and anticipated capital resources will be adequate to meet our liquidity requirements. If we are unable to address our liquidity challenges, then
our financial results and financial condition would be adversely affected.



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We have incurred and may in the future incur significant expenses as a result of
acquisitions, which reduces the amount of capital available to fund our business.

We have incurred, and in the future may
continue to incur, significant expenses related to acquisitions. These expenses include investment banking fees, legal fees, accounting fees, printing and mailing of stockholder materials, integration and other costs, as well as past and possible
future outlays of cash. There may also be unanticipated costs related to acquisitions on an ongoing basis, including expenditures on acquisition opportunities that do not result in completed transactions. As a result, the capital available to fund
our activities has been and is expected to be further reduced. If we are unsuccessful in securing sufficient sales from established markets or in generating sufficient new revenues from emerging markets, then we would likely continue to require cash
to fund our operations. The remaining cash available to us might not be adequate in subsequent years.

A material
impairment in the carrying value of goodwill, intangible assets or other long-lived assets could negatively affect our consolidated operating results and net worth.

A significant portion of our assets consists of goodwill and other intangible assets relating to acquisitions. We review goodwill, other intangible assets and long-lived assets on an annual basis and
whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying value of these assets exceeds the current fair value, the asset is considered impaired and is reduced to fair value,
resulting in a non-cash charge to earnings during the period in which any impairment is determined.

The recent significant
decline in our stock price and revised forecasts regarding revenue, gross margin and operating profit during the second quarter of 2012 indicated potential impairment of acquisition-related goodwill, intangible assets and other long-lived assets,
and we undertook and interim review for impairment in connection with the second quarter close, As a result of this analysis, we recorded a preliminary goodwill impairment charge of $21.4 million, an intangible asset impairment charge of $19.9
million and a property and equipment impairment charge of $4.0 million in the second quarter ended June 30, 2012.

We
expect to complete our goodwill impairment analyses prior to the reporting of our financial results for the third quarter of 2012, and will record any adjustments to the preliminary goodwill impairment charge estimate at that time. We will continue
to monitor relevant market and economic conditions that could result in impairment, including a sustained drop in the market price of our common stock, increased competition or loss of market share, product innovation or obsolescence, or a decline
of our business related to acquired companies. It is possible that conditions could deteriorate due to these factors, resulting in the need to adjust our estimates or to take additional impairment charges in the future. As a result, our operating
results and stockholders equity could be materially and adversely affected.

We have a history of operating losses
and negative cash flow from operations and may not achieve or maintain profitability.

We have a history of operating
losses and negative cash flow from operations. If we are unable to achieve expected results, including experiencing sufficient revenue growth to generate positive future cash flow, and continue to incur losses, we may be unable to achieve or
maintain profitability.

Our results may fluctuate greatly from quarter to quarter and, as a result, may not be a valid
indicator of our future performance.

Our quarterly and annual operating results have varied greatly in the past and will
likely vary greatly in the future depending upon a number of factors. Many of these factors are beyond our control. Our revenues, gross profit and operating results may fluctuate significantly from quarter to quarter due to, among other things:



| |  |  | business and economic conditions overall and in our markets;
| | - |  | ------------------------------------------------------------



| |  |  | the timing and amount of orders we receive from our customers that may be tied to annual or other budgetary cycles, seasonal demand, product plans or
program roll-out schedules;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | cancellations or delays of customer orders or the loss of a significant customer;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | our ability to obtain an adequate supply of quality components on a timely basis;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the absence of significant backlog in our business;
| | - |  | ---------------------------------------------------



| |  |  | our inventory levels and the inventory levels of our customers and indirect sales channels;
| | - |  | -------------------------------------------------------------------------------------------



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| |  |  | competition;
| | - |  | ------------



| |  |  | new product announcements or introductions;
| | - |  | -------------------------------------------



| |  |  | our ability to develop, introduce, market and deliver new products and product enhancements on a timely basis, if at all;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to successfully market and sell our products and solutions into new geographic or market segments;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | the sales volume, product configuration and mix of offerings that we sell;
| | - |  | --------------------------------------------------------------------------



| |  |  | technological changes in the markets for our products and solutions;
| | - |  | --------------------------------------------------------------------



| |  |  | the rate of adoption of industry-wide standards;
| | - |  | ------------------------------------------------



| |  |  | the rate of development of emerging market markets such as NFC-based mobile applications and cashless payment;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | reductions in the average selling prices that we are able to charge due to competition or other factors;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | strategic acquisitions, sales and dispositions;
| | - |  | -----------------------------------------------



| |  |  | fluctuations in the value of foreign currencies against the U.S. dollar;
| | - |  | ------------------------------------------------------------------------



| |  |  | the timing and amount of marketing and research and development expenditures;
| | - |  | -----------------------------------------------------------------------------



| |  |  | loss of key personnel; and
| | - |  | --------------------------



| |  |  | costs related to events such as dispositions, organizational restructuring, headcount reductions, litigation or write-off of investments or goodwill.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

Due to these and other factors, our revenues may not increase or even remain at their current levels.
Because a majority of our operating expenses are fixed, a small variation in our revenues can cause significant variations in our operational results from quarter to quarter and our operating results may vary significantly in future periods.
Therefore, our historical results may not be a reliable indicator of our future performance.

The unpredictable
purchase patterns of customers in our ID Products segment impacts our budgeting process and may adversely affect our results if orders are not placed in line with expectations.

In our Identity Management segment, sales tend to be relatively linear (regularly spaced throughout the quarter), as orders are tied to
projects with relatively predictable timelines. In our ID Products segment, the largest component of revenue in any given quarter is sales of smart card reader technology. Historically, many of our smart card reader customers have tended to make a
significant portion of their purchases towards the end of the quarter, in part because they believe they are able to negotiate lower prices and more favorable terms. As a result, smart card reader revenue in any quarter depends on contracts entered
into or orders booked and shipped in that quarter. This makes it difficult to predict revenues both in our smart card reader business, and for the company overall. In addition, the increasing use of RFID technology in the marketplace is resulting in
larger program deployments of transponder products and components. Accordingly, changes in ordering patterns, including delays or reductions in orders from our transponder customers also can have a significant effect on our business. Across both our
segments, the timing of closing larger orders increases the risk of quarter-to-quarter fluctuation in revenues. If orders forecasted for a specific group of customers for a particular quarter are not realized or revenues are not otherwise recognized
in that quarter, our operating results for that quarter could be materially adversely affected. In addition, from time to time, we may experience unexpected increases or decreases in demand for our products resulting from fluctuations in our
customers budgets, purchasing patterns or deployment schedules. These occurrences are not always predictable and can have a significant impact on our results in the period in which they occur.

If we do not accurately anticipate the correct mix of products that will be sold, we may be required to record charges related to
excess inventories.

Due to the unpredictable nature of the demand for our products, we are required to place orders with
our suppliers for components, finished products and services in advance of actual customer commitments to purchase these products. Significant unanticipated fluctuations in demand could result in costly excess production or inventories. In order to
minimize the negative financial impact of excess production, we may be required to significantly reduce the sales price of the product to increase demand, which in turn could result in a reduction in the value of the original inventory purchase. If
we were to determine that we could not utilize or sell this inventory, we may be required to write down its value, which we have done in the past. Writing down inventory or reducing product prices could adversely impact our cost of revenues and
financial condition.



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We may choose to take back unsold inventory from our customers.

If demand is less than anticipated, our distribution customers may ask that we accept returned products that they do not believe they can
sell. We do not have a policy relating to product returns for the majority of our products. However, we may determine that it is in our best interest to accept returns in order to maintain good relations with our customers. If we were to accept
product returns, we may be required to take additional inventory reserves to reflect the decreased market value of slow-selling returned inventory, even if the products are in good working order.

We are subject to a lengthy sales cycle and additional delays could result in significant fluctuations in our quarterly operating
results.

In much of our business, the initial sales cycle for a new customer usually takes a minimum of six to nine
months, and even in the case of established customers, it may take up to a year for us to receive approval for a given purchase from the customer. In the case of emerging market areas such as NFC, this cycle may be longer and less predictable, as
demand from our customers end markets may not be predictable. During the sales cycle, we may expend substantial financial and managerial resources with no assurance that a sale will ultimately result. The length of a new customers sales
cycle depends on a number of factors, many of which we may not be able to control. These factors include the customers product and technical requirements and the level of competition we face for that customers business. Any delays in the
sales cycle for new customers could delay or reduce our receipt of new revenue and could cause us to expend more resources to obtain new customer wins. If we are unsuccessful in managing sales cycles, our business could be adversely affected.

Our business could be adversely affected by significant changes in the contracting or fiscal policies of governments and
governmental entities.

We derive a substantial portion of our revenues from indirect sales to U.S. federal, state and
local governments and government agencies, as well as from subcontracts under federal government prime contracts. Large government programs are an important target for our business, as higher security systems employing smart cards, RFID or other
access control technologies are increasingly used to enable applications ranging from authorizing building and network access for federal employees to paying taxes online, to citizen identification, to receiving health care. We believe that the
success and growth of our business will continue to be influenced by our successful procurement of government business either directly or through our indirect sales channels. Accordingly, changes in government purchasing policies or government
budgetary constraints could directly affect our financial performance.

Among the factors that could adversely affect our
government-related business are:



| |  |  | changes in fiscal policies or decreases in available government funding or grants;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | changes in government programs or applicable requirements;
| | - |  | ----------------------------------------------------------



| |  |  | delays in developing technology standards;
| | - |  | ------------------------------------------



| |  |  | the adoption of new laws or regulations or changes to existing laws or regulations pertaining to security;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | changes in political or social attitudes with respect to security or electronic identification issues;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | potential delays or changes in the government appropriations process; and
| | - |  | -------------------------------------------------------------------------



| |  |  | delays in the payment of its invoices by government payment offices.
| | - |  | --------------------------------------------------------------------

These and other factors could cause governments and governmental agencies to reduce their purchases or to defer or cancel new identity
management programs that might have utilized our products, any of which could have an adverse effect on our business, financial condition and results of operations. Many of our government end customers are subject to stringent budgetary constraints.
The award of additional orders from government agencies could be adversely affected by existing or future spending reduction efforts or budget cutbacks at these agencies.

For example, in our Hirsch Identive business, budget and project delays in the deployment of access control systems by U.S. government agencies resulted in an estimated $3.6 million decrease in revenues
in 2011 compared with the prior year. As a general trend, U.S. federal agencies continue to be subject to federal security improvement mandates that require the implementation of systems such as ours, but budget and funding constraints will likely
continue to impact our sales with certain agencies.



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We anticipate that an increasingly significant portion of our future revenues will come from
government programs outside the U.S., such as national identity, eGovernment, eHealth and others applications. We currently supply smart card readers, RFID stickers and credential management solutions for various government programs in Europe and
Asia and are actively targeting additional programs in these areas as well as in Latin America. However, the timing of government smart card programs is not always certain and delays in program implementation are common. The delay of government
projects in any country for any reason could negatively impact our sales.

Fluctuations in the valuation of foreign
currencies could impact costs and/or revenues we disclose in U.S. dollars, and could result in foreign currency losses.

A
significant portion of our business is conducted in foreign currencies, principally the euro. Fluctuations in the value of foreign currencies relative to the U.S. dollar will continue to cause currency exchange gains and losses. If a
significant portion of operating expenses are incurred in a foreign currency such as the euro, and revenues are generated in U.S. dollars, exchange rate fluctuations might have a positive or negative net financial impact on these transactions,
depending on whether the U.S. dollar devalues or revalues compared to the euro. In addition, the valuation of current assets and liabilities that are denominated in a currency other than the functional currency can result in currency exchange
gains and losses. For example, when one of our subsidiaries uses the euro as the functional currency, and this subsidiary has a receivable in U.S. dollars, a devaluation of the U.S. dollar against the euro of 10% would result in a foreign
exchange loss of the reporting entity of 10% of the value of the underlying U.S. dollar receivable. We cannot predict the effect of exchange rate fluctuations upon future quarterly and annual operating results. The effect of currency exchange
rate changes may increase or decrease our costs and/or revenues in any given quarter, and we may experience currency losses in the future. To date, we have not adopted a hedging program to protect against risks associated with foreign currency
fluctuations.

We derive a substantial portion of revenue through the sale of our Hirsch Identive solutions for U.S.
government programs that involve competitive bidding and may be subject to significant delay, which may produce volatility in our revenues and earnings.

In our Hirsch Identive business a substantial portion of revenues are related to orders received from government agencies through our indirect channel partners, and to a lesser extent, from direct sales
governed by pricing as published in the General Services Administration (GSA) schedules. Government orders are frequently awarded only after a formal competitive bidding process, which typically is protracted and dependent upon necessary
funds being available to the public agency. We may not be awarded orders for which we bid directly and our dealers may not be successful in their bids that would utilize our offerings. In some cases, unsuccessful bidders for government agency orders
are provided the opportunity to formally protest certain order awards through various agency, administrative and judicial channels. The protest process may substantially delay a successful bidders award or result in cancellation of the order
entirely. Furthermore, local government agency awards may be contingent upon availability of matching funds from federal or state entities and law enforcement and other government agencies are subject to political, budgetary, purchasing and delivery
constraints. Any of these factors can make it difficult to predict our quarterly and annual revenues and operating results.

Our U.S. government business is dependent upon receipt of certain governmental approvals or certifications, and failure to receive
such approvals or certifications could have a material adverse effect on our sales in those market segments for which such approvals or certifications are customary or required.

While we are not able to quantify the amount of sales made to the U.S. government due to the indirect nature of our selling process, we
believe that orders for U.S. government agencies represent a significant portion of our revenues. Failing to obtain certain government approvals or certifications could have a material adverse effect in those environments for which such approvals or
certifications are customary or required. As newer versions of existing products, or new products in development, are released, they may require certifications or approvals. In addition, the U.S. government may introduce new requirements that some
existing products will be required to meet. If we fail to obtain any required approvals or certifications for our products, our business will suffer.

Our business could be adversely affected by negative audits by government agencies; we could be required to reimburse the U.S. government for costs that we have expended on government orders; and our
ability to compete successfully for future orders could be materially impaired.

Government agencies may audit our business
as part of their routine audits and investigations of government orders. As part of an audit, these agencies may review our performance on orders, cost structures and compliance with applicable laws, regulations and standards. These agencies may
also review the adequacy of, and our compliance with, our own internal control



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systems and policies, including our purchasing, property, estimating, compensation and management information systems. If any of our costs are found to be improperly allocated to a specific
order, the costs may not be reimbursed and any costs already reimbursed for such order may have to be refunded. An audit could materially affect our business competitive position and result in a material adjustment to our financial results or
statement of operations. If a government agency audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of orders, forfeiture of profits, suspension of
payments, fines and suspension or debarment from doing business with the federal government. In addition, our business could suffer serious harm to its reputation if allegations of impropriety were made against us.

While our business has never had a negative audit by a governmental agency, we cannot assure you that one will not occur. If we were
suspended or barred from supplying solutions to the federal government generally, or if our reputation or relationships with our distribution channel or government agencies were impaired, or if the government otherwise ceased doing business with us
or significantly decreased the amount of business it does with us, our revenues and prospects would be materially harmed.

A significant portion of our sales is made through an indirect sales channel, and the loss of dealers, systems integrators, resellers,
or other channel partners could result in decreased revenue.

We currently use an indirect sales channel that includes
dealers, systems integrators, value added resellers and resellers to sell a significant portion of our products and solutions, primarily into markets or customers where the channel partner may have closer relationships or greater access than we do.
Some of these channel partners also sell our competitors products, and if they favor our competitors products for any reason, they may fail to market our products as effectively or to devote resources necessary to provide effective
sales, which would cause our sales to suffer. Indirect selling arrangements are intended to benefit both us and the channel partner, and may be long- or short-term relationships, depending on market conditions, competition in the marketplace and
other factors. If we are unable to maintain effective indirect sales channels, there could be a reduction in the amount of product we are able to sell, and our revenues could decrease.

Our business could suffer if our third-party manufacturers cannot meet production requirements.

Many of our products are manufactured outside the U.S. by contract manufacturers. Our reliance on foreign manufacturing poses a number of
risks, including, but not limited to:



| |  |  | difficulties in staffing;
| | - |  | -------------------------



| |  |  | currency fluctuations;
| | - |  | ----------------------



| |  |  | potentially adverse tax consequences;
| | - |  | -------------------------------------



| |  |  | unexpected changes in regulatory requirements;
| | - |  | ----------------------------------------------



| |  |  | tariffs and other trade barriers;
| | - |  | ---------------------------------



| |  |  | export controls;
| | - |  | ----------------



| |  |  | political and economic instability;
| | - |  | -----------------------------------



| |  |  | lack of control over the manufacturing process and ultimately over the quality of our products;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | late delivery of our products, whether because of limited access to our product components, transportation delays and interruptions, difficulties in
staffing, or disruptions such as natural disasters;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | capacity limitations of our manufacturers, particularly in the context of new large contracts for our products, whether because our manufacturers lack
the required capacity or are unwilling to produce the quantities we desire; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | obsolescence of our hardware products at the end of the manufacturing cycle.
| | - |  | ----------------------------------------------------------------------------

The use of contract manufacturing requires us to exercise strong planning and management in order to ensure that our products are
manufactured on schedule, to correct specifications and to a high standard of quality. If any of our contract manufacturers cannot meet our production requirements, we may be required to rely on other contract manufacturing sources or identify and
qualify new contract manufacturers. We may be unable to identify or qualify new contract manufacturers in a timely manner or at all or with reasonable terms and these new manufacturers may not allocate sufficient capacity to us in order to meet our
requirements. Any significant delay in our ability to obtain adequate supplies of our products from our current or alternative manufacturers would materially and adversely affect our business and operating results. In addition, if we are not
successful at



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managing the contract manufacturing process, the quality of our products could be jeopardized or inventories could be too low or too high, which could result in damage to our reputation with our
customers and in the marketplace, as well as possible write-offs of excess inventory.

We have a limited number of
suppliers of key components, and may experience difficulties in obtaining components for which there is significant demand.

We rely upon a limited number of suppliers for some key components of our products. For example, we currently utilize the foundry services
of external suppliers to produce our ASICs for smart cards readers and inlays, and we use chips and antenna components from third-party suppliers in our contactless smart card readers. Our reliance on a limited number of suppliers may expose us to
various risks including, without limitation, an inadequate supply of components, price increases, late deliveries and poor component quality. In addition, some of the basic components used in our reader products, such as semiconductors, may at any
time be in great demand. This could result in components not being available to us in a timely manner or at all, particularly if larger companies have ordered more significant volumes of those components, or in higher prices being charged for
components. Disruption or termination of the supply of components or software used in our products could delay shipments of our products. These delays could have a material adverse effect on our business and operating results and could also damage
relationships with current and prospective customers.

Cybersecurity breaches in systems we sell or maintain could result
in the disclosure of sensitive government information or private personal information that could result in the loss of clients and negative publicity.

Many of the systems we sell manage private personal information and protect information involved in sensitive government functions. A cybersecurity breach in one of these systems could cause serious harm
to our business as a result of negative publicity and could prevent us from having further access to such systems or other similarly sensitive areas for other governmental clients.

As part of our technical support services, we agree, from time to time, to possess all or a portion of the security system database of
our customers. This service is subject to a number of risks. For example, despite our security measures our systems may be vulnerable to cyber attacks by hackers, physical break-ins and service disruptions that could lead to interruptions, delays or
loss of data. If any such compromise of our security were to occur, it could be very expensive to correct, could damage our reputation and could discourage potential customers from using our services. Although we have not experienced attempted cyber
or physical attacks, we may experience such attempts in the future. Our systems may also be affected by outages, delays and other difficulties. Our insurance coverage may be insufficient to cover losses and liabilities that may result from such
events.

Failure to properly manage the implementation of customer projects in our business may result in costs or claims
against us, and our financial results could be adversely affected.

In our business, deployments of our solutions often
involve large-scale projects. The quality of our performance on such projects depends in large part upon our ability to manage relationships with our customers and to effectively manage the implementation of our solutions in such projects and to
deploy appropriate resources, including our own project managers and third-party subcontractors, in a timely manner. Any defects or errors or failures to meet clients expectations could result in damage to our reputation or even claims for
substantial monetary damages against us. In addition, we sometimes provide guarantees to customers that we will complete a project by a scheduled date or that our solutions will achieve defined performance standards. If our solutions experience a
performance problem, we may not be able to recover the additional costs we will incur in our remedial efforts, which could materially impair profit derived from a particular project. Moreover, a portion of our revenues are derived from fixed price
contracts.

Our products may have defects, which could damage our reputation, decrease market acceptance of our products,
cause us to lose customers and revenue and result in costly litigation or liability.

Products such as our smart card readers, access control panels and RFID inlays may contain defects for many reasons, including defective
design or manufacture, defective material or software inoperability issues. Often, these defects are not detected until after the products have been shipped. If any of our products contain defects or perceived defects or have reliability, quality or
compatibility problems or perceived problems, our reputation might be damaged significantly, we could lose or experience a delay in market acceptance of the affected product or products and we might be unable to retain existing customers or attract
new customers. In addition, these defects could interrupt or delay sales. In the event of an actual or perceived defect or other problem, we may need to invest significant capital, technical, managerial and other resources to investigate and correct
the potential defect or problem and potentially divert these resources from other development efforts. If we are unable to provide a solution to the potential defect or problem that is acceptable to our customers, we may be required to incur
substantial product recall, repair and replacement and even litigation costs. These costs could have a material adverse effect on our business and operating results.



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We provide warranties on certain product sales, which range from 12 to 24 months, and
allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires us to make estimates of product return rates and expected costs to repair or to replace the products under warranty. We
currently establish warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior twelve months sales activities. If actual return rates and/or repair and replacement costs
differ significantly from our estimates, adjustments to recognize additional cost of sales may be required in future periods.

In addition, because our customers rely on our smart card readers to prevent unauthorized access to PCs, networks or facilities, a
malfunction of or design defect in our products (or even a perceived defect) could result in legal or warranty claims against us for damages resulting from security breaches. If such claims are adversely decided against us, the potential liability
could be substantial and have a material adverse effect on our business and operating results. Furthermore, the possible publicity associated with any such claim, whether or not decided against us, could adversely affect our reputation. In addition,
a well-publicized security breach involving smart card-based or other security systems could adversely affect the markets perception of products like ours in general, or our products in particular, regardless of whether the breach is actual or
attributable to our products. Any of the foregoing events could cause demand for our products to decline, which would cause our business and operating results to suffer.

We have global operations, which require significant financial, managerial and administrative resources.

Our business model includes the management of separate product lines that address disparate market opportunities that are geographically dispersed. While there is some shared technology across our
products, each product line requires significant research and development efforts to address the evolving needs of our customers and markets. To support our development and sales efforts, we maintain company offices and business operations in
several locations around the world, including Australia, Germany, Hong Kong, India, Japan, the Netherlands, Singapore, Switzerland and the U.S. We also maintain manufacturing facilities in Germany and Singapore and manage contract manufacturers in
multiple countries, including China and Singapore. Managing our various development, sales, administrative and manufacturing operations places a significant burden on our financial systems and has contributed to a level of operational
spending that is disproportionately high compared to our current revenue levels.

Operating in diverse geographic locations
also imposes significant burdens on our managerial resources. In particular, our management must:



| |  |  | divert a significant amount of time and energy to manage employees and contractors in different geographic areas and time zones, who are from diverse
cultural backgrounds and who speak different languages;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | travel between our different company offices;
| | - |  | ---------------------------------------------



| |  |  | maintain sufficient internal financial controls in multiple geographic locations that may have different control environments;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | manage different product lines for different markets;
| | - |  | -----------------------------------------------------



| |  |  | manage our supply and distribution channels across different countries and business practices; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | coordinate these efforts to produce an integrated business effort, focus and vision.
| | - |  | ------------------------------------------------------------------------------------

Any failure to effectively manage our operations globally could have a material adverse effect on our business and operating results.

We conduct a significant portion of our operations outside the U.S. Economic, political, regulatory and other risks
associated with international sales and operations could have an adverse effect on our results of operation.

We conduct a
substantial portion of our business in Europe and Asia. Approximately 49% of our revenue in the first six months of 2012 and 57% of our revenue in 2011 was derived from customers located outside the U.S.



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Because a significant number of our principal customers are located in other countries, we
anticipate that international sales will continue to account for a substantial portion of our revenues. As a result, a significant portion of our sales and operations may continue to be subject to risks associated with foreign operations, any of
which could impact our sales and/or our operational performance. These risks include, but are not limited to:



| |  |  | changes in foreign currency exchange rates;
| | - |  | -------------------------------------------



| |  |  | changes in a specific countrys or regions political or economic conditions and stability, particularly in emerging markets;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | unexpected changes in foreign laws and regulatory requirements;
| | - |  | ---------------------------------------------------------------



| |  |  | export controls;
| | - |  | ----------------



| |  |  | potentially adverse tax consequences;
| | - |  | -------------------------------------



| |  |  | longer accounts receivable collection cycles;
| | - |  | ---------------------------------------------



| |  |  | difficulty in managing widespread sales and manufacturing operations; and
| | - |  | -------------------------------------------------------------------------



| |  |  | less effective protection of intellectual property.
| | - |  | ---------------------------------------------------

Personnel Risks

Our key personnel and directors are critical to our
business, and such key personnel may not remain with us in the future.

We depend on the continued employment of our senior
executive officers and other key management and technical personnel. If any of our key personnel were to leave and not be replaced with sufficiently qualified and experienced personnel, our business could be adversely affected.

We also believe that our future success will depend in large part on our ability to attract and retain highly qualified technical and
management personnel. However, competition for such personnel is intense. We may not be able to retain our key technical and management employees or to attract, assimilate or retain other highly qualified technical and management personnel in the
future.

Likewise, as a small, publicly-traded company, we are challenged to identify, attract and retain experienced
professionals with diverse skills and backgrounds who are qualified and willing to serve on our Board of Directors. The increased burden of regulatory compliance under the Sarbanes-Oxley Act of 2002 and Dodd-Frank Act creates additional liability
and exposure for directors; financial losses in our business and lack of growth in our stock price make it difficult for us to offer attractive director compensation packages. If we are not able to attract and retain qualified board members, our
ability to practice a high level of corporate governance could be impaired.

Qualified management, marketing, and sales
personnel are difficult to locate, hire and train, and if we cannot attract and retain qualified personnel, it will harm the ability of our business to grow.

The success of our company depends, in part, on the continued service of key managerial, marketing and sales personnel. Competition for qualified management, technical, sales and marketing employees is
intense. We cannot assure you that we will be able to attract, retain and integrate employees to develop and continue our business and successfully implement strategic acquisitions.

Risks of Financial and Capital Markets

Our stock price has been and is
likely to remain volatile.

Over the past few years, the NASDAQ Stock Market and the Frankfurt Stock Exchange have
experienced significant price and volume fluctuations that have particularly affected the market prices of the stocks of technology companies. Volatility in our stock price on either or both exchanges may result from a number of factors, including,
among others:



| |  |  | low volumes of trading activity in our stock;
| | - |  | ---------------------------------------------



| |  |  | variations in our or our competitors financial and/or operational results;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the fluctuation in market value of comparable companies in any of our markets;
| | - |  | ------------------------------------------------------------------------------



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| |  |  | expected, perceived or announced relationships or transactions with third parties;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | announcements of significant contract wins or losses;
| | - |  | -----------------------------------------------------



| |  |  | comments and forecasts by securities analysts;
| | - |  | ----------------------------------------------



| |  |  | trading patterns of our stock on the NASDAQ Stock Market or the Frankfurt Stock Exchange;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the inclusion or removal of our stock from market indices, such as groups of technology stocks or other indices;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | loss of key personnel;
| | - |  | ----------------------



| |  |  | announcements of technological innovations or new products by us or our competitors;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | announcements of dispositions, organizational restructuring, headcount reductions, litigation or write-off of investments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | litigation developments; and
| | - |  | ----------------------------



| |  |  | general market downturns.
| | - |  | -------------------------

In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were the object of securities class action
litigation, it could result in substantial costs and a diversion of our managements attention and resources.

If we
fail to comply with the listing requirements of The NASDAQ Global Market, the price of our common stock and our ability to access the capital markets could be negatively impacted.

Our common stock is currently listed on The NASDAQ Global Market. There are a number of continuing requirements that must be met in order
for our common stock to remain listed on The NASDAQ Global Market, and the failure to meet these listing standards could result in the delisting of our common stock from NASDAQ. Given the recent significant decline in our stock price, we may fail to
meet the continued listing requirement to maintain a $1.00 minimum bid price. NASDAQ may notify us that we are not in compliance with the minimum bid price rule and would provide a grace period of 180 calendar days to regain compliance with this
requirement or be delisted if we do not regain compliance. If our Board of Directors exercises its discretion to approve a reverse stock split to seek to regain compliance with the NASDAQ listing requirements and increase the per share trading price
of our common stock, the announcement of the reverse stock split could adversely affect the trading price per share even if we ultimately regain compliance. If our common stock ceases to be listed for trading on The NASDAQ Global Market for any
reason, it may harm our stock price, increase the volatility of our stock price, decrease the level of trading activity and affect our ability to access the capital markets.

You may experience dilution of your ownership interests due to the future issuance of additional shares of our stock, and future sales of shares of our common stock could have an adverse effect on our
stock price.

We have issued a significant number of shares of our common stock, together with warrants to purchase shares
of our common stock, in connection with a number of acquisitions in recent years. In May 2011 we issued approximately 7.8 million shares of Identive common stock in an underwritten public offering. As of June 30, 2012, warrants to purchase
approximately 8.6 million shares of Identive common stock were outstanding. From time to time, in the future we also may issue additional previously authorized and unissued securities, resulting in the dilution of the ownership interests of our
current stockholders. We are currently authorized to issue up to 130,000,000 shares of common stock. As of August 1, 2012, 60,042,621 shares of common stock were outstanding, excluding 618,400 shares held in treasury.

In addition, the Company maintains various incentive plans under which equity may be issued. As of June 30, 2012, an aggregate of
approximately 10.6 million shares of common stock are reserved for future grants and 3.3 million shares are reserved for future issuance pursuant to outstanding equity awards under the various equity incentive plans. In addition, as of
June 30, 2012, an aggregate of approximately 3.4 million shares of common stock are reserved for future issuance in connection with the Companys acquisition of Bluehill ID and polyright. We may issue additional shares of our common
stock or other securities that are convertible into or exercisable for shares of common stock in connection with the hiring of personnel, future acquisitions, future private placements, or future public offerings of our securities for capital
raising or for other business purposes. If we issue additional securities, the aggregate percentage ownership of our existing stockholders will be reduced. In addition, any new securities that we issue may have rights senior to those of our common
stock.



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The issuance of additional shares of common stock or preferred stock or other securities, or
the perception that such issuances could occur, may create downward pressure on the trading price of our common stock.

One
of our directors indirectly holds significant amounts of our common stock and could have significant influence over the outcome of corporate actions requiring board and stockholder approval.

As of July 30, 2012, Mountain Partners AG, together with its affiliates (collectively Mountain Partners), had the right
to vote approximately 12% of the outstanding shares of our common stock. Daniel Wenzel, a director of our Company, is a co-founder of Mountain Partners. As of March 1, 2012, the directors and officers of Identive Group collectively held
approximately 8% of our common stock. Accordingly, our directors and officers could have influence over the outcome of corporate actions requiring board and stockholder approval, including the election of directors, any merger, consolidation or sale
of all or substantially all of our assets or any other significant corporate transaction.

Provisions in our agreements,
charter documents, Delaware law and our rights plan may delay or prevent the acquisition of Identive by another company, which could decrease the value of your shares.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us or enter into a material transaction with us without the
consent of our Board of Directors. These provisions include a classified Board of Directors and limitations on actions by our stockholders by written consent. Delaware law imposes some restrictions on mergers and other business combinations between
us and any holder of 15% or more of our outstanding common stock. In addition, our Board of Directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile
acquirer.

We have adopted a stockholder rights plan. The triggering and exercise of the rights would cause substantial
dilution to a person or group that attempts to acquire us on terms or in a manner not approved by our Board of Directors, except pursuant to an offer conditioned upon redemption of the rights. While the rights are not intended to prevent a takeover
of our Company, they may have the effect of rendering more difficult or discouraging an acquisition of us that was deemed to be undesirable by our Board of Directors.

These provisions will apply even if the offer were to be considered adequate by some of our stockholders. Because these provisions may be deemed to discourage a change of control, they may delay or
prevent the acquisition of our Company, which could decrease the value of our common stock.

Legal and Regulatory Risks

Our business could be adversely affected by changes in laws or regulations pertaining to security.

The U.S. federal government, suppliers to the federal government and certain industries in the public sector currently fall, or may
in the future fall, under particular regulations pertaining to security. Some of the laws, regulations, certifications or requirements that may stimulate new security systems sales include the following:



| |  |  | Homeland Security Presidential Directive (HSPD) 12 and Federal Information Processing Standards (FIPS) 201 produced by National Institute of Standards
and Technology (NIST);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Federal Information Security Management Act (FISMA);
| | - |  | ----------------------------------------------------



| |  |  | Transportation Security Administrations (TSA) Transportation Worker Identification Credential (TWIC) program;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Sarbanes-Oxley Act of 2002 (also known as the Public Company Accounting Reform and Investor Protection Act);
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | Dodd-Frank Act;
| | - |  | ---------------



| |  |  | Health Insurance Portability and Accountability Act (HIPAA);
| | - |  | ------------------------------------------------------------



| |  |  | Gramm-Leach Bliley Act of 1999 (GLBA, a.k.a., the Financial Modernization Act);
| | - |  | -------------------------------------------------------------------------------



| |  |  | Customs-Trade Partnership Against Terrorism (C-TPAT);
| | - |  | -----------------------------------------------------



| |  |  | Free and Secure Trade Program (FAST);
| | - |  | -------------------------------------



| |  |  | Chemical Facility Anti Terrorism Standards (CFATS); and
| | - |  | -------------------------------------------------------



| |  |  | various codes of the Code of Federal Regulations (CFR).
| | - |  | -------------------------------------------------------



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Discontinuance of, changes in, or lack of adoption of laws or regulations pertaining to
security could adversely affect our performance.

We are subject to extensive government regulation, and any failure to
comply with applicable regulations could subject us to penalties that may restrict our ability to conduct our business.

Our business is affected by and must comply with various government regulations that impact its operating costs, profit margins and its
internal organization and operations. Furthermore, our business may be audited to assure compliance with these requirements. Any failure to comply with applicable regulations, rules and approvals could result in the imposition of penalties, the loss
of government orders or the removal of our products from the GSA approved list, any of which could adversely affect our business, financial condition and results of operations. Among the most significant regulations affecting our business are the
following:



| |  |  | the Federal Acquisition Regulations, or the FAR, and agency regulations supplemental to the FAR, which comprehensively regulate the formation and
administration of, and performance under government contracts;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with contract negotiations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under cost-based government contracts;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Foreign Corrupt Practices Act; and
| | - |  | --------------------------------------



| |  |  | laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the
exportation of certain products and technical data.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These regulations affect how our customers can do
business with us, and, in some instances, the regulations impose added costs on our business. Any changes in applicable laws and regulations could restrict our ability to conduct our business. Any failure to comply with applicable laws and
regulations could result in contract termination, price or fee reductions or suspension or debarment from contracting with the federal government generally.

If we are unable to continue to obtain U.S. government authorization regarding the export of our products, or if current or future export laws limit or otherwise restrict our business, we could be
prohibited from shipping our products to certain countries, which could cause our business, financial condition and results of operations to suffer.

In our business, we must comply with U.S. and European Union (EU) laws, among others, regulating the export of our products. In some cases, explicit authorization from the U.S. or an
EU government is needed to export our products. The export regimes and the governing policies applicable to our business are subject to changes. We cannot be certain that such export authorizations will be available to us or for our products in the
future. In some cases, we rely upon the compliance activities of our prime contractors, and we cannot be certain they have taken or will take all measures necessary to comply with applicable export laws. If we or our prime contractor partners cannot
obtain required government approvals under applicable regulations, we may not be able to sell our products in certain international jurisdictions.

We face risks from future claims of third parties and litigation.

From
time to time, we may be subject to claims of third parties, possibly resulting in litigation, which could include, among other things, claims regarding infringement of the intellectual property rights of third parties, product defects,
employment-related claims, and claims related to acquisitions, dispositions or restructurings. Any such claims or litigation may be time-consuming and costly, divert management resources, cause product shipment delays, require us to redesign our
products, require us to accept returns of products and to write off inventory, or have other adverse effects on our business. Any of the foregoing could have a material adverse effect on our results of operations and could require us to pay
significant monetary damages.

We expect the likelihood of intellectual property infringement and misappropriation claims may
increase as the number of products and competitors in our markets grows and as we increasingly incorporate third-party technology into our products. As a result of infringement claims, we could be required to license intellectual property from a
third-party or redesign our products. Licenses may not be offered when we need them or on acceptable terms. If we do obtain licenses from third parties, we may be required to pay license fees or royalty payments or we may be required to license some
of our intellectual property to others in



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return for such licenses. If we are unable to obtain a license that is necessary for us or our third-party manufacturers to manufacture our allegedly infringing products, we could be required to
suspend the manufacture of products or stop our suppliers from using processes that may infringe the rights of third parties. We may also be unsuccessful in redesigning our products. Our suppliers and customers may be subject to infringement claims
based on intellectual property included in our products. We have historically agreed to indemnify our suppliers and customers for patent infringement claims relating to our products. The scope of this indemnity varies, but may, in some instances,
include indemnification for damages and expenses, including attorneys fees. We may periodically engage in litigation as a result of these indemnification obligations. Our insurance policies exclude coverage for third-party claims for patent
infringement.

We may be exposed to risks of intellectual property infringement by third parties.

Our success depends significantly upon our proprietary technology. We currently rely on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality agreements and contractual provisions to protect our proprietary rights, which afford only limited protection. We may not be successful in protecting our proprietary technology through patents, it is possible
that no new patents will be issued, that our proprietary products or technologies are not patentable or that any issued patent will fail to provide us with any competitive advantages.

There has been a great deal of litigation in the technology industry regarding intellectual property rights, and from time to time we may
be required to use litigation to protect our proprietary technology. This may result in our incurring substantial costs and we may not be successful in any such litigation.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to use our proprietary information and software without authorization. In
addition, the laws of some foreign countries do not protect proprietary and intellectual property rights to the same extent as do the laws of the U.S. Because many of our products are sold and a significant portion of our business is conducted
outside the U.S., our exposure to intellectual property risks may be higher. Our means of protecting our proprietary and intellectual property rights may not be adequate. There is a risk that our competitors will independently develop similar
technology or duplicate our products or design around patents or other intellectual property rights. If we are unsuccessful in protecting our intellectual property or our products or technologies are duplicated by others, our business could be
harmed.

Changes in tax laws or the interpretation thereof, adverse tax audits and other tax matters may adversely affect
our future results.

A number of factors may impact our tax position, including:



| |  |  | the jurisdictions in which profits are determined to be earned and taxed;
| | - |  | -------------------------------------------------------------------------



| |  |  | the resolution of issues arising from tax audits with various tax authorities;
| | - |  | ------------------------------------------------------------------------------



| |  |  | changes in the valuation of our deferred tax assets and liabilities;
| | - |  | --------------------------------------------------------------------



| |  |  | adjustments to estimated taxes upon finalization of various tax returns;
| | - |  | ------------------------------------------------------------------------



| |  |  | increases in expenses not deductible for tax purposes; and
| | - |  | ----------------------------------------------------------



| |  |  | the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.
| | - |  | -----------------------------------------------------------------------------------------------

Any of these factors could make it more difficult for us to project or achieve expected tax results. An increase or decrease in our tax
liabilities due to these or other factors could adversely affect our financial results in future periods.

We have
identified material weaknesses in our internal control over financial reporting. We will continue to incur costs to remediate these weaknesses and to maintain effective internal controls over financial reporting. If we are unable to remediate these
material weaknesses, and if additional weaknesses are discovered in the future, our business, results of operations and investors confidence in us could be materially affected.

Under Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, our management is required to make certain assessments and
certifications regarding our disclosure controls and internal controls over financial reporting. We have dedicated, and expect to continue to dedicate, significant management, financial and other resources in connection with our compliance with
Section 404 of the Sarbanes-Oxley Act. The process of maintaining and evaluating the effectiveness of these controls is expensive, time-consuming and requires significant attention from our management and staff. During the course of our
evaluation, we may identify areas requiring improvement and may be required to design enhanced processes and controls to address issues identified through this review. This could result in significant delays and costs to us and require us to divert
substantial resources, including management time from other activities.



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As described in Controls and Procedures in Part I, Item 4 of this report,
in connection with the audit of our financial statements as of and for the year ended December 31, 2011, we and our independent registered public accounting firm identified material weaknesses in internal control over financial reporting.
Specifically, we determined that we had an insufficient number of accounting personnel with appropriate knowledge, experience or training in U.S. GAAP to provide effective oversight and review of transactions and the preparation of financial
statements, particularly at the subsidiary level and that the design of controls related to revenue recognition were inadequate. Although management has implemented a remediation plan to address these material weaknesses, there can be no assurance
that such remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. In addition, we may in the future identify additional internal control deficiencies that could
rise to the level of a material weakness or uncover errors in financial reporting.

If we fail to remediate the material
weakness and maintain an effective system of disclosure controls or internal control over financial reporting, we may not be able to rely on the integrity of our financial results, which could result in inaccurate or late reporting of our financial
results and investigation by regulatory authorities. If we fail to achieve and maintain adequate internal controls the financial position of our business could be harmed; current and potential future shareholders could lose confidence in us and/or
our reported financial results, which may cause a negative effect on the trading price of our common stock; and we could be exposed to litigation or regulatory proceedings, which may be costly or divert management attention.

In addition, all internal control systems, no matter how well designed and operated, can only provide reasonable assurance that the
objectives of the control system are met. Because there are inherent limitations in all control systems, no evaluation of control can provide absolute assurance, that all control issues and instances of fraud, if any, within the Company have been or
will be detected. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies
or procedures. Any failure of our internal control systems to be effective could adversely affect our business.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

On April 2, 2012, Bluehill ID AG, a wholly-owned subsidiary of the Company, acquired additional outstanding shares of payment
solution AG (payment solution) from one selling security holder such that, when aggregated with the shares acquired in January 2012, resulted in the Company owning approximately 82.5% of the outstanding shares of payment solution. The
purchase of the additional payment solution shares was made pursuant to the terms and conditions of a Share Exchange Agreement between Bluehill ID AG, the Company and the selling shareholder. In exchange for the additional shares of payment
solution, the Company issued 548,114 shares of its Common Stock to the selling shareholder, having a value of approximately $1.2 million. The issuance of the shares of Common Stock under the Share Exchange Agreement was made to a qualified investor
outside the United States in reliance on the exemption provided by Regulation S under the Securities Act of 1933 from the registration requirements under such Act, as well as comparable exemptions under applicable foreign securities laws. The shares
have not been, and will not be, registered under the Securities Act of 1933 and are subject to applicable restrictions on transfer.



|Item 3. | Defaults upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | Mine Safety Disclosures
|------- | -----------------------

Not applicable.



|Item 5. | Other Information
|------- | -----------------

None.



|Item 6. | Exhibits
|------- | --------

Exhibits are listed on the Exhibit Index at the end of this Quarterly Report. The exhibits required by Item 601 of Regulation S-K, listed on such Index in response to this Item, are incorporated
herein by reference.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.



|               |  |                      |  |                                                   |  |                    
|-------------- |  | -------------------- |  | ------------------------------------------------- |  | -------------------
|               |  | IDENTIVE GROUP, INC.
|               |  |                      | 
|August 8, 2012 |  |                      |  | By:                                               |  | /s/ AYMAN S. ASHOUR
|               |  |                      |  | Ayman S. Ashour                                  
|               |  |                      |  | Chairman of the Board and Chief Executive Officer
|               |  |                      |  | (Principal Executive Officer and Director)       
|               |  |                      |  |                                                   |  |                    
|August 8, 2012 |  |                      |  | By:                                               |  | /s/ DAVID WEAR     
|               |  |                      |  | David Wear                                       
|               |  |                      |  | Chief Financial Officer and Secretary            
|               |  |                      |  | (Principal Financial Officer)                    



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EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                             
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | DESCRIPTION OF DOCUMENT                                                                                                                                                                                                                                     
|               | 
|10.1           |  | Executive Employment Agreement, dated as of April 1, 2012, by and between Identive Group, Inc. and Mr. Jason Hart (Incorporated by reference to exhibit 10.1 to the
Companys Current Report on Form 8-K filed on April 4, 2012).                           
|               | 
|10.2           |  | Amendment to Executive Employment Agreement, dated as of May 3, 2012, by and between Identive Group, Inc. and Melvin Denton-Thompson (Incorporated by reference to exhibit 10.1
to the Companys Current Report on Form 8-K filed on May 3, 2012).          
|               | 
|10.3           |  | Executive Employment Agreement, dated as of May 3, 2012, by and between Identive Group, Inc. and David Wear (Incorporated by reference to exhibit 10.2 to the Companys
Current Report on Form 8-K filed on May 3, 2012).                                   
|               | 
|10.4           |  | Amendment to Employment Agreement, effective as of June 1, 2012, by and between Ayman S. Ashour and Identive Services AG (Incorporated by reference to exhibit 10.1 to the
Companys Current Report on Form 8-K filed on June 1, 2012).                     
|               | 
|10.5           |  | Amendment to Executive Employment Agreement, effective as of June 1, 2012, by and between Identive Group, Inc. and Melvin Denton-Thompson (Incorporated by reference to exhibit
10.2 to the Companys Current Report on Form 8-K filed on June 1, 2012).    
|               | 
|10.6           |  | Amendment to Executive Employment Agreement, effective as of June 1, 2012, by and between Identive Group, Inc. and Jason Hart (Incorporated by reference to exhibit 10.3 to the
Companys Current Report on Form 8-K filed on June 1, 2012).                
|               | 
|10.7           |  | Amendment to Employment Agreement, effective as of June 1, 2012, by and between Identive Group, Inc. and Lawrence Midland (Incorporated by reference to exhibit 10.4 to the
Companys Current Report on Form 8-K filed on June 1, 2012).                    
|               | 
|10.8           |  | Amendment to Amended and Restated Employment Agreement, effective as of June 1, 2012, by and between Identive Group, Inc. and Manfred Mueller (Incorporated by reference to
exhibit 10.5 to the Companys Current Report on Form 8-K filed on June 1, 2012).
|               | 
|10.9           |  | Amendment to Employment Agreement, effective as of June 1, 2012, by and between Bluehill ID AG and John S. Rogers (Incorporated by reference to exhibit 10.6 to the
Companys Current Report on Form 8-K filed on June 1, 2012).                            
|               | 
|10.10          |  | Amendment to Employment Agreement, effective as of June 1, 2012, by and between Identive Group, Inc. and Joseph Tassone (Incorporated by reference to exhibit 10.7 to the
Companys Current Report on Form 8-K filed on June 1, 2012).                      
|               | 
|10.11          |  | Amendment to Executive Employment Agreement, effective as of June 1, 2012, by and between Identive Group, Inc. and David Wear (Incorporated by reference to exhibit 10.8 to the
Companys Current Report on Form 8-K filed on June 1, 2012).                
|               | 
|31.1           |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                                                                                                 
|               | 
|31.2           |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                                                                                                 
|               | 
|32             |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                              
|               | 
|101.INS*       |  | XBRL Instance Document                                                                                                                                                                                                                                      
|               | 
|101.SCH*       |  | XBRL Taxonomy Extension Schema Document                                                                                                                                                                                                                     
|               | 
|101.CAL*       |  | XBRL Taxonomy Extension Calculation Linkbase Document                                                                                                                                                                                                       
|               | 
|101.DEF*       |  | XBRL Taxonomy Extension Definition Linkbase Document                                                                                                                                                                                                        
|               | 
|101.LAB*       |  | XBRL Taxonomy Extension Label Linkbase Document                                                                                                                                                                                                             
|               | 
|101.PRE*       |  | XBRL Taxonomy Extension Presentation Linkbase Document                                                                                                                                                                                                      





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|* | As permitted by Rule 405(a)(2) of Regulation S-T, XBRL Interactive Data files with detailed tagging will be filed by amendment to this Quarterly Report on Form 10-Q
within 30 days of the filing date of this Quarterly Report on Form 10-Q.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



63