##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934 OR  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2004 OR  o
    
    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: 0-31052 Gemplus International S.A. (Exact name of registrant as specified in its charter) Not Applicable  Grand Duchy of Luxembourg  46a Avenue J.F. Kennedy L-1855 Luxembourg
 Grand Duchy of Luxembourg
  Securities registered or to be registered pursuant to Section 12(b) of the Act:None Securities registered or to be registered pursuant to Section 12(g) of the Act: Ordinary Shares, without par value Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: 607,582,003                    Ordinary Shares, without par value 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. þ       Yes
    
    o       No
 Indicate by check mark which financial statement item the registrant has elected to follow. o     Item 17
    
    þ      Item 18




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TABLE OF CONTENTS Special Note Regarding Forward-Looking StatementsSummaryPART 1Item 1. Identity of Directors, Senior Management and Advisors
    
    
    5Item 2. Offer Statistics and Expected Timetable
    
    
    5Item 3. Key Information
    
    
    5Item 4. Information on the Company
    
    
    17Item 5. Operating and Financial Review and Prospects
    
    
    38Item 6. Directors, Senior Management and Employees
    
    
    57Item 7. Major Shareholders and Related Party Transactions
    
    
    71Item 8. Financial Information
    
    
    73Item 9. The Offer and Listing
    
    
    75Item 10. Additional Information
    
    
    77Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    83Item 12. Description of Securities Other than Equity Securities
    
    
    87PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    87Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    87Item 15. Controls and Procedures
    
    
    87Item 16. Reserved
    
    
    87Item 16A Audit Committee Financial Expert
    
    
    87Item 16B Code of Ethics
    
    
    87Item 16C Principal Accountant Fees and Services
    
    
    88Item 16D Exemptions from the Listing Standards for Audit CommitteesItem 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    88PART IIIItem 17. Financial Statements
    
    
    88Item 18. Financial Statements
    
    
    89Item 19. Exhibits
    
    
    90LIST OF SIGNIFICANT SUBSIDIARIESCERTIFICATION BY CEOCERTIFICATION BY CFOCERTIFICATIONCERTIFICATIONCONSENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRMEXHIBIT 1EXHIBIT 4.4EXHIBIT 4.5EXHIBIT 8EXHIBIT 12.1EXHIBIT 12.2EXHIBIT 13.1EXHIBIT 13.2EXHIBIT 15.1
  1




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##### Table of Contents



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements in this Annual Report constitute forward-looking statements. These
statements relate to future events or our future financial performance and involve assumptions,
known and unknown risks, uncertainties and other factors that may cause our or our actual results,
levels of activity, performance or achievements to be materially different from any future results,
levels of activities, performance or achievements expressed or implied by such forward-looking
statements. In some cases, you can identify forward-looking statements by terminology such as
may, should, will, intend, seek, predicts, potential, or continue or similar
expressions or the negative of such terms. These statements are only predictions. Actual events or
results may differ materially. The assumptions, risks and uncertainties involved in forward-looking statements include
without limitation: economic, competitive and technological factors affecting markets, services,
and prices; changes in spending on technology and technology upgrades; the extent and timing of
growth in the telecommunications industry; continued demand for our products and services; the
development of new markets for our products and services; chip card technology being adopted in
wireless transmission standards and other technology standards; political, regulatory and
commercial risks inherent in international operations, including the risk of currency exchange rate
fluctuations; and general economic and business conditions in various regions of the world. Although we believe that the assumptions on which our forward-looking statements are based are
reasonable in light of available information, any of those assumptions could prove to be
inaccurate, and we cannot guarantee future results, events, levels of activity, performance or
achievements. Factors that could cause actual results to differ materially from those estimated by
the forward-looking statements contained in this Annual Report include, but are not limited to, the
risk factors set forth under Item 3. Key Information  Risk Factors, Item 5. Operating and
Financial Review and Prospects and other factors found elsewhere in this Annual Report. You are cautioned not to place undue reliance on forward-looking statements, which speak only
as of the date of this Annual Report. We are not under any obligation, and we expressly disclaim
any obligation, to update or alter any forward-looking statements, whether as a result of new
information, future events or otherwise, except to the extent that, as a result of fulfilling our
disclosure obligations under applicable securities laws and regulations, we determine that such an
update is necessary.




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##### Table of Contents



PART I 
 Item 1. Identity of Directors, Senior Management and Advisors Not applicable. 
 Item 2. Offer Statistics and Expected Timetable Not applicable. 
 Item 3. Key Information SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below has been derived from, and is
qualified in its entirety by reference to our audited Consolidated Financial Statements and notes
thereto, which have been prepared in accordance with International Financial Reporting Standards
(IFRS) formulated by the International Accounting Standards Board (IASB). These standards differ in
certain significant respects from generally accepted accounting principles in the United States,
commonly referred to as U.S. GAAP. Note 39 to our audited Consolidated Financial Statements
describes the principal differences between IFRS and U.S. GAAP as they relate to us, and reconciles
our net income and shareholders equity to U.S. GAAP. Selected consolidated financial data below is in accordance with IFRS except as otherwise
stated. Information indicated as restated for 2003 and previous years has been prepared following
the adoption of International Accounting Standard 1
(Revised 2003) (see Note 2.23 to our Consolidated Financial
Statements). Year ended as at December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $ (1)in millions, except per share amounts or as otherwise statedINCOME STATEMENT
DATA:Net sales
    
    
    1,205
    
    
    
    1,023
    
    
    
    787
    
    
    
    749
    
    
    
    865
    
    
    
    1,068Cost of sales
    
    
    (751
    )
    
    
    (716
    )
    
    
    (587
    )
    
    
    (542
    )
    
    
    (595
    )
    
    
    (735
    )Gross profit
    
    
    454
    
    
    
    307
    
    
    
    200
    
    
    
    207
    
    
    
    270
    
    
    
    333Research and development
expenses
    
    
    (91
    )
    
    
    (113
    )
    
    
    (92
    )
    
    
    (69
    )
    
    
    (63
    )
    
    
    (78
    )Reversal of research
credit allowance
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling and marketing
expenses
    
    
    (158
    )
    
    
    (165
    )
    
    
    (113
    )
    
    
    (100
    )
    
    
    (101
    )
    
    
    (125
    )General and
administrative expenses
    
    
    (90
    )
    
    
    (111
    )
    
    
    (90
    )
    
    
    (77
    )
    
    
    (64
    )
    
    
    (79
    )Litigation expenses
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Management severance
expenses
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructuring expenses
    
    
    
    
    
    
    (28
    )
    
    
    (90
    )
    
    
    (62
    )
    
    
    (8
    )
    
    
    (10
    )Other non-operating
income (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Goodwill amortization and
impairment
    
    
    (11
    )
    
    
    (27
    )
    
    
    (47
    )
    
    
    (33
    )
    
    
    (8
    )
    
    
    (10
    )




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##### Table of Contents



Year ended as at December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $ (1)in millions, except per share amounts or as otherwise statedOperating income (loss)
    
    
    116
    
    
    
    (181
    )
    
    
    (232
    )
    
    
    (134
    )
    
    
    26
    
    
    
    32Financial income
    
    
    21
    
    
    
    28
    
    
    
    20
    
    
    
    10
    
    
    
    8
    
    
    
    10Financial expense
    
    
    (9
    )
    
    
    (8
    )
    
    
    (71
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Share of profit (loss) of
associates
    
    
    (4
    )
    
    
    (4
    )
    
    
    (3
    )
    
    
    (8
    )
    
    
    (6
    )
    
    
    (8
    )Other non-operating
income (expense), net
    
    
    14
    
    
    
    55
    
    
    
    (22
    )
    
    
    (11
    )
    
    
    (7
    )
    
    
    (9
    )Income (loss) before taxes
    
    
    138
    
    
    
    (110
    )
    
    
    (308
    )
    
    
    (144
    )
    
    
    19
    
    
    
    23Income tax benefit
(expense)
    
    
    (30
    )
    
    
    14
    
    
    
    (9
    )
    
    
    (15
    )
    
    
    (13
    )
    
    
    (16
    )Net income (loss)
    
    
    108
    
    
    
    (96
    )
    
    
    (317
    )
    
    
    (159
    )
    
    
    6
    
    
    
    7Attributable to:Equity holders
    
    
    99
    
    
    
    (100
    )
    
    
    (321
    )
    
    
    (161
    )
    
    
    5
    
    
    
    6Minority interest
    
    
    9
    
    
    
    4
    
    
    
    4
    
    
    
    2
    
    
    
    1
    
    
    
    1Net income (loss) per
share attributable to
equity
holders(2)- Basic
    
    
    0.20
    
    
    
    (0.16
    )
    
    
    (0.53
    )
    
    
    (0.27
    )
    
    
    0.01
    
    
    
    0.01- Diluted
    
    
    0.18
    
    
    
    (0.16
    )
    
    
    (0.53
    )
    
    
    (0.27
    )
    
    
    0.01
    
    
    
    0.01
 Year ended as at December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $(1)in millions, except per share amounts or as otherwise statedOperating income (loss) under U.S. GAAP
    
    
    (111
    )
    
    
    (117
    )
    
    
    (257
    )
    
    
    (154
    )
    
    
    27
    
    
    
    33- Net income (loss) under U.S. GAAP
    
    
    (123
    )
    
    
    (49
    )
    
    
    (280
    )
    
    
    (182
    )
    
    
    8
    
    
    
    10- Net income (loss) per share under U.S. GAAP(2)- Basic
    
    
    (0.25
    )
    
    
    (0.08
    )
    
    
    (0.46
    )
    
    
    (0.30
    )
    
    
    0.01
    
    
    
    0.01- Diluted
    
    
    (0.25
    )
    
    
    (0.08
    )
    
    
    (0.46
    )
    
    
    (0.30
    )
    
    
    0.01
    
    
    
    0.01OTHER DATA:Adjusted EBITDA(3)
    
    
    195
    
    
    
    (60
    )
    
    
    (98
    )
    
    
    (39
    )
    
    
    83
    
    
    
    102Net cash from (used for) operating activities
    
    
    69
    
    
    
    (23
    )
    
    
    (63
    )
    
    
    (10
    )
    
    
    27
    
    
    
    33Net cash (used for) investing activities
    
    
    (266
    )
    
    
    (65
    )
    
    
    (47
    )
    
    
    (17
    )
    
    
    (26
    )
    
    
    (32
    )Net cash from (used for) financing activities
    
    
    818
    
    
    
    (35
    )
    
    
    4
    
    
    
    (6
    )
    
    
    (3
    )
    
    
    (4
    )BALANCE SHEET DATA:Cash and cash equivalents
    
    
    636
    
    
    
    491
    
    
    
    417
    
    
    
    391
    
    
    
    388
    
    
    
    479Trade accounts receivable, net
    
    
    311
    
    
    
    189
    
    
    
    145
    
    
    
    155
    
    
    
    149
    
    
    
    184Inventory, net
    
    
    174
    
    
    
    140
    
    
    
    97
    
    
    
    99
    
    
    
    116
    
    
    
    143Derivative financial instruments
    
    
    23
    
    
    
    (5
    )
    
    
    10
    
    
    
    16
    
    
    
    33
    
    
    
    41Other current receivables
    
    
    74
    
    
    
    104
    
    
    
    83
    
    
    
    67
    
    
    
    66
    
    
    
    81Total assets
    
    
    1,909
    
    
    
    1,531
    
    
    
    1,218
    
    
    
    1,053
    
    
    
    1,025
    
    
    
    1,265Long-term debt, less current portion
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority interest
    
    
    17
    
    
    
    17
    
    
    
    15
    
    
    
    12
    
    
    
    11
    
    
    
    14Equity attributable to equity holders
    
    
    1,385
    
    
    
    1,168
    
    
    
    860
    
    
    
    695
    
    
    
    711
    
    
    
    878Total assets under U.S. GAAP
    
    
    1,767
    
    
    
    1,441
    
    
    
    1,234
    
    
    
    1,061
    
    
    
    1,039
    
    
    
    1,283Shareholders equity under U.S. GAAP
    
    
    1,243
    
    
    
    1,078
    
    
    
    879
    
    
    
    700
    
    
    
    726
    
    
    
    896
 
 (1)
    
    Dollar amounts have been translated for
convenience at the Noon Buying Rate (as defined below in the section
Exchange Rate Information and The European Monetary
System) on May 31, 2005, of U.S. $1.00 =
 0.81.(2)
    
    Basic net income per share attributable to our equity holders under IFRS and U.S. GAAP is calculated by dividing net income attributable to our equity holders by the weighted average number of our ordinary
shares outstanding during each period, in each case adjusted for a fifty-for-one share split that took place on June 21, 2000. The weighted average number of shares used in calculating the basic net income per
share was 497,523,946, 636,992,392, 606,222,660, 605,658,965 and 606,672,060 for the years ended December 31, 2000, 2001, 2002, 2003 and 2004. Diluted net income per share attributable to our equity holders
under IFRS and U.S. GAAP is calculated in the same manner as basic net income per share, except that the dilutive effect of the exercise of our outstanding share options and warrants is included in the
determination of the weighted average number of shares outstanding for each period. The weighted average number of shares used in calculating the diluted net income per share was 539,256,206, 636,992,392,
606,222,660, 605,658,965 and 619,022,472 for the years ended December 31, 2000, 2001, 2002, 2003 and 2004.




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##### Table of Contents



(3)
    
    Adjusted EBITDA is defined as earnings attributable to our equity holders before interest expense (net of interest income), provision for income taxes and depreciation and amortization expense. We believe that
Adjusted EBITDA is a useful indicator of operational strength and performance of our business. However, Adjusted EBITDA is not a measurement of operating performance calculated in accordance with either IFRS or
U.S. GAAP, and therefore should not be considered a substitute for operating income or net income as a measure of profitability, or a substitute for cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with IFRS or U.S. GAAP. Because all companies do not calculate EBITDA identically, the presentation of Adjusted EBITDA contained herein may not be comparable to
similarly titled measures provided by other companies. The reconciliation of Adjusted EBITDA with operating income is as follows: 2000
    
    
    2001
    
    
    2002
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $(1)in millionsOperating income (loss)
    
    
    116
    
    
    
    (181
    )
    
    
    (232
    )
    
    
    (134
    )
    
    
    26
    
    
    
    32Depreciation, amortization and impairment
    
    
    79
    
    
    
    121
    
    
    
    134
    
    
    
    95
    
    
    
    57
    
    
    
    70Adjusted EBITDA
    
    
    195
    
    
    
    (60
    )
    
    
    (98
    )
    
    
    (39
    )
    
    
    83
    
    
    
    102
 
 (1)
    
    Dollar amounts have been translated for convenience at the Noon Buying Rate on May 31, 2005, of U.S. $1.00 =  0.81. Exchange Rate Information and The European Monetary System For your convenience, this Annual Report contains translations of
certain euro amounts into U.S. dollars. Unless otherwise indicated, U.S. dollar amounts have been
translated from euros at the rate of U.S. $1.00 =  0.81, the Noon Buying Rate for the euro on
May 31, 2005. The Noon Buying Rate is the noon buying rate in New York City for cable transfers
in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.
This does not mean that we actually converted these amounts into U.S. dollars at that rate, and you
should not assume that they could have been converted at that or any other rate. Fluctuations in the exchange rate between the euro and the U.S. dollar may affect the U.S.
dollar price of our American Depositary Shares (ADSs) on the NASDAQ.




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##### Table of Contents



The following table shows the euro/U.S. dollar
exchange rates based on the Noon Buying Rate expressed in euros per U.S. dollar for the periods
indicated. EurosPeriod-
    
    
    Averageend Rate
    
    
    Rate
    
    
    High
    
    
    Low2000
    
    
    1.07
    
    
    
    1.08
    
    
    
    1.21
    
    
    
    0.972001
    
    
    1.12
    
    
    
    1.12
    
    
    
    1.19
    
    
    
    1.052002
    
    
    0.95
    
    
    
    1.06
    
    
    
    1.16
    
    
    
    0.952003
    
    
    0.79
    
    
    
    0.88
    
    
    
    0.97
    
    
    
    0.792004 (full year)
    
    
    0.74
    
    
    
    0.80
    
    
    
    0.85
    
    
    
    0.732004December
    
    
    0.74
    
    
    
    0.75
    
    
    
    0.76
    
    
    
    0.732005January
    
    
    0.77
    
    
    
    0.76
    
    
    
    0.77
    
    
    
    0.74February
    
    
    0.75
    
    
    
    0.77
    
    
    
    0.78
    
    
    
    0.75March
    
    
    0.77
    
    
    
    0.76
    
    
    
    0.78
    
    
    
    0.74April
    
    
    0.77
    
    
    
    0.77
    
    
    
    0.78
    
    
    
    0.76May
    
    
    0.81
    
    
    
    0.79
    
    
    
    0.81
    
    
    
    0.77
 
 (1)
    
    The average of the Noon Buying Rates on the last business day of each month (or portion thereof) during the relevant period. RISK FACTORS Risks Related to Our Business Slow growth or downturns in the wireless communications industry may adversely affect our business. Our business is significantly affected by trends in the wireless communications industry
because a substantial portion of our revenues is derived from sales of wireless products and
services. In 2004, sales of wireless products and services accounted for approximately 74% of our
revenues, as compared to 72% in 2003. The wireless communications industry experienced positive
growth in 2004 as demand for wireless products and services increased. There can be no assurance
that this growth will continue, or that the wireless communications industry will not experience
dramatic downturns similar to those that occurred in the years 2001 and 2002. Due to the competitive market environment, suppliers to the wireless communications industry are
under constant pressure to reduce selling prices, and while we endeavor to provide a broad product
range to our customers and continually add new high-end products, a reduction in the average
selling price may continue to affect our profitability. In addition, if wireless operators delay
making the necessary investments for the introduction of new wireless systems and technologies, our
business may be adversely affected due to reduced demand for our products. The markets that we have targeted for a substantial part of our future growth are in the early
stages of development, and may not develop rapidly or at all. Many of the markets that we target for our future growth are currently small or non-existent
and need to develop for us to achieve our growth objectives. If some or all of these markets do not
develop, or if they develop more slowly than we anticipate, then our business may be adversely
affected. For example:




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##### Table of Contents




    
    We are seeking to take advantage of the development of new markets for
wireless communications products and services, including mobile
commerce, mobile banking and mobile Internet services. These markets
are still just starting to develop.
    
    We are developing chip card products and services for the financial
services market. Chip card technology has not yet been widely adopted
by the financial services industry outside of France, Germany and the
United Kingdom, largely due to the cost of building the necessary
infrastructure, the need for more internationally compatible standards
and the relatively limited capabilities of all but the newest chip
cards.
    
    We are investing in identification and security networks products and
services, but so far we have not deployed these products and services
on a widespread basis internationally. Some of our businesses in these
markets remain in early-stage operations, and we do not know whether
or when these businesses will be significantly profitable. Our success depends upon recruiting and retaining key personnel. Our products, services and technologies are complex, and our future growth and success depend
to a significant extent on the skills of capable engineers, operators, managers and other key
personnel. Maintaining our know-how, and the continued re-training of currently competent
personnel, are also necessary to maintain an appropriate level of innovation and technological
advancement. The ability to recruit, retain and develop quality personnel is a critical success
factor for us. We believe that having stable management is important to our success. In 2001 and 2002 we had
significant changes in our senior management, and although we do not expect similar changes to
occur in the near term, we cannot be assured that such changes will not occur and adversely affect
our business. Improvements in our performance and operations depend significantly on the success of
the management team. Our restructuring and repositioning strategies, or our implementation of those strategies, may fail
to provide lasting positive results. We implemented three separate restructuring plans in 2001 and 2002. These plans were adopted
to address the effects on our business of the global slowdown in the wireless communications
industry. The slowdown led to a decline in sales of our wireless products and services in 2001 and
2002 and an increase in our operating losses in those years. While implementation of these plans
resulted in reduced operating costs in 2004, as compared to 2003, if we are not able to maintain
the reduction in our operating costs or increase our productivity because our restructuring plans
do not continue to provide the results that we expect, or are not implemented adequately, we may
experience losses and difficulties in growing our business. Chip card technology may not be adopted in new standards for the markets that we target, such that
we may lose some of our existing customers or not be able to obtain new customers. Our ability to grow depends significantly on whether government and industry organizations
adopt chip card technology as part of their new technology standards. If these entities do not
adopt chip card technology, we might not be able to succeed in some of the new markets we are
targeting, or we may lose our existing customers. In order for us to achieve our growth objectives, chip card technology must be adopted in a
variety of areas, including in:  
    
    certain wireless communication devices and networks that are currently
not equipped to use chip cards;
    
    bank credit and debit card systems, which in most countries still use
magnetic stripe cards as their primary technology;
    
    computer equipment, which must include chip card readers as standard
equipment if the use of chip cards for




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Internet and other applications is to become common;
    
    digital signature information technology security systems; and
    
    identity card programs. The decisions of standard setting bodies that may decide whether to adopt chip card technology
are likely to be based on factors such as:  
    
    the cost of adopting chip card technology relative to alternatives;
    
    the degree of security provided by chip card technology relative to alternatives;
    
    the development of competing technologies to provide security and premium value services;
    
    the relative ease of implementing chip card technology; and
    
    whether chip card technology becomes generally accepted by businesses and consumers. Most of our products are subject to competition from other technologies. These technologies
include magnetic stripe payment cards, non-chip based authentication, certain wireless standards
that do not incorporate a SIM card into the network architecture, and non-portable security devices
built into PC motherboards. We believe the chip card has certain advantages, although there may be
viable alternatives to our products. We may need to further develop our position as a provider of software and services to earn higher
margins from our technology. The development of sophisticated operating systems and applications can represent both a
potentially high-margin business and a key driver of more advanced, higher-margin chip card sales.
Although we have had some successes positioning ourselves as a provider of services and systems, we
cannot be assured that we will be successful in developing a profitable business line, or that we
will be able to capture a significant share of the market for the sophisticated services and
systems that we believe are likely to produce more attractive margins in the future. We may fail to manage optimally our inventories of microcontroller chips or suffer disruptions in
our supply chain. Our technology is based principally on microcontroller chips. The wireless communications
industry has been volatile in recent years, experiencing rapid growth in 2000, a downturn in 2001
and 2002, signs of growth in 2003 and improved growth in 2004. We have had periods of difficulty
managing our inventory levels of microcontroller chips. Failures to manage our inventory can cause
us to lose business to competitors, and have lower margins on existing sales. Managing our
inventory levels is made more difficult by the fact that the lead-times for the procurement of
semiconductors is significant compared to the volatility of demand from our customers. Although in
2004 we managed our inventory at more acceptable levels, managing our inventory supply in the
future, particularly if the industry undergoes significant and rapid change, will remain a
challenge to our procurement strategy. In addition, if the wireless communications industry experiences a sudden upturn, with
significant levels of growth in the near future, we will need to secure adequate supplies of
microcontroller chips to expand our production. If we are not able to secure these supplies, or
experience supply problems with the newest generation of microcontroller chips that generate our
highest margins, we may record lower revenues and profits and lose market share to competitors that
have secured adequate chip supplies. There may be supply limitations in the future that could
negatively affect our ability to procure microcontroller chips.




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Until 1999, STMicroelectronics and Infineon were the only two major silicon suppliers for the
chip card industry, covering roughly 90% of market needs. Since 2000, we have invested in a
multi-sourcing program to enlarge our supplier base. In 2004, we purchased approximately 90% of our microcontroller chips from three suppliers.
While there are several chip suppliers in the market, the failure by one or more of our main
suppliers to continue to meet our needs could have a material adverse affect on our business. Major
suppliers in this industry include Atmel, Infineon, ST Microelectronics, Philips and Samsung. If we are unable to keep up with rapid changes in chip card technology, our existing products and
services may no longer be competitive or could become obsolete. The market for our products and services is marked by rapid technological change because of
frequent new product introductions and chip card technology enhancements, uncertain product life
cycles, changes in client demands and evolving industry standards. New products and services based
on new or improved technologies or new industry standards can render existing products and services
obsolete and unmarketable. To succeed, we need to continually enhance our current products and
service offerings and develop new products and services on a timely basis to keep pace with
developments related to chip card technology and to satisfy the increasingly sophisticated
requirements of our customers. Any delays in developing and releasing enhanced or new products and
services, or in keeping pace with continuous technological change, may cause us to lose our
existing customer base or prevent us from expanding it, which could adversely affect our business. The process of developing our products and services is highly complex and requires significant
continuing development efforts and investments. Our investments in research and development have
been considerable, and while they have declined in recent years, they may need to increase. These
expenses may adversely affect our operating results and financial condition. Our quarterly financial results fluctuate and are difficult to predict, and if our future results
are below the expectations of investors, the price of our shares or ADSs may decline. Our operating results have varied from quarter to quarter, and we anticipate that this pattern
will continue. This variability makes it difficult to use a particular quarters results of
operations as an indicator of possible trends. Although these quarterly variations are a historical part of our business, they could affect
the market price of our shares or ADSs. In particular, if our results of operations in any quarter
are below the expectations of investors, the trading price of our shares or ADSs may decrease
significantly. In addition to general economic factors and factors that affect companies generally, a number
of factors specific to us are likely to cause quarterly variations, including:  
    
    the mix of products and services that we are able to sell, including
in particular, whether we are able to increase the sales of our higher
margin product and services, such as those we sell in the wireless
communications market;
    
    the geographical mix of our sales, including the relative extent of
our growth in countries where our products and services are sold at
the most attractive prices;
    
    costs related to possible acquisitions of technology or businesses,
including costs related to the integration of acquired businesses into
our operations; and
    
    the level of success we achieve in maintaining and enhancing existing
relationships and developing new relationships with strategic
partners, including third party software developers, systems
integrators and other implementation partners.




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In prior years, we experienced seasonal fluctuations in our operating results but cannot be
sure such fluctuations will continue in the same or another pattern in the future. The period between our initial contact with a potential customer and the sale of our products or
services to that customer tends to be long and may be subject to delays which may have a negative
affect on our revenues. The period between our initial contact with a potential customer and the purchase of our
products and services is often long and subject to delays associated with the budgeting, approval
and competitive evaluation processes that frequently accompany significant capital expenditures. A
lengthy sales cycle may have a negative effect on the timing of our revenues, which may cause our
quarterly operating results to fall below investor expectations. A customers decision to purchase
our products and services is often discretionary, involves a significant commitment of resources,
and is influenced by customer budgetary cycles. To successfully sell our products and services, we
generally must educate our potential customers regarding the uses and benefits of our products and
services, which can require the expenditure of significant time and resources, however, there can
be no assurance that this significant expenditure of time and resources will result in actual sales
of our products and services. If our products contain defects or if we make errors in providing services, we could lose customers
and revenues and become subject to costly claims. Complex chip card products such as ours can contain errors and defects, particularly when
first introduced or when new versions or enhancements are released. Similarly, our services can
involve decisions that result in our customers making significant investments and changes to their
business organizations or processes. Serious defects or errors in our products or services could
result in lost revenues or a delay in market acceptance, would be detrimental to our reputation and
could cause us to lose existing customers or prevent us from securing new ones, which would harm
our business, operating results and financial condition. Defects or other performance problems in our products and services could also result in
financial or other losses to our customers, in which case our customers could seek compensation for
losses from us. If these kinds of legal claims were to be made, they could be expensive, time
consuming and costly to defend against and could harm our reputation, which in turn could result in
a loss of our customers and a decrease in our revenues. Although our sales and services agreements
typically contain provisions designed to limit our exposure to such claims, existing or future laws
or unfavorable judicial decisions could potentially limit the effectiveness of these provisions. If our strategic relationships terminate or do not develop, we may lose important sales and
marketing opportunities. We have established strategic relationships, including joint ventures with telecommunications
carriers, third party software developers, financial institutions and several government agencies
and organizations. These relationships expose our products and services to potential customers to whom we may not
otherwise have access. In addition, these relationships provide us with insights into new
technology and with access to third-party service providers that our customers can use for
implementation assistance. These entities are not always obligated to continue their business
relations with us. These business relations could be terminated, and they may either work instead
with our competitors or become new competitors of ours. If our strategic relationships or joint
ventures are terminated, we might lose important sales and marketing opportunities. Challenges to our intellectual property rights could cause us to incur costly litigation, and if we
are not successful, could result in our losing valuable assets or market share. Our success depends, in part, upon our proprietary technology and other intellectual property
rights. If we are not able to defend successfully our industrial or intellectual property rights,
we might lose rights to use technology that we need to develop our business, which may cause us to
lose market share, or we might be required to pay significant license fees for the use of such
technology or might be unable to use such technology at all. To date, we have relied primarily on a
combination of patent, trade secret and copyright laws, as well as nondisclosure and other
contractual restrictions on copying, reverse engineering and distribution, to protect our
proprietary technology. We regularly




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prepare patent applications for technology related to our chip
cards. There can be no assurance that these applications, laws and contractual restrictions will be
successful. Litigation to enforce our intellectual property rights or protect our trade secrets could
result in substantial costs and may not be successful, which could result in costly judgments,
license fees or injunctions. Any loss of or inability to protect intellectual property in our
technology could seriously harm our business, operating results and financial condition. In
addition, the laws of certain foreign countries may not protect our intellectual property rights to
the same extent as do the laws in the European Union or the United States. Our means of protecting
our intellectual property rights in the European Union, the United States or any other country in
which we operate, may not be adequate to fully protect our intellectual property rights. Similarly, if third parties claim that we infringe their intellectual property rights, we
might be required to incur significant costs and devote substantial resources to the defense of
such claims, and if we are unsuccessful, we could suffer costly judgments and injunctions that could materially adversely
affect our business, operating results or financial condition. We might be forced to change our product and service offerings or to pay higher costs if the
third-party technology that we use in our products changes or if the price of such technology
increases. Many of our products integrate third-party technologies that we license or otherwise obtain
the right to use, including:  
    
    software relating to chip card operating systems;
    
    security and cryptographic technology for chip card operating systems,
which help prevent unauthorized parties from accessing with or
tampering information; and
    
    public key infrastructure technology that is used for Internet
transactions and identification in corporate security networks. Technology providers frequently change their products and cease supporting prior versions of
their products. Should such cessation of support occur, we cannot be assured that we will be able
to effectively adapt our products and services to accommodate such changes. If not, we may have to
change the features of our products and services or to discontinue some or all of them. Some
changes in technology may be accompanied by significant price increases that cannot be passed on to
our customers, which could increase our costs and materially affect our business, financial
condition or results of operation.




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We have multinational operations that are subject to risks inherent in international operations,
including currency exchange rate fluctuations. We conduct our business in all regions of the world, including in many countries outside the
United States and the European Union. As a result, we are subject to political, regulatory and
commercial risks inherent in international operations, including the risk of currency exchange rate
fluctuations, particularly in relation to the U.S. dollar, the British pound, the Chinese yuan and
the Singapore dollar. Our operations are subject to the risks associated with international operations, which
include:  
    
    a slowdown or a recession in global, regional or national economic growth;
    
    tariffs and trade barriers;
    
    exchange controls;
    
    fluctuations in national currencies;
    
    social and political risks;
    
    national and regional labor disputes;
    
    required compliance with a variety of foreign laws, regulations and standards; and
    
    the difficulty of enforcing legal claims and agreements through certain legal systems. To the extent that we incur costs in one currency and make our sales in another, our profit
margins may be affected by changes in the exchange rates between the currencies. A substantial
part of our expenses is in euros, while a significant amount of our sales is in U.S. dollars and
other currencies. The U.S. dollar, and currencies whose exchange rates are tied to the U.S.
dollar, have experienced a decline in the recent past. Although our general policy is to hedge
against much of our currency fluctuation risks, given the volatility
of currency exchange rates and
the costs of hedging against them, there is no assurance that we will be able to manage effectively
these risks. Furthermore, our regional businesses are subject to cyclical fluctuations in the economies in
which they operate. Any of the risks above could adversely affect our results of operations. In 2004, we earned 6% of our revenues in China, and we expect to continue to earn a material
portion of our revenues in China. Conducting business and manufacturing activities in China is
subject to special risks that may not arise in other countries, including:  
    
    the possible failure to adopt, or the adoption of inconsistent or ineffectual,
market-oriented economic reforms by the government;
    
    uncertainties regarding the interpretation and enforcement of laws and regulations; and
    
    the devaluation of the local currency or the imposition of restrictions on currency
conversion or expatriation of profits.




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We operate in many jurisdictions with highly complex and variable tax regimes, and changes in
tax rules and the outcome of tax assessments and audits could cause a material effect on our
financial results. We operate in many jurisdictions with highly complex and variable tax regimes. Changes in tax rules
and the outcome of tax assessments and audits could have a material effect on our financial
results. The tax rates that we are subject to are variable. Our effective tax rate in any
jurisdiction may depend on changes in our level of operating profit or in the applicable rate of
taxation there, as well as on changes in estimated tax provisions due to new events. We currently
enjoy tax benefits in certain jurisdictions. These benefits may not be available in the future due
to changes in the relevant tax rules, which could cause our effective tax rate to increase in the
future. Future acquisitions may adversely affect our business. Our strategy to achieve growth may lead us to make significant acquisitions of businesses that
we believe to be complementary to our own. Our strategy also depends in part on our ability to
identify suitable acquisition targets, finance their acquisitions and obtain required regulatory
and other approvals. Future acquisitions may require us to use significant financial resources, to
make potentially dilutive issuances of our equity securities, to incur debt and to incur
impairments related to goodwill and other intangible assets. Acquisitions involve numerous other
risks, including difficulties in integrating the operations, technologies and products acquired and
the employees of the acquired businesses, the diversion of managements attention from other
business concerns, the risk of entering geographic markets in which we have little or no prior
experience, and the potential loss of key employees of acquired businesses. We face risks relating to certain partnerships, joint ventures and subsidiaries that we do not
control. Some of our activities are, and will in the future be, conducted through entities that we do
not entirely control or in which we have minority interest, such as in certain joint ventures.
Under the governing documents or agreements for these entities, certain key matters such as the
approval of business plans require the agreement of our partners and, in some cases, decisions
regarding these matters may be made without our approval. There is also a risk of disagreement or
deadlock among the stakeholders of jointly controlled entities and that decisions contrary to our
interests will be made. These factors could affect our ability to pursue our stated strategies with
respect to those entities or have a material adverse effect on our results or financial condition. Our operating results can vary significantly due to impairment of goodwill and other intangible
assets arising from acquisitions, as well as to impairment of assets due to changes in the business
environment. As of December 31, 2004, the value reported on our Consolidated Balance Sheet for goodwill was 
28.2 million, net of amortization (December 31, 2003:  37.7 million, December 31, 2002: 
73.2 million). Because the market for our products is characterized by rapidly changing
technologies, and because of significant changes in our industry, our future cash flows may not
support the value of goodwill and other intangibles in our balance sheet. We are required to
regularly test goodwill and to assess the carrying values of intangible and tangible assets when
impairment indicators exist. As a result of such tests, we could be required to book an impairment
in our statement of income if the carrying value in our balance sheet is in excess of the fair
value. The amount of any potential impairment is not necessarily predictable since it depends on
our estimates of projected market trends, results of operations and cash flows. Any potential
impairment, if required, could have a material adverse effect on our results of operations. Changes in International Financial Reporting Standards could affect our reported
results. We have been preparing our consolidated financial statements and reporting our results in
accordance with International Financial Reporting Standards
(IFRS) since 2000. Some changes in IFRS may have a
significant impact on our reported operating results. The International Accounting Standards Board regularly revises current International Financial
Reporting Standards with a view to increasing international harmonization of accounting rules. This
process of amendment and convergence of worldwide accounting rules could result in significant
amendments to the existing rules. It is not possible to predict the effect on our reported results
of any such changes which may be made in the future, or whether such rule changes would be
retrospective, potentially requiring us to restate past reported results.




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Risks Related to Our Industry Our markets are highly competitive and competition could harm our ability to sell products and
services and could reduce our margins and market share. The market for chip card products and services is rapidly changing and intensely competitive.
We expect competition to increase as the industry grows and as some chip card technology matures.
Intense competition has led to increased pricing pressures on our products which, in turn, has
resulted in lower price margins on those products. We may not be able to compete successfully
against current or future competitors, or may not be able to make a profit at the prices we would
need to sell products to be competitive. The competitive pressures facing us may harm our business,
operating results and financial condition. Our current principal competitors include chip card product and service providers such as
Axalto, Giesecke & Devrient, Oberthur Card Systems, Orga Kartensysteme and Incard. There have also
been new entrants into the industry with low-cost operating models, especially in China, with
aggressive pricing policies that are threatening our market share and our profitability. As the
market for chip card products and services in the wireless, financial services and Internet
security industries grows, and as these markets converge, we may experience additional competition
from companies that are currently our suppliers, customers and strategic partners, including:  
    
    operating system developers, such as Microsoft and IBM;
    
    electronic security product and service providers, such as Entrust, RSA and Verisign;
    
    wireless device manufacturers, such as Nokia, Motorola, Samsung and Sony-Ericsson;
    
    systems integrators, such as IBM, Siemens and EDS;
    
    microcontroller chip manufacturers, such as STMicroelectronics, Infineon, Philips,
Atmel, Renesas, Samsung and Sony; and
    
    wireless infrastructure software providers, such as SmartTrust. Some of our competitors and potential competitors may have larger technical staffs, larger
customer bases, more established distribution channels, greater brand recognition and greater
financial, marketing and other resources than we do. Our competitors may be able to develop
products and services that are superior to our products and services, which achieve greater
customer acceptance or which have significantly improved functionality as compared to our existing
and future chip card products and services. In addition, our competitors may be able to negotiate
strategic relationships on more favorable terms than we have been or are able to negotiate. Many of
our competitors may also have well-established relationships with our existing and prospective
customers. Increased competition may result in reduced margins, loss of sales or decreased market
shares, which in turn could harm our business, operating results and financial condition. Communications networks may not expand as a commerce and business medium. Our growth may suffer if wireless devices do not become a widely used method of accessing the
Internet for commercial transactions. The acceptance and use of wireless communications networks for Internet commerce, mobile
banking and mobile commerce could be limited by a number of factors, including:  
    
    inadequate development of the necessary network infrastructure;




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
    
    inconsistent quality of service;
    
    excessive cost of high-speed service;
    
    concerns about transaction security and fraud or theft of stored data
and information communicated over wireless communications networks;
    
    increased government regulation and the taxation of transactions
conducted over wireless communications networks; and
    
    delays in development or adoption of new standards or protocols to
handle increased levels of activity on wireless communication
networks. In addition, companies and government agencies that have already invested substantial
resources in other methods of conducting business may be reluctant to adopt new methods. Future regulations may be enacted that either directly restrict our business or indirectly affect
our business by limiting the growth of Internet and mobile commerce. Our products and services are sold in numerous countries around the world, each of which
imposes regulations affecting our operations, including product controls, trade restrictions,
tariffs and charges, and labor and other social controls. Many countries impose regulatory
restrictions or bans on the use or transfer of cryptography, which is an essential part of our chip
card products and services. Regulation of the Internet in general, and of e-commerce, and mobile
commerce in particular, is largely unsettled. As Internet and mobile commerce evolve, we expect that various governmental entities will
enact or revise laws, rules and regulations covering issues such as user privacy, consumer fraud,
pricing, content and quality of products and services and the use of cryptography. Such laws, rules
or regulations may increase the costs or administrative burdens of doing business using the
Internet and wireless communications networks and may cause companies to seek alternative means of
transacting business in those countries. The limitations on the use and transfer of cryptography
and the enactment of laws increasing the cost or burdens of using the Internet or wireless
communications would limit the market for our products and services
which could have an adverse effect on
our business, financial condition and operations. New developments may render our chip card encryption technology inadequate or ineffective. Chip cards use cryptographic technology to secure transactions and exchange confidential
information. Most types of chip cards are equipped with secret keys that are required to encrypt
and decode messages through the application of algorithms. The security afforded by this technology
depends on the integrity of a users secret key and the complexity of the algorithms used to
encrypt and decode information. Any significant advance in techniques for attacking cryptographic
systems, including the successful decoding of cryptographic messages or the misappropriation of
private keys, could result in a decline in the security of our technology and affect the markets
acceptance of, or demand for, our products which could have an adverse effect on our business,
financial condition and results of operation. The role of chip cards may be relegated to that of simple identity tokens with limited additional
added value. The primary role of chip cards has historically been to ensure authentication, and they are
widely used as identity tokens. Chip cards can also provide additional value with on-board
applications running in a stand-alone or in a client-server mode. This value is created if:  
    
    chip cards are technically enabled to play an effective role in applications; and




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
    
    applications relying on chip cards are actually developed and used. If an insufficient number of applications rely on the chip cards, chip cards risk having their
role reduced to that of simple identity tokens, providing limited additional value. In these
circumstances, the value of chip cards would not grow, which could materially adversely affect our
business, operating results and financial condition. Risks Related To Trading of Our Shares and ADSs Technology-related stock prices are especially volatile, and this volatility may depress our stock
price, and the trading in our shares and ADSs often experiences low volumes. Because we operate in the highly volatile technology sector, the market price of our shares
and ADSs is likely to continue to be highly volatile. In addition, there is often low market volume
in our shares and ADSs. If we are unable to meet the continued listing standards of the exchanges or quotation systems
on which our securities trade, or if remaining as a publicly listed company is not considered
economically justified, we may delist and investors may not be able to resell their shares or ADSs
easily. Because several of our shareholders own a large percentage of our voting stock, other shareholders
effective voting power may be limited. As
of April 26, 2005, to our companys knowledge, our executive officers, directors and their affiliates beneficially
owned or controlled approximately 0.26% of our shares (excluding shares held by Texas Pacific Group
and its affiliates and members of the Quandt family) and had options to acquire approximately an
additional 3.41% of our shares on a fully diluted basis. As of April 26, 2005, Texas Pacific Group,
members of the Quandt family, and Groupe Industriel Marcel Dassault owned or controlled
approximately 26.17%, 18.97% and 5.25%of our shares, respectively, or approximately 23.34%, 16.92%
and 4.69% on a fully diluted basis, respectively. If some or all of such persons act together, they
have the ability to control matters submitted to our shareholders for approval, including the
election and removal of directors and the approval of any merger, consolidation or sale of all or
substantially all of our assets. This potential concentration of control can affect the value of
our traded securities or limit the effective voting power of small shareholders. If we are deemed a passive foreign investment company, certain unfavorable U.S. tax rules may
apply. Recent increases in our market capitalization have reduced the risk that comparatively minor
changes in our assets or share price could result in our becoming a passive foreign investment
company or PFIC for U.S. tax purposes for reasons outside our control. If there is a decline in
our market capitalization in the future, this risk could become more significant. Certain
unfavorable U.S. tax rules apply to shareholders in companies that are PFICs for even a single
year. See Item 10. Additional Information  Taxation  United States Federal Income Tax
Considerations  Passive Foreign Investment Company
Considerations.




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Item 4. Information on the Company HISTORY AND DEVELOPMENT OF THE COMPANY We started our operations in 1988 as a major supplier of prepaid phonecards. Because of our strength in the prepaid phonecard market during the 1990s, we developed
strong ties with the telecommunications industry and, as a result, we helped pioneer the
development of chip card technology for wireless communications. Prior to 1999, our business was conducted through a French limited partnership known as
Gemplus S.C.A. In December 1999, we merged Gemplus Associates, the general partner of Gemplus
S.C.A, into Gemplus SCA and transformed the surviving entity into a French corporation, Gemplus
S.A. In February 2000, we reorganized our corporate structure, creating a new holding company,
Gemplus International S.A., a Luxembourg corporation. The shareholders of Gemplus S.A. contributed
to Gemplus International S.A. substantially all of the shares of Gemplus S.A. in exchange for
shares of our capital stock. As a result of these transactions, as of December 31, 2004, our
company held 99.49% of the outstanding shares of Gemplus S.A. Texas Pacific Group became a shareholder of our company at the time of its equity contribution
in February 2000. In December 2000, we completed an initial public offering of our capital stock,
in the form of ordinary shares and ADSs. In 2004, we completed the planned reorganization of our
corporate structure by transferring most of the subsidiaries of Gemplus S.A. to Gemplus
International S.A. In April 2005, we purchased Setec OY, a company headquartered in Finland that,
among other things, supplies conventional and electronic travel passports to various governments
and products involving secure printing. Our company is organized under the laws of the Grand Duchy of Luxembourg and is registered
with the Commerce and Companies Registry under No. B73145. Our registered office is located at 46a
Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, telephone +352.26.005.226. Our
website address is www.gemplus.com. The information on our web site is not incorporated by
reference into this Annual Report. Capital Expenditures and Divestitures The following table sets forth our capital expenditures, before retirements and disposals, for
each year in the three-year period ended December 31, 2004. Year ended December 31,2002
    
    
    2003
    
    
    2004(millions of euros)Research and development equipment
    
    
    1.8
    
    
    
    1.2
    
    
    
    1.0Manufacturing
    
    
    12.1
    
    
    
    9.4
    
    
    
    13.3Buildings
    
    
    17.7
    
    
    
    3.1
    
    
    
    5.8Other
    
    
    0.3
    
    
    
    1.5
    
    
    
    2.8Total capital expenditures
    
    
    31.9
    
    
    
    15.2
    
    
    
    22.9
 In 2004 and 2003, we continued to execute a restructuring and rationalization
program that we commenced in 2002. This program includes the rationalization of our office
facilities on a worldwide basis. The capital expenditures relating to manufacturing in 2004 were
made in almost all of our plants, and were focused on increasing our capacity to make SIM cards
for our wireless activities. In 2002




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we made a capital expenditure
of  17.7 million related to constructing a research and development and office
building located in La Ciotat, France, which was mainly financed through a sale-leaseback
transaction. We
plan to internally fund our capital expenditures, and have budgeted capital expenditures of
approximately
 25 million, for the year ending December 31, 2005. Of that amount, we anticipate
incurring approximately:  17.4 million mainly for new equipment for product assembly, plastic
lamination and printing, micro-module embeding and personalization for SIM cards;  3.0 million
for improvements in our management information systems, including in a personal computer
replacement program;  2.9 million on our facilities; and  1.7 million mainly relating to IT
hardware for research and development. See Item 5. Operating and Financial Review and Prospects  Liquidity and Capital Resources
for a description of our sources of financing for our budgeted capital expenditures. BUSINESS OVERVIEW Overview We are a leading provider of technology, products and services that enable wireless network
operators to offer their customers secure voice and data communications and transactions through
mobile phones, and that enable companies, financial institutions and public entities to provide
customized services to their customers and employees through a range of systems, including
financial card networks, loyalty and bonus point programs and identification and Internet security
systems. In 2004, we reported our results in three main business segments:  
    
    Telecommunications, which includes our wireless products such as
subscriber identification modules (SIMs), related software and
services, and prepaid phonecards for fixed telephony operators;
    
    Financial Services, which focuses on applications for the financial
services sector to facilitate secure transactions within a variety of
systems; and
    
    Identity and Security, which includes systems and services based on
chip card technology in areas such as national ID, healthcare,
drivers licenses, car registration, passport and visa, e-government
secured services, physical and logical access control as well as chip
card readers and interfacing technologies. We started reporting in three business segments on January 1, 2004. See Item 5. Operating and
Financial Review and Prospects  Recent Developments for a description of business segment
reporting, and Note 32.1 to our Consolidated Financial Statements. Within our Telecommunications business segment, our wireless products and services are based
on subscriber identification modules (SIMs), which are small plastic modules with embedded
microcontroller chips, and related systems. SIMs are used in the global system for mobile
communications (GSM) wireless standard, which is dominant in Europe and the most widely used system
in the world, in terms of both the number of subscribers and number of countries. SIM cards are also increasingly used in other
wireless communications systems standards, such as in CDMAOne, WCDMA and CDMA2000. Within our Financial Services segments, our chip card products and services are used by
financial, retail, and other businesses to provide a wide array of services, and to manage customer
relationships. In the financial services market, for example, banks can issue credit and debit
cards with embedded chips to reduce fraud and to provide their cardholders with premium services
and retail applications (e.g., applications that store cash values that can be used to make
purchases) which applications can be transacted in person or on-line.




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Within our Identity and Security segment, our products and services are used by private and
public entities to provide secure access to restricted facilities and computer networks through the
use of chip cards, software and related products and services. We also deliver chip card-based
identity solutions to national and local governments to enhance identification processes among
their residents by using chip cards for a range of identity applications, including in the areas of
border control, drivers licenses, vehicle registration and health care. In addition, we offer
contactless electronic passport technology for biometric authentication at national border
controls. In all our businesses we provide a range of software and services that allow our customers to
implement and manage sophisticated systems. Our software includes card management systems that
allow our customers to manage card issuance, update data, download applications and obtain user
information. Our services include customization, technical support, consulting, system design and
integration and system operation. Many chip card sales are combined and priced or sold together
with sales of these services and software for customers within the applicable reporting segment,
and therefore we do not separately report these sales. See Note 32.1 to our Consolidated Financial
Statements. We also provide non-chip card products and services in other areas that are related to our
chip card businesses, such as magnetic stripe payment cards for banks and card-based transportation
access products that operate in conjunction with authentication and non-repudiation software. In
addition, we provide chip card readers and other devices, including reader chipsets for use by
third party manufacturers. Our Strategy We are pursuing our objectives of expanding and enabling the market for safe electronic
services involving our products, including services delivered through wireless or fixed wire
networks, while increasing the use of widely-held, portable, secure and personalizable devices. Our strategy for attaining these objectives is to be a leading provider of chip cards and
related products, and of applications and services that operate using chip cards and other devices
with embedded microcontrollers. We hope to grow our core businesses, while continuing to enhance
our profitability. Simultaneously, we seek to establish stronger positions in promising new markets
for the use of chip cards and related software such as in identity and corporate security markets. Achieving and maintaining profitable growth by following through on our restructuring and
efficiency initiatives, and gaining momentum through innovation and continued cost control  
    
    We are continuing to adapt our cost structure and increase our
competitiveness in an environment where price is an overriding factor.
    
    We have been reorganizing our business structures to better align to
market structures. We have been enhancing our customer-facing
front-end and supply chain related back-end processes to more
effectively and efficiently serve our markets.
    
    We are working on increasing our market share in higher margin
products in the wireless communications sector by innovating, working
closely with key customers, enhancing our product mix, improving our
supply chain and business processes, and using differentiating account
strategies. Differentiating on value  Our strategy includes focusing on a number of growing markets in
addition to our traditional businesses, including:
    
    Software and services in wireless communications, including SIM
administration, content delivery, mobile-payment, and over the air
(OTA) platform markets. We believe that our position as a leading
supplier of OTA platforms should enable us to further strengthen our
relationship with our customers and facilitate the




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##### Table of Contents



advancement of the value that SIM cards can add to wireless networks.
    
    Identity card programs. National identity programs represent a large
and growing opportunity for us. We are continuing our development
efforts in this area with the objective of tapping into this
significant market potential. In addition, we are seeking to form
alliances with strategic partners to enhance our prospects for success
in this area.
    
    Corporate security (controlling access to buildings and computer
networks). With our experience in relevant security technologies, we
hope to become a leader in this field. Getting closer to our customers We are continuing to strengthen our regional structures in order to improve our customer
responsiveness worldwide. We believe that improved regional sales and sales support functions will
enhance our customer relationships by combining the ability to design and deliver complex high-end
solutions using our products and services with support from local offices and direct supply chain
management on commodities. Technology Overview Chip Card Technology Our products and services are part of a class of technology that involves small modules or
cards with embedded electronic chips, known as chip cards or smart cards. Chip card technology
has evolved significantly since chip cards were first introduced in the 1970s. Since our inception
in 1988, we have played, and continue to play, an important role in the evolution of chip cards and
related applications. There are two major categories of chip cards:  
    
    Memory cards containing chips that provide only secure storage of data
can be modified at a special terminal. Memory cards are used for
single applications that do not require sophisticated data processing
functions, such as prepaid phonecards and certain loyalty cards.
    
    Microcontroller cards containing chips that are capable of storing and
processing data like a miniature computer, can transfer processed data
to a network and run software programs or applets that interact
remotely with server-based applications. The most sophisticated new
chip cards, such as subscriber identification modules (SIMs) used in
wireless communications, are all microcontroller cards. Chip card technology is developing rapidly as the capability of microcontroller chips to
conduct sophisticated operations expands. Some of the most important recent technological
developments in chip card technology include:  
    
    The development of operating systems for microcontroller chips that
allow card issuers to load multiple applets onto a single card. This
allows our customers to offer their users several functions on the
same card. For example, a single multi-application card can be used to
access facilities or computer networks, to make payments as a debit or
credit card, to store bonus points that can be used to make purchases
and to authenticate Internet transactions.
    
    The development of open standards for chip card operating systems.
These operating systems contain an embedded virtual machine or
interpreter which interacts with the operating system and a documented
application programming interface (API) to execute applets. The API
allows software programmers to design new applets in a standardized
format, without reference to the technical specifications of the
interpreter,




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improving ease of use and programming time. In addition,
microcontroller chips based on open operating systems are
interoperable with more systems. This means that software programmers
can create new applications based on a standard language or protocol,
which can be used to provide services through the chip cards of
different manufacturers. The most widely used open platforms today are
based on Java Card technology, a software API specification for chip
cards based on technology from Sun Microsystems.
    
    The development of sophisticated card management software for chip
cards to help card issuers take advantage of new chip card
capabilities by enabling the issuers to manage the cards remotely, and
to update, download and install new information or applets as they
become available, without replacing the cards. These new software
capabilities have also created a demand for system design, integration
and management services that allow chip card technology companies to
develop closer ties with their customers.
    
    Significant advances in the memory structure and capacity of
microcontroller chips, including the development of flash memory
technology. Chips based on this technology are able to store
substantially more information, conduct more sophisticated operations
and load a higher number of applets. In addition to greater memory
capacity, flash memory chips can give card manufacturers increased
flexibility to modify the chips operating system.
    
    The development of chip cards designed to work with the most advanced
security technologies, such as public key infrastructure (PKI) systems
and secure downloadable applets. Cards with PKI capability offer
customers a higher level of security, including for individuals or
companies that conduct transactions or business over the Internet, and
banks that implement mobile payment systems.
    
    The increased use of contactless chip cards which include an antenna
that allows the card to communicate using radio waves. Contactless
cards provide the benefits of easy access since insertion into a card
reader is not required. This technology is becoming increasingly
attractive for identity programs and payment systems. We believe that chip card products and related services include features that are attractive
to customers in the sophisticated wireless, financial, Internet and corporate security markets. The
features that we believe are most significant include:  
    
    Security. Chip cards are capable of storing complex algorithms that
can be used to identify a user or to encrypt information, such as a
digital certificate. Because a user needs both a card and an
activation mechanism, such as a personal identification number (PIN),
to use a card, security is not entirely compromised by just the loss
of a card or the communication of a PIN. As a result, using chip cards
to authenticate mobile and electronic commerce transactions, can
significantly reduce the incidence of fraud. In addition,
microcontroller chip cards can be equipped with sophisticated
cryptographic algorithms and functions that prevent unauthorized
parties from tampering with the contents of the card.
    
    Portability. Chip cards can be easily transferred from one device to
another. As a result, for example, a mobile phone subscriber can
purchase and immediately use a new mobile phone without changing his
or her service subscription, a feature that mobile phone network
operators find attractive as it reduces customer turnover. Similarly,
a chip card used to authenticate the user of a companys computer
network can be inserted into any computer equipped with a reader, and
include certain user profile and other information so the user is less
dependent on a particular computer.
    
    Flexibility. The newest chip cards can carry and run multiple applets
that can be updated remotely without the need to replace the card.
This increases the flexibility of banks and other companies to use
chip cards as customer management tools by changing applications in
response to changes in product offerings or customer preferences. This
also allows them to offer multiple services, such as wireless,
banking, payment and loyalty applications, on a single platform. Despite these advantages, chip card technology has not yet been widely deployed in some areas,
particularly in financial services markets. This is primarily because the replacement of existing
terminals with devices capable of reading chip cards, and the development of related network
infrastructure, is costly and time consuming. See Item 3. Key InformationRisk FactorsRisks
Related to Our Business.




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##### Table of Contents



Use of Our Chip Card Technology in Wireless Communications Currently, one of the largest uses for chip card technology is in wireless communications, due
to the security and flexibility provided by chip cards. There are various wireless network
standards:  
    
    Wireless 2G standards are the second major type of technology used for
wireless communication. Wireless 2G standards mainly support voice
transmission, but also support some data transmission capability. The
global system for mobile (GSM) communications is the most widely used
2G standard, both in terms of number of subscribers and number of
countries. The GSM standard requires the use of subscriber
identification module (SIM) technology.
    
    Wireless 2.5G standards support higher data transmission capability
than GSM and other 2G standards. Wireless 2.5G standards incorporate
identification module technology similar to that used in 2G SIM cards.
The technology is included in a removable card or in the telephone
handset. In the transition from 2G to 2.5G, some operators located
outside of Europe are migrating to the European GSM-originated
standard.
    
    Wireless 3G standards, including WCDMA and CDMA2000, which support
higher data transmission capability than 2.5G, are in the process of
being deployed. As with 2.5G, the wireless 3G standards incorporate
identification module technology similar to that used in SIM cards,
either as a removable card or in the telephone handset. The following table generally summarizes the principal 2G, 2.5G and 3G transmission standards,
indicating the principal geographical regions where they are used and whether they incorporate
removable identification module technology. Some countries use more than one standard, and are
listed in more than one place in the table. Use of Removable CardTransmission Standard
    
    Principal Regions
    
    Identification Modules2GGSM
    
    Europe, Asia (including China),
several regions in the United
States
    
    YesCDMA
    
    United States, China
    
    NoTDMA
    
    United States
    
    No2.5GGPRS (based on GSM)
    
    Europe, most of Asia
    
    YesCDMAOne
    
    United States, China,
    
    Yes in China and South KoreaSouth KoreaIDEN
    
    United States, Korea
    
    Yes3G
    
    Europe, Asia
    
    YesWCDMA
    
    (including Japan),United StatesCDMA2000
    
    United States, Asia
    
    Operator-specific




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##### Table of Contents



Market Overview The market for chip card technology, products and services is growing, both in terms of size
and sophistication. According to Eurosmart, 2,290 million chip cards  including microcontroller
cards and memory cards  were sold worldwide in 2004, compared with 1,898 million in 2003. Using
data provided by Eurosmart we estimate that we are the worlds largest chip card provider, with
28.6% of the global market in terms of volume in 2004, compared to 30% in 2003. Wireless Market The wireless communications market, particularly over networks using GSM standards, recorded
strong growth prior to 2001, primarily as a result of a significant increase in the use of mobile
phones around the world for voice transmission. The market suffered a slowdown in 2001 and 2002.
Demand began to return in 2003 due to consumer equipment replacement, driven significantly by the
availability of handsets with color displays, and growth in emerging markets. There was further
market growth in 2004. According to Eurosmart, approximately 1,075 million SIM cards were sold in
2004, as compared to 670 million in 2003. In established markets, wireless communication operators are seeking to enhance their
offerings with new premium value services based on the increasing use of wireless data transmission
services. For example, short message service (SMS) allows text messaging through mobile phones. In
anticipation of the growing demand for wireless data services, including the provision of pictures,
streaming audio and video, and high-speed Internet access through mobile phones, operators have
made significant investments in 3G licenses (government provided licenses to use frequency bands
for 3G data communication), and are continuing to develop the infrastructures necessary to deliver
3G services. To date, we have been involved in the launch of every commercial 3G network worldwide.
We believe that the growth of the wireless data market is important for the growth of the chip card
market, and that demand for new wireless data services could increase demand for more sophisticated
chip cards. Because identification module technology helps wireless operators to facilitate and
control the access between wireless subscribers and content providers, we believe that our chip
card products, software and services can be a core technology for our wireless customers to address
this new market. Financial Services Market According to Eurosmart, approximately 280 million chip cards were sold in the financial
services industry in 2004, compared to 205 million in 2003. According to Frost & Sullivan, we
estimate that we are one of the top three providers of chip cards in the banking and retail sectors
with approximately 20% of the market in terms of units sold, compared to 22% in 2003. We believe
use of chip card products and services will grow due to enhanced security requirements and
increased fraud rates among conventional cards. Identity and Security Market The Identity and Security market, while still relatively small, has experienced solid growth
over the past few years. The convergence of physical and logical access control continues to drive
the enterprise security market, and is expected to reach over one billion euros in 2007 according
to Datamonitor. In the enterprise security market, Fortune 500 companies and federal agencies are
implementing chip cards as a means to govern employee access to physical and logical resources. The
Government ID market is escalating rapidly with many ongoing nationwide identity programs expected
to be rolled out over the next few years. We are involved in several of these ID programs,
including national projects in the Middle-East in Oman and the United Arab Emirates, and Indias
vehicle registration card program with a market potential of over 100 million cards to be issued
nationwide over the next five years. The demand for contactless chip cards in the
Identity and Security market is also expanding quickly, mainly through mass-transit and physical
access applications, and also through the introduction of electronic passports. We also sell chip
card readers in the Identity and Security market, and we remained the worlds leading supplier of
chip card readers in 2004, with a 21% market share according to Frost & Sullivan.




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##### Table of Contents



Our Products and Services The following table sets forth our revenues for the year ended December 31, 2004. Revenues - Year ended December 31,2004
    
    
    2003
    
    
    2002(in millions of
    
    
    (as a % of total
    
    
    (in millions of
    
    
    (as a % of total
    
    
    (in millions of
    
    
    (as a % of totaleuros)
    
    
    revenues)
    
    
    euros)
    
    
    revenues)
    
    
    euros)
    
    
    revenues)Telecommunications
    
    
    641.8
    
    
    
    74
    %
    
    
    542.5
    
    
    
    72
    %
    
    
    544.5
    
    
    
    69
    %Financial Services
    
    
    182.2
    
    
    
    21
    %
    
    
    168.2
    
    
    
    23
    %
    
    
    195.0
    
    
    
    25
    %Identity and Security
    
    
    41.0
    
    
    
    5
    %
    
    
    38.5
    
    
    
    5
    %
    
    
    47.9
    
    
    
    6
    %Total
    
    
    865.0
    
    
    
    100
    %
    
    
    749.2
    
    
    
    100
    %
    
    
    787.4
    
    
    
    100
    %
 Revenues - Year ended December 31,2004
    
    
    2003
    
    
    2002(in millions of
    
    
    (as a % of total
    
    
    (in millions of
    
    
    (as a % of total
    
    
    (in millions of
    
    
    (as a % of totaleuros)
    
    
    revenues)
    
    
    euros)
    
    
    revenues)
    
    
    euros)
    
    
    revenues)EMEA
    
    
    443.1
    
    
    
    51
    %
    
    
    407.7
    
    
    
    54
    %
    
    
    416.2
    
    
    
    53
    %Asia
    
    
    194.3
    
    
    
    23
    %
    
    
    171.9
    
    
    
    23
    %
    
    
    199.5
    
    
    
    25
    %Americas
    
    
    227.6
    
    
    
    26
    %
    
    
    169.6
    
    
    
    23
    %
    
    
    171.7
    
    
    
    22
    %Total
    
    
    865.0
    
    
    
    100
    %
    
    
    749.2
    
    
    
    100
    %
    
    
    787.4
    
    
    
    100
    %
 See Item 5. Operating and Financial Review and Prospects for a discussion of our total revenues,
broken down by category of activity and geographic market, for each of the last three financial
years. Delivering a complete solution We provide our customers with a portfolio of products, software and services that enable the
delivery of complete solutions:  
    
    Chip Card Products. We provide a complete range of chip card products,
from low-end to high-end, with proprietary and open operating
systems, offering various amounts of available memory, some with
features and embedded applications dedicated to specific markets. We
also provide conventional government-issued passports and
microcontroller-embedded passports with sophisticated printed security
features. Our chip card reader products and software development tools
are a direct complement to our chip cards.
    
    Software. We provide software that helps us manage the client-server
architecture and enable interactions between the applets stored on
chip cards and the card issuers computing system. We also provide
card management systems that enable the tracking of issued cards and
the management of information stored on the chip card.
    
    Technical Support. We provide our customers with a full range of
maintenance and technical support including help desk services for
their card solutions. Our regional service centers are responsible for
our help desk services in their region, with several sub-regional or
local technical support staffs as needed.
    
    Consulting, System Design, Customization and Integration. Our
consulting services focus on key topics and issues in the development
and implementation of chip card systems, including marketing and
commercial analysis and recommendations, feasibility and security
studies, and the development of possible implementation scenarios. We
also provide our customers with training in chip card technology and
software applications.




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
    
    Our system design services provide our customers with
flexibility in the overall design of chip card
systems, including security parameters and detailed
component design.
    
    Our customization services include the development of
customized software applets for particular card
issuers.
    
    We provide system integration services to deliver
complete systems using a project management approach.
This approach involves coordinating with contractors
to obtain and integrate the required system
components, including customized software applications
and providing operational system support during
acceptance testing, pilot programs and the roll-out of
the final, customized card system.  
    
    Personalization. Our personalization services involve the process of
loading personal data or premium value applications onto the memory or
microcontroller chips embedded in cards. We also emboss and print
customized card bodies for our customers, and customize the associated
packaging and card carriers used to deliver cards to end-users. Our
card printing capabilities include technically advanced, high quality
techniques. We often prepare and distribute products directly to
end-users on behalf of our customers.  
    
    Outsourced Operations. We provide a variety of services associated
with the administration of card management systems, including card
profile update campaigns, network management, server management and
data encryption and archiving. We also provide other operational
services for our customers chip card system managers, such as mapping
and profiling, certificate authority and management services to work
with trusted third party systems and certification authorities. Telecommunications Products and Services Our telecommunications products and services consist primarily of SIM-based products, software
and services for wireless communications operators, and chip-based prepaid phonecards for public
pay telephone operators. Wireless Products, Software and Services SIM cards were introduced to provide standardized and secure subscriber identification and
authentication. Evolution of technology and subscriber demands has helped turn the SIM card into a
wireless data service enabler within an open client-server architecture. SIM cards are well adapted for applications that need to be highly personalized, secure and
portable. SIM-enabled systems can be used to enhance customer relationships, to enable content
delivery and to secure mobile transactions. We design many of our products around interoperable SIM
platforms that connect to networks and remote applications and over the air (OTA) platform
technology. These telecommunications products include:  
    
    GemXplore  the card platform and associated software applications. We
offer a range of products for all major wireless network types and
generations. Working primarily with open, Java-based operating
systems, we provide developers with software development tools to
create and test applications.
    
    GemConnect  software modules and agents that communicate with remote
content and services. Our open OTA infrastructure is an essential link
between subscribers and personalized content as it provides card,
service and handset management.
    
    GemSuite  enables value-added solutions including mobile
entertainment, location-based services, instant messaging and mobile
payment. Our wireless partner program, known as SIMXplore, integrates
third party solutions, such as content and application providers.
    
    GemServices  card issuance, professional services and outsourcing.
Our professional services group provides wireless communication
operators with the expertise to design, develop and deploy mobile
services. These services cover all phases from consulting, development
and integration to post-installation, support and training. Our
outsourced solutions can increase our customers service portfolios,
while limiting infrastructure and




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resource investments. Customers can access our equipment, technology and expertise through a connection to
our hosting center. Phonecards Based on information published by Eurosmart in its 2004 report, we believe we are one of the
worlds leading manufacturers of prepaid phonecards and associated phonecard security products with
a 47% share of the worldwide phonecard market in 2004, compared to 40% in 2003. As of June 2, 2005,
we have produced over 3.5 billion phonecards since our inception in 1988. Our main customers
include more than 20 major telecommunications operators, including China Telecom, France Telecom,
and Telmex. Our multi-application solutions help telecommunications operators take advantage of the
convergence of telephony with banking, loyalty and transportation applications. These products
generate increased revenues by helping to enable innovative marketing opportunities. Scratch Cards We provide a range of scratch cards under the name GemScratch, which contain a scratch-off
panel revealing unique numbers to be used by the end-user of the card in order to place a prepaid
telephone call. We sell our GemScratch cards primarily to our wireless customers who provide
prepaid services. Our GSM Prepaid Kit includes a SIM card and a scratch card in a single package,
allowing wireless operators to offer their subscribers an integrated communications package. Our
scratch-off products are also used by fixed-line telecommunications operators to provide calling
card services to their customers. Financial Services Secure chip card technology offers a platform for a variety of financial and banking service
applications, such as credit/debit cards (payment cards), e-purse cards (cards that store cash
values that can be used to make purchases), multi-application services and mobile banking services.
Chip-based payment cards and e-purse cards contain an embedded microcontroller chip that processes
transaction information received at the point of sale and carries information that allows a card
reader to accept or reject a transaction up to a specified amount without on-line authorization.
The chip card reduces fraud associated with existing magnetic stripe card-based systems by helping
to prevent, among other things, the use of stolen cards to make unauthorized purchases because the
cardholder enters a PIN code with the reader at the point of sale rather than simply signing a
printed card receipt. Furthermore, microcontroller chips for this market contain sophisticated
cryptographic algorithms and functions that help prevent unauthorized parties from tampering with
their contents, in contrast with the more limited security safeguards of magnetic stripe cards. Several large payment card associations, including Visa International and MasterCard
International, as well as American Express, have introduced chip cards in some of the payment cards
in their systems. Banking and credit card associations in countries around the world, such as
Australia, Austria, Brazil, China, Denmark, Japan, Taiwan, Korea, Malaysia, Finland, Spain and
Switzerland, have recently announced plans to adopt chip cards to replace some of their magnetic
stripe cards. The adoption of chip card technology in these countries represents a new phase in the
financial services industry, which has been slow to broadly adopt this technology, in large part
due to the cost of associated infrastructure. We believe that several continuing developments have
the potential to accelerate the adoption of chip card technology in the financial services
industry, including:  
    
    Interoperability. One obstacle to the widespread adoption of
microcontroller chip technology is that many card specifications were
adopted by each country on an individual basis, preventing the
interoperability of payment cards issued in different countries. To
address this problem, in 1996, the major payment card associations,
Europay International, MasterCard International and Visa International
(together known as EMV), adopted standard specifications for payment
cards, which enable interoperability between different payment
systems. We believe that migration to the EMV standard is now a
well-established expectation that could contribute to a structural
change in the financial services market.
    
    New Services. The capabilities of microcontroller chip technology
permit banks to offer their customers




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services that were not available
when banks initially studied the technology. New services include
online authentication, instant rewards and more advanced loyalty and
coupon programs, mobile banking, mobile commerce and other services
made available with the development of multi-application cards. Single Application Cards We design and develop chip card products and services that enable financial card issuers to
offer a wide range of single-application services to their customers. Our financial services
products are designed to meet the requirements and specifications of the most important industry
standards, such as the EMV specifications for payment cards. In addition, our chip card products
have been individually certified by the major financial and banking organizations and bodies, such
as Visa International, Europay International, MasterCard International, Cartes Bancaires (France),
Banksys (Belgium) and APACS (United Kingdom). Our main product offering includes:  
    
    GemVision, a range of payment cards developed for banks that are members of Visa International;
    
    GemShare, a range of payment cards developed for members of Europay International and
MasterCard International; and
    
    GemValue, a range of payment cards developed in compliance with both Visa and MasterCard
specifications. We have also developed and market a full range of chip cards for e-purse systems, which are
cards that store cash values that can be used to make payments. Our e-purse products have been
individually certified by the major e-purse system operators, such as CEPS, Zentral Kredit Auschuss
(Germany), Proton World International, Visa International and Mondex. Our main product offerings in
this market include Geldkarte, an e-purse card developed for German e-purse systems, and Mondex
E-Purse, an e-purse application developed for the Multos multi-application card that is mainly used
in the United Kingdom, Latin America, South Korea, Australia and the Philippines. Multi-Application Cards One of our main multi-application cards for financial services is based on MPCOS, a
multi-application standard, commonly used in Asia. This card contains credit/debit and e-purse
applications, loyalty programs and transportation ticketing functionality. This card is also
available in a contact/contactless mode under the designation GemCombi that allows interaction with
the card using radio frequencies. We have also developed a line of multi-application Java-based
cards that provide our customers with the flexibility to quickly develop and bring to market new
services. Our line of Java-based financial cards, GemXpresso, is also targeted to retail banking
and e-commerce payment applications. Loyalty and Retail We have developed chip card products for a wide variety of loyalty and retail programs,
including bonus point and reward programs, such as our microcontroller chip card-based system for
Boots, a United Kingdom retailer, Shell U.K., and Esso Netherlands. Our loyalty applications can
also be combined with other applications, such as payment cards and e-purse applications, by using
our multi-application chip cards. We believe that chip cards should facilitate the next generation
of loyalty programs because they enable retailers to set up card-based programs to offer customers
a combination of in-store and Internet-based benefits, such as instant rewards, online coupons and
privileged access to websites and points systems. Bank and Retail Conventional Cards In addition to chip cards, we provide our customers with magnetic stripe (conventional)
cards that do not contain embedded microchips, mostly for our banking customers. Our conventional
card operations were launched in 1995 in order to strengthen our position both in the financial
services market and in several geographic markets in which conventional cards were the principal
product in the local card industry, such as the United States.




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We offer a wide range of magnetic stripe and encoding options to meet the demands of our
different customers. We delivered over 252 million magnetic stripe cards to our customers in the
banking sector in 2004, according to the 2004 Nilson Report. We also provide certified card
personalization and production and disaster recovery services to MasterCard, Visa and American
Express card issuers in various regions around the world. Other Businesses We also serve customers where our cards are used for identification together with a payment
application such as:  
    
    transportation access, which includes contactless chip systems that
are used for highway tolls and access to public transportation and
other transportation facilities;
    
    pay television chip cards, which are used to allow pay television
subscribers access to programs and services over cable and satellite
television systems; and
    
    loyalty and identification programs that do not use chip cards. Identity and Security Services The chip card is a security device that serves as a component in enabling identity management
systems for governments and corporations. Chip card technology allows users to access corporate and
external networks, digitally sign transactions and documents and identify themselves
electronically. Due to customer demand and opportunities presented in the Identity and Security
market, our organization for this market is divided into two section that are driven by
applications and usage: Enterprise Security In this area, we are continuing to work actively with our corporate customers to design
security software and services based on microcontroller chip technology to control access to
corporate computer networks and to permit the secure exchange of information. In November 2003, we
introduced SafesITe, a subsystem that integrates with enterprise systems and applications to
combine logical access (i.e., access to computing devices or systems) and physical access control
with employee identity badges. The SafesITe components are chip cards (either Java Card, PKI,
contact, or contactless with a diverse memory capacity range), readers (either contact or
contactless for both logical and physical access control), software (including public key and
password authentication, digital signing, password management, and e-purse), and card management
(utilizing integrated solutions from a variety of vendors) as well as related consulting, project
management, custom design and implementation services. Government ID In the Government ID market, programs include identification (including passports and drivers
licenses), healthcare services, citizens rights projects, freedom and privacy and fraud
prevention. For these markets, we offer a subsystem called ResIDent, designed specifically for
national ID and e-government applications. Through ResIDent we offer the necessary components of a
full chip card-based ID system, including printed security features, chip card modules, operating
systems and applets design, chip card readers, client/server software, card management and issuance
systems, personalization services, consulting, integration, training and maintenance services. We
also deliver electronic passport technology through our GemBorder solution for contactless
biometric authentication at border controls. Typical Government ID applications include:  
    
    Chip card-based vehicle registration and drivers license systems for
government agencies, allowing authorities to track vehicle ownership
and driving records, and to verify fines and offenses.
    
    Chip card systems for accurate identification of travelers at borders
and other ports of entry into a country,




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enabling authorities to facilitate the entry of foreign travelers or workers while helping to
ensure compliance with national immigration regulations.
    
    Chip card-based national identification programs involving the
issuance of chip cards by national governments to their residents. For
example, in the Sultanate of Oman and United Arab Emirates, we are
currently delivering a national identification program, including
consultancy, project management and integration services, as well as
software and chip cards.
    
    Conventional government-issued passports and visas, and
microcontroller-embedded passports, with sophisticated printed
security features. Our business in this area has been expanded by our
acquisition of Setec Oy in 2005. GemVentures To promote the use of chip card technology and applications across a broad range of markets,
we created GemVentures, a wholly-owned venture capital company. GemVentures has invested in start
up and developing companies that create and market innovative technologies, applications and
services in our core markets, such as wireless communications and computer security infrastructure
and service providers. GemVentures leverages our expertise in the chip card industry to provide
portfolio companies with strategic advice and support in the development of new chip card
technologies, applications and services. Customers We have a broad base of customers, including many of the largest wireless operators in each of
the markets in which we operate, as well as major banking and financial institutions around the
world. In 2004, no single customer accounted for more than 10% of our revenues. Our largest customer
represented 5% of our total revenues, and our five largest customers together represented 17% of
our total revenues. Our ten largest customers together represented approximately 25%, and our
fifteen largest customers together represented approximately 31% of our total revenues. Suppliers We rely on a number of different suppliers of materials and components to manufacture our
products. The two basic components of our products are silicon micro-controller and memory chips
and plastic cards and other materials used in the manufacturing process, such as lamination film
and inks. We have structured our silicon chip-purchasing strategy in the effort to implement more
balanced sourcing with four major suppliers that we anticipate should be able to meet our
requirements in terms of cost and volumes. Major suppliers in this industry include Atmel,
Infineon, ST Microelectronics, Philips, Renesas and Samsung. Our main plastic
supplier is Bayer AG, which produces several types of resins for injection-molding in Europe, Asia and the United States.
We also have supply arrangements for specific types of plastic with BASF, Dupont, Klockner, Lucasi
and several other plastic suppliers. We have diverse supply arrangements for our other materials,
including ink and lamination film, for each of which we have at least two supply sources.




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In 2004, we made additional improvements to our purchasing strategies (including further
multi-sourcing for certain products and better forecasting systems). There are some signs that
there may be supply limitations for microcontroller chips in the future that could negatively
affect our ability to procure such chips at favorable prices. There are also indications of
possibly higher future prices for some metals and petroleum-based plastics used in the manufacture
of some of our products. We believe, however, that our improved purchasing strategies will help
mitigate the affects of price increases or supply restrictions if they arise. Nevertheless, in the
event of higher sales volumes, our gross margins may be negatively affected, in particular, by
higher chip prices. Competition The chip card market is highly competitive. We face competition in all of our markets from
chip card and chip manufacturers, software developers, and security providers. Moreover, our
customers and companies with whom we currently have strategic relationships may become competitors
in the future. Chip card manufacturers are currently our main source of competition in all of our markets.
According to Gartner Dataquest, our overall share of the global chip card market was approximately
27.1% in terms of chip card units sold on a worldwide basis in 2004, followed by Axalto (formerly
part of Schlumberger) with 20.4%, Giesecke & Devrient with 13.8%, Oberthur Card Systems with 6.2%,
Orga Kartensysteme with 3.7% and Incard with 3.1%. The relative strengths and market shares of each
of our competitors, however, vary in each of the chip card markets, depending on their core
competencies and their strategic alliances and partnerships. Certain of our customers, suppliers and companies with whom we currently have strategic
relationships, may become competitors in the future. In 2003, Proton World International, a chip
card system software company, and Incard SpA, a chip card manufacturer, were acquired by ST
Microelectronics, a semiconductor manufacturer. This vertical integration may threaten the
competitive position of companies like ours that do not own semiconductor manufacturing facilities,
and therefore are potentially subject to supply constraints. There are also new entrants into the
chip card manufacturing market, particularly in China, where Chinese chip card manufacturers such
as Eastcom Peace Smart Card Co., Datang Microelectronics Technology Co., WatchData System Co. and
Wuhan Tianyu have entered into the industry with low-cost operating models and aggressive pricing
policies that are reducing market share and profit margins in that region. See
Item 3. Key Information  Risk Factors  Risks Related to Our Business. Telecommunications Markets Wireless Products and Services The market for wireless infrastructure products and services is characterized by intense
competition and rapidly changing technology. Our main competitors in this market include Axalto,
Giesecke & Devrient, Oberthur Card Systems and Orga Kartensysteme. Success in this market is determined by the ability to consistently provide products and
software at attractive prices that enable our customers to provide premium value services to their
customers. We believe that our research and development activities position us as an innovator in
SIM technology, and our global manufacturing capacity provides us with production volumes that
enable us to offer competitive prices. In addition, our experience in over-the-air (OTA) server
software helps expand the potential of SIM-based technologies by creating a unique link between
wireless operators and their customers and provides us with a more strategic role within the
wireless network. Because wireless infrastructure providers work closely with wireless operators to
design and implement customized SIM-based systems, the development of strong customer relationships
and the joint creation of product development plans are also important elements in competing in
this market.




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Because of the enhanced capabilities of microcontroller chip technology, we may face new
competition from operating system and software application developers. The development of open
operating systems and platforms are expected to lead to the creation of a new market for
application development tools, in which software development providers create and market premium
value applications, either as generic packages or customized software for specific customers. The
enhanced capabilities of chip cards are expected to create the potential for a variety of products
and services that may attract a number of new competitors into software, services and
infrastructure markets, including:  
    
    operating system developers, such as Microsoft and IBM;
    
    electronic security product and service providers, such as Entrust, RSA and Verisign;
    
    wireless device manufacturers, such as Nokia, Motorola, Samsung and Sony-Ericsson;
    
    systems integrators, such as IBM, Siemens and EDS;
    
    silicon chip manufacturers, such as STMicroelectronics, Infineon, Philips, Renesas,
Samsung, Sony and Atmel; and
    
    wireless infrastructure software providers, such as SmartTrust. Phonecards Public telephony is a mature market, and is highly competitive. Our presence in this market
since its origins in the late 1980s has allowed us to become a leading provider of phonecards on a
worldwide basis. According to Eurosmart, approximately 670 million phonecards were sold worldwide
in 2004, compared to 800 million in 2003. Our main competitor in this market is Axalto, followed by
other chip card manufacturers such as Giesecke & Devrient and Oberthur Card Systems. The ability to
deliver large volumes of phonecards at competitive prices, as well as the capability of meeting
changing customer demands, such as increased volume requirements, in a short time frame are key
competitive factors in this market. Financial Services Markets The financial services market is currently fragmented and subject to intense competition. Many
of the companies that provide chip card products and services to banks also manufacture
conventional bank cards with magnetic stripes. Our competitors in this market include Giesecke &
Devrient, Oberthur Card Systems and Axalto. The financial chip card market is currently focused in
Europe, where competitors such as Oberthur Card Systems have a strong presence in the banking
industry. Identity and Security Markets The market for identification and security products is currently in its development stage.
There are a number of contracts for government identification and security chip card-based systems
that are currently being offered through public tender procedures. We and our competitors compete
in these tenders in association with major system integrators to provide the chip card products
used in these systems. Marketing We use a direct sales force to market and sell our products and services. In addition, we use
some local distributors and agents in certain markets. Strategic relationships and sales through other channels are an important part of our overall
marketing strategy. Through our Partners Program we facilitate new product development,
collaborative marketing initiatives and joint sales efforts with a select group of value-added
resellers, systems integrators, consultants and developers.




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Intellectual Property We take appropriate measures under the intellectual property laws of applicable jurisdictions
in an effort to protect our rights to our chip card technology. Performance in the chip card
industry can depend, among other factors, on patent protection. Our policy is to regularly identify
patentable inventions developed within our company, and to systematically seek to acquire patent
rights upon such technologies. Many of our current patents expire between 2008 and 2021. We mainly
develop and patent technology in the fields of card body manufacturing, chip operating system
software, card readers, chip design and cryptographic processes. We seek to obtain a reasonably
broad territorial protection for our patented technologies. We usually file initial patent applications in the country of invention, according to the location of
the applicable engineers, and subsequently extend such protection to the European Union, the United
States, Canada and Japan, as well as China and other foreign countries depending on the relevant
circumstances. We also hold certain co-ownership rights in patents developed through joint venture
companies established with our business partners. Proprietary rights in technologies developed
through such joint ventures usually vest in the jointly owned companies. We have entered into non-exclusive licenses from third parties for technologies relevant to
our business, such as from Sun Microsystems with respect to Java Card technology, from IBM with
respect to IBM mask data for certain chip cards operating systems. We have also entered into a
comprehensive patent cross-license with Axalto and its subsidiary CP8 Technologies. See Item 3.
Key Information  Risk Factors and Item 9.  Material Contracts. We include third party
technology in our products, and our business would be harmed if we were not able to continue using
this third party technology. Despite our efforts to protect our intellectual property rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we regard as
proprietary. Policing unauthorized use of our property is difficult, and while we are sometimes
able to determine and reduce the extent to which misappropriation of our intellectual property
rights occurs, such infringement can be expected to be a persistent problem. In addition, the laws
of some foreign countries do not protect our proprietary rights to as great an extent as do the
laws of the European Union and the United States. Our means of protecting our proprietary rights
might not be adequate and our competitors may independently develop similar technology, duplicate
our products or design around our patents. Due to the importance of proprietary technology in the chip card industry, our business
involves a substantial risk of overlap with third party patents and subsequent litigation with
competitors or patent-holders. Any claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or cause us to enter into royalty-bearing
licensing agreements. Regulation Encryption Technology Controls Our security products and services rely on the ability of our chip cards to perform
cryptographic functions, such as the encryption and decryption of information sent by chip card
users over the Internet. The domestic use and transfer, and the export of systems and equipment
with encryption capabilities, including hardware, software, modules and cards, have been subject to
national regulation in many countries and to international controls. As a result, the domestic use
and transfer, and the export of cryptographic products are subject in many countries to strict
controls and governmental scrutiny, often requiring the user or transferor to obtain special
licenses. In an effort to reduce delays arising from the above restrictions in the development and
delivery of our chip card-based security technology, we have created a centralized organization
within our company to coordinate all of our operations that involve the transfer of our
cryptographic-enabled products and services and ensure compliance with all relevant laws and
regulations. Environmental Matters Our manufacturing and personalization operations may be subject to extensive, evolving and
increasingly stringent environmental and occupational health and safety laws and regulations in a
number of jurisdictions, including




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regulations governing the management, use and release or
discharge of hazardous and toxic materials into the environment. As part of our sustainable development initiatives and to avoid incurring liability under
applicable environmental, health and safety laws and regulations, we have adopted global
environment, health and safety guidelines for the layout, construction and operation of our facilities. These guidelines
have been defined to comply with current laws and regulations and are completed or modified by our
local environment, health and safety officers to ensure compliance with all applicable local laws
and regulations. If there are no local environmental, health and safety laws or regulations, or if
our guidelines contain environmental, health and safety rules that are stricter than local laws or
regulations, our guidelines will be generally applied in those localities. Geographic Organization We are a global company, with headquarters located in Luxembourg. We have operations and
facilities located throughout Europe, North America, South America and Asia. We have organized our
global operations into three world regions:  
    
    EMEA, which consists of Europe, the Middle East and Africa;
    
    the Americas, which consists of North, Central and South America and the Caribbean; and
    
    Asia, which consists of sub regions: SEA (composed of South East Asia), JAKOR
(composed of Japan and Korea), and Greater China (composed of China, Hong Kong and
Taiwan). Our manufacturing and research and development activities are organized on a global basis,
while our sales and marketing activities are organized on a regional basis. As of December 31,
2004, we operated 50 sales and marketing offices, 17 personalization centers and 11 manufacturing
centers and research and development centers in 4 countries. Organizational Structure Our company is the sole parent company of its group with approximately 60 direct and indirect
subsidiaries located throughout the world. In May 2004, we completed an internal reorganization
intended to better align our legal structures to our business operations. This involved the
transfer of 27 subsidiaries from Gemplus S.A. to Gemplus International S.A. and had no material
affect on our Consolidated Financial Statements. The following table sets forth our significant direct and indirect subsidiaries as of June 2,
2005. Name
of Company
    
    Percentage OwnedGemplus
Industrial S.A. de C.V., a Mexican corporation
    
    
    100.0
    %Gemplus Corp., a Delaware (U.S.) corporation
    
    
    100.0
    %Gemplus Finance S.A., a Luxembourg corporation
    
    
    100.0
    %Gemplus GmbH, a German corporation
    
    
    100.0
    %Gemplus Limited, a British corporation
    
    
    100.0
    %Gemplus Japan Co Ltd, a Japanese corporation
    
    
    100.0
    %Gemplus Microelectronics Asia Pte Limited, a Singapore corporation
    
    
    100.0
    %Gemplus S.A., a French corporation
    
    
    99,49
    %(1)Gemplus Tianjin New Technologies Company Limited, a Chinese corporation
    
    
    100.0
    %Gemplus Pologne S.P.Z.o.o., a Polish corporation
    
    
    100.0
    %Goldpac
SecurCard Zhuhai Co Ltd, a Chinese corporation
    
    
    67
    %Setec Oy, a Finnish corporation
    
    
    100.0
    %Tianjin Gemplus Smart Card Company Limited, a Chinese corporation
    
    
    51.0
    %
 
 (1)
    
    The remaining shares are mainly held by our employees
following the exercise of stock options; such shares may be
contributed to our company in exchange for shares of our
company. For accounting purposes, these shares are already
assumed to be a component of the companys shareholders
equity.




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Property, Plant and Equipment Our manufacturing operations are organized on a global basis with a view toward achieving
timely and cost-efficient production and delivery of our products in each of our regions. Our
expertise in chip card manufacturing includes:  
    
    Chip Design. We work with our main suppliers to design chips that meet
our customers requirements, including chip geometry, circuit and
architecture design.
    
    Micro-electronics. We receive memory and microcontroller chips from
our suppliers in wafer form. In clean rooms, rooms that have a high
level of dust filtration, we assemble our chip modules, each of which
consists of a chip and a printed circuit board, using microelectronic
technologies.
    
    Embedding. The printed card body is prepared for the assembled chip
module, which is then embedded onto the card body using various
techniques. Our chip cards are subject to in-process visual inspections designed to ensure that each card
meets the customers physical specifications. We perform a series of electric tests on our modules
prior to embedding them onto the card body. These tests are designed to ensure the electrical
functionality of our chip cards. We also perform a final visual inspection of our chip cards to
ensure quality control and compliance with our chip card specifications. We constantly seek to enhance the efficiency of our global manufacturing operations in order
to increase production capacity, to reduce production and delivery time and to lower operational
costs, through upgrades in our chip card manufacturing technology, by outsourcing non-critical
manufacturing processes and by constructing new manufacturing capacity in lower-cost regions. To
further these and related goals, commencing in the second quarter of 2001, we implemented three
successive restructuring plans. These restructurings included the closure of a factory in Seebach,
Germany in 2003, in Herne, Germany in February 2005 and a reallocation of our production
requirements among our manufacturing and other facilities around the world. See Item 6. Directors,
Senior Management and Employees  Employees. Our main chip card manufacturing centers are currently located in France, Germany, Poland,
China, Singapore, Mexico and the United States. All of these centers have microcontroller and
memory card manufacturing capabilities. Our main plastic card manufacturing centers are located in
China, Germany, Singapore, the United Kingdom and the United States. Our material tangible fixed assets, including leased properties, include the following
facilities: Location
    
    Primary Activities
    

Gross Floor Area (m2)Cuernavaca, Mexico
    
    embedding, personalization
    
    
    6,664*Gemenos, France
    
    embedding, personalization
    
    
    25,502Havant, United Kingdom
    
    plastic cards, personalization, embedding
    
    
    6,332Madrid, Spain
    
    personalization
    
    
    1,340




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Location
    
    Primary Activities
    
    Gross Floor AreaLa Ciotat, France
    
    microcontroller module production and assembly
    
    
    5,871Montgomeryville,
    
    plastic cards, embedding, personalization
    
    
    8,535Pennsylvania, United StatesSingapore
    
    microcontroller module assembly,
embedding, personalization, contactless cards, Plastic cards
    
    
    20,984
    *Tczew, Poland
    
    embedding, personalization
    
    
    8,393
    *Tianjin, China1
    
    embedding, personalization, microcontroller module assembly
    
    
    12,730
    **Zhuhai, China2
    
    plastic cards, personalization,
embedding, contactless cards
    
    
    2,722
    *Bangkok, Thailand
    
    personalization
    
    
    66Johannesburg, South Africa
    
    personalization
    
    
    330Sao
Paulo/Brazil3
    
    personalization
    
    
    403Filderstadt, Germany
    
    embedding, personalization
    
    
    9,424
 
 *
    
    Facilities owned by the company. ** Facilities partially owned and partially leased. All others
are leased. 1 The property and equipment used in our activities in Tianjin, China, are divided
between a legal entity that we wholly own, and another legal entity in which we hold 51% of the
equity. 2 The property and equipment used in our activities in Zhuhai, China, are held by a
legal entity in which we have a 65% equity interest. 3
The property and equipment used in our activities in Sao Paulo,
Brazil, are held by a legal entity in which we have a 50% equity interest. As of June 1, 2005, our approximate annual practical capacity in millions of units for the
manufacture of the following products is: Activity
    
    CapacityChip card modules
    
    
    888Chip card embedding
    
    
    832Conventional polyvinyl chloride (PVC) plastic cards (including magnetic stripe)
    
    
    572
 In addition to the tangible fixed assets that we use in our manufacturing activities, we lease
office space in various countries throughout the world, including a significant building in La
Ciotat, France, that we use for activities including research and development and product sales and marketing. See Note 18 to
our Consolidated Financial Statements.




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Item 5. Operating and Financial Review and Prospects OPERATING RESULTS The financial information included in the discussion below for the three years prior to
December 31, 2004, is derived from the Consolidated Financial Statements included in this Annual
Report. You should read the following discussion together with the Consolidated Financial
Statements and related notes. Our Consolidated Financial Statements have been prepared in
accordance with IFRS, which differ from U.S. GAAP. Note 39 to our Consolidated Financial Statements
describes the principal differences between IFRS and U.S. GAAP as they relate to our company, and
reconciles our net income and shareholders equity to U.S. GAAP. Information indicated as restated
for 2003 and previous years has been prepared following the adoption of International Accounting
Standard 1 (Revised 2003) (see Note 2.23 to
our Consolidated Financial Statements) and to reflect changes in our reporting segments as
described below (see Note 32 to our Consolidated Financial Statements). Overview In 2004, we made significant progress in net sales and profitability. We were able to reinforce our
competitive position by responding to strong demand in our core markets. At the same time, we
strengthened our position in certain emerging geographic markets for Telecommunications and
Financial Services, and we improve our situation in the growing markets that are targeted by our
Identity and Security segment. We also maintained robust, industry-leading research and development
activities to prepare us for future opportunities. We observed strong customer demand throughout the year across all regions in our core markets. This
was particularly true in the markets for wireless products, which continued to benefit from rapid
migration to SIM technology in the United States and in Japan. We also benefited from subscriber
growth in rapidly developing economies, as well as continued shifts towards higher-end cards in
developed economies. EMV (Europay MasterCard Visa) migration, which involves the replacement of
conventional magnetic stripe payment cards with microcontroller cards as a result of banking
industry-wide agreements, remained a key driver of the market for chip-based payment cards. Larger
volumes of chip cards were issued in the United Kingdom as a result of EMV migration, and EMV card
issuances began in other European and in Asian countries. In 2004, we also observed increased
interest in initiatives for Identity and Security card programs in the emerging corporate security
and government markets. Our net sales increased in 2004 by 15% to € 865.0 million in 2004 from € 749.2 million in
2003, driven primarily by higher demand throughout the year for wireless communication products and
EMV payment cards. On a currency adjusted basis, our net sales increased by 20%. Despite a decline
in average selling prices and adverse currency fluctuations in certain markets, our gross margin
improved by 3.6 percentage points in 2004, mainly driven by a favorable wireless mix (i.e.,
weighted towards higher-end products) and higher unit shipments allowing greater manufacturing
productivity. Our operating expenses were substantially lower during the year, due to lower restructuring and
general and administrative expenses and less goodwill amortization. These expenses in 2004 were
reduced by € 96.9 million (or 28%) as compared to 2003. As a result, in 2004 we improved our operating result from a loss of € 133.8 million in 2003
to an income of € 26.3 million (even after taking into account € 16.1 million in
restructuring and goodwill amortization expenses incurred in 2004). We also returned to a net
profit of € 6.3 million in 2004, compared to a loss of € 159.0 million in 2003. Cash and cash equivalents were € 388.4 million at December 31, 2004, compared to € 390.7
million at December 31, 2003, despite cash outlays of € 82.2 million. These cash outlays
included € 34.9 million relating to a tax assessment in France, € 25.3 million related to
the implementation of restructuring plans and a € 22.0 million payment into an escrow account
relating to a pending lawsuit. See Item 8 Financial Information, Legal Proceedings.




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Factors Affecting Revenues Most of our revenues were earned from sales of our chip card products, which are typically
invoiced to customers on the basis of the number of cards supplied. We generally record revenues
from our product sales when we transfer title and risk of loss of those products to the customer.
We recognize revenues in our systems design and integration services as the services are completed. Our sales of wireless products in our Telecommunications segment continue to represent a large
percentage of our sales. The prices for our most sophisticated wireless subscriber identification
module (SIM) cards are higher than our prices for our earlier generation SIM cards. When we
introduce a new chip card, it can initially have the effect of decreasing our average prices as
prices decline for our earlier generation cards before sales volumes migrate to the new card. For our Financial Services segment, which also includes systems and services based on chip
card technology in areas such as financial services loyalty programs, transportation access,
pay-television applications, as well as magnetic stripe cards for banking applications, our
revenues can vary over the life of our contracts with our customers. The revenues for design,
development and implementation of chip card-based products are usually earned earlier in the term
of the agreements, while revenues for card issuances and replacements may begin later and be earned
over a longer period of time. Revenues in our Identity and Security segment include those from both software and hardware
product sales. Similar to the sales in our Financial Services segment, the revenues from the
customers of our Identity and Security segment for design, development and implementation of chip
card-based products is usually earned earlier in the term of the agreements. Additional revenues
are then generated over the life of the contracts as chip cards are supplied, along with revenue
for technology support and maintenance. For system deliveries, we also typically record a larger
share of our revenues early in the life of a contract, when we receive progress and completion
revenues for the implementation of a system, and card sale revenues to supply the initial needs of
a customer. As a contract matures, our revenues consist, to a greater extent, of sales of cards as
new cardholders join the system and replace cards that have expired or were lost. Factors Affecting Operating Income Our operating income is affected by a number of factors. The most significant factor in recent
years has been our product mix, as our wireless products and services have generated margins that
were higher than many of our other products and services, particularly our magnetic stripe bank
cards. Historically, as our sales of wireless products and services have grown, our gross margin
and operating margin have also grown. Starting in 2001, however, the overall market decline led us
to reduce our prices on wireless communications products, which reduced our gross margin. New
competition, especially in China, has also led to reduced prices. Our cost of sales consists principally of the cost of our microcontroller chips, the plastic
that is used in our cards, tools and equipment used to manufacture and personalize our chip cards,
and personnel related to manufacturing, supply, logistics and management of production. Our margins
are significantly affected by the extent to which we are able to match our inventory and production
capacity with demand for our products. Our operating income is also affected by our selling and
marketing, research and development and administrative expenses, all of which are typically a
function of planning that is based on projected business demand. When we initiate a major card program or open a new manufacturing facility, we typically incur
costs in connection with the establishment of the program or the facility, including the cost of
manufacturing tools and equipment and personnel who are trained to implement the program or hired
to operate the new facility. Depending on when the start up phase occurs in relation to our
accounting periods, we may incur significant start up costs in a period before we earn substantial revenues. When this happens, our
operating income is negatively affected in the period that the start up phase occurs. In contrast,
once the program begins to generate revenues or the new manufacturing facility begins to run, our
operating income typically increases.




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##### Table of Contents



Effect of Exchange Rates We report our Consolidated Financial Statements in euros. Because we earn a significant portion of
our revenues and incur expenses in countries where the euro is not the local currency, exchange
rate movements between the euro and other currencies can significantly affect our results of
operations. These other currencies are primarily the US dollar, the British pound, the Chinese yuan
and the Singapore dollar. In 2004, we earned 12% of our revenues in the United States, 12% in the
United Kingdom, 6% in China and 16% in Asia outside China. A substantial portion of our sales in
Asia outside China is denominated in Singapore dollars and in US dollars. In 2004, our results of
operations continued to suffer from the decline in the value of the US dollar and currencies pegged
to the US dollar, against the value of the euro. The table below sets forth information relating to
the average exchange rates between the euro and the main billing currencies used to record our
revenues. We seek to mitigate our exposure to currency fluctuations by engaging in hedging
transactions where we deem appropriate. We have hedged certain foreign currency positions for 2005.
We cannot predict, however, all changes in currency, inflation or other factors, that could affect
our international business. We provide information on a currency adjusted basis to help in the comparison of changes in
our results of operations over time. We calculate the effect of currency variances for making
currency adjustments by converting the figures from the current year in local currencies using the
applicable exchange rates of the previous year. The following table sets forth information relating to the average exchange rates between the
euro and the British pound, the Chinese yuan, the U.S. dollar and the Singapore dollar since
January 1, 2002, calculated based on daily indicative fixing publicly supplied by the European
Central Bank (ECB) and indicative quotations supplied by recognized data providers for currencies
on which the ECB does not establish fixing.  (yearly average, in euros, per unit of foreign currency)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002British pound
    
    
    0.6773
    
    
    
    0.6887
    
    
    
    0.6294Chinese yuan
    
    
    10.2936
    
    
    
    9.2584
    
    
    
    7.8204US dollar
    
    
    1.2412
    
    
    
    1.1289
    
    
    
    0.9486Singapore dollar
    
    
    2.0867
    
    
    
    1.9553
    
    
    
    1.6928
 Seasonality In prior years, we have experienced limited seasonal fluctuations, where a greater percentage
of our net sales are recorded in the fourth quarter. A significant factor causing this seasonality
has been the replacement of mobile telephone handsets towards the year-end holiday season. In 2001
and 2002, this seasonality was offset by global market fluctuations and an uneven economic
recovery. In 2003 and 2004, we experienced a limited recurrence of this seasonality. We earned 28%
and 31% of our net sales in the fourth quarter of 2004 and 2003, respectively. Reporting segments We started reporting in three business segments for the year 2004. All identity and security
activities in the previous Financial and Security Services segment have been transferred to a new
segment, entitled Identity and Security. See Note 32 to our Consolidated Financial Statements. The Financial Services segment includes systems and services based on chip card technology in
areas such as financial services, loyalty programs, transportation access, e-business security, and
pay-television applications, as well as magnetic stripe cards for banking applications. The
Identity and Security segment includes systems and services based on chip card technology in areas
such as national ID, healthcare, drivers licenses, car registration, passport and visa,
e-government secured services, physical and logical access control as well as chip card readers and
interfacing technologies. Our activities in both these segments include the sales of chip card
readers to our customers and chip




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##### Table of Contents



card interfacing technologies to device manufacturers. There is no change with respect to the
Telecommunications segment, which includes our wireless solutions, as well as prepaid telephone
cards and other products. This change in the Financial Services and Security segment reporting is
consistent with our managements financial reporting structure. For a discussion of recent
developments, see Item 5. Operating and Financial Review and Prospects  Results of
Operations-Recent Developments. Recent Developments In 2001 and 2002 we announced a series of restructuring programs. As of December 31, 2004, the
last of these programs had resulted in a reduction of 877 employees worldwide and the
rationalization of production sites and office facilities on a worldwide basis and an additional 66
employees are expected to leave the company during the first half of 2005. Year ended December 31, 2004, compared to year ended December 31, 2003 Net sales The following table shows the breakdown of our net sales in 2004 and 2003 by reporting segment
(our reporting segments are further described in Note 32 to our Consolidated Financial Statements). (in millions of euros)2004
    
    
    2003
    
    
    
    % change
    
    % change, currency adjustedYears ended December 31
    
    
    
    
    
    (Restated)Telecommunications
    
    
    641.8
    
    
    
    542.5
    
    
    
    
    18
    %
    
    24
    %Financial Services
    
    
    182.2
    
    
    
    168.2
    
    
    
    
    8
    %
    
    12
    %Identity and Security
    
    
    41.0
    
    
    
    38.5
    
    
    
    
    7
    %
    
    11
    %Total
    
    
    865.0
    
    
    
    749.2
    
    
    
    
    15
    %
    
    20
    %
 On a currency adjusted basis, the net sales of our Telecommunications segment experienced
strong growth of 24% in 2004 compared to 2003. The growth of revenue in our Telecommunications
segment was primarily driven by a 28% increase in sales of our wireless products, to € 558.5
million in 2004 from € 436.7 million in 2003. On a currency adjusted basis, this increase in
the sales of our wireless products was 34%. In 2004, SIM card shipments rose 39% from 2003, to 255 million units, driven by growth in the
Americas, emerging markets in South East Asia and demand in Europe. The shift towards more high-end
SIM cards, including those with higher storage capacity and those for use in 3G networks helped to
partially offset the continued price pressure we have been experiencing in certain markets, as well
as unfavorable currency fluctuations. Our net sales of other cards continued to drop in 2004, as
they did in 2003, mainly due to lower selling prices offered by certain competitors and reduced
volumes supplied in
Asia and in the EMEA region. The Telecommunications segment represented 74% of our revenues in
2004, as compared to 72% in 2003. In 2004, our Telecommunications segment net sales also benefited from our deliveries of more
complete solutions to certain customers, including our
Over-The-Air software platforms that allow operators to remotely manage SIM cards and provide additional services, resulting in
enhanced sources of revenue from our chip card customers. This strategy also helped us to maintain
a leading position within advanced 3G markets. After adjusting for currency fluctuations, the net sales of our Financial Services segment
increased by 12% in 2004 compared to 2003. Financial Services segment revenue was mainly driven by
EMV migration. This included a significant rollout of EMV cards in the United Kingdom, and
increasing deliveries of EMV cards in France, Turkey, Mexico, South America and Malaysia. The
volume of shipments of microcontroller payment cards increased 33%, reaching 51 million units in
2004, with an increase in net sales of such products by 29% in 2004 compared to 2003. The Financial
Services segment represented 21% of our revenues in 2004, compared to 23% in 2003.




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##### Table of Contents



The net sales of our Identity and Security segment increased by 11% in 2004 compared to 2003
on a currency adjusted basis. The growth of net sales in our Identity and Security segment was
mainly driven by the sale of enterprise security solutions, particularly in the United States and
the United Kingdom. Our continuing strategy of marketing subsystems based on software components,
value-added services and high-end chip cards led to a significant improvement in the product mix of
this segment (i.e., weighted more towards products with higher margins). Our Identity and Security
segment represented 5% of our revenues in 2004, unchanged from 2003. We organize our operations into three geographic regions: EMEA (Europe, Middle East and
Africa), Asia and the Americas. The following table breaks down the net sales among our three regions. (in millions of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    % change
    
    % change, currency adjustedEMEA
    
    
    443.1
    
    
    
    407.7
    
    
    
    9
    %
    
    
    8
    %Asia
    
    
    194.3
    
    
    
    171.9
    
    
    
    13
    %
    
    
    22
    %Americas
    
    
    227.6
    
    
    
    169.6
    
    
    
    34
    %
    
    
    48
    %Total
    
    
    865.0
    
    
    
    749.2
    
    
    
    15
    %
    
    
    20
    %
 The increase in revenue in the Americas and Asia regions was mainly driven by
increased sales of wireless products in our Telecommunications segment. Our Americas and Asia
regions represented 26% and 23% of our total revenue in 2004, respectively, compared to 23% and 23%
in 2003. The revenue in our EMEA region represented 51% of our revenue in 2004, compared to 54% in
2003. The increase in sales in our EMEA region in 2004 was mainly driven by increased sales in our
Financial Services segment and, to a lesser extent, the sales of wireless products in our
Telecommunications segment. In 2004, we experienced a significant increase in our Telecommunications sales in the United
States, which was our most dynamic region in 2004 for wireless products, fueled by the rapid
adoption of communication systems that require SIM cards. Among other factors, we believe wireless
carriers in the United States have been adopting SIM card-based systems because these systems
represent a less expensive path towards the implementation of more advanced communication
standards, such as 3G networks, that will allow carriers to provide enhanced services to their
customers. There are also continued signs of a similar trend towards adoption of chip card-based
technologies in Latin America. Gross profit We experienced a substantial improvement in our gross profit, with a 30% increase, to €
270.5 million in 2004 from € 207.3 million in 2003. Our gross margin increased to 31.3% in
2004 from 27.7% in 2003. This increase in gross margin of 3.6 percentage points was mainly driven
by an improved business mix (i.e., weighted towards more wireless products and high-end products),
strong volume growth and lower chip purchasing prices. These improvements more than offset the
continuing price competition and adverse currency fluctuations that we experienced in 2004. Our
gross profit also benefited from savings resulting from our restructuring and other improvements in
our cost structure.




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##### Table of Contents



The following table shows the breakdown of our gross profit and gross margin in 2004 and 2003 by
reporting segment. 2004
    
    2003
    
    % change(in millions of euros)
    
    
    (% of sales)
    
    (in millions of euros)
    
    
    (% of sales)
    
    in gross profitYears ended December 31
    
    
    
    
    
    
    
    
    
    (Restated)Telecommunications
    
    
    220.8
    
    
    
    34.4
    %
    
    
    166.8
    
    
    
    30.7
    %
    
    
    32
    %Financial Services
    
    
    37.7
    
    
    
    20.7
    %
    
    
    32.0
    
    
    
    19.0
    %
    
    
    18
    %Identity and Security
    
    
    12.0
    
    
    
    29.4
    %
    
    
    8.5
    
    
    
    22.2
    %
    
    
    41
    %Total
    
    
    270.5
    
    
    
    31.3
    %
    
    
    207.3
    
    
    
    27.7
    %
    
    
    30
    %
 The gross margin of our Telecommunications segment increased to 34.4% in 2004 from
30.7% in 2003. This increase resulted primarily from higher volumes of SIM cards shipped, lower
purchase prices for wireless microcontroller chips and a more favorable product mix (i.e., weighted
towards high-end wireless products). The gross margin in this segment also benefited from
restructuring and other improvements in our cost structure. These improvements more than offset the
continuing price competition and adverse currency fluctuations that we experienced in 2004. The gross margin of our Financial Services segment increased to 20.7% in 2004 from 19.0% in
2003. This was mainly driven by higher volumes shipped of microcontroller chip cards for payment
applications. This included a large rollout of EMV cards in the United Kingdom, and EMV ramp-up in
France, Turkey, Mexico, South America and Malaysia. The gross margin of our Identity and Security segment increased to 29.4% in 2004 from 22.2% in
2003. The growth of gross margin in our Identity and Security segment was mainly driven by the
results of our strategy of marketing subsystems based on software components, value-added services
and high-end chip cards. Operating expenses In 2004, our operating expenses totaled € 244.2 million, a decrease of 28% from 2003.
These expenses represented 28% of our net sales, compared to 46% in 2003. This decrease was mainly
driven by lower restructuring and general and administrative expenses, and the absence of
previously experienced adverse effects from goodwill impairment. The decrease also reflects
benefits achieved from earlier restructuring and other cost reduction measures. Our general and administrative expenses decreased by 17% to € 63.9 million in 2004,
compared to € 77.3 million in 2003. Our research and development expenses decreased by 10% to
€ 62.6 million in 2004, compared to € 69.2 million in 2003. Our selling and marketing
expenses increased by 1% to € 101.5 million in 2004, compared to € 100.2 million in 2003,
due to our higher sales. In 2004, we recorded a total pre-tax restructuring charge of € 20.2 million in our annual
Consolidated Statement of Income, mainly related to our third restructuring program. This 2004
expense was partially offset by a release of unused provisions amounting to € 11.8 million,
mainly related to our second restructuring plan. As a result, the total pre-tax net restructuring
charge recorded in 2004 amounted to € 8.4 million, compared to the total pre-tax net
restructuring charge recorded in 2003 of € 62.0 million. Goodwill amortization and impairment amounted to € 7.7 million 2004, compared to €
33.1 million in 2003. In 2003, we incurred a goodwill impairment charge of € 19.9 million,
resulting from the revision of the business plan of the activities of Celocom Limited which we
acquired in November 2000.




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##### Table of Contents



2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    % change in(in millions of euros)
    
    
    (% of sales)
    
    (in millions of euros)
    
    
    (% of sales)
    
    operating expensesYears ended December 31
    
    
    
    
    
    
    
    
    
    (Restated)Telecommunications
    
    
    (149.0
    )
    
    
    23.2
    %
    
    
    (196.1
    )
    
    
    36.1
    %
    
    
    (24
    %)Financial Services
    
    
    (63.9
    )
    
    
    35.1
    %
    
    
    (88.5
    )
    
    
    52.6
    %
    
    
    (28
    %)Identity and Security
    
    
    (31.3
    )
    
    
    76.3
    %
    
    
    (56.4
    )
    
    
    146.5
    %
    
    
    (45
    %)Total
    
    
    (244.2
    )
    
    
    28.2
    %
    
    
    (341.0
    )
    
    
    45.5
    %
    
    
    (28
    %)
 The operating expenses for our Telecommunications segment decreased by 24% to €
149.0 million in 2004, compared to € 196.1 million in 2003. This decrease was mainly driven by
the reduction of restructuring costs in 2004 and lower depreciation of our capitalized research and
development projects. The operating expenses for our Financial Services segment decreased by 28% to € 63.9
million in 2004, compared to € 88.5 million in 2003. This decrease was mainly driven by the
reduction of restructuring expenses in 2004 and lower general and administrative expenses in 2004
compared to 2003, mainly due to the provision for a pending lawsuit that we recorded in 2003. See
Item 8. Financial Information  Legal Proceedings. The operating expenses for our Identity and Security segment decreased by 45% to € 31.3
million in 2004, compared to € 56.4 million in 2003. In 2003, we incurred a goodwill
impairment charge of € 19.9 million, relating to the
activities of Celocom Limited. This decrease
was also driven by the reduction of restructuring costs in 2004 compared to 2003. Operating income (loss) In 2004, we recorded operating income of € 26.3 million, compared to an operating loss of
€ 133.8 million in 2003. The increase in our operating income of € 160.1 million was
mainly driven by increased volumes of chip cards shipped, improved gross margin in all of our
segments, and decreases in our operating expenses mainly driven by lower restructuring and general
and administrative expenses, and lower charges for goodwill amortization and impairment. Our
operating income in 2004 also reflects the overall benefits achieved by earlier restructuring and
other cost reduction measures. (in millions of euros)2004
    
    2003
    
    Change in operating income (loss)Years ended December 31
    
    
    
    
    
    (Restated)Telecommunications
    
    
    71.8
    
    
    
    (29.3
    )
    
    
    101.1Financial Services
    
    
    (26.3
    )
    
    
    (56.6
    )
    
    
    30.3Identity and Security
    
    
    (19.2
    )
    
    
    (47.9
    )
    
    
    28.7Total
    
    
    26.3
    
    
    
    (133.8
    )
    
    
    160.1
 The operating income for our Telecommunications segment improved by € 101.1
million to an operating profit of € 71.8 million in 2004, compared to an operating loss of
€ 29.3 million in 2003. This increase was mainly due to significantly higher sales, resulting
in a higher gross profit, and the decrease in our operating expenses. The operating loss for our Financial Services segment decreased by € 30.3 million to an
operating loss of € 26.3 million in 2004, compared to an operating loss of € 56.6 million
in 2003. This decrease is the result of higher sales, resulting in a higher gross profit, and the
benefits from the earlier implementation of restructuring programs and other cost reduction
measures.




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##### Table of Contents



The operating loss for our Identity and Security segment decreased by € 28.7 million to
€ 19.2 million, compared to € 47.9 million in 2003. The decrease was mainly due to higher
sales, reduced costs and lower charges for goodwill amortization and impairment in 2004. Financial income (expense), net Our financial income (expense), net, decreased to € 5.7 million in 2004 from € 8.2
million in 2003. Interest income on short-term bank deposits decreased to € 7.4 million in
2004 from € 8.4 million in 2003 due to lower average effective interest rates. Currency
exposure on intercompany financing and related hedges generated a € 1.4 million gain in 2003,
and no effect on the Consolidated Statement of Income in 2004. Share of profit (loss) of associates In 2004, share of loss of associates was € 6.0 million compared to € 7.6 million in
2003. This loss included goodwill amortization of € 3.5 million, compared to € 3.3
million in 2003, and impairment losses of € 0.7 million, compared to € 2.7 million in
2003. Other non-operating income (loss), net In 2004, we recorded a net non-operating loss of € 6.8 million compared to € 11.1
million in 2003. This loss included foreign exchange loss amounting to € 5.9 million in 2004,
compared to € 8.6 million loss in 2003, and net losses in available-for-sale financial assets
amounting to € 0.9 million in 2004, compared to € 2.5 million in 2003. Income tax benefit (expense) We recorded an income tax expense of € 13.0 million in 2004, which reflected a charge of
€ 3.0 million relating to the discounting of a receivable resulting from carry back of tax
losses in France, a net charge from a provision for tax risk of € 1.6 million and a partial
write-down of deferred tax assets. In 2003, we recorded an income tax expense of € 14.7
million, which included € 7.5 million of write-down of deferred tax assets recognized in
previous years. Net income We reported a net income of € 6.3 million in 2004, compared to a net loss of € 159.0
million in 2003, corresponding to a net income per share attributable to equity holders of €
0.01 in 2004, and a net loss per share of € 0.27 in 2003. Year ended December 31, 2003, compared to year ended December 31, 2002 Net Sales Net sales for the year ended December 31, 2003 amounted to € 749.2 million, a 5% decrease
compared with net sales of € 787.4 million for the year ended December 31, 2002. After
adjusting for currency fluctuations, however, net sales increased by 4%.




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##### Table of Contents



The following table shows the breakdown of our net sales in 2003 and 2002 by reporting segment
(our reporting segments are further described in Note 32 to our Consolidated Financial Statements). (in millions of euros)2003
    
    
    2002
    
    
    % change
    
    % change, currency adjustedYears ended December 31
    
    (Restated)
    
    
    (Restated)Telecommunications
    
    
    542.5
    
    
    
    544.5
    
    
    
    0
    %
    
    
    9
    %Financial Services
    
    
    168.2
    
    
    
    195.0
    
    
    
    (14
    %)
    
    
    (8
    %)Identity and Security
    
    
    38.5
    
    
    
    47.9
    
    
    
    (20
    %)
    
    
    (13
    %)Total
    
    
    749.2
    
    
    
    787.4
    
    
    
    (5
    %)
    
    
    4
    %
 The net sales of our Telecommunications segment remained relatively stable, decreasing
slightly to € 542.5 million in 2003, compared to € 544.5 million in 2002. On a currency
adjusted basis, the net sales of our Telecommunications segment increased by 9% in 2003 compared to
2002. Our increase in net sales in 2003, on a currency adjusted basis, was influenced by a more
rapid adoption of wireless communication systems that require SIM cards in the United States, a
strong growth in South America and a continued demand in Europe. Shipments of high-end
microcontroller cards (i.e., with greater computing power and memory) increased as compared to
2002. Telecommunications segment revenue was primarily driven by a 9% increase in sales of products
used in the wireless communication market, amounting to € 436.7 million in 2003 compared to
€ 400.6 million in 2002. This increase was primarily attributable to stronger demand for
wireless products as our shipments of SIM cards rose 35% from 137 million units in 2002 to 184
million units in 2003. The favorable shift to higher-end wireless products in 2003 and the stronger demand for
wireless products overall, including software and services, were sufficient to overcome the
continuous price pressure in this segment. Other card sales in our Telecommunications segment
decreased significantly in 2003 compared to 2002, mainly driven by lower demand for cards used in
the public telephony market and stronger price pressure. Sales of phone cards decreased by 27%.
The Telecommunications segment represented 72% of our revenues in 2003, as compared to 69% in 2002. Growth in our Telecommunications segment is driven by very large wireless carriers increasing
their use of advanced SIM cards to enhance end-user relationships and operator investments in
network infrastructure that accelerate the SIM card renewal process. Higher revenues in this
segment are also driven by the migration of wireless networks towards technologies that require SIM
cards, particularly in the Americas and in China. Demand for SIM cards continues to shift towards
higher-end products as wireless carriers launch networks based on more advanced technologies,
including next generation 2.5G and 3G systems. These systems also facilitate a growing number of
applications that require higher-end SIM cards, better device management and improved mobile data
services. The net sales of our Financial Services segment declined by 14% to € 168.2 million in
2003, from € 195.0 million in 2002. After adjusting for currency fluctuations, the net sales
of our Financial Services segment decreased by 8%. The decline in our Financial Services segment
was primarily due to the Geldkarte (i.e., the German payment card) market shifting to a lower
volume replacement cycle, the decreased demand in the Pay-TV market, and the lower demand for
microcontroller payment cards (i.e., chip cards) in the United States primarily due to the
completion of certain chip card programs. Despite the lower demand for Geldkarte microcontroller
payment cards, shipments were up 10%, driven by the ramp-up of EMV migration in the United Kingdom,
which started in the third quarter of 2003. The Financial Services segment represented 23% of our
revenues in 2003, as compared to 25% in 2002. Net sales of our Identity and Security segment declined by 20% to € 38.5 million in 2003,
from € 47.9 million in 2002. After adjusting for currency fluctuations, the net sales of our
Identity and
Security segment decreased by 13%. The Identity and Security segment represented 5% of our revenues
in 2003, as compared to 3% in 2002.




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##### Table of Contents



We organize our operations into three geographic regions: EMEA
(Europe, Middle East and Africa), Asia and the Americas. The following table breaks down the net sales among our three regions. (in millions of euros)Years ended December 31
    
    2003
    
    
    2002
    
    
    % change
    
    % change, currency adjustedEMEA
    
    
    407.7
    
    
    
    416.2
    
    
    
    (2
    %)
    
    
    0
    %Asia
    
    
    171.9
    
    
    
    199.5
    
    
    
    (14
    %)
    
    
    1
    %Americas
    
    
    169.6
    
    
    
    171.7
    
    
    
    (1
    %)
    
    
    18
    %Total
    
    
    749.2
    
    
    
    787.4
    
    
    
    (5
    %)
    
    
    4
    %
 Primarily due to a mixed performance of our three segments during these periods, net
sales were relatively stable in the EMEA region, which represented 54% of our revenues in 2003, as
compared to 53% in 2002. The Telecommunications segment improved in 2003, as wireless carriers
resumed investments in a new infrastructure (in which our products often have a prominent role), in
an effort to increase their average revenue per user. Telecommunications revenue was strong in 2003
with the leading wireless carriers in Europe. We believe this resulted from our new sales
organization and its emphasis on key accounts. In our Financial Services segment in EMEA, there
were some improvements in 2003 due to the EMV payment card migration, mainly driven by the United
Kingdom market. Total revenues in EMEA fell due to decreased demand for the Geldkarte and the
weakness in the Pay-TV market. Net sales in Asia declined by 14% in 2003, although they were up by 1% on a currency adjusted
basis. The decrease reflects a deterioration of pricing conditions (both currency and selling
prices) in the wireless communication market despite higher volumes shipped. Net sales in the Americas declined by 1%, although on a currency adjusted basis, revenue in
the Americas was up by 18%. In 2003, we experienced a significant increase in our
Telecommunications sales in the United States, which was our most dynamic region in 2003 for
wireless products, fueled by the rapid adoption of communication systems that require SIM cards.
Among other factors, we believe wireless carriers in the United States have been adopting SIM
card-based systems because these systems represent a less expensive path towards the implementation
of more advanced communication standards, such as 3G networks, that will allow carriers to provide
enhanced services to their customers. There are also signs of a similar trend towards adoption of
chip card-based technologies in Latin America. Gross profit Gross profit increased by 4% in 2003 to € 207.3 million, from € 199.7 million in
2002. Our gross margin increased in 2003 to 27.7%, from 25.4% in 2002. Despite adverse currency
fluctuations and the effect of price pressures, gross margin increased by 2.3 percentage points,
mainly driven by an improved business mix (i.e., weighted towards more wireless products,
higher-end products and more favorable regional mix), and the benefit of our restructuring and cost
cutting initiatives.




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##### Table of Contents



The following table breaks down our gross profit and gross margin by segment. 2003
    
    
    2002
    
    
    % change(Restated)
    
    (Restated)Years ended December 31
    
    (in millions of euros)
    
    
    (% of sales)
    
    (in millions of euros)
    
    
    (% of sales)
    
    in gross profitTelecommunications
    
    
    166.8
    
    
    
    30.7
    %
    
    
    154.5
    
    
    
    28.4
    %
    
    
    8
    %Financial Services
    
    
    32.0
    
    
    
    19.0
    %
    
    
    34.7
    
    
    
    17.8
    %
    
    
    (8
    %)Identity and Security
    
    
    8.5
    
    
    
    22.2
    %
    
    
    10.5
    
    
    
    21.9
    %
    
    
    (19
    %)Total
    
    
    207.3
    
    
    
    27.7
    %
    
    
    199.7
    
    
    
    25.4
    %
    
    
    4
    %
 The gross margin of our Telecommunications segment increased to 30.7% in 2003, from
28.4% in 2002. This increase resulted primarily from higher volumes of SIM cards shipped, lower
purchase prices in the first half of 2003 for wireless microcontroller chips used in the making of
our products, favorable business mix (both in terms of geographic area and products) and the
benefits of our restructuring and cost cutting measures. This increase was partially offset by the
continuous price pressure in this segment and unfavorable currency fluctuations in 2003. The gross margin in our Financial Services segment increased to 19.0% in 2003, from 17.8% in
2002. This increase was primarily due to higher volumes shipped of microcontroller payment cards
and our restructuring and cost cutting measures. This increase was partially offset by unfavorable
currency fluctuations in 2003. The gross margin of our Identity and Security segment improved to 22.2% in 2003, compared to
21.9% in 2002. Operating expenses In 2003, our operating expenses totaled € 341.0 million, a 21% decrease compared to 2002.
These expenses represented 46% of our net sales, compared to 55% in 2002. This reduction in our
operating expenses reflected the effects of our restructuring, combined with other cost saving
programs. Our research and development expenses decreased by 25% to € 69.2 million in 2003,
compared to € 92.2 million in 2002, while general and administrative expenses decreased by 14%
to € 77.3 million in 2003, from € 89.9 million in 2002. Our selling and marketing
expenses also benefited from our restructuring and cost cutting measures, falling by 11% to €
100.2 million in 2003, from € 112.2 million in 2002. In 2003 we made progress under our restructuring program announced in December 2002. Under
this plan, we reduced our headcount by 777 during the entire year 2003, most of which occurred in
the second half of the year. The restructuring charge of € 62.0 million that we recorded in
2003 included an amount of € 61.7 million related to this restructuring program. Goodwill amortization and impairment amounted to € 33.1 million in 2003, as compared to
€ 47.1 million in 2002. In 2003, we recorded a goodwill write-down of € 19.9 million
based on impairment testing. This write-down relates to the goodwill generated following the
acquisition of Celocom Limited in November 2000, and is due to the revision of the business plan of
the acquired activities of that company (see Note 11 to our Consolidated Financial Statements). In
2002, goodwill amortization and
impairment included a write-down of € 22.1 million following impairment testing. This
write-down concerned the goodwill generated following the acquisition
of SLP S.A. in October 2000, and was due to significantly
declining sales of SLP software. In early 2003, we decided to cease
our SLP operations. The wind-down of these operations was substantially completed in 2004.




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The following table breaks down our operating expenses by segment. 2003
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    % change(Restated)
    
    (Restated)Years ended December 31
    
    (in millions of euros)
    
    
    (% of sales)
    
    (in millions of euros)
    
    
    (% of sales)
    
    in operating expensesTelecommunications
    
    
    (196.1
    )
    
    
    31.6
    %
    
    
    (273.8
    )
    
    
    50.3
    %
    
    
    (28
    %)Financial Services
    
    
    (88.5
    )
    
    
    52.6
    %
    
    
    (110.9
    )
    
    
    56.9
    %
    
    
    (20
    %)Identity and Security
    
    
    (56.4
    )
    
    
    146.5
    %
    
    
    (46.7
    )
    
    
    97.6
    %
    
    
    21
    %Total
    
    
    (341.0
    )
    
    
    45.5
    %
    
    
    (431.4
    )
    
    
    54.8
    %
    
    
    (21
    %)
 The operating expenses of our Telecommunications segment decreased by 28% to €
196.1 million in 2003, compared to € 273.8 million in 2002. This decrease was mainly driven by
the reduction of restructuring costs and no impact of goodwill impairment in 2003. The operating expenses of our Financial Services segment decreased by 20% to € 88.5
million in 2003, compared to € 110.9 million in 2002. This decrease was mainly driven by the
reduction of restructuring costs. The operating expenses of our Identity and Security segment increased by 21% to € 56.4
million in 2003, compared to € 46.7 million in 2002. This increase was mainly driven by the
goodwill write-down of € 19.9 million based on impairment testing. This write-down relates to
the goodwill generated following the acquisition of Celocom Limited. Operating income (loss) We recorded an operating loss of € 133.8 million in 2003, compared to an operating loss
of € 231.7 million in 2002. The 2003 operating loss was lower due to increased volumes of
products shipped, improved gross margins in our reporting segments and lower restructuring
expenses. Our restructuring expenses in 2003 amounted to € 62.0 million compared to €
90.0 million in 2002. The decrease of our operating loss in 2003 also reflects the overall benefits
achieved by earlier restructuring and other cost reduction measures. The following table breaks down our operating income (loss) by segment. (in millions of euros)2003
    
    2002
    
    Change in operatingYears ended December 31
    
    (Restated)
    
    (Restated)
    
    income (loss)Telecommunications
    
    
    (29.3
    )
    
    
    (119.3
    )
    
    
    90.0Financial Services
    
    
    (56.6
    )
    
    
    (76.2
    )
    
    
    19.6Identity and Security
    
    
    (47.9
    )
    
    
    (36.2
    )
    
    
    (11.7
    )Total
    
    
    (133.8
    )
    
    
    (231.7
    )
    
    
    97.9
 The operating loss for our Telecommunications segment decreased by € 90.0
million to an operating loss of € 29.3 million in 2003, compared to an operating loss of
€ 119.3 million in 2002. This improvement was mainly attributable to our higher gross margin,
and the decrease in our operating expenses.




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The operating loss for our Financial Services segment decreased by € 19.6 million to an
operating loss of € 56.6 million in 2003, compared to an operating loss of € 76.2 million
in 2002. This improvement was mainly attributable to the earlier implementation of our
restructuring programs and other cost reduction measures. The operating loss for our Identity and Security segment increased by € 11.7 million to
an operating loss of € 47.9 million in 2003, compared to an operating loss of € 36.2
million in 2002. This increase was primarily the result of a goodwill write-down of € 19.9
million arising from impairment testing. Financial income (expense), net We recorded net financial income of € 8.2 million in 2003, compared to € 51.1
million net financial expense in 2002. Net financial income and expense was affected by the following specific factors:  
    
    Provision for a loan to our former Chairman of the Board: in 2000, one
of our indirect subsidiaries granted a loan to Mr. Lassus, our former
Chairman of the Board. In 2002, we recorded in financial expense a
€ 67.6 million non-cash charge to cover the risk of possible
non-reimbursement of the loan. In 2003, no additional financial
expense was recorded related to this risk. We have not forgiven the
loan (see Note 16 to our Consolidated Financial Statements).
    
    Interest receivable on loans to senior management: net financial
expense incurred in 2002 included € 1.7 million of interest
income on the loan granted in 2000 by one of our indirect subsidiaries
to Mr. Lassus. In 2003, no interest was accrued on this loan, given
that we made a provision for the loan described above.
    
    Financial income related to an advance made to a trade supplier: net
financial income in 2003 included € 0.6 million of interest
arising from the amendment of an advance facility made to a trade
supplier that previously did not bear interest, as compared to €
1.9 million of interest income in 2002 arising from the reversal of
accrued interest expenses (such advance previously bearing no
interest) (see Note 9 to our Consolidated Financial Statements). Excluding these specific items, the net financial income reported in 2003 amounted to €
7.6 million, as compared to a net financial income of € 12.9 million in 2002, primarily
reflecting the decrease in our cash balances and the decrease in the market interest rate. Other non-operating income and expense, net We recorded a net other non-operating expense of € 11.1 million in 2003, compared to a
net other non-operating expense of € 21.6 million in 2002. Net other non-operating expense in
2003 was
attributable to foreign exchange losses (€ 8.7 million; mainly loss in time value of the
option contracts used as part of our foreign currency hedging program) and losses on
available-for-sale financial assets (€ 2.5 million). Net other non-operating expense in 2002
was attributable to foreign exchange losses (€ 15.1 million) and losses on available-for-sale
financial assets (€ 6.4 million). Income tax benefit (expense) We recorded an income tax expense of € 14.7 million in 2003, reflecting non-recognition
of additional deferred tax assets on most of the losses incurred, and an increase of the valuation
allowances for deferred tax assets recognized in previous years by € 7.5 million. In 2002, we
recorded an income tax expense of € 9.1 million, which included a provision for tax risks of
€ 5.9 million relating to a tax audit in France. See Item 8. Financial Information  Legal
Proceedings.




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Net loss We recorded a net loss of € 159.0 million in 2003, or € 0.27 per share, as compared
to a net loss of € 316.6 million in 2002, or € 0.53 per share. Our net loss recorded in
2003, primarily reflected € 62.0 million in restructuring expenses that we incurred in that
year. In 2003, we were not affected by any further write-down on the loan granted to Mr. Lassus in
2000. Our smaller net loss recorded in 2003 also reflected a reduction of € 47.6 million in
our operating expenses (excluding restructuring expenses and goodwill amortization and impairment),
comprised of € 23.0 million of savings in research and development expenses, € 12.0
million of savings in selling and marketing expenses, and € 12.6 million of savings in general
and administrative expenses. In 2002, our net loss primarily reflected the € 90.0 million in
restructuring expenses we incurred in that year, the € 67.6 million non-cash write-down of the
loan granted in 2000 to Mr. Lassus and declines in our gross margins. Our loss in 2002 was,
however, offset by reductions in our operating expenses as a result of our restructuring programs. Liquidity and Capital Resources Our financial position remained strong during the year 2004. Cash and cash equivalents were
€ 388.4 million at December 31, 2004, as compared to € 390.7 million at December 31,
2003, despite significant cash outlays of € 82.2 million. These cash outlays included € 34.9 million related to the tax assessment in France, € 25.3 million related to restructuring
plans and € 22.0 million payment on an escrow account
relating to a pending lawsuit. See Item 8. Financial Information  Legal Proceedings. Operating activities generated € 27.0 million of cash during 2004, compared to €
10.1 million used in 2003. Accounts payable and related current assets as of December 31, 2004,
increased by € 20.8 million as compared to December 31, 2003. Accounts receivable and related
current liabilities as of December 31, 2004, increased by € 3.0 million as compared to
December 31, 2003. Inventory levels as of December 31, 2004, increased by € 19.5 million as
compared to December 31, 2003. The year 2004 was also affected by € 25.3 million paid in
connection with our restructuring programs as compared to € 57.0 million in 2003. Net cash used in investing activities during the year 2004 was € 26.1 million as compared
to € 16.7 million used in 2003 primarily due to higher capital expenditures, which were €
22.9 million in 2004 as compared to € 15.2 million in 2003. Financing activities used € 3.4 million of cash during 2004, as compared to € 6.3
million cash used in 2003. We believe that our existing cash resources and our anticipated cash flow from operations are
sufficient to provide for our foreseeable liquidity needs within the next two years. At December
31, 2004, cash and cash equivalents amounted to € 388.4 million. We
also use certain financial instruments in our foreign currency
hedges. For a description of our foreign currency hedges, see Item 11. Quantitative and Qualitative
Disclosures About Market Risk and Note 8 to our Consolidated Financial Statements. Critical Accounting Estimates and Policies Our annual Consolidated Financial Statements have been prepared in accordance with
International Financial Reporting Standards (IFRS). We consider our critical accounting policies to be those that: (1) involve significant
judgments and uncertainties; (2) require estimates that are more difficult for management to
determine; and (3) have the potential to result in materially different outcomes under varying
assumptions and conditions. On an ongoing basis, we evaluate our estimates which are based on
historical experience and on various other assumptions that are believed to be reasonable under the
circumstances. We believe that the following represents our critical accounting policies that
require significant management judgments and estimates. For a summary of our significant accounting
policies, including the critical accounting policies discussed below,
see Note 2 of the
Consolidated Financial Statements.




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Revenue recognition Revenues from our product sales are recorded upon transfer of title and risk of loss provided
that no significant obligations of ours remain and collection of the resulting receivable is
probable. We record deferred revenue for cards that are invoiced to customers but not shipped
because they require customization by us. Procedures exist which are regularly reviewed to ensure
that the policies are consistently applied throughout our subsidiaries worldwide. Impairment of goodwill and other long-lived assets Goodwill is reviewed for impairment based on expectations of future cash flows, which by
definition are uncertain, at each balance sheet date, or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Future cash flows are
computed based on the revenue estimates for the next five years, and include a terminal value
assumption. Whenever possible, forecast and long range planning data approved by management are
used in those computations. Future cash flows are discounted using our cost of capital at the time
of the acquisition to which the goodwill is related. We consider significant underperformance
relative to expected historical or projected future operating results, significant change in the
manner we use the acquired assets or the strategy for our overall business, and significant
negative industry or economic trends. We believe that the estimates of future cash flows and fair
value are reasonable; however, changes in estimates resulting in lower future cash flows and fair
value due to unforeseen changes in business assumptions such as a drastic decline in consumer
demand could negatively affect the valuations of goodwill. Other assets that are subject to amortization or depreciation are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognized for the amount by which the assets carrying amount
exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less
costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the
lowest levels for which there are separately identifiable cash flows (cash-generating units). Under
our current assumptions we believe that no further material impairment of goodwill and
other long-lived assets is required. Inventory Our industry is highly competitive and influenced by rapid technological change, frequent new
product development, changes in demand, product pricing pressure and rapid product obsolescence. We
regularly review inventory quantities on hand for excess inventory, obsolescence and declines in
market value below cost and record an allowance against the inventory balance for such declines.
These reviews are primarily based on managements estimated forecast of future product demand and
production requirements. Possible changes in these estimates could result in revisions to the
valuation of inventory. Inventories are carried at the lower of cost or market, with cost being
determined principally on the weighted-average cost basis. Cost elements included in inventories
are raw materials, labor and manufacturing overhead, excluding the impact of low activity, if any.
A significant component of the cost of production relates to the acquisition of microprocessor
chips. Our provision for microprocessor chips inventory is determined based on the anticipated net
realizable value of finished products which includes cost of production, raw materials, labor and
manufacturing overheads. Research and development Our results of operations depend on the continued successful development and marketing of new
and innovative products and services. The development of new products and services requires
significant capital investments by our businesses and the success of these products depends on
their acceptance by customers and business associates. Further, our businesses are characterized by
rapid technological changes and corresponding shifts in customer demand, resulting in unpredictable
product transitions, shortened life cycles and increasing emphasis on being first to market new
products and services. There can be no assurance that we will successfully introduce new products and services, that
these products and services will be accepted by customers, or that our businesses will recoup or
realize a return on their capital investments. We capitalize certain development costs when it is
probable that a development project will be a success and once technological feasibility is
established, otherwise such costs are recognized as an expense when incurred.




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These costs are capitalized through the time the product under development is produced and future
profitability is demonstrated. These costs are then amortized on a systematic basis over their
expected useful lives, which due to the constant development of new technologies does not exceed
three years. During the development stage, management must exercise judgment in determining
technological feasibility and future profitability of these projects as well as their expected
useful lives. Should a product fail to substantiate its estimated feasibility or life cycle, we may
be required to write off excess development costs in future periods. In addition, from time to time we may experience difficulties or delays in the development,
production or marketing of new products and services. Consequently, we continually evaluate the
recoverability of capitalized costs and make write-downs when necessary. Restructuring We have gone through three restructuring programs during the last three years. Provisions for
restructuring were recognized only when a detailed formal plan for restructuring did exist and the
main features of the plan were announced. The remaining restructuring provisions are principally
for ongoing rents for closed sites and payment obligations for employee terminations. The latter is
mainly linked to the close of a plant in Germany. The
balances of our restructuring provisions are reviewed at each reporting period and adjustments
are recorded when deemed necessary. Income taxes As part of the process of preparing our Consolidated Financial Statements, we are required to
estimate our income tax liability in each of the jurisdictions in which we do business. This
process involves estimating our actual current tax expense together with assessing temporary
differences resulting from differing treatment of items for tax and accounting purposes. These
differences result in potential deferred tax assets and liabilities. We must then assess the
likelihood that these deferred tax assets will be recovered from future taxable income and, to the
extent we believe that recovery is not more likely than not or unknown, we do not recognize those
deferred tax assets. The recognition of deferred tax assets is based on our estimates of taxable
income by jurisdiction and assumptions regarding the period over which our deferred tax assets will
be recovered. Significant management judgment is required in determining our provision for income
taxes, deferred tax assets and liabilities. Hedge accounting We account for derivative financial instruments in accordance with IAS 39. This requires that
derivatives are initially recognized at fair value on the date the derivative contract is entered
into and subsequently measured at their fair value. The method of recognizing the resulting gain or
loss depends on whether the derivative is designated and qualifies as a hedging instrument and the
amount and timing of the item being hedged. We make significant estimates when calculating the fair
value of our derivative instruments and when identifying the amount and timing of the items being
hedged. Fair value of the forward exchange contracts at inception is zero. Fair value during the life
and at expiration of the forward exchange contracts is calculated according to parameters obtained
from official information providers or fixings by central banks, and using the following variables:
(i) spot foreign exchange rate at the date the valuation is performed; (ii) risk-fee interest
rates; (iii) time to expiration; and (iv) notional amount of the contract. Fair value is then
obtained by discounting, for the remaining maturity, the difference between the contract rate and
the market forward rate multiplied by the nominal amount. Fair value of the option contracts at inception equals the option premiums. Option contracts
are marked-to-market during their life and at expiration using standard option pricing method (such
as Black & Scholes option pricing model), based on market parameters obtained from official
information providers or fixings by central banks, and using the following variables: (i) spot foreign exchange rate; (ii) option strike price; (iii)
volatility; (iv) risk-free interest rate; (v) expiration date of the option.




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Large shifts in the market conditions above could lead to significant changes in the fair
value of our financial instruments which could result in material movements in the Consolidated
Financial Statements. Changes in accounting rules could affect our reported results The International Accounting Standards Board regularly revises current International Financial
Reporting Standards with a view to increasing international harmonization of accounting rules. This
process of amendment and convergence of worldwide accounting rules could result in significant
amendments to the existing rules. It is not possible to predict the affect on our reported results
of any such rule changes which may be made in the future, or whether such rule changes would be
retrospective, potentially requiring us to restate past reported results. Market Risk In the conduct of our business, we are exposed to a number of market risks, including currency
exchange risks, interest rate risks and credit risks. To hedge our market risk exposures, we use
several types
of derivative instruments. We discuss our exposure to market risks and our hedging activities in
Item 11. Quantitative and Qualitative Disclosures About Market Risk. U.S. GAAP Reconciliation We prepare our Consolidated Financial Statements in accordance with IFRS, which differs in
several respects from U.S. GAAP. As a result, our net income and shareholders equity are different
under U.S. GAAP and under IFRS. The following table sets forth our consolidated net income under IFRS and under U.S. GAAP for
the periods indicated. Year ended December 31,2004
    
    
    2003
    
    
    2002Restated
    
    
    Restated(millions of euros)IFRS net income (loss)
    
    
    6.3
    
    
    
    (159.0
    )
    
    
    (316.6
    )Total differences between U.S. GAAP and IFRS
    
    
    1.9
    
    
    
    (22.7
    )
    
    
    36.9U.S. GAAP net income (loss)
    
    
    8.2
    
    
    
    (181.7
    )
    
    
    (279.7
    )
 One of the principal differences affecting the determination of our net income under
U.S. GAAP compared with IFRS has resulted from the granting of share options to our executive
officers and employees. In accordance with IFRS, the issuance of share options has not had any
affect on net income at the time of grant or of exercise of the options. Under IFRS, upon exercise
of the options, the price paid for the underlying shares is allocated to share capital and
paid-in-capital. Under U.S. GAAP the difference between the exercise price and the fair market
value of our shares at the time the options are granted generates compensation expense.
Consequently, the accounting for share options in accordance with U.S. GAAP resulted in a net
compensation expense of € 7.0 million for the year ended December, 31, 2004, € 6.4
million for the year ended December 31, 2003, and € 2.9 million for the year ended December
31, 2002.




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##### Table of Contents



Another significant difference affecting the determination of our net income under U.S. GAAP
compared with IFRS has resulted from goodwill amortization. As a result of the adoption of SFAS 142
as of January 1, 2002, we no longer amortize goodwill under U.S. GAAP. The following table sets forth our shareholders equity under IFRS and U.S. GAAP as of the
dates indicated. As of December 31,2004
    
    
    2003
    
    
    2002Restated
    
    
    Restated(millions of euros)IFRS shareholders equity
    
    
    721.3
    
    
    
    707.1
    
    
    
    875.6Total differences between U.S. GAAP and IFRS
    
    
    4.5
    
    
    
    (7.0
    )
    
    
    3.2U.S. GAAP shareholders equity
    
    
    725.8
    
    
    
    700.1
    
    
    
    878.8
 For a discussion of the differences between IFRS and U.S. GAAP as they relate to our
consolidated net income and shareholders equity, see Note 39 to our Consolidated Financial
Statements. RESEARCH AND DEVELOPMENT We maintain a longstanding commitment to investing in a broad range of research and
development initiatives to strengthen our leadership in chip card technology and
software, such as our research initiatives in open operating systems, cryptographic processes and
application development and remote management tools. The focus of our research and development is
to develop new software and integrated systems based on our microcontroller chip technology and to
reduce the time required to bring new products and applications to market. We carry out our research and development activities on chip card operating systems through a
centralized group responsible for the business lines of all three reporting segments
(Telecommunications, Financial Services and Identity and Security). In addition, there are separate
teams for all other research and development initiatives undertaken by each reporting segment. Our research and development activities are organized on a global basis, with our main
research and development centers located in France, Singapore, Germany and China. We believe we
have one of the largest research and development teams in the chip card industry both in terms of
gross research and development expenditures and number of employees. As of December 31, 2004, we
had 608 engineers working in our research and development centers around the world (plus an
additional 34 engineers working in our manufacturing group), compared to 612 engineers as of
December 31, 2003 and 711 engineers as of December 31, 2002. In 2004, our gross research and development expenditures were € 68.2 million, or
approximately 7.9% of our net sales, compared to gross research and development expenditures of
€ 63.9 million, or approximately 8.5% of our net sales in 2003, and of € 95.3 million, or
approximately 12.1% of our net sales in 2002. A portion of these expenditures was financed through
grants and research tax credits available under certain government programs, which amounted to
€ 4.3 million in 2004, € 2.7 million in 2003, and € 5.6 million in 2002. We also maintain certain licenses to third parties technologies. See Item 4. Information on
the Company  Business Overview  Intellectual Property.




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##### Table of Contents



TREND INFORMATION Trends in the Markets for our Telecommunications Segment After a market downturn starting in 2001 and continuing into early 2002, growth in the markets
for our wireless products (primarily SIM cards) started to re-emerge
in 2003 and was strong in
2004. This corresponded with new demand for more advanced wireless telecommunications services,
including wireless data transmission, and growth linked to further adoption of wireless
communication systems using SIM cards. In addition, wireless telecommunications services continued
to become more financially accessible in developing economies, along with continued improvement in
the wireless communications infrastructure in those areas. The portion of increased demand that most positively affected our performance was demand for
higher priced wireless products (primarily SIM cards with greater capabilities). In 2004, the
favorable shift to these higher-end wireless products and the stronger overall demand for wireless
products were sufficient to overcome the continuous selling price pressure in this segment. We believe that our Telecommunications segment should benefit if the wireless sector continues
to gain momentum through 2005. Growth in our Telecommunications segment may, however, be somewhat
lessened by continued declines in the demand for public telephony phonecards and by price pressures
due to increased competition. Wireless carriers are increasingly recognizing the flexible and strategic role of SIM cards
for offering improved and new value-added services to their customers. This should increase the
demand for higher priced SIM cards with greater memory and processing power. We believe this, in
turn, should result in a further improved business mix towards higher priced products and help
offset pressures to lower prices on our more mature products. This improved product mix should also
be aided by further growth in the United States and Latin America, where carriers are adopting SIM
card-based systems and by the growth related to the progressive implementation of 3G networks. Trends in the Markets for our Financial Services Segment Progress in the markets for our financial services products was also negatively affected by
the downturns of 2001 and 2002. A significant hindrance to growth in the past has been the absence
of widely accepted technology standards for improved interoperability of products. The adoption of
the EMV standard for chip card-based payment systems should be a positive impact in the adoption of
chip cards in 2005. Trends in the Markets for our Identity and Security Segment As government and corporate demand increases toward more secure systems for authenticating
persons and controlling access to networks and facilities, there should be opportunities to promote
the adoption of chip card-based security systems. Our strategy is focused on selling subsystems
based on software components, value-added services and high-end cards. We believe our Identity and
Security segment also stands to benefit from broader acceptance of technology standards that would
allow larger organizations to implement chip card security and identity systems with more
confidence in system interoperability and forward compatibility. We believe our abilities to produce large volumes of chip cards and deliver associated
infrastructure and integration services should position us to capture market share as spending
increases in this sector. Trends in Our Development In 2004, we realigned our business units into three segments: Telecommunications, Financial
Services and Identity and Security. This realignment separated our former Financial Services and
Security segment into two business units. While our Identity and Security segment is starting from
a small base, we believe its potential growth merits its treatment as a separate business unit. We
believe this realignment will enable us to better serve our customers over time through more
focused sales and marketing efforts in all our business units.




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##### Table of Contents



The restructuring programs that we implemented in recent years are starting to deliver lower
fixed costs. We intend to continue to keep focusing on managing costs, and are further implementing
processes to better control our expenses. The anticipated improvement in our profitability, however, assumes an average exchange rate of
approximately US$1.20 per euro. The effects of currency fluctuations have played a significant
factor in our results in the recent past and may continue to do so; however, we have attempted to
mitigate our losses through our hedging programs. See Note 8 to our Consolidated Financial
Statements. OFF-BALANCE SHEET ARRANGEMENTS There are no off-balance sheet transactions that have, or are reasonable likely to have, a
current or future effect on our financial condition, revenues, expenses, results of operations,
liquidity, capital expenditures, or capital resources that would be material to our shareholders. (in millions of euros)December 31
    
    2004
    
    
    2003
    
    
    2002Performance, downpayment and bid bonds
    
    
    10.4
    
    
    
    10.8
    
    
    
    15.8Guarantees related to operations
    
    
    3.8
    
    
    
    6.5
    
    
    
    9.4Total guarantees issued
    
    
    14.2
    
    
    
    17.3
    
    
    
    25.2
 As of December 31, 2004, the amount of guarantees, mainly representing performance bonds and
bid bonds, amounted to € 10.3 million. These guarantees are primarily made in the ordinary
course of business where our customers demand guarantees to secure our performance under contracts
or tenders for business which become payable based upon non-performance by us. As of December 31, 2004, guarantees related to operations included an amount of € 2.6
million relating to a potential liability in respect of the restricted cash in China (see Notes 9
and 37 to our Consolidated Financial Statements). These guarantees also included an amount of
€ 887 thousand (DKK 6.6 million) relating to a stand-by letter of credit issued by us in favor
of Realtime A/S (see Note 37 to our Consolidated Financial Statements
and Item 7. Related Party
Transactions). See Note 35 to our Consolidated Financial Statements.




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##### Table of Contents



CONTRACTUAL OBLIGATIONS Schedule of payments
    
    
    (in millions of euros)Contractual obligationsas of December 31, 2004
    
    Total
    
    
    Less than 1 year
    
    
    1 to 5 years
    
    
    More than 5 yearsFinance lease obligations
    
    
    44.6
    
    
    
    7.2
    
    
    
    25.5
    
    
    
    11.9Operating lease obligations
    
    
    18.4
    
    
    
    3.9
    
    
    
    6.1
    
    
    
    8.4Purchase obligations (1)
    
    
    60.9
    
    
    
    60.9
    
    
    
    
    
    
    
    Total
    
    
    123.9
    
    
    
    72.0
    
    
    
    31.6
    
    
    
    20.3
 
 (1)
    
    Including € 46.8 million related to microprocessor chips purchase commitments. As of December 31, 2004, no obligations or commitments other than those disclosed
above would have a significant affect on our Consolidated Financial Statements. We also have certain
commitments arising from our foreign currency hedges. For a description
of our foreign currency hedges, see Item 11. Quantitative and Qualitative Disclosures About Market
Risk and Note 8 to our Consolidated Financial Statements.




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Item 6. Directors, Senior Management and Employees BOARD OF DIRECTORS Under Luxembourg law, our board of directors is vested with broad powers to manage our
company. All powers not expressly reserved by law or by the articles of incorporation to the
shareholders fall within the powers of the board of directors. Our board of directors currently has twelve members. Members of our board of directors are
appointed by the shareholders to serve terms not to exceed three years and may be re-appointed for
consecutive terms. They may resign at any time, and their functions as members of our board of
directors may be terminated at any time by a simple majority of the votes of the shareholders
voting at a general meeting. Under Luxembourg law, a director may be an individual or a
corporation. Our board of directors held eight meetings in 2004. At these meetings, the average attendance
(physically and by telephone) was 81.25%. As of January 1, 2004, our board of directors consisted of Mr. Dominique Vignon (Chairman),
Mr. David Bonderman (Vice Chairman), Mr. Alex Mandl, Mr. Randy Christofferson, Mr. Thierry
Dassault, Mr. Geoffrey Fink, Mr. Werner Koepf, Dr. Johannes Fritz, Dr. Peter Kraljic, Mr. Daniel
Le Gal, Mr. Ronald W. Mackintosh and Mr. William S. Price III. On April 27, 2004, Mr. Ron Mackintosh and Mr. Thierry Dassault ceased being members of our
board of directors, and our shareholders elected Mr. Michel Akkermans and Mr. Kurt Hellström to our
board of directors. As of May 31, 2004, Mr. Randy Christofferson ceased to be a member of our board
of directors. Effective June 1, 2004, Mr. John Ormerod became a member of our board of directors. Our board of directors conducts its activities in accordance with governance principles set
forth in applicable regulations, exchange rules, our articles of incorporation, our Code of Ethics,
committee charters and other adopted practices. As of April 26, 2005, the following individuals comprised our board of directors: Date of
    
    ExpirationName
    
    Age
    
    appointment
    
    of Term
    
    OccupationMr. Dominique
Vignon
    
    
    57
    
    
    June 21, 2002
    
    April 2007
    
    Chairman of our board
of directorsMr. David Bonderman
    
    
    62
    
    
    December 19, 2001
    
    April 2007
    
    Vice-Chairman of our
board of directors;
Managing Partner,
Texas Pacific GroupMr. Alex Mandl
    
    
    61
    
    
    October 29, 2002
    
    April 2007
    
    Chief Executive OfficerMr. Michel Akkermans
    
    
    45
    
    
    April 27, 2004
    
    April 2007
    
    Founder and Chairman,
Clear2PayMr. Geoffrey Fink
    
    
    35
    
    
    October 28, 2003
    
    April 2007
    
    Principal, Texas Pacific GroupMr. Johannes Fritz
    
    
    50
    
    
    December 19, 2002
    
    April 2007
    
    Managing Director, Quandt family office




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Date of
    
    ExpirationName
    
    Age
    
    appointment
    
    of Term
    
    OccupationMr. Kurt Hellström
    
    
    61
    
    
    April 27, 2004
    
    April 2007
    
    Advisor, Investor ABMr. Werner Koepf
    
    
    63
    
    
    October 28, 2003
    
    April 2007
    
    Board member, Marconi Corporation plcMr. Peter Kraljic
    
    
    65
    
    
    April 17, 2002
    
    April 2007
    
    Member of the McKinsey
Advisory CouncilMr. Daniel Le Gal
    
    
    54
    
    
    April 17, 2002
    
    April 2007
    
    Partner and Managing
Director, FinadvanceMr. John Ormerod
    
    
    56
    
    
    June 1, 2004
    
    April 2007
    
    Chairman Walbrook
Group LimitedMr. William S. Price
    
    
    49
    
    
    February 1, 2000
    
    April 2007
    
    Managing Partner,
Texas Pacific Group
 Board Committees Our board of directors has three committees and one subcommittee: an Audit Committee, a
Compensation Committee (with a Stock Administration Committee as a subcommittee) and a Strategy
Committee. Audit Committee In
2004, the members of our Audit Committee were Mr. John Ormerod (Chairman), Mr. William S. Price
III, Mr. Werner Koepf, and Mr. Johannes Fritz. Mr. Randy Christofferson ceased to be a member of
the Audit Committee on May 31, 2004, and Mr. John Ormerod was elected in replacement of Mr.
Christofferson as a member of the Audit Committee, effective June 1, 2004. On June 28, 2004, Mr.
Ormerod became the Chairman of our Audit Committee. On April 13, 2005, Mr. William S. Price
resigned from the committee. Since that date, the Audit Committee has consisted of three members. Our Audit Committee held twelve meetings in 2004. At ten of these Audit Committee meetings,
all members were in attendance (physically or by telephone). At two Audit Committee meetings, there
were three members in attendance. The activities of the committee are governed by a specific
committee charter. Among other things, this committee reviews our financial statements, the
evolution of our material litigation and claims and potential conflicts of interests with a
director or any other related party and all other activities as required by law and securities
exchange rules. During 2004, the Audit Committee reviewed, among other items, our Consolidated
Financial Statements for 2003, our quarterly statements for 2004, the quarterly accounting
judgments and material comments made by our auditors and reports on related party transactions
presented to it, as well as reports on the implementation of regulations arising under the
Sarbanes-Oxley Act. Main off-balance sheet liabilities (and particularly guarantees and foreign exchange
operation) are regularly reviewed by our Audit Committee and our Chief Financial Officer. The Audit Committee has the sole authority with respect to the recommendation, compensation,
retention and oversight of the work of our independent auditors. Luxembourg law requires our
auditors to be appointed by our shareholders; therefore, our shareholders appoint the auditors upon
recommendation of the Audit Committee. The Audit Committee has not established any pre-approval
procedures for
permissible non-audit services proposed to be performed by our independent auditors, and requires
each engagement for non-audit services to be approved in advance by the Audit Committee (except for
delegation to the Chairman of the Committee of the authority to approve in advance all audit and
non-audit services to be provided by the auditors if presented to the Committee at the next
regularly scheduled meeting).




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##### Table of Contents



Compensation Committee In
2004, the members of our Compensation Committee were Mr. Dominique Vignon (Chairman), Mr. Thierry
Dassault and Mr. David Bonderman. On April 27, 2004, Mr. Werner Koepf replaced Mr. Thierry Dassault
on our Compensation Committee. On February 8, 2005 Mr. Bonderman resigned from the committee and
was replaced by Mr. Geoffrey Fink. The Compensation Committee held five meetings in 2004. At all
these meetings, all members were in attendance (physically or by telephone). The activities of the
committee are governed by a specific committee charter. Among other things, this committee reviews
our Chief Executive Officer compensation and makes recommendations on the compensation of all our
executive officers and directors. The Compensation Committee follows guidelines that generally call
for the bonus portion of senior executive compensation to vary between 75% and 100% of the
applicable salary, depending on the executives position. Generally, one-half of this bonus depends
on the performance of the company, and the other half depends on achievement of individual
objectives related to the executives performance. The committee also evaluates and recommends
candidates for new directors and for the selection of our Chairman and Chief Executive Officer. In 2004, the members of our Stock Administration Committee, acting as a subcommittee to the Compensation
Committee were Mr. Alex Mandl, Mr. Philippe Duranton, Mr. Yves Guillaumot, Mr. Stephen
Juge and Mr. Frans Spaargaren. As of June 1, 2004, Mr. Frans Spaargaren replaced Mr. Yves Guillaumot as a member of the
Stock Administration Committee. The activity of this committee is governed by a specific committee
charter. The Stock Administration Committees role is to advise the board of directors concerning
stock option issuances and related matters. Stock options are generally granted to executives and
certain other personnel when they are hired, and potential additional grants are subject to annual
review based on individual and collective company achievement criteria. Strategy Committee In 2004, the Strategy Committee consisted of Mr. Dominique Vignon (Chairman), Mr. Peter
Kraljic, Mr. Daniel Le Gal, Mr. Alex Mandl and Mr. William S. Price III. The Strategy Committee met
one time in 2004, with all members in attendance. The Strategy Committees role is to advise the
board of directors concerning our overall strategy and long term planning. SENIOR MANAGEMENT Our board of directors has, with the authorization of our shareholders, delegated the
day-to-day management of our company, including the power to act on behalf of our company and
sub-delegate powers, to the Chief Executive Officer, for matters up to 30 million euros. This
delegation is subject to certain powers reserved by law to the board of directors or our
shareholders. In September 2002, Mr. Alex Mandl became our Chief Executive Officer, replacing Mr. Ronald
Mackintosh. In January 2004, Mr. Jacques Seneca was appointed as the head of the newly formed
Identity and Security business unit, Mr. Philippe Combes was appointed as the head of the Financial
Services business unit and Mr. Ernest Berger was appointed President of Gemplus North America. On
June 1, 2004, Mr. Frans Spaargaren was appointed as our Chief Financial Officer, replacing Mr. Yves
Guillaumot. On April 18, 2005, Mr. Martin McCourt was appointed President of Gemplus Asia. The following table sets forth the name, age and current position of each of our top executive
officers as of, June 2, 2005. Name
    
    Age
    
    PositionMr. Alex Mandl
    
    
    61
    
    
    Chief Executive Officer




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##### Table of Contents



Name
    
    Age
    
    PositionMr. Ernest Berger
    
    
    50
    
    
    Executive Vice President, Gemplus North AmericaMr. Philippe Combes
    
    
    52
    
    
    Executive Vice President, Operations and
Financial Services Business UnitMr. Philippe Duranton
    
    
    45
    
    
    Executive Vice President, Human ResourcesMr. Stephen Juge
    
    
    51
    
    
    Executive Vice President, General CounselMr. Martin McCourt
    
    
    43
    
    
    Executive Vice President, Gemplus AsiaMr. Jacques Seneca
    
    
    45
    
    
    Executive Vice President, Business Development
Group and Security and Identity Business UnitMr. Frans Spaargaren
    
    
    49
    
    
    Executive Vice President, Chief Financial OfficerMr. Philippe Vallée
    
    
    40
    
    
    Executive Vice President, Telecom Business Unit
 DIRECTOR AND EXECUTIVE OFFICER BIOGRAPHIES Dominique Vignonhas served as Chairman of the board of directors since June 21, 2002. Mr.
Vignon served as Chairman of the board of directors and Chief Executive Officer of the Framatome
Group from 1996 to 2001, where he also developed that groups connector business (FCI). From the
end of 2000 to the end of 2001, he served as President of Framatome ANP and led the merger of the
Framatome and Siemens corresponding activities. From 1995 to 1996, he was President of Framatomes
nuclear business. From 1993 to 1995, he was Chairman of Jeumont Industrie. From 1990 to 1993, Mr.
Vignon was General Manager of Nuclear Power International (NPI), the joint venture of Framatome and
Siemens. From 1975 to 1990, he worked at Electricité de France, where he was in charge of major new
generation projects in France and abroad. Mr. Vignon is a graduate of Frances Ecole Polytechnique,
and of the leading French Engineering School, the Ecole Nationale des Ponts et Chaussées (civil
engineering). He also holds a Master in Economics. Mr. Vignon serves on the board of Completel
Europe N.V. Alex Mandlhas served as Chief Executive Officer since September 2002, and as director since
October 29, 2002. From April 2001 through August 2002, Mr. Mandl was a principal in ASM Investments
focusing on technology investments. Previously, Mr. Mandl served as Chairman and CEO of Teligent, a
company he started in 1996, offering the business markets an alternative to the local Bell
Companies for telecommunication/internet services. From 1991 to 1996, Mr. Mandl was with AT&T where
he served as President and Chief Operating Officer with responsibility for long distance, wireless,
local communications and Internet services. Prior to his President/COO position, he was AT&Ts
Chief Financial Officer. Between 1987 and 1991, Mr. Mandl was Chairman and CEO of Sea-Land
Services, Inc., the worlds leading provider of ocean transport services. In 1980, he joined
Seaboard Coastline Industries, a diversified transportation company, as Senior Vice President and
Chief Financial Officer. Mr. Mandl began his career in 1969, when he joined Boise Cascade Corp. as
a merger and acquisition analyst, and he held various financial positions during the next eleven
years. Mr. Mandl holds a Master of Business Administration from the University of California at
Berkeley and a Bachelor of Arts degree in economics from Willamette
University in Salem, Oregon. Mr. Mandl serves on the boards of Dell Computer Corporation, the
Walter A. Haas School of Business at the University of California at Berkeley, Willamette
University and the American Enterprise Institute for Public Policy Research. David Bondermanhas served as Vice-Chairman of the board of directors since December
2001. He is a principal, general partner and one of the founders of Texas Pacific Group (TPG).
Prior to forming TPG in 1993, Mr. Bonderman was Chief Operating Officer of the Robert M. Bass
Group, Inc. (now doing business as Keystone, Inc.) (RMBG) in Fort Worth, Texas. Prior to joining
RMBG in 1983, Mr. Bonderman was a partner in the law firm of Arnold & Porter in Washington, DC
where he specialized in corporate, securities, bankruptcy, and antitrust litigation. From 1969 to
1970, Mr. Bonderman was a Fellow in Foreign and Comparative Law in
conjunction with Harvard University and from 1968 to 1969, he was Special Assistant to the U.S.
Attorney General in the Civil Rights Division. From 1967 to 1968, Mr. Bonderman was Assistant
Professor at Tulane University School of Law in New




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Orleans. Mr. Bonderman graduated magna cum laudefrom Harvard Law School in 1966. He was a
member of the Harvard Law Review and a Sheldon Fellow. He is a 1963 graduate of the University of
Washington in Seattle. Mr. Bonderman serves on the boards of ProQuest Company, Ducati Motor
Holding, S.p.A., Co-Star Group, Inc., and Ryanair Holdings, plc. He also serves on the boards of
The Wilderness Society, the Grand Canyon Trust, the World Wildlife Fund and the American Himalayan
Foundation. In addition, he serves on the board of directors of the University of Washington
Foundation as well as the Harvard Law School Deans Advisory Board. Michel Akkermanshas served as one of our directors since April 27, 2004. Mr. Akkermans is a
successful entrepreneur specializing in information technology for the banking industry. Mr.
Akkermans holds a Master of Science in Electronic Engineering and Computer Sciences and a degree in
Economics & Finance from the University of Leuven in Belgium. He is currently Chairman and Chief
Executive of Clear2Pay, a software solutions company that helps financial institutions to provide
branded electronic payment services. Mr. Akkermans was previously Chairman and CEO of FICS and
Former Executive Chairman of NASDAQ-listed S1 Corporation, the market leader in internet banking.
In addition to Clear2Pay, he also serves on the boards of Capco, Data4s, Approach, Proficient, and
is a member of the Advisory Board of GIMV. Ernest Bergerhas served as President of Gemplus North America since January 2004. He has 15
years of experience in the financial services sector with American Express from 1990 to 1995, and with First USA from 1995 to 1999, where he
held senior management positions. More recently, Mr. Berger was a member of the executive team at the New York office of Walker Digital, and
then managed his own consulting firm. He holds a Bachelor of Science in Mechanical Engineering from
Columbia University in New York, and an Master of Business Administration from the Wharton School,
University of Pennsylvania, in Philadelphia. Randy L. Christoffersonhas served as a director from November 2000 to May 31, 2004. Mr.
Christofferson has been the Managing Director of MIOGA Ventures since 2000. From August 1999 to
September 2000, Mr. Christofferson served as Chief Executive Officer of Walker Digital. From 1995
to 1999, Mr. Christofferson served as President of First USA Bank. From 1990 to 1995, Mr.
Christofferson held several senior management positions at the American Express Company, including
President of Amex Relationship Services, Senior Vice President of Worldwide Quality and
Reengineering and Senior Vice President of Corporate Strategy and Advanced Technology. Prior to
1990, Mr. Christofferson was a partner of Bain & Company. Mr. Christofferson received his Master of
Business Administration from Harvard University and graduated with highest honors from Michigan
State University, where he earned a Bachelor of Science in Chemical Engineering. Mr. Christofferson
serves on the boards of directors of IntelliRisk Management Corporation, FineStationery.com,
DeNovo, Inc. and the Delaware Art Museum. Philippe Combeswas appointed Executive Vice President, Operations on February 12, 2003, and
as head of the Financial Services Business Unit with effect as of January 20, 2004. Prior to
joining Gemplus, Mr. Combes had been running his own executive coaching consultancy. From 1998 to
2002, he was CEO of Philips Displays, based in Holland, the worldwide leader in consumer displays.
From 1988 to 1998, Mr. Combes served in general management positions for Thomson Multimedia in Hong
Kong, China, Poland and France, including VP Operations for Displays. In 1975 he joined
Schlumberger Industries where he held various operational responsibilities in France, Brazil and
Indonesia. Mr. Combes has a Bachelor of Arts degree from ENSAM (Ecole Nationale Supérieure dArts
et Métiers) with a Masters in Robotics and Electronics. Thierry Dassaultserved as a director from April 2002 to April 27, 2004. He currently serves
as the Chairman of Dassault Multimedia, a venture capital company that holds investments in
companies such as ATARI (Infogrames), Hi-Média, EMME Interactive and Welcome Real Time in which Mr.
Dassault also serves as director. Prior to that, from 1985 to 1993, he was Producer Partner at
Claude Delon Productions Company. From 1982 to 1984, he was General Manager in an alarm systems
company, and from 1979 to 1981, he was director of the Equipments Civils pour lElectronique Serge
Dassault company in Brazil. Mr. Dassault has served on the supervisory board of Gemplus S.A. from
1998 to May 2004 and as Vice-Chairman from March 2001 to May 2004. He serves on the boards of
various companies, including Chapitre.com, Dassault Multimedia and Groupe Industriel Marcel
Dassault. He also serves on the supervisory board of Société du Journal des Finances. Philippe Durantonhas served as our Executive Vice President, Human Resources since May 2003.
Prior to joining Gemplus, Mr. Duranton served as Human Resources EVP at Canal+ and Co-Managing
Director, General Affairs, for the Television and Film Division of Vivendi Universal from 1998 to
2002. Prior to joining Canal+, Mr. Duranton




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spent nine years (1989 to 1998) at Thales where he held numerous Human Resource management positions across the companys divisions. Mr. Duranton began his
career in education and held various positions from 1985 to 1988 in both the public and private sectors. Mr. Duranton holds a variety of academic distinctions
including a D.E.S.S. diploma in Human Resource Management from the Institute of Administration for
Business, Bordeaux, France, and a Masters degree in History. Geoffrey D. Finkhas served as a director since October 2003. Mr. Fink is a London-based
Principal in Texas Pacific Groups operating group, which he joined in December 2000. From May 1998
to December 2000, Mr. Fink was a Vice President and subsequently Senior Vice President with
Security Capital Group. Between August 1999 and December 2000, Mr. Fink was also Chief Operating
Officer, head of the Management Committee, and board member of Access Space. In 1993 and from 1995
to 1998, Mr. Fink was a Consultant and then Engagement Manager with McKinsey & Company in London
and he was one of the founders of McKinseys asset management practice. Prior to joining McKinsey,
Mr. Fink worked in the M&A departments of both Goldman Sachs in London and PaineWebber in New York.
Mr. Fink received a Bachelor of Arts degree summa cum laudefrom Yale University, a Juris Doctor
degree magna cum laudefrom Harvard University and a Masters degree focused on international
business from the Fletcher School of Law and Diplomacy. Johannes Fritzhas served as a director since December 2002. He has been the managing director
of the Quandt family office since June 2000. From 1991 to June 2000, he was a managing director
responsible for all financial affairs of the Quandt family office and running its
day-to-day-business. In 1989 he joined the Quandt family office. Prior to that, he spent five years
at KPMG covering financial institutions and industrial companies. From 1982 to 1983, he worked with
Bertelsmann AG in the area of human resources. Mr. Fritz studied at Mannheim University where he
was awarded a Master and Doctor degree in Business Administration. As a research associate he
followed a postgraduate education at the business school of the New York University. Mr. Fritz
earned a degree as a tax advisor and a certified public accountant (CPA). He serves on the advisory
board of Drees & Sommer AG, as a member of the regional council of Deutsche Bank and on the
advisory board of BHF-Bank. Yves Guillaumotserved as our Executive Vice President Chief Financial Officer from November
2002 to June 1, 2004, and as Vice President, Interim Chief Financial Officer from March 2002 to
November 2002. Mr. Guillaumot joined our company in July 1998 as Corporate Controller. He was
promoted to Vice President in March 2001. Prior to joining Gemplus, from 1987 to 1998, Mr.
Guillaumot held various financial management positions with Digital Equipment, including as
director of Finance for Southern Europe, Middle East and Africa from 1997 to 1998 and Controller of
the PC division from 1996 to 1997. Prior to 1996, Mr. Guillaumot held positions with Arthur
Andersen and Arthur Young. Mr. Guillaumot graduated from the Ecole de Hautes Etudes Commerciales du
Nord in France. Kurt Hellströmhas served as a director since April 27, 2004. Mr. Hellström is the former
President and Chief Executive Officer of Ericsson, the major telecommunications group, where he
spent almost 20 years in a number of senior roles. Earlier in his career, he held commercial
positions with Jugner Instrument and Standard Radio & Telephone. Mr. Hellström holds a Master of
Science in Electrotechnology. He serves on the Boards of Atlas Copco, Bharti Televentures in India
and Spirent. Werner Karl Koepfhas served as a director since October 2003. Mr. Koepf currently holds
various senior management positions at Marconi Corporation plc London UK, in particular he serves
as director and member of the audit, nominations, remunerations and operations review committee.
Mr. Koepf serves as well as Chairman of the supervisory board and the nominations committee of
Marconi Communications GmbH, and as Chairman of the supervisory board of Marconi Communications
Holding GmbH. From 1993 to 2002, Mr. Koepf was successively Vice President and General Manager of
the General Business Group of Compaq Computer Europe Middle East and Africa (EMEA) and Chief
Executive Officer and Chairman for Compaq Computer, EMEA. From 1989 to 1993, Mr. Koepf was Chairman
and Chief Executive Officer for European Silicon Structures S.A. in Luxemburg. Previously, Mr.
Koepf held various management positions at Texas Instruments Inc., including as Vice President and
General Manager of several divisions of the group. Mr. Koepf received a Master of Business
Administration from Munich University and a Bachelor of Electrical Engineering degree with honors
from the Technical College in St. Poelten in Austria. Mr. Koepf is an advisor for Techno Venture
Management GmbH, a venture capital company in Munich and Boston (Massachusetts). Mr. Koepf is
Chairman of the board of directors of PXP Software AG in Austria.




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Stephen Jugehas served as our Executive Vice President, General Counsel since November 2000.
Prior to joining Gemplus, Mr. Juge served from January to October 2000, as Senior Vice President
and General Counsel of Walt Disney Europe. From April 1996 to January 2000, Mr. Juge served as
Senior Vice President and European Legal Counsel of The Walt Disney Company (Europe) S.A. From
November 1987 to March 1996, Mr. Juge served as Vice
President and General Counsel of Disneyland Paris Resort (Euro Disney S.C.A.). Prior to joining
Disneyland Paris, Mr. Juge was an associate at the international law firm of Coudert Frères in
Paris between 1981 and 1987. Mr. Juge attended Louisiana State University, received a Juris Doctor
degree from the Tulane University School of Law and studied comparative law at the University of
Oxford on a Marshall Foundation Fellowship. Peter Kraljichas served as a director since April 2002. He currently serves as a senior
director with McKinsey Advisory Council, New York. Dr. Kraljic joined McKinsey in 1970 and has
worked extensively on strategic, organizational, operational and restructuring programs for
industrial companies in Germany, Austria, France as well as in Central and Eastern Europe. From
1993 to 1998, he was responsible for McKinseys activities in France as Directeur Général. Prior
to joining McKinsey, Dr. Kraljic worked as a researcher in La Continentale Nucleaire, Luxembourg, as
well as for the Welding Institute Ljubljana, Slovenia. Dr. Kraljic holds a degree in metallurgy
from the University of Ljubljana, a Doctorate from the Technical
University Hanover and a Masters in
Business Administration from INSEAD, Fontainebleau, France. Dr. Kraljic serves on the supervisory
board of the Wolfsburg AG association, LEK d.d. and of IEDC Bled Management School. Daniel Le Galhas served as a director since April 2002. He currently serves as a partner and
Managing Director of Finadvance. One of our co-founders in 1988, Mr. Le Gal served as our Chief
Executive Officer from 1997 to 1999, prior to which he held several management positions in Sales,
Marketing and Strategic Planning for our company. Prior to founding our company, from 1982 to 1987,
Mr. Le Gal served as Marketing Manager in the Telecommunication Unit of Thomson Semiconductors.
From 1975 to 1982, he held various positions at France Telecom. Daniel Le Gal holds an Engineering
Degree from Supelec, in Paris, France. Mr. Le Gal serves on the boards of directors of Tornado,
T.O.D, Qualicontrol and S.E.A. Ronald W. Mackintoshserved as a director from April 2001 to April 27, 2004. He also served as
interim Chief Executive Officer from December 19, 2001 (when he resigned as a director) until
August 31, 2002 and was re-elected director at the annual general meeting of shareholders held on
April 17, 2002. Mr. Mackintosh was the Chief Executive Officer of Differentis from July 2000
through December 2001, when he resigned from that position in order to take the interim role at
Gemplus. Since completing his interim role for Gemplus, he has returned to Differentis as Chairman.
Mr. Mackintosh served as Chief Executive Officer of Computer Sciences Corporation, European
Business since October 1992. From June 1990 to September 1992, Mr. Mackintosh served as Chief
Executive, CSC UK. From November 1987 to June 1990, Mr. Mackintosh served as Chief Executive
Officer at Index Group Europe. Prior to October 1987, Mr. Mackintosh was a Partner at Nolan Norton
& Co. Europe. Mr. Mackintosh serves on the board of directors of Differentis. Mr. Mackintosh
graduated from Arbroath High School, Scotland. Martin McCourthas served as President of Gemplus Asia since April 2005, responsible for the
whole of Asia, including Asia Pacific, Greater China, Japan and Korea. He has 20 years of
experience in the Telecom sector, including several years focused on Asian markets. He has held
leadership roles in R&D, Sales and Marketing, Operations, Strategy and M&A and was most recently
Vice President of Corning Cable systems Project Services business. Mr. McCourt has a Master of
Business Administration from INSEAD, a Ph.D in Integrated Optics from the Institut National
Polytechnique in Grenoble and a Bachelor of Electronic Engineering from University College Dublin. John Ormerodhas served as our director since June 1, 2004. Mr. Ormerod became a Senior
Partner in the UK practice of Deloitte & Touche LLP, the international accounting firm from 2002
until May 2004 and a member of the firms UK Executive and Board. In 1981, Mr. Ormerod was a
Partner of Andersen. He served two years on Andersens Worldwide Chief Executives Advisory Council
and was European Technology, Media & Telecommunications (TMT) practice leader and member of the
Global TMT Industry team executive. Mr. Ormerod was the Chairman of Andersens UK Partnership
Council (from 1999 until 2000) and Andersens UK managing partner (from 2001 until 2002) Mr.
Ormerod was educated at Oxford and is a Chartered Accountant. He serves on the board and chairs the
audit committee of Transport for London. Mr. Ormerod is presently the Chairman of Walbrook Group
Limited. Mr. Ormerod is a non-executive director of BMS Associates Limited, trustee of the
Roundhouse Trust and member of the Global Advisory Board of London Business School.




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William S. Price, IIIhas served as a director since February 2000. Mr. Price was a founding
partner of the Texas Pacific Group in 1992. Prior to forming the Texas Pacific Group, Mr. Price was
Vice President of Strategic Planning and Business Development for General Electric Capital
Corporation. From 1985 to 1991, Mr. Price was employed by the management consulting firm of Bain &
Company, attaining partnership status and acting as co-head of the Financial Services Practice.
Prior to 1985, Mr. Price was employed as an associate specializing in corporate securities
transactions with the law firm of Gibson, Dunn & Crutcher LLP. Mr. Price is a member of the
California Bar and graduated with honors in 1981 from the Boalt Hall School of Law at the
University of California, Berkeley. He is a 1978 Phi Beta Kappa graduate of Stanford University.
Mr. Price serves on the boards of directors of Del Monte Foods, Denbury Resources, Inc, Belden &
Blake Corp. Bally, DoveBid, Findexa and Kraton Holdings. Jacques Senecahas served as our Executive Vice President, Business Development Unit since
January 2003, and as head of the ID & Security Business Unit with effect as of January 20, 2004.
Prior to that date, he served as General Manager of our GemVentures Services Unit from September 1,
2001, and continues in that role. Mr. Seneca joined Gemplus in 1989 as Project Manager. He has held
several management positions as Products Department Manager, General Manager for Sales and
Manufacturing Operations in Germany, General Manager for the Telecom Business Division, and as
Executive Vice President for Gemplus Marketing & Technology. Mr. Seneca has been a member of the
Gemplus Executive Committee since 1990. Prior to joining our company, he worked with
ST-Microelectronics where he held various positions in the fields of manufacturing, marketing and
business development. Mr. Seneca holds a Bachelors degree from ENSAM (Ecole Nationale Supérieure
dArts et Métiers) and a Business Administration degree from IAE of Aix-en-Provence in France. Frans Spaargarenhas served as our Chief Financial Officer and Executive Vice President of
Gemplus since June 2004. Before joining Gemplus he was Executive Vice President of Philips
International, with responsibility for Philips joint venture operations with LG Electronics. From
May 1998 till November 2001 he was Chief Financial Officer and Executive Vice President of Philips
Components. Prior to that he held various positions in general and financial management at Varta
Batteries, latest as a Member of the Divisional Board of Varta Portable Batteries. Mr. Spaargaren
has a Bachelors degree in Economics and Accounting from Utrecht University, a post-graduate
Diploma in Financial Management, and a Master in Business Administration from Henley Management
College, United Kingdom. Philippe Valléehas served as our Executive Vice President, Telecom Business Unit since
February 2002. He was Vice-President Marketing of the Telecom Business Unit from May 2001 to
February 2002. He was previously based in Singapore as Executive Vice-President of Gemplus
Technologies Asia, and headed the marketing and development activities and professional services
operations of Gemplus Asia Pacific. Mr. Vallée has 12 years of experience in the chip card industry
and has served in various marketing, product management and sales capacities in our company. Prior
to joining our company, Mr. Vallée served as product manager on the first generation of GSM mobile
phones for Matra Communications (now Lagardère Group) in France. Mr. Vallée has a Bachelors degree
in Electronics and Telecommunications Engineering and a Master of Science in Marketing Management
from ESSEC. COMPENSATION OF DIRECTORS AND PRINCIPAL EXECUTIVE OFFICERS Aggregate compensation paid by us with respect to our directors and executive officers as a
group for the fiscal year ended December 31, 2004 was approximately  8,332 thousand, including
 5,109 thousand to our executive officers and  3,223 thousand to our directors. In
addition, a total of 2,400,000 options were granted to our directors and executive officers as a
group during 2004. The following table presents the gross amounts of the compensation paid for the fiscal year
ended December 31, 2004 to our mandataires sociaux(as defined under French law), which legal term
includes our Chief Executive Officer and certain of our directors1.




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##### Table of Contents



Total amount inName
    
    Thousands of eurosMichel Akkermans
    
    
    34David Bonderman
    
    
    54Randy L. Christofferson
    
    
    26Geoffrey Fink
    
    
    50Johannes Fritz
    
    
    62Kurt Hellström
    
    
    34Werner Karl Koepf
    
    
    65Peter Kraljic
    
    
    51Alex J. Mandl2
    
    
    2,298Daniel Le Gal
    
    
    51Ronald Mackintosh
    
    
    16John Ormerod
    
    
    44William S. Price
    
    
    65Dominique Vignon
    
    
    373Total
    
    
    3,223
 
 1
    
    Directors not listed did not receive any compensation from us for the year 2004.2
    
    Includes bonus and housing allowance. See
Item 19. Exhibits. At the annual meeting of the shareholders held on April 27, 2004, our shareholders approved
the principles of the compensation of directors amounting to a maximum of  1 million.
Subsequently, on April 27, 2004, our board of directors decided to allocate compensation to
individual directors of  50 thousand per year per director as compensation in connection with
services performed as a member of our board of directors, plus  20 thousand for the Audit
Committee Chairman,  10 thousand for elected committee Chairmen, plus  1 thousand per
committee meeting attendance for each committee member. On April 26, 2005, our board of directors
decided, subject to the shareholders approval of the principles of the amount of the compensation,
to allocate compensation to individual directors in the same manner as decided on April 27, 2004.
At the annual meeting of the shareholders held on April 26, 2005, our shareholders re-approved the
principles of the compensation of directors amounting to a maximum of  1 million. Mr. Thierry
Dassault waived his compensation for 2004. None of the non-employee directors have any agreement with us that provides for benefits upon
termination of service. Mr. Vignon is an employee of our company in respect of his capacity as a
Chairman of our board of directors and, therefore, may be entitled to ordinary benefits upon
termination of his employment. STOCK OPTIONS In General On July 27, 2000, we adopted a stock option plan that provides for the grant of stock options
to our employees. The term of the options granted under the plan is determined by the notice of
grant, and will not exceed ten years from the date of the grant of the option. Pursuant to an
authorization of the shareholders during an extraordinary general meeting held on April 29, 2003,
options may be granted under the current plan until May 31, 2006. The maximum number of shares of common stock that may be issued under the current stock option
plan is 50,000,000. As of March 31, 2005, 32,931,106 stock options were outstanding. Our employees are also currently beneficiaries under the stock option plans previously adopted
for Gemplus S.A., our main operating subsidiary in France. Our employees may contribute to our
company the stock options or the shares of Gemplus S.A. received upon exercise of these options in
exchange for options or shares, as applicable, of our company. As of March 31, 2005, 304,365
options for subscription of shares of Gemplus S.A. were outstanding under the old plans. If such
Gemplus S.A. stock options outstanding as of March 31, 2005 were exercised or exchanged for options
of our company and if all the shares resulting from the exercise of these options were contributed
to our company, the beneficiaries would be the holders of 15,218,250 of our shares. In addition,
certain




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##### Table of Contents



employees of Gemplus S.A. have elected to receive stock options of our company in exchange
for their Gemplus S.A. stock options. As of March 31, 2005, 2,471,417 options resulting from the
conversion of Gemplus S.A. stock options were outstanding. The terms and conditions of Gemplus S.A.s stock option plans are substantially consistent
with those of our stock option plan as described below, except for the method of determination of
the option exercise price and the vesting period. The exercise price was determined at the time of
issuance of the options based on the fair market value of the securities as determined by the board
of directors of Gemplus S.A. One-third of the options vest each year over a three-year term for
beneficiaries in France under the Gemplus S.A. stock option plan issued to employees in France in
1999 and 2000, while 25% of the options vest each year over a four-year term for beneficiaries
outside of France. No more options may be granted under the Gemplus S.A. stock option plans. Plan Administration Our stock option plans are administered by the Stock Administration Committee that reports
plan activities to the Compensation Committee of our board of directors on a quarterly basis. Under

the option plan and other guidelines, the Stock Administration Committee has limited authority to
determine, in its discretion:  
    
    the persons to whom options are granted (except any grant of options to directors
and senior executive officers, which is under the authority of the Compensation
Committee);
    
    the vesting schedule and conditions under which the options may be exercised,
including any lockup periods; and
    
    any other matters necessary or desirable for the administration of the option plan. Vesting Period Unless otherwise decided by the Stock Administration Committee, the vesting period for options
granted under our stock option plans will be four years, with 25% of the granted options
vesting in each year, exercisable upon each anniversary of the date of grant, subject to specific
provisions pursuant to local regulations as applicable. Option Exercise Price Our stock option plans require that the exercise price for issued options be 100% of the fair
market value of the underlying shares of common stock on the date of grant as determined by the
Compensation Committee or the Stock Administration Committee, subject to specific provisions
pursuant to local regulations as applicable. The exercise price may not be less than 100% of the
value of the underlying shares on the relevant stock exchange on the date of grant, subject to
applicable law. On April 17, 2002, our board of directors approved a plan whereby our employees were offered
the opportunity to waive and cancel 0%, 50% or 100% of the stock options previously granted between
July 2000 and December 31, 2001 and to receive newly issued options. This plan was launched on May
23, 2002. On June 5, 2002, 17,106,162 options were cancelled according to the instructions of the
option holders. The new options vest over a period of 3.5 years subject to the following schedule:
25% vested after 6 months from the date of grant, 25% vest after 1.5 years from the date of grant,
25% vest after 2.5 years from the date of grant, 25% vest after 3.5 years from the date of grant
(subject to certain specific provisions pursuant to local regulations). Out of the 17,034,084 new
stock options granted in connection with this exchange on December 10, 2002 for worldwide employees
and July 22, 2003 for employees in the UK, 12,463,518 stock options were outstanding as of March
31, 2005. General Plan Provisions Share Counting. If any outstanding option expires, terminates or is canceled for any reason,
the shares of common stock subject to the unexercised portion of such option will become available
for future grants under the option plan.




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##### Table of Contents



Effect of Termination of Employment. If an option holders employment is terminated:  
    
    for any reason other than the option holders death, he or she may exercise
options which were exercisable at the time of the option holders termination within
twelve months after such termination, and all other options will expire at such time;
    
    on account of the death of the option holder, his or her designated beneficiary
may exercise all options granted to the beneficiary within six months following the option holders death. Adjustments upon Changes in Capitalization.Our stock option plans provide for an adjustment
in the number of shares of common stock available to be issued under the plans, the number of
shares subject to options and the exercise prices of options upon changes in our capitalization. Adjustments upon Change of Control.Our stock option plans provide for certain rights relating
to vesting of outstanding employee options upon the occurrence of a change of control and similar
events. No Assignment or Transfer. During an option holders lifetime, each option granted to an
option holder is exercisable only by him or her and is not transferable. Amendment. The Stock Administration Committee may at any time amend the stock option plans to
adjust to or comply with applicable local legal, tax and accounting requirements. However, any
modification or adaptation that would impair the rights of an option holder requires the prior
consent of that option holder. Senior Management Stock Options On November 10, 2000, our shareholders authorized our board of directors to increase our share
capital and issue up to 60,000,000 shares to our directors and executive officers (including any of
its subsidiaries or affiliates) in the form of stock options or, except in the case of directors,
in the form of free shares, in each case on terms and conditions determined by our board of
directors in its sole discretion. Our board of directors may issue these stock options and free
shares from time to time over a five-year period from the date of publication of the shareholder
resolution and in accordance with Luxembourg law. As of March 31, 2005, 21,197,500 such stock
options were outstanding. The stock options issued pursuant to this shareholder resolution are not
subject to the terms and conditions of our stock option plans, but are subject to the terms of a
separate plan for this reserve of stock options. On April 17, 2002, our board of directors approved a plan whereby members of our senior
management were offered the opportunity to waive and cancel 0%, 50% or 100% of the stock options
previously granted between July, 2000 and December 31, 2001 and receive newly issued options. This
plan was launched on May 23, 2002. On June 5, 2002, 250,000 options were cancelled according to the
instructions of the holders. On December 10, 2002, 250,000 new options were granted. The new
options vest over a period of 3.5 years subject to the following schedule: 25% vested after 6
months from the date of grant, 25% vest after 1.5 years from the date of grant, 25% vest after 2.5
years from the date of grant, and 25% vest after 3.5 years from the date of grant (subject to
certain specific provisions pursuant to local regulations). As of March 31, 2005, 187,500 of the
stock options granted on December 10, 2002 were outstanding. During 2004, our executive officers were granted 2,400,000 stock options at an exercise price
of  1.79,  1.58 or  1.45. None of such options were exercised during 2004. On
May 23, 2005, our board of directors resolved to grant certain
stock options under authorizations from our shareholders. Under this arrangement, our board of
directors decided to issue options for 5,524,140 shares to certain senior managers under
substantially the same vesting conditions and other terms as our existing stock option plans. Our
board of directors also decided under this arrangement to issue options for 6,000,000 shares to
certain senior executives, excluding our CEO, with vesting linked to
our share price performance and at an exercise price of
 2.
These more stringent vesting conditions for the options for senior executives are generally as
follows: 100 % of the options will vest if our share price reaches  4 as an average for a
consecutive 90 day period before the end of the first quarter of 2008; 80% of the options will vest
if our share price reaches  3.5 as an average for a consecutive 90 day period before the end of
the first quarter of 2008; 40 % of the options will vest if our share price reaches  3 as an
average for a consecutive 90 day period before the end of the first quarter of 2008; and none of
the options will vest if our share price does not reach  3 as an average for a consecutive 90 day
period before the end of the first quarter of 2008. The board of directors has resolved that we
should issue these stock options and has delegated the implementation of the plan to the
Compensation Committee and the Stock Administration Committee. Major grants and exercise of stock options by employees of the company The following table sets forth certain information with respect to: (i) stock options granted
to the ten employees of our company (i.e., excluding the non-employees directors) who received the
largest number of stock options granted in 2004; and (ii) the
exercise of stock options by the ten
employees who, by exercising stock options during 2004, acquired the largest of shares.




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##### Table of Contents



Weighted averageTotal amount
    
    
    price of theof options
    
    
    options grantedgranted or
    
    
    or sharesShares
    
    
    subscribed orSubscribed
    
    
    Acquiredor acquired
    
    
    (in )
    
    
    Stock Option PlanOptions for shares in Gemplus International S.A. granted in 2004 to the
10 employees who received the largest amount of stock options
    
    
    3,140,000
    
    
    
    1.66
    
    
    Plan adopted on July 27, 2000 and November 10, 2000Options for shares in Gemplus International S.A. exercised in 2004
by the 10 employees who, by exercising stock options, acquired the largest number of shares
    
    
    128,946
    
    
    
    1.13
    
    
    Plan adopted on July 27, 2000 and November 10,2000Options for shares in Gemplus S.A. exercised in 2004 by the 10 employees
who, by exercising stock options, acquired the largest number of shares
    
    
    3,978
    
    
    
    1.35
    
    
    Plan adopted on  December 21, 1997
 SHARE OWNERSHIP OF DIRECTORS AND OFFICERS As of April 26, 2005, Mr. Alex Mandl owned 503,130 of our common shares, representing 0.074%
of our shares on a fully diluted basis, and had options to subscribe to 12 million of our common
shares, with a purchase price of  0.84 and  2.25 for, respectively, 8 million shares and 4 million of such options, that, upon exercise, would represent 1.76% of our shares on a fully
diluted basis. As of April 26, 2005, Mr. David Bonderman was a Managing Partner of Texas Pacific Group, Mr.
William Price was a Managing Partner of Texas Pacific Group, and Mr. Geoffrey Fink was a Principal
of Texas Pacific Group. As of April 26, 2005, affiliates of the Texas Pacific Group held
159,305,600 of our shares, representing 26.17% of the shares outstanding. Messrs. Bonderman, Fink
and Price have disclaimed beneficial ownership of any of these shares. As of April 26, 2005, Mr. Johannes Fritz was the managing director of the Quandt family
office. As of April 26,2005, the members of the Quandt family and its affiliates owned 115,508,200
of our shares, representing 18.97% of the shares outstanding. Mr. Fritz has disclaimed beneficial
ownership of any of these shares. None of our other officers or directors was the beneficial owner of more than 1% of our
capital stock. See Item 7. Major Shareholders and Related
Party Transactions-Major Shareholders. EMPLOYEES The following table sets forth the number of employees and a breakdown of employees by main
category of activity and geographic location as of the end of each year in the three-year period
ended December 31, 2002 through December 31, 2004. 2002
    
    
    2003
    
    
    2004Number of employees
    
    
    5,680
    
    
    
    5,037
    
    
    
    5,476Category of activityManufacturing
    
    
    3,241
    
    
    
    2,892
    
    
    
    3,261Research and Development
    
    
    702
    
    
    
    557
    
    
    
    608Sales and Marketing
    
    
    745
    
    
    
    694
    
    
    
    705




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##### Table of Contents



2002
    
    
    2003
    
    
    2004Services
    
    
    242
    
    
    
    277
    
    
    
    286General and Administrative
    
    
    750
    
    
    
    617
    
    
    
    616Geographic locationFrance
    
    
    2,187
    
    
    
    1,702
    
    
    
    1,701Rest of Europe, Middle East and Africa
    
    
    1,208
    
    
    
    1,049
    
    
    
    1,056Asia
    
    
    1,527
    
    
    
    1,603
    
    
    
    1,673Americas
    
    
    758
    
    
    
    683
    
    
    
    1,046
 In the second quarter of 2001, we implemented the first of three restructuring and
rationalization programs. The second and third programs were announced in the first and fourth
quarter of 2002, respectively. The primary objective of the restructuring and worldwide
rationalization programs was to reduce operating costs by consolidating, eliminating and/or
downsizing existing operating locations, i.e., manufacturing plants and sales offices. We expect
that all actions related to the restructuring will be completed by the end of 2005. There are no
significant remaining activities to be terminated at December 31, 2004 as part of those
restructuring plans though an additional 66 employees are expected to leave the company during the
first half of 2005. During May 2003, some of the employees of Gemplus S.A. in France (mainly manufacturing
workers) engaged in a strike for approximately one week. We believe our relations with these
employees have stabilized and improved since that time. On May 15, 2003, Gemplus S.A. entered into
an agreement with certain labor unions representing some members of its workforce in France that
amended and replaced a previous agreement dated April 15, 2003, and that provides for a period of
three years for minimum production volumes in the manufacturing facilities of Gemplus S.A. located
in Gémenos and La Ciotat, France, on condition of such facilities meeting certain productivity
criteria. The agreement also provides for maintaining certain marketing, research and development,
new product introduction and related administrative functions in the Gémenos and La Ciotat areas.
Effective February 1, 2004, this agreement was amended primarily to provide greater flexibility
regarding the methods of maintaining production volumes while continuing to further the objective of maintaining employment levels in manufacturing at the
Gémenos and La Ciotat sites. Under French law, all employers of more than 20 employees in France are required to implement
a 35-hour workweek. In February 1999, we entered into an agreement to implement the 35-hour
workweek mandated by French law. Under this agreement, employees could work more than 35 hours in
some weeks, but in exchange were required to reduce the number of hours worked in other weeks to
ensure that they did not work more than 35 hours per week on an annual basis. This agreement was
modified in the beginning of 2000. Under the new agreement, the number of hours worked during the
week has not been modified (i.e., employees can work 40 hours a week), but the employees are
entitled to 22 additional paid days off a year. Although the workweek is shorter on average and we
have not reduced salaries, the agreement allows us greater flexibility than before to organize the
use of employee time. We believe this added flexibility partly compensates for the reduction in
hours, and that the mandated 35-hour week should not have a material adverse effect on our
operations or financial condition. We use temporary labor from time to time to provide short-term increases in capacity as and
when required. During 2004, we did not employ a significant number of full time equivalent
temporary staff.




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##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions MAJOR SHAREHOLDERS Our capital stock consists of ordinary shares, with no par value, which are issued in
registered form. Under our articles of incorporation, each ordinary share represents one vote. The
following table sets forth information with respect to the beneficial ownership of our shares by
each person who is known by us to own beneficially more than 2% of our outstanding shares. The
existence of treasury shares accounts for the difference between the outstanding shares percentage
and voting rights percentage. Number of shares
    
    
    Percentage of outstanding shares
    
    Percentage of voting centersApril 29, 2003
    
    
    April 27, 2004
    
    
    April 26, 2005
    
    
    April 29,
    
    April 27,
    
    April 26,
    
    April 29,
    
    April 27,
    
    April 26,Name of Beneficial Ownership
    


    
    


    
    


    
    
    2003
    
    2004
    
    2005
    
    2003
    
    2004
    
    2005Texas Pacific Group(1)
    
    
    159,305,600
    
    
    
    159,305,600
    
    
    
    159,305,600
    
    
    
    26.4
    %
    
    
    26.2
    %
    
    
    26.2
    %
    
    
    26.4
    %
    
    
    26.3
    %
    
    
    26.2
    %Quandt family(2)
    
    
    115,508,200
    
    
    
    115,508,200
    
    
    
    115,508,200
    
    
    
    19.1
    %
    
    
    19.0
    %
    
    
    19.0
    %
    
    
    19.2
    %
    
    
    19.1
    %
    
    
    19.0
    %Groupe Dassault
    
    
    32,737,666
    
    
    
    32,659,866
    
    
    
    31,990,066
    
    
    
    5.4
    %
    
    
    5.4
    %
    
    
    5.3
    %
    
    
    5.4
    %
    
    
    5.4
    %
    
    
    5.3
    %GE Capital
    
    
    24,443,311
    
    
    
    24,093,311
    
    
    
    (3)
    
    
    
    4.1
    %
    
    
    4.0
    %
    
    
    (3)
    
    
    
    4.1
    %
    
    
    4.0
    %
    
    
    (3)Centro Bank Group
    
    
    27,167,181
    
    
    
    22,570,681
    
    
    
    (4)
    
    
    
    4.5
    %
    
    
    3.7
    %
    
    
    (4)
    
    
    
    4.5
    %
    
    
    3.7
    %
    
    
    (4)Brunei Investment Agency
    
    
    22,500,000
    
    
    
    15,750,000
    
    
    
    15,750,000
    
    
    
    3.7
    %
    
    
    2.6
    %
    
    
    2.6
    %
    
    
    3.7
    %
    
    
    2.6
    %
    
    
    2.6
    %SAGEM
    
    
    63,252,839
    
    
    
    
    
    
    
    
    
    
    
    10.5
    %
    
    
    
    
    
    
    
    
    
    
    10.5
    %Treasury shares
    
    
    1,319,229
    
    
    
    1,290,129
    
    
    
    1,261,465
    
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aOther shareholders
    
    
    157,303,383
    
    
    
    235,942,734
    
    
    
    284,995,950
    
    
    
    26.1
    %
    
    
    38.9
    %
    
    
    46.7
    %
    
    
    26.2
    %
    
    
    38.9
    %
    
    
    43.2
    %Outstanding
shares
    
    
    603,537,409
    
    
    
    607,120,521
    
    
    
    608,811,281
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   (1)
    
    Texas Pacific Group is a group of investment
funds founded by Messrs. David Bonderman, James G.
Coulter and William S. Price III to pursue investment opportunities through a
variety of means, including leveraged buyouts, recapitalizations, joint ventures, restructurings
and strategic public securities investments. Messrs. Bonderman, Coulter and Price are the
shareholders of the general partner of the Texas Pacific Group funds. Each of Messrs. Bonderman,
Coulter and Price disclaims beneficial ownership of the shares of our company held by Texas Pacific
Group. Messrs. Bonderman, Price and Fink are also directors of our company.(2)
    
    Mr. Stefan Quandt was a member of the board of directors of Gemplus S.A. from July 1999 to February
2000, and of our board of directors from February to November 2000. On May 2, 2002, the Quandt family
reorganized their holdings of our shares. As of that date, 100 shares were held of record by Stefan
Quandt and 100 shares were held of record by Johanna Quandt. In addition, 33,236,428 shares were held
by Acton 1 Beteiligungs GmbH, 35,700,770 shares by Acton 2 Beteiligungs GmbH and 46,570,802 shares by
Acton 3 Beteiligungs GmbH, all companies controlled by members of the Quandt family.(3)
    
    Further to the notification by GE Capital of a crossing of shareholding threshold dated September
28, 2004, the number of shares held by GE Capital as of September 28, 2004 was equal to 8,469,663
shares representing approximately 1,4% of the issued capital of our company.(4)
    
    As of the date of the partial bearer share registered ordered by our Company, on March 2, 2005,
Centro Bank Group owned 22,570,700 shares, representing 3,7% of the outstanding shares of our
company and 3,7% of the voting rights. However, this position was not confirmed during the ordinary
general meeting of the Shareholders held on April 26, 2005 in Luxembourg.




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##### Table of Contents



To our knowledge, there are no other shareholders holding more than 2% of our voting rights as
of April 26, 2005. As
of April 26, 2005, there were 6,647,575 of our ADSs outstanding, representing 13,295,150
ordinary shares, or 2.18% of our total shares outstanding. As of April 26, 2005, our total amount of shares was divided into 427,512,118 registered
shares held through Euroclear and 181,299,163 registered shares registered in our share register
under each owners name. In March 2005, we ordered a partial bearer share register through Euroclear for shareholders
holding more than 10,000 shares as of March 2, 2005 which
represented approximately 87.4% of all
bearer shares. Our
share register does not evidence any shareholders who are residents of Luxembourg.
Information regarding the identity and residence of shareholders who hold their shares through
Euroclear is not readily available. However, from the partial bearer share register through
Euroclear ordered in March 2005, we note that 4.77%% of our outstanding shares are held by
financial institutions based in Luxembourg. We are not aware of other shareholders who are
residents of Luxembourg. As of April 26, 2005, approximately 0.32% of our registered shares were held by French
residents. The percentage of shares held through Euroclear by French residents cannot be
identified. See
Item 6. Directors, Senior Management and Employees 
Share Ownership. RELATED PARTY TRANSACTIONS We have engaged in the following related party transactions: GemVentures 1 N.V., a wholly owned subsidiary of our company, and Dassault Multimedia SAS are
minority shareholders of Welcome Real Time S.A. Mr. Thierry Dassault, one of our former directors,
is also the President of Dassault Multimedia, which is one of our shareholders. On October 9, 2003,
GemVentures and Dassault Multimedia entered into an agreement providing for a loan by GemVentures
to Dassault Multimedia of Welcome Real Time shares constituting 1.5% of Welcome Real Times
capital. The loan grants Dassault Multimedia the dividend and voting rights associated with the
shares in exchange for the right to receive a certain percentage of any dividends that Dassault
Multimedia might receive in respect of the loaned shares. Upon expiration of the agreement on
September 30, 2009, Dassault Multimedia is obligated to return the shares to GemVentures. Upon the
occurrence of certain events set forth in the agreement, GemVentures may request that the shares be
returned within two months from the date of the event. On the same date, GemVentures also entered
into another agreement with an unrelated party for the loan of the same number of Welcome Real Time
shares on identical arms-length terms. On March 9, 2004, Apeera Inc. entered into a Share and Asset Purchase Agreement with Intuwave
Ltd. by which the shares of Apeera France SAS, a wholly owned subsidiary of Apeera Inc., and
certain assets were sold to Intuwave for a consideration payable in shares of  3 million, plus
an additional  1 million upon fulfillment of certain technological and commercial conditions.
GemVentures 1 N.V. and TPG Ventures, L.P., both shareholders of Apeera Inc., were parties to such
agreement for the purposes of guaranteeing the obligations of Apeera Inc., in respect of the
warranties and indemnities given by Apeera Inc. TPG Ventures, L.P. is managed by Texas Pacific
Group, which is one of our shareholders. Three of our directors are respectively managing partners
and a principal of the Texas Pacific Group. The initial consideration, payable on completion, was
to be satisfied by the issuance of shares to Apeera Inc.,




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which designated, according to its liquidation and dissolution plan, GemVentures 1 N.V. and TPG Ventures, L.P. to receive the shares
instead on March 31, 2004. On March 31, 2004, GemVentures 1 N.V. entered into an investment agreement with Intuwave, its
investors and managers, which provides for the investment of US$2 million in consideration for the
issuance of shares in Intuwave. Both TPG Ventures, L.P. and GemVentures 1 N.V. are represented on Apeera Inc.s board but
GemVentures 1 N.V. abstained from voting with respect to the share and asset sale given its planned
investment in Intuwave. We are the guarantor for a stand-by letter of credit issued at its demand by Deutsche Bank in
favor of Nordea Bank Danmark for the guarantee of obligations (with a maximal amount of DKK 6.6
million ( 887 thousand) ) of Realtime A/S, a Danish company. GemVentures 1 NV, a wholly owned
subsidiary of our company, is a minority shareholder of Realtime with board representation. On July 30, 2004, Certplus S.A., a French company in which Gemplus Trading S.A., indirectly a
wholly owned subsidiary of our company, holds 99.9% of the shares, and Infrasec S.A., a French
company, entered into a share contribution agreement. As a result of this agreement, Certplus
contributed to Infrasec S.A. its certification services operator business division. In return,
Certplus received 19.1% of the shares of Infrasec S.A. Dassault Multimedia, which is part of Groupe
Industriel Marcel Dassault, which is one of our shareholders, became shareholder of Infrasec with
1.2% of the share capital of Infrasec SA, and Mr. Thierry Dassault, who was one of our directors
until April 2004, has become Chairman of the Board of Directors of Infrasec. On October 13, 2004,
Infrasec was renamed Keynectis S.A. Tianjin Gemplus Smart Card Co. Ltd (TGSC) is a joint venture established initially between a
French subsidiary of ours, Gemplus SA, owning 51% of the total equity interest in TGSC, and Tianjin
Telephone Equipments Factory (TTEF) owning the remaining 49% of the total equity interest in
TGSC. Gemplus (Tianjin) New Technologies Co. Ltd (GTNT), an indirectly wholly-owned subsidiary of
our company, agreed to make a time deposit with China Everbright Bank (the Bank) following a
pledge, in favor of the Bank, by TTEF of 30% of the total equity interest to secure a loan of CNY
90 million ( 7,982 thousands as of December 31, 2004) made by the Bank to TTEF. Afterwards,
TTEF transferred its whole equity interest held in TGSC to a parent company named Tianjin Zhong
Tian Telecommunications Co. Ltd (ZT) with Gemplus S.A.s consent subject to an increase of the
pledge from 30% to 45.8% of the total equity interest in TGSC. In the event of (i) a failure to
comply with conditions and warranties agreed by TTEF and/or Shanghai Post Telecommunications
Equipment (SPTE) which are the co-shareholders of ZT, and (ii) the subsequent activation of the
pledge, GTNT or the company would have to purchase back the whole equity interest held by ZT in
TGSC, using the amount of the time-deposit. As of December 31, 2004, CNY 30 million ( 2.6
million) remained to be reimbursed by TTEF under the loan agreement, secured by a corresponding
time deposit amount made by GTNT. As of May 31, 2005, CNY 20 million
( 10,38 million)
remains to be reimbursed by TTEF under the loan agreement.




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Item 8. Financial Information AUDITED CONSOLIDATED FINANCIAL STATEMENTS See Item 18. Financial Statements and pages F-1 through F-67. OTHER FINANCIAL INFORMATION Legal Proceedings We are involved in litigation from time to time in the ordinary course of business. We believe
that none of the ordinary course litigation in which we are currently involved will have a material
adverse effect on our results of operations, liquidity or financial condition. In 2000, an indirect subsidiary of ours, Zenzus Holdings Ltd, granted a loan to a then
director and executive officer of ours, Mr. Marc Lassus. In December 2001, as a result of the
reorganization of the management group, we agreed to pay to Mr. Lassus, an amount of USD 10 million
( 7.335 million,  8 million and  9.638 million as at December 31, 2004, 2003 and 2002,
respectively) upon fulfillment of certain specific conditions. In 2002, as a result of Mr. Lassuss
failure to confirm his intent and ability to reimburse the loan, we recorded a provision amounting
to  67.6 million to cover the risk of non-reimbursement of the loan. In 2003, our company
submitted the matter to binding arbitration. In April 2004, the arbitral tribunal issued a final
award in favor of our company and an indirect subsidiary in the amount of  71.9 million, plus
accrued interest of approximately  7 million and attorneys fees and costs. The potential for
any repayment of the loan depends on the financial strength of Mr. Lassus, which we believe is
uncertain. The provision corresponds to the amount of the loan outstanding net of all the amounts
payable to Mr. Lassus, including an amount of  1.5 million corresponding to past employment
obligations. We consider that such payments are conditioned to the reimbursement of the loan. We
have not forgiven the loan and are seeking repayment by Mr. Lassus through enforcement procedures. In 2002, certain of our French subsidiaries, including Gemplus S.A., received a tax assessment
from the French tax authority primarily relating to the fiscal years 1998 through 2000. In July
2004, we finalized an agreement with the French tax authority relating to this tax assessment. The
tax assessment resulted in a net income tax charge over the period 2002 to 2004 in an amount of
 4 million (a provision of  5.8 million was accounted for in 2002, the provision was
revised downwards in 2003 in an amount of  1.9 million and upwards in 2004 in an amount of 
66 thousand), in addition to the tax payable recorded from 1998 through 2000 of  6.0 million.
The tax assessment resulted in an amount payable by our company of  34 million and the
recognition of tax losses carried over amounting to  24 million. In 2004, we made a cash
settlement of the amount payable of  34 million and elected to carryback the recognized tax
losses of  24 million. Our recovery of the carryback is expected in mid-2007. This carryback
has been discounted in accordance with IFRS, resulting in additional income tax expense of  3
million and financial income of  273 thousand in 2004. As at December 31, 2004, the present
value of the carryback receivable, amounting to  21.3 million, is recorded in other
non-current receivables. As part of this tax assessment, a certain number of VAT and other tax
liabilities have been recognized for an amount of  506 thousand in 2004 ( 1.8 million in
year 2003 and prior). In December 1997, Mr. Alain Nicolaï and other parties brought a legal action before
the Marseille Commercial Court against Gemplus S.A., our main French subsidiary, and other parties
alleging a breach of contract relating to the promotion of a chip card reading system and device in
the area of casino slot machines. On March 18, 2004, the Marseille Commercial Court ordered Gemplus
S.A. to pay the plaintiffs  22 million in damages. We appealed to the Aix-en-Provence Court of
Appeal. On April 2, 2004, the Court of Appeal suspended the enforcement of the decision of the
Marseille Commercial Court and ordered Gemplus S.A. to make a cash deposit of  22 million into
an escrow account as security pending the decision on the appeal. On May 26, 2005, the Court of
Appeal rendered a decision in favor of Gemplus S.A., reversed the judgment of the Marseille
Commercial Court, dismissed all the plaintiffs claims for damages and ordered the plaintiffs to
pay court costs and expert fees. As a result of the decision of the Court of Appeal, the escrow
deposit of  22 million was released in full to Gemplus S.A. Also following the decision of the
Court of Appeal, we decided to release the provision we had recorded for this matter on December
31, 2003, in the amount of  5.2 million. This release will be recorded in our consolidated
accounts in June 2005. See Note 38 to our Consolidated Financial Statements. This case is subject
to a possible request for appeal to the French Supreme Court, which would require that courts
approval and would be strictly limited to questions of law.




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Prior to 2004, we recorded a provision of  9 million for the risks related to a patent
litigation with British Technology Group under the caption Non-current portion of provisions (see
Note 19 to our Consolidated Financial Statements). Because some risks remain in certain areas, and
as five divisional patent applications are still being examined by the European Patent Office, we
have decided to maintain this provision. Certain of our subsidiaries are under tax audit in Germany and Singapore. We increased our
provision for tax risk in Singapore at December 31, 2004, by a net amount of  1.1 million. In
Germany, as a result of discussions with the German tax authorities, we reduced our related
provision for tax risk at December 31, 2004, by  1.7 million. On March 7, 2003, the workers committee of Gemplus S.A. filed an action before the Marseille
Commercial Court requesting the Court to nominate an expert to analyze certain decisions allegedly
taken by the management or the supervisory board of Gemplus S.A., and to prohibit Gemplus S.A. from
taking or implementing certain of such alleged decisions and to appoint a Court-designated
representative to monitor such requested prohibition. The purpose of this proceeding under
French law is to permit the workers committee to obtain information regarding the alleged
management decisions cited. On April 2, 2003, the Commercial Court appointed two experts to analyze
the matter. On October 14, 2003, the experts rendered a report which found no wrongdoing or
improper conduct by Gemplus S.A. or any of its affiliates. The workers committee of Gemplus S.A.
filed an appeal of the judgment seeking to re-open and extend the proceedings to other subjects,
and Gemplus S.A. also appealed. In May 2004, the Court of Appeal of Aix-en-Provence ruled that the
workers committee had been entitled to file the original request with the Commercial court but
rejected the request of extension and dismissed both appeals. Dividend Policy We have not declared any dividends on our ordinary shares since our inception, and do not
anticipate paying dividends in the foreseeable future. We currently expect to retain all future
earnings, if any, for use in the operation and expansion of our business. We may declare dividends out of funds or reserves legally available for distribution upon the
recommendation of our board of directors and the approval of our shareholders at their annual
general meeting. In general, under Luxembourg law, only realized profits or distributable reserves
(including profits that are carried forward) determined in accordance with Luxembourg accounting
principles are available for distribution as dividends. Luxembourg law requires us to allocate 5%
of our annual net profits to a legal reserve. We must make this annual allocation until the legal
reserve reaches 10% of our subscribed capital. We discuss certain aspects of Luxembourg and U.S. taxation of dividends in Item 10.
Additional Information-Taxation in this Annual Report. SIGNIFICANT CHANGES For a discussion of recent developments, see Item 5. Operating and Financial Review and
Prospects-Results of Operations-Recent Developments.




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Item 9. The Offer and Listing NATURE OF TRADING MARKET Deutsche Bank Trust Company Americas is currently the depositary for our American Depositary
Shares (ADSs) pursuant to a Supplemental Agreement to Deposit Agreement dated February 11, 2003.
Our ADSs have traded on the Nasdaq National Market under ticker symbol GEMP and our ordinary shares
have traded on the Premier Marchéof Euronext Paris under the ticker symbol LU0121 706294-GEM since
December 11, 2000. The following table sets forth, for the periods indicated, the reported high and low sales
prices for our ordinary shares and ADSs from December 11, 2000, the first day on which our
ordinary shares traded on the Premier Marchéand our ADSs traded on the Nasdaq National Market. See
Item 3. Key Information-Exchange Rate Information with respect to rates of exchange between the
dollar and the euro applicable during the periods set forth below. Monthly Highs and Lows Euronext Paris
    
    
    Nasdaq National Market per share
    
    
    U.S.$ per ADSHigh
    
    
    Low
    
    
    High
    
    
    Low2000 (from December 11, 2000)
    
    
    9.99
    
    
    
    6.55
    
    
    $
    18.88
    
    
    $
    12.002001
    
    
    9.90
    
    
    
    1.93
    
    
    $
    17.88
    
    
    $
    3.602002
    
    
    3.08
    
    
    
    0.37
    
    
    $
    5.47
    
    
    $
    0.772003First Quarter
    
    
    1.16
    
    
    
    0.63
    
    
    $
    2.48
    
    
    $
    1.47Second Quarter
    
    
    1.46
    
    
    
    0.79
    
    
    
    3.40
    
    
    
    1.68Third Quarter
    
    
    1.74
    
    
    
    1.14
    
    
    
    3.90
    
    
    
    2.55Fourth Quarter
    
    
    1.92
    
    
    
    1.42
    
    
    
    4.69
    
    
    
    3.382004First Quarter
    
    
    2.26
    
    
    
    1.62
    
    
    $
    5.80
    
    
    $
    4.08Second Quarter
    
    
    2.20
    
    
    
    1.52
    
    
    
    5.15
    
    
    
    3.61Third Quarter
    
    
    1.79
    
    
    
    1.28
    
    
    
    4.25
    
    
    
    3.13Fourth Quarter
    
    
    1.77
    
    
    
    1.43
    
    
    
    4.73
    
    
    
    3.592005January
    
    
    1.99
    
    
    
    1.71
    
    
    
    4.99
    
    
    
    4.60February
    
    
    2.13
    
    
    
    1.86
    
    
    
    5.24
    
    
    
    4.83March
    
    
    2.01
    
    
    
    1.79
    
    
    
    5.35
    
    
    
    4.52April
    
    
    1.97
    
    
    
    1.62
    
    
    
    5.05
    
    
    
    4.18May
    
    
    1.79
    
    
    
    1.61
    
    
    
    4.44
    
    
    
    4.09
 Trading on the Premier Marché A single listing, entitled Eurolist by Euronext, was adopted on February 21, 2005. Eurolist by
Euronext has replaced the three regulated markets that were formerly operated by Euronext Paris:
the Premier Marché, Second Marchéand Nouveau Marché. Companies on this regulated market are
classified in alphabetical order and identified by market capitalization, making it easy to locate
small caps (market capitalization under 50 million), mid-caps ( 150 million to  1
billion) and large caps (over  1 billion). Eurolist is operated and managed by Euronext
Paris, a market operator (entreprise de marché) responsible for the admission of securities and the
supervision of trading in




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listed securities. Companies on Eurolist are subject to a single set of listing and disclosure rules, reflecting the regulatory context in Europe. Trading by our company in its own shares Under Luxembourg law, we may not issue shares to our company, but we may purchase our shares
in limited cases. In accordance with Luxembourg law, we may repurchase our own shares subject to
certain limits and conditions, including, in several cases, the prior approval of a general meeting
of shareholders and subsequent approval by the Autorité des Marchés Financiers. At the
extraordinary general meeting held on April 26, 2005, our shareholders authorized us to repurchase
our shares from time to time through October 25, 2006, in an aggregate amount of up to 10% of our
issued shares of capital stock. These shares can be purchased at prices ranging from  0.01 to
 4 per share. Under Luxembourg law, we cannot lend or grant security for, or give financial
assistance in the purchase of, our own shares, except for any loans, guarantees or other financial
assistance provided to our employees. See
Item 10. Additional Information  Articles of
Incorporation.




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Item 10. Additional Information NASDAQ RULE EXEMPTIONS Quorum (Marketplace Rule 4350(f)). Nasdaq requires issuers by-laws to establish a minimum
quorum of 33 1/3% for any meeting of the holders of common stock. Luxembourg corporate law does not
provide for a quorum requirement for any meetings of shareholders other than extraordinary general
meetings acting on specific resolutions. A special quorum, however, is required by Luxembourg law
to amend a companys articles of incorporation. The absence of a
quorum requirement in our Articles of Incorporation is consistent with Luxembourg law and such a requirement would
be contrary to generally accepted business practice in Luxembourg.
None of our shareholders
meetings since our initial listing in 2000 has had less than 33 1/3% of the holders
of common stock present. Solicitation of Proxies (Marketplace Rule 4350 (g)). Nasdaq requires each issuer to solicit
proxies and to provide proxy statements for all meetings of
shareholders. In accordance with Luxembourg practice, we inform our shareholders of all meetings in a public notice, which
contains details regarding how shareholders may participate in the meeting. The convening notice
for the annual general meeting of our shareholders is made publicly available, is
delivered to registered shareholders and is delivered to holders of our American
depositary shares located through the depositary. The information in the convening notice includes,
among other things, audited financial statements, information on the compensation of the CEO and the
board of directors, draft resolutions and a form of proxy if desired by the shareholder along with
instructions for its completion and delivery. Our practice of not soliciting proxies and
providing proxy statements is consistent with Luxembourg law and a requirement to do so would be
contrary to generally accepted business practice in Luxembourg. Shareholder Approval (Marketplace Rule 4350(i)). Nasdaq requires each issuer to obtain
shareholder approval prior to the issuance of certain securities, including when an issuance will
result in a change of control, or in connection with the acquisition of the stock or assets of
another corporation. Luxembourg law requires that shareholder approval shall be obtained for all
issuances of securities. Luxembourg law permits shareholders to approve certain delegations to the
board of directors regarding the issuance of securities with certain limitations on the purposes
for, and time during which, the delegation may be used. Distribution of Annual Reports (Marketplace Rule 4350(b)). Nasdaq requires that
issuers distribute to shareholders and file with Nasdaq a copy of their annual report prior to
their annual meeting, and make available certain quarterly reports. Luxembourg law requires that a
company send to its shareholders copies of the companys balance sheets, the profit and loss
account, and the report of its statutory auditors. We follow Luxembourg law and business practice
in the reports we distributes to our shareholders. We make available copies of quarterly reports
including statements of operating results to our shareholders. ARTICLES OF INCORPORATION The following description summarizes several aspects of our articles of incorporation and our
share capital, which consists of ordinary shares only. A copy of our articles of
incorporation has been filed as an exhibit to this Annual Report. Directors Our articles of incorporation provide that in the case of a conflict of interest of a
director, the director must inform the board of directors of the conflict, have a record of his
statement included in the minutes of the meeting, and refrain from deliberating and voting on the
matter. At the following general meeting, a special report shall be made on any transactions in
which any of the directors has had an interest conflicting with our own. Our articles of
incorporation provide that the age limit of directors is seventy (70) years. There is no share
ownership requirement for directors. See Item 6. Directors, Senior Management and Employees-Board
of Directors for additional information about our board of directors. There is no explicit
restriction in the articles of incorporation on the borrowing power of directors. Director
compensation is determined by the Compensation Committee or the board of directors. Share Capital




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As of March 31, 2005 our subscribed capital was fixed at  128,903,529.04 consisting of
608,811,281 shares with no par value. As of June 13, 2005, our subscribed capital was fixed at 
132,925,829.04 consisting of 627,811,281 shares with no par value. As of such dates, our authorized
share capital is  400 million, consisting of 1,889,466,226 shares with no par value. Our authorized share capital may be increased or reduced by resolution
passed with a two-thirds majority vote at a meeting of shareholders. Luxembourg law provides that
shareholders have preemptive rights to subscribe for any new shares issued by us for cash
consideration. Out of the authorized share capital, the board of directors is authorized to issue further
shares up to the total authorized share capital in whole or in part from time to time with or
without reserving any pre-emptive subscription rights for existing shareholders and as it may in
its discretion determine within a period expiring, for issues of shares reserved pursuant to items
(i) to (iv) in the paragraph below, on the fifth anniversary after the date of publication of the
minutes of the extraordinary general meeting held on November 10, 2000, for issues of shares
reserved pursuant to item (v) in the paragraph below as set out therein and for any other issues of
shares on the third anniversary after the date of publication of the minutes of the extraordinary
general meeting held on April 27, 2004 (with each time subject to extensions) and to determine the
conditions of any such subscription. Out of the authorized share capital the following shares are reserved and are not subject to
shareholders pre-emption rights:  
    
    the issue of a maximum of 20 million shares in exchange for shares in Gemplus S.A. at a ratio of
fifty new shares of our company for one share of Gemplus S.A.;  
    
    the issue of a maximum of 56,845,700 shares either in exchange for shares of Gemplus S.A. to be
issued under any of the Gemplus S.A. stock option plans in existence on February 1st, 2000 or
before or with respect to options to be issued by our company to subscribe for shares in our
company upon terms identical to those existing for options issued under any of the Gemplus S.A.
stock option plans in existence on February 1st, 2000 or before, against surrender or exchange
of, or renunciation to, such latter stock options in the same amounts on an adjusted basis
(subject to the applicable ratio);  
    
    the issue of a maximum of 50 million shares with respect to the options granted to the employees
or officers of our company (including any subsidiaries or affiliates) in accordance with the
stock option plan as from time to time determined by the board of directors subject to such
further conditions as may be imposed by the general meeting of shareholders;  
    
    the issue of a total number of a maximum of up to 60 million shares without nominal value to
senior management, directors and/or executives of our company by way of stock options, the terms
and conditions thereof and/or relating thereto to be determined by the board of directors in its
sole discretion, and/or, except in the case of board members, by way
of free shares, of free shares, on terms and conditions determined by the board of directors in its sole discretion.
Upon any issue of free shares, we will be required to record an amount equal to the accounting
par value of these shares in our shareholders equity and deduct an equivalent amount from our
realized profits or distributable reserves, which may limit our ability to pay dividends or make
other distributions to our shareholders;  
    
    the issue of a maximum of up to 30 million shares without nominal value in
relation to public offering(s) of shares to take place prior to December 5th, 2005. On December 7, 2000, our board of directors resolved that up to 15 million shares be issued in
connection with our initial public offering with no pre-emptive subscription rights for existing
shareholders. These 15 million shares were subsequently issued in our initial public offering on
December 13, 2000. Form, Ownership and Transfer




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Our shares are issued in registered form. Pursuant to Luxembourg law, we keep a register of
all of the holders of our registered shares. The shares are either registered under the owners
name, or under Euroclear when held through Euroclear. Ownership of registered shares will be
established by inscription in the register and confirmation of these inscriptions are issued to our shareholders upon request. We may appoint registrars in different
jurisdictions, each of whom will maintain a separate register for the shares entered in each of
these registers. Holders of our shares may elect to be entered into one of these registers and to
transfer their shares from one register to another. We currently have no separate registers other
than our Luxembourg share register. The transfer of our shares is governed by Luxembourg law and our articles of incorporation.
Transfers of our shares are carried out by means of a declaration of transfer entered into the
register, dated and signed by the transferor and the transferee or by their duly authorized
representatives. Transfers will be accepted and entered into the register by presentation of
correspondence or other documents recording the agreement between the transferor and the
transferee. Voting Rights Each share is entitled to one vote. directors are elected by the simple majority of votes of
the shareholders present or represented and voting at the relevant meeting pursuant to the simple
majority rules for election of directors under applicable Luxembourg law. A shareholder may appear
and act at any general meeting of shareholders by appointing a proxy in writing, cable, telegram,
telex or facsimile sent to our registered designee. The board of directors may establish other
conditions that must be fulfilled by shareholders to take part in any general meeting of
shareholders, including the determination of the record date on which a shareholder needs to be
registered. Shareholder resolutions at an annual general meeting are approved by a simple majority of the
shares represented at the meeting in person or by proxy. There are no quorum requirements
applicable to annual general meetings. Amendments to our articles of incorporation require approval
at an extraordinary general meeting, at which at least 50% of the voting shares must be present or
represented, by shareholders present in person or by proxy, holding at least two thirds of the
voting shares present or represented. If the quorum requirement for an extraordinary shareholders
meeting is not met, the resolution to amend the articles may be passed at a second extraordinary
shareholders meeting with no quorum requirement. Amendments to change our jurisdiction or to
impose additional financial obligations on the shareholders may only be approved with the unanimous
consent of all shareholders. Dividend Rights/Exchange Controls Our shares will be entitled to any dividends declared by the shareholders at a general
shareholders meeting or by our board of directors out of funds or reserves legally available for
distributions. In general, under Luxembourg law, only realized profits or distributable reserves
(including profits that are carried forward) determined in accordance with Luxembourg accounting
principles are available for distribution as dividends. Interim dividends can be declared by our
board of directors up to two times in any fiscal year if a financial statement prepared for the
declaration of interim dividends shows that there are sufficient funds available for distribution. Luxembourg law requires us to allocate 5% of our annual net profits to a legal reserve. We
must make this annual allocation until the legal reserve reaches 10% of our subscribed capital. If
we issue new shares, we will be required to continue making this annual allocation until the legal
reserve reaches 10% of our subscribed capital once more. The legal reserve is not available for
dividends. MATERIAL CONTRACTS On May 15, 2003, Gemplus S.A. entered into an agreement with certain labor unions representing
some members of its workforce in France that amended and replaced a previous agreement dated April
15, 2003. It provides for minimum production volumes in the manufacturing facilities of Gemplus
S.A. located in Gémenos and La Ciotat, France, on the condition that such facilities meet certain
productivity criteria for a period of three years. The agreement also provides for maintaining
certain marketing, research and development, new product introduction and related administrative
functions in the Gémenos and La Ciotat areas. Effective February 1, 2004, this agreement was
amended primarily to provide greater flexibility regarding the methods of maintaining production
volumes while




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continuing to further the objective of maintaining employment levels in manufacturing
at the Gémenos and La Ciotat sites. See Item 19.
Exhibits. On April 22, 2005, our company and its wholly owned subsidiary, Gemplus Nordic Oy, and the
shareholders and owners of stock options of Setec Oy entered into a share purchase agreement for
the acquisition of Setec Oy, a Finnish company. The agreement provided for the sale of all the
equity of Setec Oy to Gemplus Nordic Oy. In return, the sellers of Setec Oy are entitled to
receive: a cash base purchase price of  30 million at closing; 19 million
newly issued shares of our company at closing; and a deferred payment to be determined on
December 31, 2005, depending on the size of the acquired operations order backlog as defined under
the agreement, which payment can range from  0 up to  30 million. The closing was completed
on June 1, 2005. On January 14, 2005, we entered into broad patent cross-licenses with Axalto and its subsidiary,
CP8 Technologies. Under these agreements, each party released potential patent claims against each
other and agreed that each party may conduct its existing business
without claims under the other partys
existing patents. See
Item 5. Operating and Financial Review and
Prospects-Operating Income (Loss)  Management
severance expenses and Item 7. Major Shareholders and Related Party Transactions-Related Party
Transactions. TAXATION The following is a summary of the principal Luxembourg and U.S. federal income tax
considerations that are likely to be material to the ownership and disposition of ordinary shares
or ADSs. The summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to the ownership and disposition of ordinary shares or ADSs.
This summary applies to you only if you hold ordinary shares or ADSs as capital assets for tax
purposes, and does not apply to you if you are a member of a class of holders subject to special
rules, such as:  
    
    a dealer in securities or currencies;  
    
    a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;  
    
    a bank;  
    
    a life insurance company;  
    
    a tax-exempt organization;  
    
    a person that holds ordinary shares or ADSs that are a hedge or that are hedged against interest rate or
currency risks;  
    
    a person that holds ordinary shares or ADSs as part of a straddle or conversion transaction for tax purposes;  
    
    a person whose functional currency for tax purposes is not the U.S. dollar; or  
    
    a person that holds ordinary shares or ADSs and owns or is deemed to own 10% or more of any class of our
stock. The summary is based on laws, treaties and regulatory interpretations in effect on the date
hereof, all of which are subject to change. You should consult your own adviser regarding the tax
consequences of owning or disposing of the ordinary shares or ADSs in the light of your particular
circumstances, including the effect of any state, local, or other national laws. Luxembourg Tax Considerations




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The following is a summary of the principal Luxembourg tax considerations that are likely to
be material to the ownership and disposition of ordinary shares or ADSs by you if you are not
domiciled, resident, or formerly resident in Luxembourg and do not hold ordinary shares or ADSs in
connection with a permanent establishment or fixed base in Luxembourg. Dividends on Ordinary Shares or ADSs Dividends paid with respect to the ordinary shares or ADSs are generally subject to Luxembourg
withholding tax at a rate of 20%. You may, however, qualify for a reduced rate of withholding under
an applicable income tax treaty. The income tax treaty between Luxembourg and the United States
(the Treaty) generally provides for Luxembourg withholding tax at a reduced rate of 15%. You
should consult your own adviser regarding the specific procedures for entitlement to a reduced rate
of withholding tax under an applicable income tax treaty. Sale or other Disposition of Ordinary Shares or ADSs Holders of ordinary shares or ADSs that (i) are not Luxembourg residents, (ii) have not
formerly been Luxembourg residents and (iii) have never owned (alone or together with a spouse or
any children under age, directly or indirectly) more than 10% of the ordinary shares or ADSs will
not be subject to Luxembourg tax on capital gains on a disposal of the ordinary shares or ADSs. United States Federal Income Tax Considerations The following is a summary of the principal U.S. federal income tax considerations that are
likely to be material to the ownership and disposition of ordinary shares or ADSs by you if you are
a U.S. holder. You are a U.S. holder if you are a resident of the United States for the purposes
of, and fully eligible for benefits under, the Treaty. You will generally be entitled to Treaty
benefits in respect of ordinary shares or ADSs if you are:  
    
    the beneficial owner of the ordinary shares or ADSs (and any dividends paid with respect thereto);  
    
    (i) an individual citizen or resident of the United States that has a substantial presence, permanent
home or habitual abode in the United States or (ii) a U.S. corporation;  
    
    not also a resident of Luxembourg for Luxembourg tax purposes; and  
    
    not subject to an anti-treaty shopping article, which generally apply only under limited circumstances. The Treaty benefits discussed herein generally are not available to holders that hold ordinary
shares or ADSs in connection with the conduct of a business through a permanent establishment, or
the performance of personal services through a fixed base, in Luxembourg. This summary does not
discuss the treatment of such holders. In general, if you hold ADSs, you will be treated as the holder of the ordinary shares
represented by those ADSs for U.S. federal income tax purposes. Dividends on Ordinary Shares or ADSs The gross amount of any dividends distributed with respect to the ordinary shares or ADSs
(including any amounts withheld in respect of Luxembourg tax) generally will be subject to U.S.
federal income taxation as ordinary income to a U.S. holder. Such dividends generally will be
treated as foreign source income and will generally be classified as passive income for U.S.
foreign tax credit purposes. A U.S. holder will include dividends paid in a currency other than the
U.S. dollar in income in a dollar amount calculated by reference to the exchange rate in effect on
the date a U.S. holder received the dividends (or, in the case of ADSs, the date the depositary
receives them). Certain dividends received from U.S. domestic corporations and qualifying non-U.S.
corporations will be taxed at a maximum rate of 15%. A qualifying non-U.S. corporation is a
corporation that is eligible for benefits of a comprehensive income tax treaty with the U.S. or a
non-U.S. corporation whose shares with respect to which such dividend is paid is readily




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##### Table of Contents



tradable on an established securities market in the U.S. Specifically excluded from the definition of a
qualifying non-U.S. corporation are passive foreign investment companies, foreign investment
companies and foreign personal holding companies. To be eligible for the 15% tax rate, the shares
must be held for more than 61 days during the 121-day period beginning 60 days before the
ex-dividend date. If dividends paid in a currency other than U.S. dollars are converted into U.S. dollars on the
date of receipt, the U.S. holder should not be required to recognize foreign currency gain or loss
in respect of the dividend income. A U.S. holder may be required to recognize foreign currency gain
or loss on the receipt of a refund of Luxembourg withholding tax pursuant to the Treaty to the
extent the U.S. dollar value of the refund differs from the U.S. dollar equivalent of that amount
on the date of receipt of the underlying dividend. Subject to generally applicable limitations under U.S. law, Luxembourg withholding tax at the
rate provided under the Treaty will constitute a foreign income tax that is eligible for credit
against a U.S. holders U.S. federal income tax liability or, at the election of the recipient, may
be deducted in computing taxable income. Foreign tax credits will not be allowed for withholding
taxes imposed in respect of certain short-term or hedged positions and arrangements in which the
U.S. holders expected economic profit is insubstantial. Sale or other Disposition of Ordinary Shares or ADSs Subject to the discussion below under Passive Foreign Investment Company Considerations, for
U.S. federal income tax purposes, gain or loss realized by a U.S. holder on the sale or other
disposition of ordinary shares or ADSs will be capital gain or loss and will be long-term capital
gain or loss if the ordinary shares or ADSs were held for more than one year. The maximum tax rate
on capital gains is 15% for regular tax and alternative minimum tax purposes. This tax rate is
effective for taxable years beginning before 1 January 2009, after which the rate becomes 20%. A
U.S. holders ability to use capital losses to offset ordinary income is limited. Passive Foreign Investment Company Considerations Unfavorable U.S. tax rules apply to companies that are considered passive foreign investment
companies (PFICs). We will be classified as a PFIC in a particular taxable year if either:  
    
    75% or more of our gross income is treated as passive income for purposes of the PFIC rules; or  
    
    the average percentage of the value of our assets that produce or are held for the production
of passive income is at least 50%. Depending on our market capitalization, comparatively minor changes in the relative proportion
of our assets that would be considered to produce passive income for purposes of the PFIC rules
could result in our becoming a PFIC. U.S. holders should consult their own advisers regarding the
advisability of making a mark-to-market election, as described below. If we are a PFIC in respect of any year, a U.S. holder who holds ordinary shares or ADSs
during that year and does not make a mark-to-market election will be subject to a special tax at
ordinary income tax rates on certain dividends received with respect to the ordinary shares or ADSs
and on any gains realized on a sale of the ordinary shares or ADSs (excess distributions) in all
subsequent years, without regard to whether we were a PFIC in the year an excess distribution was
received. The amount of this tax will be increased by an interest charge to compensate for tax
deferral, calculated as if the excess distribution had been earned ratably over the period the U.S.
holder held its ordinary shares or ADSs. If we are a PFIC in respect of any year, there may also be
other adverse tax consequences, including the denial of a step-up in the basis of ordinary shares
and ADSs at the death of a U.S. holder of the ordinary shares or ADSs and the inapplicability of
the maximum U.S. tax rate on dividends of 15%. A U.S. holder may avoid the unfavorable rules described above by electing to mark such U.S.
holders ordinary shares or ADSs to market. For any year in which we are a PFIC, a U.S. holder who
makes a mark-to-market election would include as ordinary income the excess of the fair market
value of the ordinary shares or ADSs at year-end over




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the holders basis in those ordinary shares or ADSs. In addition, any gain recognized upon a sale of ordinary shares or ADSs would be taxed as
ordinary income in the year of sale. We do not intend to furnish U.S. holders with the information necessary to make a qualified
electing fund election. U.S. holders should consult their own advisers regarding the U.S. federal income tax
considerations discussed above and should carefully consider whether to make a mark-to-market
election. U.S. Information Reporting and Backup Withholding Rules Payments in respect of the ordinary shares or ADSs that are made in the U.S. or by a U.S.
related financial intermediary will be subject to information reporting and may be subject to
backup withholding unless you:  
    
    are a corporation or other exempt recipient; or  
    
    provide a U.S. taxpayer identification number and certify that no loss
of exemption from backup withholding has occurred. If you are not a U.S. person, you generally are not subject to these rules, but you may be
required to provide a certification of your non-U.S. status in order to establish that you are not
subject to these rules. DOCUMENTS ON DISPLAY We are subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended. In accordance with these requirements, we file reports and other information with the U.S.
Securities and Exchange Commission. These materials, including this Annual Report and the exhibits thereto, may be inspected and copied
at the SECs public reference room at 450 Fifth Street, N.W., Washington D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for more information on the public reference room and their copy charges.
Our SEC filings are also available on the Internet at the SECs website at http://www.sec.gov.




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Item 11. Quantitative and Qualitative Disclosures About Market Risk We are exposed to the following market risks in our activities: currency risk and interest
rate / re-investment risk. Our overall risk management program focuses on the unpredictability of
financial markets and seeks to minimize potential adverse effects on our financial performance. We
use derivative financial instruments to hedge identified currency risk exposures. Foreign currency risk We operate worldwide and are therefore exposed to foreign exchange risk on our commercial
transactions. We have developed risk management guidelines that set forth our tolerance for risk and our
overall risk management policies. We have also established processes to measure our exposure to
foreign exchange risk and to monitor and control hedging transactions in a timely and accurate
manner. Such policies are approved by our Audit Committee and reviewed annually. Our policy is to hedge a portion of our subsidiaries known or forecasted commercial
transactions not denominated in their functional currencies. In order to achieve this objective, we use foreign currency derivative instruments by entering
into foreign exchange forward contracts and foreign exchange options. We do not enter into financial derivative contracts for purposes other than hedging. No option
is sold except where there is a corresponding option purchased by us. This combination strategy
reduces the cost of hedging without creating speculative positions. All hedging instruments are
allocated to underlying commercial transactions. The financial derivative contracts are traded over the counter with major financial
institutions and generally mature within 12 months. Most of the financial instruments we use to hedge our exposure to foreign currency risk are
qualified as cash flow hedges under IAS 39. Non-qualified hedging instruments are mainly the
options sold as part of combination strategies. The
table below is a summary of the outstanding financial instruments qualifying as cash
flow hedges under IAS 39 (notional amounts) and our commercial
exposure to currency risk. In the amounts reported below: hedging positions in parentheses indicate our forward commitment or option to sell the
currency against the euro; other hedging positions indicate our forward commitment or option to buy
the currency against the euro; and positive exposures indicate our receivables in the currency, or forecasted sales in the
currency; exposures in parentheses indicate our payables in the currency, or forecasted purchases
in the currency.




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##### Table of Contents



(in thousands of euros (1))December 31
    
    
    
    
    
    2004
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    2003USD and
    
    
    GBP
    
    
    JPY
    
    
    ZAR
    
    
    Others(3)
    
    
    USD and
    
    
    GBP
    
    
    JPY
    
    
    ZAR
    
    
    Others(3)USD area(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    USD area(2)Hedging positions (4)Forward contracts
    
    
    (120,811
    )
    
    
    (23,519
    )
    
    
    (12,710
    )
    
    
    (4,483
    )
    
    
    1,198
    
    
    
    (30,874
    )
    
    
    (5,061
    )
    
    
    (4,474
    )
    
    
    (3,890
    )
    
    
    (2,476
    )Option contracts (5)
    
    
    (132,244
    )
    
    
    (25,741
    )
    
    
    (22,849
    )
    
    
    
    
    
    
    4,347
    
    
    
    (128,379
    )
    
    
    (21,307
    )
    
    
    (15,747
    )
    
    
    
    
    
    
    Total
    
    
    (253,055
    )
    
    
    (49,260
    )
    
    
    (35,559
    )
    
    
    (4,483
    )
    
    
    5,545
    
    
    
    (159,253
    )
    
    
    (26,368
    )
    
    
    (20,221
    )
    
    
    (3,890
    )
    
    
    (2,476
    )Exposure (6)Balance sheet items:Commercial transactions
not settled at year end
    
    
    30,627
    
    
    
    7,414
    
    
    
    6,706
    
    
    
    4,562
    
    
    
    8,430
    
    
    
    53,529
    
    
    
    2,220
    
    
    
    1,908
    
    
    
    3,890
    
    
    
    7,818Forecasted commercial
transactions
    
    
    238,093
    
    
    
    51,838
    
    
    
    36,598
    
    
    
    
    
    
    
    (13,598
    )
    
    
    154,834
    
    
    
    34,984
    
    
    
    21,548
    
    
    
    1,600
    
    
    
    (13,284
    )Total
    
    
    268,720
    
    
    
    59,252
    
    
    
    43,304
    
    
    
    4,562
    
    
    
    (5,168
    )
    
    
    208,363
    
    
    
    37,204
    
    
    
    23,456
    
    
    
    5,490
    
    
    
    (5,466
    )
 
 (1)
    
    Currency amounts are converted to euros at year end closing rates.(2)
    
    USD area includes currencies closely related to USD, mainly the CAD, AED, AUD, KRW and SGD.(3)
    
    Other currencies include mainly the CHF, NOK and PLN.(4)
    
    Financial instruments that hedge the our commercial currency exposure and that are effective
hedges under IAS 39 qualify as cash flow hedges.(5)
    
    Option hedges qualifying as effective hedges under IAS 39 are purchased options to sell or buy
currency against the euro.(6)
    
    Our policy is to hedge all its actual commercial currency exposure as well as a time-weighted
proportion of its forecasted commercial currency exposure. Outstanding financial instruments not qualifying as effective hedges under IAS 39
are described below (notional amount). In the amounts reported below, a value in parentheses indicates our forward commitment or
option to sell the currency against the euro; other positions indicate our forward commitment or
option to purchase the currency against the euro. (in thousands of euros (1))December 31
    
    USD and
    
    
    
    
    
    2004
    
    
    
    
    
    
    
    
    USD and
    
    
    2003USD area(2)
    
    
    GBP
    
    
    JPY
    
    
    ZAR
    
    
    Others(3)
    
    
    USD area(2)
    
    
    GBP
    
    
    JPY
    
    
    ZAR
    
    
    Others(3)Forward contracts
    
    
    88
    
    
    
    
    
    
    
    (2,990
    )
    
    
    
    
    
    
    
    
    
    
    (8,796
    )
    
    
    (895
    )
    
    
    
    
    
    
    (2,375
    )
    
    
    Option contracts (4)
    
    
    (68,249
    )
    
    
    (7,253
    )
    
    
    (10,890
    )
    
    
    
    
    
    
    
    
    
    
    (46,404
    )
    
    
    (4,261
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    (68,161
    )
    
    
    (7,253
    )
    
    
    (13,880
    )
    
    
    
    
    
    
    
    
    
    
    (55,200
    )
    
    
    (5,156
    )
    
    
    
    
    
    
    (2,375
    )
    
    
    
    (2) USD area includes currencies closely related to USD, mainly the CAD, AED, AUD, KRW and SGD. (3) Other currencies include mainly the CHF, NOK and PLN. (4) Options that do not qualify as effective hedges under IAS 39 are the options that we sell as part of combination strategies. The fair market value of our financial instruments is recorded in current assets or
current liabilities as Derivative financial instruments, and consists of the following: (in thousands of euros) December 31
    
    2004
    
    
    2003Fair value of the financial instruments qualifying as cash flow hedges under IAS 39
    
    
    33,135
    
    
    
    16,986Fair value of the financial instruments not qualifying as effective hedges under IAS 39
    
    
    252
    
    
    
    (560
    )Total fair value of derivative financial instruments
    
    
    33,387
    
    
    
    16,426




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In addition, because we have subsidiaries that present their financial statements in a
currency different from euro, the euro-denominated value of our consolidated equity is exposed to
fluctuations in exchange rates. All exchange differences resulting from translating those financial
statements into our reporting currency, the euro, are classified as translation difference in our
consolidated equity. We do not hedge our equity exposure arising from net investments in foreign
entities. See Note 8 to our Consolidated Financial Statements. Interest Rate Risk The following maturity schedule describes our exposure to interest rate risk. We are in a net, short duration, financial asset position. Financial assets are short-term
investments in money market instruments with a duration of three months or less. Financial
liabilities are mainly floating rates leasing. We consider we are not significantly exposed to interest rate risk fluctuations, and
consequently we do not enter into any derivative contract to hedge interest rate risk. However, we
do face re-investment risk: when interest rates are increasing (decreasing), interest income is
increasing (decreasing respectively). This risk remains un-hedged. In 2004, the average interest rate for our financial liabilities was 3.38%. See
Item 5. Operating and Financial Review and Prospects
 Operating Income (Loss); Notes 5 and 18 to our Consolidated Financial Statements. From December 31 ,
2004(in thousand of euros(1))
    
    To December 31 , 2005
    
    
    From 1 year to 5 years
    
    
    Beyond 5 yearsFinancial assets
    
    
    388,430
    
    
    
    
    
    
    
    Fixed rate
    
    
    
    
    
    
    
    
    
    
    Floating rate
    
    
    388,430
    
    
    
    
    
    
    
    Financial liabilities
    
    
    (6,005
    )
    
    
    (22,481
    )
    
    
    (11,182
    )Fixed rate
    
    
    
    
    
    
    
    
    
    
    Floating rate
    
    
    (6,005
    )
    
    
    (22,481
    )
    
    
    (11,182
    )Net balance sheet position
before hedging
    
    
    382,425
    
    
    
    (22,481
    )
    
    
    (11,182
    )Fixed rate
    
    
    
    
    
    
    
    
    
    
    Floating rate
    
    
    382,425
    
    
    
    (22,481
    )
    
    
    (11,182
    )Hedging
    
    
    
    
    
    
    
    
    
    
    Fixed to floating rate
    
    
    
    
    
    
    
    
    
    
    Floating to fixed rate
    
    
    
    
    
    
    
    
    
    
    Net balance sheet position
after hedging
    
    
    382,425
    
    
    
    (22,481
    )
    
    
    (11,182
    )Fixed rate
    
    
    
    
    
    
    
    
    
    
    Floating rate
    
    
    382,425
    
    
    
    (22,481
    )
    
    
    (11,182
    )




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(1) Assets are presented as positive amounts and liabilities as negative amounts. Equity Risk in Minority Investments We do not trade or hold marketable securities as a part of our activities. We have, however,
investments in several non-public start-up companies. The majority of these investments are held by
one of our direct subsidiaries, GemVentures, our venture capital company. These investments are
deemed to be held for the medium term. Certain of our personnel are dedicated to managing our
venture capital activities in accordance with our internal investment policies, and they produce
quarterly reports to our finance department on their activities. Associates are all entities over which we have significant influence but not control,
generally with a shareholding of between 20% and 50% of the voting rights. Our investments in
associates are accounted for by the equity method of accounting and are initially recognized at
cost. These investments are presented on our Consolidated Balance Sheet under the caption
investments in associates and are accounted for in accordance with the accounting policies
described in Note 2.2 to our Consolidated Financial Statements. We also have minority shareholdings in other non-public start-up companies. For these
investments, we have less than 20% of the investees outstanding shares or voting rights, and these
companies are not in substance controlled or under significant influence by us. These investments
are presented on the Consolidated Balance Sheet under the caption available-for-sale financial
assets in non-current assets, and are accounted for in accordance with the accounting policies
described in Note 2.12. A write-down of these assets is recorded when there is sufficient reason to
believe that an impairment in value that is other than temporary has occurred, typically based on
questions regarding the companys business model or failure to accomplish its business plan.




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Item 12. Description of Securities Other than Equity Securities Not applicable. 
 PART II 
 Item 13. Defaults, Dividend Arrearages and Delinquencies None. 
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds As of November 10, 2000, our board of directors was authorized by our shareholders to issue
additional shares within our authorized capital with or without reserving preferential subscription
rights for existing shareholders in respect of specified stock option plans and contributions of
shares in Gemplus S.A. until May 31, 2006 (the fifth anniversary after the date of publication of
the minutes of the extraordinary general meeting held on November 10, 2000), and for public
offerings until December 5, 2005, up to a limited number of shares. As of such date, the board of
directors was also authorized to issue further shares within our authorized capital for other
purposes with or without reserving preferential subscription rights for existing shareholders. At
the extraordinary general meeting of shareholders held on April 27, 2004, the authorization of the
board of directors to issue shares for such other purposes was renewed until the third anniversary
of the publication of the minutes of such meeting. These authorizations do not affect the rights of
security holders beyond this limited delegation of authority to the board of directors. As previously authorized by the board of directors, on May 27, 2005, we issued 19 million
shares in exchange for a cash contribution  34,824,286, without reserving any pre-emptive
rights. This issue was made pursuant to the authorization given to the board of directors to issue,
out of the authorized share capital, further shares up to the total authorized share capital in
whole or in part from time to time with or without reserving any pre-emptive subscription rights
for existing shareholders and as it may in its discretion determine.




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Item 15. Controls and Procedures Our management, including our Chief Executive Officer and Chief Financial Officer, has
conducted an evaluation as to the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).
Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded
that our disclosure controls and procedures are effective as of the period covered by the annual
report and that there have been no charges in our internal controls over financial reporting (as
defined in Rule 13a-15(f) or 15d-15 (f) under the Securities Exchange Act that occurred during the
period covered by this annual report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. 
 Item 16. (Reserved.) 
 Item 16A. Audit Committee Financial Expert Our board of directors has determined that we have at least one audit committee financial
expert serving on our Audit Committee. During 2004 to the present, it has been Mr. John Ormerod.
We believe that Mr. Ormerod is an independent director as such term is defined by the Securities
and Exchange Commission (SEC) rules as codified in 17 CFR 240.10A-3 and the NASDAQ Marketplace
Rule 4350. According to the SEC, an audit committee financial expert must have: an understanding
of generally accepted accounting principles and financial statements; the ability to assess the
general application of such generally accepted accounting principles in connection with the
accounting for estimates, accruals, and reserves; experience preparing, auditing, analyzing or
evaluating financial statements that present a breadth and level of complexity of accounting issues
that are generally comparable to those raised by the registrants financial statements; an
understanding of internal controls and procedures for financial reporting; and an understanding of
audit committee functions. 
 Item 16B. Code of Ethics In December 2003, our board of directors approved a Code of Ethics applicable to all
directors, officers and employees of our company. The Code of Ethics is reasonably designed to
deter wrongdoing and promote: honest and ethical conduct; full, fair, accurate, timely and
understandable disclosure in reports filed or submitted to the Securities Exchange Commission and
other financial regulatory bodies; compliance with applicable governmental law, rules and
regulations; prompt internal reporting of violations of the code; and accountability for adherence
to the code. To date, no amendments to the code have been made, and no waivers from any provision
of the code have been granted. Individuals
can contact the Gemplus Investor Relations Department to request a copy of the Code of
Ethics, at no charge, by post at: 2-4, Place des Alpes, 1201 Geneva, Switzerland. 
 Item 16C. Principal Accountant Fees and Services PricewaterhouseCoopers has served as our independent public accountant for each of the
financial years in the three-year period ended December 31, 2004, for which audited financial
statements appear in this annual report on Form 20-F. Additionally, PricewaterhouseCoopers has
served as our Luxembourg Statutory auditor (Réviseur dEntreprises) for the same period. Audit Fees The aggregate fees billed in 2004 for professional services rendered by our principal
accountant for the audit of the annual financial statement totaled  1,637 thousand. The
aggregate fees billed in 2003 for professional services rendered by our principal accountant for
the audit of the annual financial statement totaled  1,554 thousand. Audit fees consist of fees
expensed for professional services rendered for the




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audits and reviews of the consolidated financial statements of Gemplus International S.A. and other services normally provided in
connection with statutory and regulatory filings. Audit-Related Fees The aggregate fees billed in 2004 for professional services rendered by our principal
accountant for assurance and related services related to the audit of the financial statements
totaled  144 thousand. The aggregate fees billed in 2003 for professional services rendered by
the Companys principal accountant for assurance and related services related to the audit of the
financial statements totaled  194 thousand. These services consist of fees expensed for
assurance and related services that are traditionally performed by independent accountants. These
services include accounting consultations as well as audits in connection with acquisitions or
divestments. Tax Fees The aggregate fees billed in 2004 for professional services rendered by our principal
accountant for tax services totaled  156 thousand. The aggregate fees billed in 2003 for
professional services rendered by our principal accountant for tax compliance, tax advice and tax
planning services totaled  431 thousand. These services consist of fees expensed for tax
compliance and tax planning services and tax advice. All Other Fees In
2004, our principal accountant did not bill us for any services other than Audit Fees,
Audit-Related Fees and Tax Fees. The aggregate fees billed in 2003 for professional services
rendered by our principal accountant for all other services not reported in the above sections
titled Audit Fees, Audit-Related Fees, and Tax Fees totaled  21 thousand. Our Audit Committee requires prior approval of all audit and permissible non-audit services to
be performed by our auditors and, therefore, the Audit Committee has decided not to establish a
detailed set of pre-approval policies and procedures at this time. Therefore, none of the services
described under the sections titled Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees
were approved by Audit Committee pursuant to pre-approval policies. 
 Item 16D Exemptions from the Listing Standards for Audit Committees Not applicable. 
 Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers Not applicable. 
 PART III 
 Item 17. Financial Statements Not applicable. 
 Item 18. Financial Statements




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##### Table of Contents



See pages F-1 through F-39, incorporated herein by reference. 
 Item 19. Exhibits (a) List of Financial Statements (incorporated herein by reference) Report
of Independent Registered Public Accounting Firm
    
    F-1Consolidated Statements of Income for the Years Ended December 31,
2004, 2003 and 2002
    
    F-2Consolidated Balance Sheets as of December 31, 2004, 2003 and 2002
    
    F-3Consolidated Statements of Cash Flows for the Years Ended December 31,
2004, 2003 and 2002
    
    F-4Consolidated Statements of Changes in Shareholders Equity for the
Years Ended December 31, 2004, 2003 and 2002
    
    F-5Notes to the Consolidated Financial Statements
    
    F-8
 (b) List of Exhibits  1.
    
    Updated and consolidated Articles of Incorporation of Gemplus International S.A. as amended to
date (English translation included).2.
    
    Deposit Agreement, Supplemental Agreement to Deposit Agreement and Termination Letter to Citibank,
N.A., incorporated by reference to the Form F-6 dated February 28, 2003.  4.1
    
    Employment Agreement among Gemplus International S.A., Gemplus Corp., Gemplus Management & Trading
SA and Alex Mandl dated August 29, 2002, incorporated by reference to the 20-F dated July 15, 2003.  4.2
    
    Agreement among Gemplus S.A., Gemplus Trading SA, Gemplus Electronics SA, Gemplus Telematics SARL,
Gemplus Support GIE, Gemplus Development GIE, Gemplus Europe Services and Unions U.S.G, C.F.D.T.,
C.F.T.C, and C.F.E.-C.G.C. dated May 15, 2003, incorporated by reference to the 20-F dated July 15,
2003.  4.3
    
    Amendment dated February 1, 2004, to the Agreement among Gemplus S.A., Gemplus Trading SA, Gemplus
Electronics SA, Gemplus Telematics SARL, Gemplus Support GIE, Gemplus Development GIE, Gemplus
Europe Services and Unions U.S.G, C.F.D.T., C.F.T.C, and
C.F.E.-C.G.C. dated May 15, 2003, incorporated by reference to
the 20-F dated June 30, 2004.  4.4
    
    Share Purchase Agreement by and among the Holders of Shares and
Stock Options of Setec Oy, Gemplus Nordic Oy and Gemplus
International S.A. concerning the shares and stock options of
Setec Oy, dated April 22, 2005.  4.5
    
    (a) Patent Cross License Agreement, (b) Patent License Agreement
for Terminals and (c) Amendment to Patent License Agreement
between Gemplus International S.A. and Axalto Holdings N.V. and
between Gemplus International S.A. and CP8 Technologies S.A.,
dated January 1, 2005.  8.
    
    List of significant subsidiaries.12.1
    
    Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.




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##### Table of Contents



12.2
    
    Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.13.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.13.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.15.1
    
    Consent of Independent Registered Public Accounting
Firm 
 SIGNATURE The company certifies that it meets all of the requirements for filing on Form 20-F and has
duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized. Date: June 29, 2005 GEMPLUS INTERNATIONAL S.A.By:
    
    /s/ Frans SpaargarenFrans SpaargarenChief Financial Officer




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders, In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of cash flows and of changes in shareholders equity present fairly, in all
material respects, the financial position of Gemplus International SA and its subsidiaries at
December 31, 2004, 2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004, in accordance with International
Financial Reporting Standards. These financial statements are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Notes 2.4 and 2.23 to the financial statements, the Company early adopted IAS 1
(Revised 2003) on January 1st, 2004. International Financial Reporting Standards vary in certain significant respects from accounting
principles generally accepted in the United States of America. Information relating to the nature
and effects of such differences is presented in Note 39 to the Consolidated Financial Statements. PricewaterhouseCoopers (PRICEWATERHOUSECOOPERS) Paris, France
March 11, 2005
Except for Note 38 which is as of June 17, 2005 F-1




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##### Table of Contents



Consolidated Financial Statements Consolidated Statements of Income (in thousands of euros, except shares and per share amounts) Years ended December 31
    
    Notes
    
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Net sales
    
    
    (25
    )
    
    
    865,034
    
    
    
    749,203
    
    
    
    787,434Cost of sales
    
    
    
    
    
    
    (594,533
    )
    
    
    (541,947
    )
    
    
    (587,722
    )Gross profit
    
    
    
    
    
    
    270,501
    
    
    
    207,256
    
    
    
    199,712Research and development expenses
    
    
    (12
    )
    
    
    (62,592
    )
    
    
    (69,223
    )
    
    
    (92,240
    )Selling and marketing expenses
    
    
    
    
    
    
    (101,493
    )
    
    
    (100,181
    )
    
    
    (112,227
    )General and administrative expenses
    
    
    
    
    
    
    (63,895
    )
    
    
    (77,317
    )
    
    
    (89,896
    )Restructuring expenses
    
    
    (21
    )
    
    
    (8,384
    )
    
    
    (61,973
    )
    
    
    (90,003
    )Other operating income (expense), net
    
    
    
    
    
    
    (101
    )
    
    
    703
    
    
    
    63Goodwill amortization and impairment
    
    
    (11
    )
    
    
    (7,718
    )
    
    
    (33,051
    )
    
    
    (47,117
    )Operating income (loss)
    
    
    
    
    
    
    26,318
    
    
    
    (133,786
    )
    
    
    (231,708
    )Financial income (expense), net
    
    
    (27
    )
    
    
    5,653
    
    
    
    8,204
    
    
    
    (51,092
    )Share of profit (loss) of associates
    
    
    (14
    )
    
    
    (5,970
    )
    
    
    (7,561
    )
    
    
    (3,084
    )Other non-operating income (expense), net
    
    
    (28
    )
    
    
    (6,757
    )
    
    
    (11,139
    )
    
    
    (21,550
    )Income (loss) before taxes
    
    
    
    
    
    
    19,244
    
    
    
    (144,282
    )
    
    
    (307,434
    )Income tax expense
    
    
    (29
    )
    
    
    (12,953
    )
    
    
    (14,673
    )
    
    
    (9,124
    )NET INCOME (LOSS)
    
    
    
    
    
    
    6,291
    
    
    
    (158,955
    )
    
    
    (316,558
    )Attributable to:Equity holders of the Company
    
    
    
    
    
    
    4,674
    
    
    
    (161,107
    )
    
    
    (320,891
    )Minority interest
    
    
    
    
    
    
    1,617
    
    
    
    2,152
    
    
    
    4,333Net income (loss) per share attributable to
equity holders of the Company(in euros)Basic
    
    
    (31
    )
    
    
    0.01
    
    
    
    (0.27
    )
    
    
    (0.53
    )Diluted
    
    
    (31
    )
    
    
    0.01
    
    
    
    (0.27
    )
    
    
    (0.53
    )Shares used in net income (loss) per share
calculation:Basic
    
    
    
    
    
    
    606,672,060
    
    
    
    605,658,965
    
    
    
    606,222,660Diluted
    
    
    
    
    
    
    619,022,472
    
    
    
    605,658,965
    
    
    
    606,222,660
 The accompanying notes are an integral part of the Consolidated Financial Statements. F-2




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##### Table of Contents



Consolidated Balance Sheets (in thousands of euros) December 31
    
    Notes
    
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)ASSETSCurrent assets:Cash and cash equivalents
    
    
    (5
    )
    
    
    388,430
    
    
    
    390,684
    
    
    
    417,226Trade accounts receivable, net
    
    
    (6
    )
    
    
    148,512
    
    
    
    154,727
    
    
    
    144,913Inventory, net
    
    
    (7
    )
    
    
    115,610
    
    
    
    98,673
    
    
    
    96,513Derivative financial instruments
    
    
    (8
    )
    
    
    33,387
    
    
    
    16,426
    
    
    
    10,371Other current receivables
    
    
    (9
    )
    
    
    66,160
    
    
    
    66,249
    
    
    
    83,111Total current assets
    
    
    
    
    
    
    752,099
    
    
    
    726,759
    
    
    
    752,134Non-current assets:Property, plant and equipment, net
    
    
    (10
    )
    
    
    148,916
    
    
    
    175,706
    
    
    
    216,944Goodwill, net
    
    
    (11
    )
    
    
    28,197
    
    
    
    37,727
    
    
    
    73,187Deferred development costs, net
    
    
    (12
    )
    
    
    19,222
    
    
    
    17,916
    
    
    
    25,910Other intangible assets, net
    
    
    (13
    )
    
    
    8,965
    
    
    
    16,157
    
    
    
    30,734Deferred tax assets
    
    
    (29
    )
    
    
    6,264
    
    
    
    31,860
    
    
    
    41,674Investments in associates
    
    
    (14
    )
    
    
    12,864
    
    
    
    19,216
    
    
    
    21,008Available-for-sale financial assets, net
    
    
    (15
    )
    
    
    4,752
    
    
    
    647
    
    
    
    2,080Other non-current receivables, net
    
    
    (16
    )
    
    
    43,900
    
    
    
    27,251
    
    
    
    54,085Total non-current assets
    
    
    
    
    
    
    273,080
    
    
    
    326,480
    
    
    
    465,622TOTAL ASSETS
    
    
    
    
    
    
    1,025,179
    
    
    
    1,053,239
    
    
    
    1,217,756LIABILITIESCurrent liabilities:Accounts payable
    
    
    
    
    
    
    94,025
    
    
    
    95,582
    
    
    
    80,256Salaries, wages and related items
    
    
    
    
    
    
    55,199
    
    
    
    42,742
    
    
    
    51,188Current portion of provisions and other liabilities
    
    
    (17
    )
    
    
    50,217
    
    
    
    78,090
    
    
    
    81,133Current income tax liabilities
    
    
    (29
    )
    
    
    25,708
    
    
    
    14,673
    
    
    
    27,209Current obligations under finance leases
    
    
    (18
    )
    
    
    6,005
    
    
    
    5,928
    
    
    
    6,098Total current liabilities
    
    
    
    
    
    
    231,154
    
    
    
    237,015
    
    
    
    245,884Non-current liabilities:Non-current obligations under finance leases
    
    
    (18
    )
    
    
    33,663
    
    
    
    38,893
    
    
    
    42,540Non-current portion of provisions
    
    
    (19
    )
    
    
    25,696
    
    
    
    57,082
    
    
    
    51,817Other non-current liabilities
    
    
    (19
    )
    
    
    13,353
    
    
    
    13,164
    
    
    
    1,897Total non-current liabilities
    
    
    
    
    
    
    72,712
    
    
    
    109,139
    
    
    
    96,254Shareholders equity:Ordinary shares no legal par value, 1,889,466,226
shares authorized, 608,482,253, 607,312,796
and 637,859,088 shares issued at December 31,
2004, 2003 and 2002 respectively
    
    
    (22
    )
    
    
    128,643
    
    
    
    127,889
    
    
    
    127,644Additional paid-in capital
    
    
    
    
    
    
    1,031,558
    
    
    
    1,028,849
    
    
    
    1,028,920Retained earnings
    
    
    
    
    
    
    (459,560
    )
    
    
    (464,221
    )
    
    
    (210,358
    )Other comprehensive income
    
    
    (24
    )
    
    
    11,956
    
    
    
    4,570
    
    
    
    8,571Less, cost of treasury shares
    
    
    (22
    )
    
    
    (1,985
    )
    
    
    (2,075
    )
    
    
    (94,326
    )Equity attributable to equity holders
of the Company
    
    
    
    
    
    
    710,612
    
    
    
    695,012

    
    
    
    860,451Minority interest
    
    
    
    
    
    
    10,701
    
    
    
    12,073
    
    
    
    15,167Total shareholders equity
    
    
    
    
    
    
    721,313
    
    
    
    707,085
    
    
    
    875,618TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    1,025,179
    
    
    
    1,053,239
    
    
    
    1,217,756
 The accompanying notes are an integral part of the Consolidated Financial Statements. F-3




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##### Table of Contents



Consolidated Statements of Cash Flows (in thousands of euros) Years ended December 31
    
    Notes
    
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Cash flows from operating activities:Net income (loss)
    
    
    
    
    
    
    6,291
    
    
    
    (158,955
    )
    
    
    (316,558
    )Adjustments to reconcile net income (loss)
to net cash from operating activities:Depreciation, amortization and impairment
    
    
    (36
    )
    
    
    56,691
    
    
    
    95,071
    
    
    
    133,359Changes in non-current portion of provisions and other
liabilities, excluding restructuring
    
    
    (19
    )
    
    
    (32,930
    )
    
    
    4,228
    
    
    
    9,420Deferred income taxes
    
    
    (29
    )
    
    
    3,661
    
    
    
    8,644
    
    
    
    (1,234
    )(Gain) / loss on sale and disposal of assets
    
    
    
    
    
    
    2,582
    
    
    
    2,005
    
    
    
    6,051Share of (profit) loss of associates
    
    
    (14
    )
    
    
    5,970
    
    
    
    9,098
    
    
    
    3,164Other, net
    
    
    
    
    
    
    (2,700
    )
    
    
    10,840
    
    
    
    (5,234
    )Changes in operating assets and liabilities:Trade accounts receivable and related current liabilities
    
    
    (36
    )
    
    
    (2,962
    )
    
    
    (12,292
    )
    
    
    40,598Trade accounts payable and related current assets
    
    
    (36
    )
    
    
    20,774
    
    
    
    32,485
    
    
    
    (27,405
    )Inventories
    
    
    (36
    )
    
    
    (19,466
    )
    
    
    (9,189
    )
    
    
    35,675Value-added and income taxes
    
    
    (36
    )
    
    
    21,288
    
    
    
    6,674
    
    
    
    (12,656
    )Salaries, wages and other
    
    
    (36
    )
    
    
    14,161
    
    
    
    3,306
    
    
    
    (2,716
    )Restricted cash
    
    
    (16
    )
    
    
    (28,018
    )
    
    
    
    
    
    
    Restructuring reserve payable
    
    
    (21
    )
    
    
    (18,307
    )
    
    
    (2,027
    )
    
    
    35,958Litigation expense payable
    
    
    (36
    )
    
    
    
    
    
    
    
    
    
    
    (18,120
    )Management severance expense
    
    
    (37
    )
    
    
    
    
    
    
    
    
    
    
    (10,629
    )Provision for a loan to a former director and executive
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    67,582Net cash (used for) from operating activities
    
    
    
    
    
    
    27,035
    
    
    
    (10,112
    )
    
    
    (62,745
    )Cash flows from investing activities:Sale / (Purchase) of activities net of cash disposed / acquired
    
    
    
    
    
    
    (2,898
    )
    
    
    114
    
    
    
    Other investments
    
    
    
    
    
    
    (2,982
    )
    
    
    (931
    )
    
    
    (14,720
    )Purchase of property, plant and equipment
    
    
    (10
    )
    
    
    (22,888
    )
    
    
    (15,237
    )
    
    
    (31,953
    )Purchase of other assets
    
    
    
    
    
    
    (1,725
    )
    
    
    (1,406
    )
    
    
    (2,860
    )Proceeds from sale of property
    
    
    
    
    
    
    1,300
    
    
    
    
    
    
    
    Change in non-trade accounts payable and other
    
    
    
    
    
    
    3,064
    
    
    
    780
    
    
    
    2,403Net cash used for investing activities
    
    
    
    
    
    
    (26,129
    )
    
    
    (16,680
    )
    
    
    (47,130
    )Cash flows from financing activities:Proceeds from exercise of share options
    
    
    
    
    
    
    1,479
    
    
    
    173
    
    
    
    1,657Payments on long-term borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134
    )Proceeds from sale-leaseback operations
    
    
    
    
    
    
    956
    
    
    
    2,142
    
    
    
    15,962Principal payments on obligations under finance leases
    
    
    (18
    )
    
    
    (5,827
    )
    
    
    (5,973
    )
    
    
    (3,883
    )Increase (decrease) in bank overdrafts
    
    
    
    
    
    
    1,660
    
    
    
    (51
    )
    
    
    (3,205
    )Dividends paid by subsidiaries to minority shareholders
    
    
    
    
    
    
    (1,724
    )
    
    
    (2,627
    )
    
    
    (4,297
    )Change in treasury shares
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    (617
    )Interest receivable on loans to senior management
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,706
    )Net cash (used for) from financing activities
    
    
    
    
    
    
    (3,366
    )
    
    
    (6,336
    )
    
    
    3,777Effect of exchange rate changes on cash
    
    
    
    
    
    
    207
    
    
    
    6,586
    
    
    
    32,672Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    (2,461
    )
    
    
    (33,128
    )
    
    
    (106,098
    )Cash and cash equivalents, beginning of the year
    
    
    (5
    )
    
    
    390,684
    
    
    
    417,226
    
    
    
    490,652Cash and cash equivalents, end of the year
    
    
    (5
    )
    
    
    388,430
    
    
    
    390,684
    
    
    
    417,226
 The accompanying notes are an integral part of the Consolidated Financial Statements. F-4




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##### Table of Contents



Consolidated Statement of Changes in Shareholders Equity (in thousands of euros, except number of shares) Attributable to equity holders of the CompanyNotes
    
    
    Number
    
    
    Share
    
    
    Additional
    
    
    Retained earnings
    
    
    Other
    
    
    Treasury
    
    
    Minority
    
    
    Total shareof shares
    
    
    value
    
    
    paid-in
    
    
    Prior
    
    
    Net income
    
    
    comprehensive
    
    
    shares
    
    
    interest
    
    
    holderscapital
    
    
    years
    
    
    (loss)
    
    
    income
    
    
    
    
    
    
    
    
    
    
    equity(Restated)Balance at December 31, 2001
    
    
    
    
    
    
    641,396,497
    
    
    
    127,056
    
    
    
    1,027,850
    
    
    
    225,236
    
    
    
    (100,220
    )
    
    
    (3,968
    )
    
    
    (108,192
    )
    
    
    17,176
    
    
    
    1,184,938Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,440
    
    
    
    
    
    
    
    (2,045
    )
    
    
    3,395Net unrealized gain (loss) on hedging
instruments qualifying as effective
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,099
    
    
    
    
    
    
    
    
    
    
    
    7,099Net income (loss) recognized directly
in equity under Other comprehensive income
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,539
    
    
    
    
    
    
    
    (2,045
    )
    
    
    10,494Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (320,891
    )
    
    
    
    
    
    
    
    
    
    
    4,333
    
    
    
    (316,558
    )Dividend paid to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,297
    )
    
    
    (4,297
    )Allocation of prior year loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,220
    )
    
    
    100,220
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus SA pursuant
to share options exercised to be contributed
    
    
    (22
    )
    
    
    699,100
    
    
    
    
    
    
    
    992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    992Contribution of Gemplus SA shares
to Gemplus International SA
    
    
    (3
    )
    
    
    
    
    
    
    508
    
    
    
    (508
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus International SA
pursuant to share options exercised
    
    
    (22
    )
    
    
    398,350
    
    
    
    80
    
    
    
    586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    666Cancellation of treasury shares
    
    
    (22
    )
    
    
    (4,634,859
    )
    
    
    
    
    
    
    
    
    
    
    (14,483
    )
    
    
    
    
    
    
    
    
    
    
    14,483
    
    
    
    
    
    
    
    Purchase of 656,024 treasury shares
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (617
    )
    
    
    
    
    
    
    (617
    )Balance at December 31, 2002
    
    
    
    
    
    
    637,859,088
    
    
    
    127,644
    
    
    
    1,028,920
    
    
    
    110,533
    
    
    
    (320,891
    )
    
    
    8,571
    
    
    
    (94,326
    )
    
    
    15,167
    
    
    
    875,618Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,333
    )
    
    
    
    
    
    
    (2,619
    )
    
    
    (10,952
    )Net unrealized gain (loss) on hedging
instruments qualifying as effective
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,332
    
    
    
    
    
    
    
    
    
    
    
    4,332Net income (loss) recognized directly
in equity under Other comprehensive income
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,001
    )
    
    
    
    
    
    
    (2,619
    )
    
    
    (6,620
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (161,107
    )
    
    
    
    
    
    
    
    
    
    
    2,152
    
    
    
    (158,955
    )Dividend paid to minority interest
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,627
    )
    
    
    (2,627
    )Allocation of prior year loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (320,891
    )
    
    
    320,891
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus SA pursuant
to share options exercised to be contributed
    
    
    (22
    )
    
    
    17,550
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Contribution of Gemplus SA shares
to Gemplus International SA
    
    
    (22
    )
    
    
    
    
    
    
    207
    
    
    
    (207
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus International SA
pursuant to share options exercised
    
    
    (22
    )
    
    
    179,837
    
    
    
    38
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159Cancellation of 30,743,679 treasury shares
    
    
    (3
    )
    
    
    (30,743,679
    )
    
    
    
    
    
    
    
    
    
    
    (92,756
    )
    
    
    
    
    
    
    
    
    
    
    92,756
    
    
    
    
    
    
    
    Purchase of 487,957 treasury shares
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (505
    )
    
    
    
    
    
    
    (505
    )Balance at December 31, 2003
    
    
    
    
    
    
    607,312,796
    
    
    
    127,889
    
    
    
    1,028,849
    
    
    
    (303,114
    )
    
    
    (161,107
    )
    
    
    4,570
    
    
    
    (2,075
    )
    
    
    12,073
    
    
    
    707,085Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,951
    )
    
    
    
    
    
    
    (1,265
    )
    
    
    (11,216
    )Net unrealized gain (loss) on hedging
instruments qualifying as effective
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,337
    
    
    
    
    
    
    
    
    
    
    
    17,337Net income (loss) recognized directly
in equity under Other comprehensive income
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,386
    
    
    
    
    
    
    
    (1,265
    )
    
    
    6,121Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,674
    
    
    
    
    
    
    
    
    
    
    
    1,617
    
    
    
    6,291Dividend paid to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,724
    )
    
    
    (1,724
    )Allocation of prior year loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (161,107
    )
    
    
    161,107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus SA pursuant
to share options exercised to be contributed
    
    
    (22
    )
    
    
    901,250
    
    
    
    
    
    
    
    1,151
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,151Contribution of Gemplus SA shares
to Gemplus International SA
    
    
    (22
    )
    
    
    
    
    
    
    697
    
    
    
    (697
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus International SA
pursuant to share options exercised
    
    
    (22
    )
    
    
    268,207
    
    
    
    57
    
    
    
    271
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    328Sale of 28,664 treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    77Minority shareholders contribution
not resulting in a change of subsidiary ownership
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,984
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,984Balance at December 31, 2004
    
    
    
    
    
    
    608,482,253
    
    
    
    128,643
    
    
    
    1,031,558
    
    
    
    (464,234
    )
    
    
    4,674
    
    
    
    11,956
    
    
    
    (1,985
    )
    
    
    10,701
    
    
    
    721,313
 The accompanying notes are an integral part of the Consolidated Financial Statements. F-5




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Notes to the Consolidated Financial Statements 1. THE COMPANY Gemplus International SA, including its consolidated subsidiaries (the Company), is a
leading provider of enabling technology products and services for secure wireless communications
and transactions. The Company designs, develops, manufactures and markets microprocessor solutions and non-chip-based
products for customers in the Telecommunications, Financial Services, Identity and Security
industries. The Company is incorporated in the Grand Duchy of Luxemburg. The Companys ordinary shares of common stock are listed on the Euronext Paris Market and in the
form of American Depositary Shares on the Nasdaq National Market. These Consolidated Financial Statements have been approved by the Board of Directors on March 8,
2005. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these Consolidated Financial
Statements are set out below. These policies have been consistently applied to all the years
presented, unless otherwise stated. 2.1 Basis of presentation
The annual Consolidated Financial Statements of the Company have been prepared in accordance
with International Financial Reporting Standards (IFRS) formulated by the International Accounting
Standards Board (IASB). The Consolidated Financial Statements have been prepared under the historical cost convention, as
modified by the revaluation of available-for-sale financial assets as well as financial assets and
liabilities (derivative instruments) measured at fair value. A reconciliation of net income and shareholders equity between IFRS and the accounting principles
generally accepted in the United States (US GAAP) is included in Note 39. A reconciliation of net
income and shareholders equity between IFRS and the accounting principles generally accepted in
France and in Luxemburg is included in Note 41. The preparation of Consolidated Financial Statements in conformity with IFRS requires the use of

certain critical accounting estimates. It also requires management to exercise judgment when
applying the Companys accounting policies. The areas involving a higher degree of judgment or
complexity, or the areas where assumptions and estimates are significant to the Consolidated
Financial Statements, are disclosed in the notes below. 2.2 Principles of
consolidation(a) Subsidiaries Subsidiaries are all entities over which the Company has the power to govern the financial and
operating policies generally accompanying a shareholding of more than one half of the voting
rights. The existence and effect of potential voting rights that are currently exercisable or
convertible are considered when assessing whether the Company controls another entity. Subsidiaries
are fully consolidated from the date on which control is transferred to the Company. They are
de-consolidated from the date that control ceases. The Company uses the purchase method of accounting to account for the acquisition of subsidiaries.
The cost of an acquisition is measured as the fair value of the assets given, equity instruments
issued and liabilities incurred or assumed at the date of exchange, plus costs directly
attributable to the acquisition. Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured initially at their fair values at the
acquisition date, irrespective of the extent of any minority interest. The excess of the cost of
acquisition over the fair value of the Companys share of the identifiable net assets acquired is
recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of
the subsidiary acquired, the difference is recognized directly in the income statement. Inter-company transactions, balances and unrealized gains on transactions between group companies
are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with
the policies adopted by the Company. F-6




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##### Table of Contents



(b) Associates
Associates are all entities over which the Company has significant influence but not control,
generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in
associates are accounted for by the equity method of accounting and are initially recognized at
cost. The Companys investment in associates includes goodwill (net of accumulated amortization and any
impairment loss) identified on acquisition (see Note 14). The Companys share of its associates post-acquisition profits or losses is recognized in the
income statement, and its share of post-acquisition movements in reserves is recognized in
reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the
investment. When the Companys share of losses in an associate equals or exceeds its interest in
the associate, including any other unsecured receivables, the Company does not recognize further
losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealized gains on transactions between the Company and its associates are eliminated to the
extent of the Companys interest in the associates. Unrealized losses are also eliminated unless
the transaction provides evidence of an impairment of the asset transferred. 2.3 Foreign currency (a) Functional and presentation currency Items included in the Consolidated Financial Statements of each of the Companys entities are
measured using the currency of the primary economic environment in which the entity operates (the
functional currency). The Consolidated Financial Statements are presented in euros. (b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates
prevailing at the dates of the transactions. The exchange rates prevailing at the dates of the
transactions are approximated by a single rate per currency for each month (unless these rates are
not reasonable approximations of the cumulative effect of the rates prevailing on the transaction
dates). Foreign exchange gains and losses resulting from the settlement of such transactions and
from the translation at year-end exchange rates of monetary assets and liabilities denominated in
foreign currencies are recognized in the income statement, except when those monetary assets and
liabilities are qualifying as cash flow hedges; they are then deferred in equity within Other
comprehensive income. Translation differences on non-monetary items, such as equities classified as available-for-sale
financial assets, are included in Other comprehensive income within shareholders equity. (c) Group companies
None of the Companys entities has the functional currency of a hyperinflation economy. The results and financial position of all the Company entities that have a functional currency
different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at
the date of that balance sheet; (ii) income and expenses for each income statement are translated at a monthly average exchange
rate (unless this rate is not a reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, in which case income and expenses are translated at the dates
of the transactions); and (iii) all resulting exchange differences are recognized as a separate component of shareholders
equity within Other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in
foreign entities including monetary items that form part of the reporting entitys net investment
in foreign entities, and of borrowings and other currency instruments designated as hedges of such
investments, are taken to shareholders equity. When a foreign operation is sold, such exchange
differences are recognized in the income statement as part of the
gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as
assets and liabilities of the foreign entity and translated at the closing rate. F-7




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2.4 Change in accounting policies
In 2004, the Company early adopted the IFRS below, which are relevant to its operations. The
2003 and 2002 Consolidated Financial Statements have been amended as required, in accordance with
the relevant requirements. IAS 1 (revised 2003) Presentation of Financial Statements
IAS 2 (revised 2003) Inventories
IAS 8 (revised 2003) Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10 (revised 2003) Events after the Balance Sheet Date
IAS 16 (revised 2003) Property, Plant and Equipment
IAS 17 (revised 2003) Leases
IAS 21 (revised 2003) The Effects of Changes in Foreign Exchange Rates
IAS 24 (revised 2003) Related Party Disclosures
IAS 27 (revised 2003) Consolidated and Separate Financial Statements
IAS 28 (revised 2003) Investments in Associates
IAS 33 (revised 2003) Earnings per Share The early adoption of IAS 1, 2, 8, 10, 16, 17, 21, 24, 27, 28 and 33 (all revised 2003) did not
result in substantial changes to the Companys accounting policies. In summary:  -
    
    IAS 1 (revised 2003) has affected the presentation of the Consolidated Balance Sheet (among
other new sub-classifications on the face of the Consolidated Balance Sheet and classification
of minority interest within shareholders equity) and other disclosures. The presentation of
the Consolidated Statement of Income was subject to minor modifications (see 2.23
Comparatives).-
    
    IAS 2, 8, 10, 16, 17, 21, 27, 28, and 33 (all revised 2003) had no material effect on the
Companys policies.-
    
    IAS 24 (revised 2003) has affected the identification of related parties and some other related
party disclosures. The Company did not elect for the early adoption of the following new or revised standards in 2004
and will adopt them in 2005 in accordance with the relevant requirements: IAS 19 Employee Benefits (Amendment December 2004)  Actuarial Gains and Losses, Group Plans and Disclosures
IAS 32 (revised 2003) Financial instruments: Disclosure and Presentation
IAS 36 (revised 2004) Impairment of Assets
IAS 38 (revised 2004) Intangible Assets
IAS 39 (revised 2004) Financial instruments: Recognition and Measurement
IFRS 2 (issued 2004) Share-based Payment
IFRS 3 (issued 2004) Business Combinations
IFRS 5 (issued 2004) Non-current assets held for sale and discontinued operations The Company did not elect for the early adoption of the Amendment of IAS 19 that permits an entity
to recognize all actuarial gains and losses in the period in which they occur outside profit or
loss within other comprehensive income. The early adoption of IFRS 3, IAS 36 (revised 2004) and IAS 38 (revised 2004) would have resulted
in a change in the accounting policy for goodwill. Currently, goodwill is: - Amortized on a straight line basis over a period ranging from five to twenty years; and - Assessed for an indication of impairment at least at each balance sheet date. Goodwill arising from business combinations for which the agreement date is on or after March 31,
2004, is accounted for under the provisions of IFRS 3. In accordance with the provisions of IFRS 3:  -
    
    The Company will discontinue amortization of goodwill from January 1, 2005;-
    
    Accumulated amortization as of December 31, 2004, will be eliminated with a corresponding
decrease in the cost of goodwill;  -
    
    From the year ended December 31, 2005, onwards, goodwill will be tested annually for
impairment, as well as when there are indications of impairment. Considering the Companys current accounting policies, no other impact is expected from the
application of the revised versions of IAS 36 and IAS 38. In accordance with the provisions of IFRS 2, beginning January 1, 2005, the Company will be
required to recognize share-based payment transactions in its Consolidated Financial Statements
whereas until December 31, 2004, these transactions were not recognized against goods and services
received by the Company. For shared-based payment transactions, the Company is required to measure
their value and the corresponding increase in equity, by reference to the fair value of the equity
instruments granted. Please refer to Note 39 Differences between International Financial Reporting
Standards and US Generally Accepted Accounting Principles for the impact of accounting for F-8




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##### Table of Contents



share-based payment transactions according to US GAAP. Please note that the impact of accounting
for share-based payment transactions according to IFRS might be different. Considering the Companys current accounting policies, no impact is expected from the application
of IFRS 5. 2.5 Revenue recognition
Revenue comprises the fair value for the sale of goods and services, net of value-added tax,
rebates and discounts and after eliminating sales within the Company. The Company retained the
following definition of revenue components: (a) Sales of goods
Revenues from product sales are recorded upon transfer of title and risk of loss provided that no
significant obligations of the Company remain and collection of the resulting receivable is
probable. The Company records deferred revenue for cards that are invoiced to customers but not
shipped because they require customization by the Company. Revenue on sales with resellers and
distributors is recognized only when there is no right of return and collection of the receivable
is probable. (b) Sales of services
The Company also provides system design and integration services. Revenues are recognized by
reference to the stage of completion at the balance sheet date, provided that the outcome of the
contracts can be estimated reliably. When the outcome of the contracts cannot be measured reliably,
revenue and costs are deferred until the termination of the agreement. 2.6 Trade receivables
Trade receivables are recognized initially at fair value and subsequently measured at
amortized cost using the effective interest method, less provision for impairment. A provision for
impairment of trade receivables is established when there is objective evidence that the Company
will not be able to collect all amounts due according to the original terms of receivables. The
amount of the provision is the difference between the assets carrying amount and the present value
of estimated future cashflows, discounted at the effective interest rate. The amount of the
provision is recognized in the Consolidated Statement of Income within the operating income or
loss. 2.7 Inventory
Inventories are carried at the lower of cost or net realizable value, with cost being
determined principally on the weighted-average cost basis. Cost elements included in inventories
are raw materials, labor and manufacturing overhead, excluding the impact of low activity, if any.
The Company regularly reviews inventory quantities on hand for excess inventory, obsolescence and
declines in market value below cost and records an allowance against the inventory balance for such
declines. A significant component of the cost of production relates to the acquisition of
microprocessor chips. Our provision for microcontroller chips inventory is determined based on the
anticipated net realizable value of finished products which includes cost of production, raw
materials, labor and manufacturing overheads. 2.8 Property, plant and equipment
All property, plant and equipment (P,P&E) are stated at historical cost less depreciation.
Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the assets carrying amount or recognized as a separate asset, as
appropriate, only when it is probable that future economic benefits associated with the item will
flow to the Company and the cost of the item can be measured reliably. All other repairs and
maintenance are charged to the Consolidated Income Statement during the financial period in which
they are incurred. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method
to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings
    
    20-30 yearsEquipment and machinery
    
    5 yearsFurniture and fixtures
    
    5-10 yearsLeasehold improvements
    
    8-12 years
 F-9




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##### Table of Contents



The assets residual values and useful lives are reviewed, and adjusted if appropriate, at
each balance sheet date.
An assets carrying amount is written down immediately to its recoverable amount if the assets
carrying amount is greater than its estimated recoverable amount. Gains and losses on sales are determined by comparing proceeds with carrying amount. These are
included in the Consolidated Income Statement under Other operating income (expense), net. Leases of property, plant and equipment where the Company has substantially all the risks and
rewards of ownership are classified as finance leases. Finance leases are capitalized at the
leases commencement at the lower of the fair value of the leased property and the present value of
the minimum lease payments. Each lease payment is allocated between the liability and finance
charges so as to achieve a constant rate on the finance balance outstanding. The corresponding
rental obligations, net of finance charges, are included in current and non-current obligations
under finance leases. The interest element of the finance cost is charged to the income statement
over the lease period so as to produce a constant periodic rate of interest on the remaining
balance of the liability for each period. The property, plant and equipment acquired under finance
leases are depreciated over the shorter of the useful life of the asset or the lease term. 2.9 Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Companys
share of the net identifiable assets of the acquired subsidiary/associate at the date of
acquisition. Goodwill on acquisitions of subsidiaries is presented on the Consolidated Balance
Sheet under the caption Goodwill. Goodwill on acquisitions of associates is included in
investments in associates. Goodwill is carried at cost less accumulated amortization and impairment
losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill
relating to the entity sold. Goodwill is currently amortized over a period between five and twenty years, and is reviewed for
impairment at each balance sheet date, or whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. (b) Patents
Patents and patent rights are stated at cost and are amortized using the straight-line method over
their economic useful life, which does not exceed the shorter of three years or the legal lifetime. (c) Computer software
Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire
and bring to use the specific software. These costs are amortized over their estimated useful lives
(not exceeding five years). Certain direct development costs associated with internal-use software including external direct
costs of material and services and payroll costs for employees devoting time to the software
products are included in other intangible assets and are amortized over a period not to exceed five
years beginning when the asset is substantially ready for use. Costs incurred during the
preliminary project stage, as well as maintenance and training costs, are expensed as incurred. (d) Research and development
Research and development costs are expensed as incurred, except for development costs where it is
expected that the product under development will be produced and will be profitable, and technical
feasibility has been demonstrated. Such costs are capitalized and amortized based on the
straight-line method over their estimated useful life, which normally does not exceed three years.
Costs are capitalized through the time the product under development is produced and future
profitability is demonstrated by net present value computations, using a discount rate based on the
Companys cost of capital plus a risk factor. Development costs of a project are written down to the extent that the unamortized balance is no
longer capable of being recovered from the expected future economic benefits and when the criteria
for recognition of the development costs as an asset cease to be met. The write-down or write-off
is recognized as an expense in the period in which such determination is made. 2.10 Impairment of assets
Goodwill is reviewed for impairment based on expectations of future cash flows, which by
definition are uncertain, at each balance sheet date, or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Future cash flows are
computed based on the revenue estimates for the next five years, and include a terminal value
assumption. Whenever possible, forecast and long range planning data approved by the management of
the Company are used in those computations. Future cash flows are discounted using the cost of
capital of the Company at the time of the acquisition to which the goodwill is related. In
performing its review, the Company considers factors such as significant underperformance in
comparison to expected historical or projected future operating results, significant changes in
strategy or in the business model related to the acquired Company and significant negative industry
or economic trends. F-10




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Other assets that are subject to amortization are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. An impairment
loss is recognized for the amount by which the assets carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an assets fair value less costs to sell and value
in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which
there are separately identifiable cash flows (cash-generating units). 2.11 Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by
the lessor are classified as operating leases. Payments made under operating leases (net of any
incentives received from the lessor) are charged to the Consolidated Income Statement on a
straight-line basis over the period of the lease. 2.12 Investments
The Company classifies its investments in the following categories: financial assets and
liabilities held for trading, loans and receivables originated by the enterprise and
available-for-sale financial assets. The classification depends on the purpose for which the
investments were acquired. Management determines the classification of its investments at initial
recognition and re-evaluates this designation at every reporting date. (a) Financial assets and liabilities held for trading
All derivatives are designated as hedges. Assets and liabilities in this category are classified as
current assets or liabilities under Derivative financial instruments as they are expected to be
realized within 12 months of the balance sheet date. (b) Loans and receivables originated by the enterprise
Loans and receivables originated by the enterprise are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market. They arise when the Company
provides money, goods or services directly to a debtor with no intention of trading the receivable.
They are included in current assets, except for maturities greater than 12 months after the balance
sheet date. These are classified as non-current assets. Loans and receivables originated by the
enterprise are included in trade and other current receivables in the Consolidated Balance Sheet. (c) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category
or not classified in any of the other categories. They are included in non-current assets unless
management intends to dispose of the investment within 12 months of the balance sheet date. Equity investments in which the Company has less than 20% of the investees outstanding shares or
voting rights, and that are not in substance controlled or under significant influence, are
classified as available-for-sale financial assets and are presented under Available-for-sale
financial assets in non-current assets. Marketable investments are accounted for at fair value
with changes recognized directly through shareholders equity. Non-marketable investments are
accounted for as follows:  -
    
    If the fair value of unquoted investments in equity securities is determinable by valuation
techniques appropriate for the nature of the security, these items are accounted for at fair
value with changes recognized directly through shareholders equity.  -
    
    If fair value cannot be reliably measured, these items are accounted for under the cost method. Gains or losses recognized on the sale of equity securities are recorded in the Consolidated Income
Statement under the caption Other non-operating income (expense), net. Any loss resulting from
impairment in the value of investments which represents an other than temporary decline is recorded
in the period in which the loss occurs. The Company assesses at each balance sheet date whether
there is objective evidence that a financial asset or a group of financial assets is impaired. In
the case of non-marketable equity investments classified as available-for-sale, a significant or
prolonged decline in the fair value of the security below its cost is considered in determining
whether the securities are impaired. If any such evidence exists for available-for-sale financial
assets, the cumulative loss  measured as the difference between the acquisition cost and the
current fair value, less any impairment loss on that financial asset previously recognized in
profit or loss  is removed from shareholdersequity and recognized in the Consolidated Statement
of Income. Impairment losses recognized in the Consolidated Statement of Income on shareholders
equity instruments are not reversed through the Consolidated Statement of Income. F-11




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2.13 Cash and cash equivalents
Cash and cash equivalents includes cash in hand, short-term deposits and other short-term
highly liquid investments with original maturities of three months or less. Bank overdrafts are
shown within current liabilities on the Consolidated Balance Sheet. All significant cash deposits
are made with major financial institutions having an investment grade rating and invested in euro
money market fixed term deposits or mutual funds that have a maturity of three months or less. The
Company has temporary exposure to non-investment grade institutions on payments made by customers
in certain countries, until the Company transfers such amounts to investment grade institutions. Cash and cash equivalent balances held by the Company that are restricted as to withdrawal either
under a legal restriction or due to foreign countries exchange controls restrictions are not
presented as part of Cash and cash equivalents. Those balances are presented within current or
non-current assets based on their expected release date, and are disclosed as such in the notes to
the Consolidated Financial Statements. 2.14 Other income
Income arising from the use by others of entity assets yielding interest and dividends are
presented within Financial income (expense), net as they are not arising in the course of
ordinary activity. Dividend income is recognized when the right to receive payment is established. 2.15 Income taxes
Deferred income tax is provided in full, using the liability method, on temporary differences
arising between the tax bases of assets and liabilities and their carrying amounts in the
Consolidated Financial Statements. However, if the deferred income tax arises from initial
recognition of an asset or liability in a transaction other than a business combination that at the
time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted
for. Deferred income tax is determined using tax rates (and laws) that have been enacted or
substantially enacted by the balance sheet date and are expected to apply when the related deferred
income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized to the extent that it is probable that future taxable
profit will be available against which the temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and
associates, except where the timing of the reversal of the temporary difference is controlled by
the Company and it is probable that the temporary difference will not reverse in the foreseeable
future. 2.16 Research tax credit and government grants
Research tax credits are provided by various governments to give incentives for companies to
perform technical and scientific research. Companies that have qualifying expenses can receive such
grants in the form of a tax credit irrespective of taxes ever paid or ever to be paid, therefore
these research tax credits are presented as a reduction of research and development expenses. The
Company records the benefit of this grant only when all qualifying research has been performed and
the Company has obtained sufficient evidence from the relevant government authority that the credit
will be granted. Certain grants are subject to performance conditions over an extended period of time. Grants are
recognized when the performance conditions are initially met and any risk of repayment assessed as
remote. 2.17 Earnings per share
Basic earnings per share are calculated by dividing the profit attributable to equity holders
of the Company by the weighted average number of ordinary shares in issue during the year,
excluding ordinary shares purchased by the Company and held as treasury shares. Diluted earnings per share are computed by dividing net income attributable to equity holders of
the Company by the weighted average number of shares outstanding, plus dilutive potential ordinary
shares outstanding, i.e., additional share equivalents, using the treasury stock method assuming
the exercise of warrants and stock options. Dilutive potential ordinary shares are additional
ordinary shares to be issued. The effects of anti-dilutive potential ordinary shares are ignored in
calculating diluted earnings per share. When net losses are reported, the dilutive potential
ordinary shares outstanding are excluded from the net loss per share calculation. F-12




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2.18 Share capital and treasury shares
Incremental costs directly attributable to the issue of new shares or options are shown in
equity as a deduction, net of tax, from the proceeds. From time to time, with the prior approval of the Companys shareholders, the Company may
repurchase a portion of its outstanding ordinary shares. Shares repurchased by the Company could be
cancelled or used to fulfill its obligations under the stock option plans or for any other purpose
subject to applicable laws and regulations. Treasury shares are recorded at cost and reported as a
reduction of shareholders equity. 2.19 Stock options accounting
Equity benefits in such forms as shares, stock options, and other equity instruments, issued
to executive officers and employees at less than the fair value at which those instruments would be
issued to a third party, currently do not generate any compensation expense and thus have no impact
on the Consolidated Statement of Income in the year they are granted. Upon the issuance of such
shares, or exercise of the stock options, the impact of those benefits is recorded directly in
Share capital and Paid-in-capital within shareholders equity, and the dilutive effect of the
shares is taken into account in the calculation of the basic net income (loss) per share. 2.20 Provisions
Provisions for customer and warranty claims, restructuring costs, legal claims and litigation
are recognized when:  -
    
    the Company has a present legal or constructive obligation as a result of past events;-
    
    it is more likely than not that an outflow of resources will be required to settle the
obligation;-
    
    and the amount has been reliably estimated. Restructuring provisions principally comprise lease termination penalties and employee termination
payments. Provisions are not recognized for future operating losses. 2.21 Employee benefits
The Company operates various pension schemes under both defined benefit and defined
contribution plans. The liability recognized in the balance sheet in respect of defined benefit pension plans is the
present value of the defined benefit obligation at the balance sheet date less the fair value of
plan assets, together with adjustments for unrecognized actuarial gains or losses and past service
costs. The defined benefit obligation is calculated annually by independent actuaries using the
projected unit credit method. The present value of the defined benefit obligation is determined by
discounting the estimated future cash outflows using interest rates of high-quality corporate bonds
that are denominated in the currency in which the benefits will be paid, and that have terms to
maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions
in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit
obligation are charged or credited to income over the employees expected average remaining working
lives. Past-service costs are recognized immediately in income, unless the changes to the pension plan are
conditional on the employees remaining in service for a specified period of time (the vesting
period). In this case, the past-service costs are amortized on a straight-line basis over the
vesting period. For defined contribution plans, the Company pays contributions to publicly or privately
administered pension insurance plans on a mandatory, contractual or voluntary basis. The Company
has no further payment obligations once the contributions have been paid. The contributions are
recognized as employee benefit expense when they are due. Prepaid contributions are recognized as
an asset to the extent that a cash refund or a reduction in the future payments is available. 2.22 Advertising and promotional costs
The Company expenses the costs of advertising and promotional expenses when such costs are
incurred. Advertising and promotional expenses were  5,406 thousand,  5,760 thousand and  5,735
thousand for the years ended December 31, 2004, 2003, and 2002, respectively. 2.23 Comparatives
Due to the early adoption of IAS 1 (revised 2003) Presentation of Financial Statements, the
Company has modified its Consolidated Balance Sheet and its Consolidated Statement of Income. The prior line item Other income (expense), net has been broken down on the face of the
Consolidated Statement of Income as follows: F-13




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-
    
    Gain (loss) on sales of the Companys fixed assets amounting to  703 thousand and  63
thousand in 2003 and 2002 within Other operating income (expense), net in the operating
income (loss).  -
    
    Income (loss) on investments in associates amounting to  (7,561) thousand and  (3,084)
thousand in 2003 and 2002 within Share of profit (loss) of associates.  -
    
    Minority interest amounting to  (2,152) thousand and  (4,333) thousand in 2003 and 2002
within the allocation of Net income (loss).  -
    
    Gain (loss) on investments amounting to  (2,487) thousand and  (6,444) thousand in 2003 and
2002 and Foreign exchange gain (loss) amounting to  (8,652) thousand and  (15,106) thousand
in 2003 and 2002 within Other non-operating income (expense), net. Derivative financial instruments have been excluded from Other current receivables and Other
current liabilities and included in the face of the balance sheet in Derivative financial
instruments. The prior line item Investments has been broken down on the face of the balance sheet between
Investments in associates for investments accounted for under the equity method and
Available-for-sale financial assets that comprises net value of the investments in non-marketable
equity securities. The prior line item Other non-current assets has been broken down on the face of the balance
sheet between Other intangible assets, net and Other non-current receivables that comprise
receivables or prepaid expenses that are expected to be realized in more than 12 months after the
balance sheet date. 3. FINANCIAL RISK MANAGEMENT The Company is exposed to a variety of financial risks through its activity: currency risk,
interest rate / re-investment risk, financial counter-party risk and credit risk. The Companys
overall risk management program focuses on the unpredictability of financial markets and seeks to
minimize potential adverse effects on the Companys financial performance. The Company uses
derivative financial instruments to hedge identified currency risk exposures. 3.1 Companys risk exposure (a) Currency risks The Company operates worldwide and is therefore exposed to foreign exchange risk on its commercial
transactions. The Company has developed risk management guidelines that set forth its tolerance for risk and its
overall risk management policies. The Company has also established processes to measure its
exposure to foreign exchange risk and to monitor and control hedging transactions in a timely and
accurate manner. Such policies are approved by the Companys Audit Committee and reviewed annually. The policy of the Company is to hedge a portion of its subsidiaries known or forecasted commercial
transactions not denominated in their functional currencies. In order to achieve this objective, the Company uses foreign currency derivative instruments by
entering into foreign exchange forward contracts and foreign exchange options. The Company does not enter into financial derivative contracts for purposes other than hedging. No
option is sold except where there is a corresponding option purchased by the Company. This
combination strategy reduces the cost of hedging without creating speculative positions. All
hedging instruments are allocated to underlying commercial transactions. The financial derivative contracts are traded over the counter with major financial institutions
and generally mature within
12 months. (b) Interest rate and re-investment risk
The Company is in a net, short duration, financial asset position. Financial assets are short-term
investments in money market instruments with a duration of three months or less. Financial
liabilities are mainly floating rates leasing. The Company considers it is not significantly exposed to interest rate risk fluctuations, and
consequently does not enter into any derivative contract to hedge interest rate risk. However, the Company is facing re-investment risk: when interest rates are increasing (decreasing),
interest income is increasing (decreasing respectively). This risk remains un-hedged. F-14




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(c) Financial counter-party risk
Derivatives and all significant cash deposits are held with major financial institutions of
investment grade. The Company has temporary exposure to non-investment grade institutions on
payments made by customers in certain countries, until the Company transfers such amounts to
investment grade institutions. (d) Concentration of credit risk
The Companys broad geographic and customer distribution limits the concentration of credit risk.
No single customer accounted for more than 10% of the Companys sales during the years ended
December 31, 2004, 2003 and 2002. In 2004, 2003 and 2002, the Company maintained adequate allowances for potential credit losses and
performed ongoing credit evaluations. As of December 31, 2004, the Company did not have any
significant concentration of business transacted with a particular customer that could, if suddenly
eliminated, severely impact the operations of the Company. 3.2 Accounting for derivative financial instruments
Derivatives are initially recognized at fair value on the date a derivative contract is
entered into and are subsequently remeasured at their fair value. These instruments are presented
under Derivative financial instruments in current assets or liabilities as they are expected to
be realized within 12 months of the balance sheet date. The method of recognizing the resulting
gain or loss depends on whether the derivative qualifies as a hedging instrument for accounting
purposes, and if so, the nature of the item being hedged. Most of the derivative financial
instruments used to hedge the Companys foreign exchange exposure qualify as cash flow hedges since
they reduce the variability in cash flows attributable to the Companys forecasted transactions. The Company documents at the inception of the transaction the relationship between hedging
instruments and hedged items, as well as its risk management objective and strategy for undertaking
various hedge transactions. The Company also documents its assessment, both at hedge inception and
on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items. The fair values of
various derivative instruments used for hedging purposes are disclosed in Note 8. Movements on the
hedging reserve within Other comprehensive income are shown in Note 24. The effective portion of changes in the fair value of derivatives that are designated and qualify
as cash flow hedges are recognized in equity under Other comprehensive income. The gain or loss
relating to the ineffective portion is recognized immediately in the income statement within the
foreign exchange gains and losses included in the line item Other non-operating income (expense),
net. Amounts accumulated in equity are recycled in the Consolidated Income Statement in the
periods when the hedged item will affect profit or loss. When a hedging instrument expires or is
sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or
loss existing in equity at that time remains in equity and is recognized when the forecast
transaction is ultimately recognized in the income statement. When a forecasted transaction is no
longer expected to occur, the cumulative gain or loss that was reported in equity is immediately
transferred to the Consolidated Income Statement. For hedges that do not qualify for hedge accounting, any gains or losses arising from changes in
the fair value of the hedging instruments are recorded immediately as foreign exchange gains and
losses for the period, in Other non-operating income (expense), net. 3.3 Estimation of fair value of derivatives
The fair value of financial instruments traded in active markets (such as publicly traded
derivatives, and trading and available-for-sale securities) is based on quoted market prices at the
balance sheet date. The fair value of financial instruments that are not traded in an active market (for example,
over-the-counter derivatives) is determined by using valuation techniques. The fair value of
derivative financial instruments is calculated at inception and over the life of the derivative. The fair value of the forward exchange contracts at inception is zero. Valuation during the life
and at expiration of the forward contract is calculated according to the following parameters
communicated by the Companys banks: (i) spot foreign exchange rate at the date the valuation is
performed; (ii) interest rate differential between the two currencies; (iii) time to expiration;
and (iv) notional amount of the contract. Fair value is then obtained by discounting, for the
remaining maturity, the difference between the contract rate and the market forward rate multiplied
by the nominal amount. F-15




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The option contracts value at inception is the initial premium paid or received. Over the life of
the option and at expiration, fair value is determined using standard option pricing models (such
as the Black & Scholes option pricing model), based on central banks fixings or market parameters
obtained from official financial information providers, and using the following variables: (i) spot
foreign exchange rate; (ii) option strike price; (iii) volatility, obtained from the Companys
banks; (iv) risk-free interest rate; and (v) expiration date of the option. 4. CRITICAL ACCOUNTING ESTIMATES The preparation of Consolidated Financial Statements in conformity with generally accepted
accounting principles requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses
during the reporting period. Estimates are used for, but not limited to, the accounting of doubtful
accounts, depreciation, amortization and impairment, sales returns, income taxes and contingencies.
Actual results could differ from these estimates. Estimates and judgments are continually evaluated and are based on historical experience and other
factors, including expectations of future events that are believed to be reasonable under the
circumstances. The Company makes estimates and assumptions concerning the future. The resulting accounting
estimates will, by definition, seldom equal the related actual results. The estimates and
assumptions that have a significant risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year are discussed below. (a) Estimated impairment of goodwill
The Company tests annually whether goodwill has suffered any impairment, in accordance with the
accounting policy stated in Note 2.10. (b) Income taxes
The Company is subject to income taxes in numerous jurisdictions. Significant judgment is required
in determining the worldwide provision for income taxes. There are many transactions and
calculations for which the ultimate tax determination is uncertain during the ordinary course of
business. The Company recognizes liabilities for anticipated tax audit issues based on estimates of
whether additional taxes will be due. Where the final tax outcome of these matters is different
from the amounts that were initially recorded, such differences will impact the income tax and
deferred tax provisions in the period in which such determination is made. (c) Legal claims
The estimates for provisions for litigation are based upon available information and advice of
counsel and are regularly reviewed on this basis by management. 5. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of the following: (in thousands of euros) December 31
    
    2004
    
    
    2003
    
    
    2002Cash at bank and in hands
    
    
    23,846
    
    
    
    45,955
    
    
    
    48,804Short term bank deposits
    
    
    364,584
    
    
    
    344,729
    
    
    
    368,590Cash and cash equivalents
    
    
    388,430
    
    
    
    390,684
    
    
    
    417,394
 The average effective interest rate on short-term bank deposits was 2.04% in 2004, 2.35% in
2003, and 3.26% in 2002; these deposits have a maturity of less than three months. F-16




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6. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable consist of the following: (in thousands of euros) December 31
    
    2004
    
    
    2003
    
    
    2002Trade accounts receivable, gross
    
    
    155,750
    
    
    
    163,621
    
    
    
    157,399Less, provision for impairment of receivables
    
    
    (7,238
    )
    
    
    (8,894
    )
    
    
    (12,486
    )Trade accounts receivable, net
    
    
    148,512
    
    
    
    154,727
    
    
    
    144,913
 The fair value of trade accounts receivable based on discounted cash flows does not differ
from the net book value because the Company does not have trade accounts receivable with payment
terms exceeding one year. The Company has recognized a net expense of  591 thousand related to the provision for impairment
of its trade accounts receivable during the year ended December 31, 2004 (a net income of  1,958
thousand in 2003, a net expense of  3,602 thousand in 2002). The income or expense has been
included in General and administrative expenses in the Consolidated Statement of Income. 7. INVENTORY Inventory consists of the following: (in thousands of euros) December 31
    
    2004
    
    
    2003
    
    
    2002Raw materials and supplies
    
    
    38,208
    
    
    
    27,456
    
    
    
    34,098Work-in-progress
    
    
    74,296
    
    
    
    67,066
    
    
    
    67,883Finished goods
    
    
    10,517
    
    
    
    10,158
    
    
    
    8,901Inventory, gross
    
    
    123,021
    
    
    
    104,680
    
    
    
    110,882Less, inventory allowance
    
    
    (7,411
    )
    
    
    (6,007
    )
    
    
    (14,369
    )Inventory, net
    
    
    115,610
    
    
    
    98,673
    
    
    
    96,513
 8. DERIVATIVE FINANCIAL INSTRUMENTS As indicated in Note 3, the Company uses financial instruments to manage its foreign currency
exposure incurred in the normal course of business. Most of the financial instruments used by the
Company to hedge its exposure to foreign currency risk are qualified as cash flow hedges under IAS
39. Non-qualified hedging instruments are mainly the options sold as part of combination
strategies. The following table is a summary of the outstanding financial instruments qualifying as cash flow
hedges under IAS 39 (notional amounts) and of the Companys commercial exposure to currency risk. In the amounts reported below:  
    
    hedging positions in parentheses indicate the Companys forward commitment or option to sell
the currency against the euro; other hedging positions indicate the Companys forward
commitment or option to buy the currency against the euro;  
    
    positive exposures indicate the Companys receivables in the currency, or forecasted sales in
the currency; exposures in parentheses indicate the Companys payables in the currency, or
forecasted purchases in the currency. F-17




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(in thousands of euros (1)) December 31
    
    2004
    
    
    2003USD and
    
    
    GBP
    
    
    JPY
    
    
    ZAR
    
    
    Others(3)
    
    
    USD and
    
    
    GBP
    
    
    JPY
    
    
    ZAR
    
    
    Others(3)USD area(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    USD area(2)Hedging positions(4)Forward contracts
    
    
    (120,811
    )
    
    
    (23,519
    )
    
    
    (12,710
    )
    
    
    (4,483
    )
    
    
    1,198
    
    
    
    (30,874
    )
    
    
    (5,061
    )
    
    
    (4,474
    )
    
    
    (3,890
    )
    
    
    (2,476
    )Option contracts (5)
    
    
    (132,244
    )
    
    
    (25,741
    )
    
    
    (22,849
    )
    
    
    
    
    
    
    4,347
    
    
    
    (128,379
    )
    
    
    (21,307
    )
    
    
    (15,747
    )
    
    
    
    
    
    
    Total
    
    
    (253,055
    )
    
    
    (49,260
    )
    
    
    (35,559
    )
    
    
    (4,483
    )
    
    
    5,545
    
    
    
    (159,253
    )
    
    
    (26,368
    )
    
    
    (20,221
    )
    
    
    (3,890
    )
    
    
    (2,476
    )Exposure(6)Balance sheet items:commercial transactions
not settled at year end
    
    
    30,627
    
    
    
    7,414
    
    
    
    6,706
    
    
    
    4,562
    
    
    
    8,430
    
    
    
    53,529
    
    
    
    2,220
    
    
    
    1,908
    
    
    
    3,890
    
    
    
    7,818Forecasted commercial
transactions
    
    
    238,093
    
    
    
    51,838
    
    
    
    36,598
    
    
    
    
    
    
    
    (13,598
    )
    
    
    154,834
    
    
    
    34,984
    
    
    
    21,548
    
    
    
    1,600
    
    
    
    (13,284
    )Total
    
    
    268,720
    
    
    
    59,252
    
    
    
    43,304
    
    
    
    4,562
    
    
    
    (5,168
    )
    
    
    208,363
    
    
    
    37,204
    
    
    
    23,456
    
    
    
    5,490
    
    
    
    (5,466
    )
 
 (1)
    Currency amounts are converted to euros at year end closing rates.(2)
    USD area includes currencies closely related to USD, mainly the CAD, AED, AUD, KRW and SGD.(3)
    Other currencies include mainly the CHF, NOK and PLN.(4)
    Financial instruments that hedge the Companys commercial currency exposure and that are
effective hedges under IAS 39 qualify as cash flow hedges.(5)
    Option hedges qualifying as effective hedges under IAS 39 are purchased options to sell or buy
currency against the euro.(6)
    The Companys policy is to hedge all its actual commercial currency exposure as well as a
time-weighted proportion of its forecasted commercial currency exposure. Outstanding financial instruments not qualifying as effective hedges under IAS 39 are
described below (notional amount).
In the amounts reported below, a value in parentheses indicates the Companys forward commitment or
option to sell the currency against the euro; other positions indicate the Companys forward
commitment or option to purchase the currency against the euro. (in thousands of euros (1)) December 31
    
    2004
    
    
    2003USD and
    
    
    GBP
    
    
    JPY
    
    
    ZAR
    
    
    Others(3)
    
    
    USD and
    
    
    GBP
    
    
    JPY
    
    
    ZAR
    
    
    Others(3)USD area(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    USD area(2)Forward contracts
    
    
    88
    
    
    
    
    
    
    
    (2,990
    )
    
    
    
    
    
    
    
    
    
    
    (8,796
    )
    
    
    (895
    )
    
    
    
    
    
    
    (2,375
    )
    
    
    Option contracts (4)
    
    
    (68,249
    )
    
    
    (7,253
    )
    
    
    (10,890
    )
    
    
    
    
    
    
    
    
    
    
    (46,404
    )
    
    
    (4,261
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    (68,161
    )
    
    
    (7,253
    )
    
    
    (13,880
    )
    
    
    
    
    
    
    
    
    
    
    (55,200
    )
    
    
    (5,156
    )
    
    
    
    
    
    
    (2,375
    )
    
    
    -
 
 (1)
    Currency amounts are converted to euros at year end closing rates.(2)
    USD area includes currencies closely related to USD, mainly the CAD, AED, AUD, KRW and SGD.(3)
    Other currencies include mainly the CHF, NOK and PLN.(4)
    Options that do not qualify as effective hedges under IAS 39 are the options that the Company
sells as part of its combination strategies. The fair market value of the Companys financial instruments is recorded in current assets or
current liabilities as Derivative financial instruments, and consists of the following: (in thousands of euros) December 31
    
    2004
    
    
    2003Fair value of the financial instruments qualifying as cash flow hedges under IAS 39
    
    
    33,135
    
    
    
    16,986Fair value of the financial instruments not qualifying as effective hedges under IAS 39
    
    
    252
    
    
    
    (560
    )Total fair value of derivative financial instruments
    
    
    33,387
    
    
    
    16,426
 F-18




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9. OTHER CURRENT RECEIVABLES Other current receivables include the following: (in thousands of euros) December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Value added tax receivable
    
    
    16,679
    
    
    
    18,677
    
    
    
    40,349Other taxes receivable
    
    
    4,111
    
    
    
    11,255
    
    
    
    9,175Advance facility to supplier
    
    
    
    
    
    
    12,001
    
    
    
    9,598Advance payments to non-trade suppliers
    
    
    826
    
    
    
    1,099
    
    
    
    2,356Prepaid expenses
    
    
    10,090
    
    
    
    15,780
    
    
    
    15,129Advance payments to trade suppliers
    
    
    3,804
    
    
    
    3,454
    
    
    
    3,369Prepaid pension costs (see Note 20)
    
    
    
    
    
    
    
    
    
    
    504Restricted cash
    
    
    27,405
    
    
    
    
    
    
    
    Other current assets
    
    
    3,245
    
    
    
    3,983
    
    
    
    2,631Total other current receivables
    
    
    66,160
    
    
    
    66,249
    
    
    
    83,111
 During the fourth quarter of 2000, to reduce supply risk associated with obtaining microprocessor
chips, the Company entered into a long-term supply agreement with a major microprocessor
manufacturer. In connection with this supply agreement, the Company financed enhancements of this
suppliers production capacity with an unsecured advance facility. By December 31, 2004, the
supplier had paid in full the advance facility and related interests. Prepaid expenses include certain royalties paid in advance in the second quarter 2002 for the
license to use certain software integrated in the Companys products. This amount is being expensed
through 2005, proportionally based on the number of units sold to customers. At each balance sheet
date the Company reviews forecasted volumes to ensure that they are sufficient to cover the balance
of the pre-paid amount. If necessary, part of the pre-payment is expensed in proportion to the
volume decrease. As of December 31, 2004, the current portion of royalties paid in advance amounted
to  3,216 thousand. Restricted cash is mainly composed of  22,225 thousand (including interest amounting to  273
thousand) related to the Nicolaï case (see Note 35). It also comprises  2,657 thousand (of which
 886 thousand is reported under the caption Other non-current receivables, see Note 16), that
relates to a time deposit in China to secure a loan in favor of TTEF (see Note 37). Restricted
cash also comprises an amount of  3,409 thousand related to Gemplus China Investment (GCI), a
wholly owned subsidiary of the Company. The Company can only withdraw this cash when GCI is
liquidated, which is the intention of the Company. However, this process has not yet started. F-19




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##### Table of Contents



10. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment (P,P&E) can be analyzed as follows: (in thousands of euros) Land
    
    
    Buildings
    
    
    Machinery
    
    
    Total 2004
    
    
    Total 2003
    
    
    Total 2002CostAs of January 1
    
    
    6,524
    
    
    
    165,005
    
    
    
    305,054
    
    
    
    476,583
    
    
    
    512,677
    
    
    
    526,813Additions
    
    
    
    
    
    
    5,766
    
    
    
    17,122
    
    
    
    22,888
    
    
    
    15,238
    
    
    
    31,953Disposals
    
    
    (368
    )
    
    
    (7,486
    )
    
    
    (20,374
    )
    
    
    (28,228
    )
    
    
    (31,669
    )
    
    
    (24,521
    )Changes in consolidation scope
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (597
    )
    
    
    2,547Currency adjustments
    
    
    (141
    )
    
    
    (1,607
    )
    
    
    (5,474
    )
    
    
    (7,222
    )
    
    
    (19,066
    )
    
    
    (24,115
    )As of December 31
    
    
    6,015
    
    
    
    161,678
    
    
    
    296,328
    
    
    
    464,021
    
    
    
    476,583
    
    
    
    512,677Accumulated depreciationAs of January 1
    
    
    
    
    
    
    (55,740
    )
    
    
    (245,137
    )
    
    
    (300,877
    )
    
    
    (295,733
    )
    
    
    (258,029
    )Depreciation
    
    
    
    
    
    
    (13,100
    )
    
    
    (29,143
    )
    

    
    (42,243
    )
    
    
    (51,064
    )
    
    
    (72,376
    )Reversal of impairment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,555
    
    
    
    Disposals
    
    
    
    
    
    
    4,824
    
    
    
    18,625
    
    
    
    23,449
    
    
    
    30,794
    
    
    
    22,896Changes in consolidation scope
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192
    
    
    
    (511
    )Currency adjustments
    
    
    
    
    
    
    518
    
    
    
    4,048
    
    
    
    4,566
    
    
    
    12,379
    
    
    
    12,287As of December 31
    
    
    
    
    
    
    (63,498
    )
    
    
    (251,607
    )
    
    
    (315,105
    )
    
    
    (300,877
    )
    
    
    (295,733
    )Net book value as of December 31
    
    
    6,015
    
    
    
    98,180
    
    
    
    44,721
    
    
    
    148,916
    
    
    
    175,706
    
    
    
    216,944Including:P,P&E under finance lease contracts, gross
    
    
    3,153
    
    
    
    66,579
    
    
    
    139
    
    
    
    69,871
    
    
    
    68,926
    
    
    
    69,407P,P&E under finance lease contracts, depreciation
    
    
    
    
    
    
    (26,908
    )
    
    
    (84
    )
    
    
    (26,992
    )
    
    
    (22,689
    )
    
    
    (18,865
    )Net book value under finance lease
contracts as of December 31
    
    
    3,153
    
    
    
    39,671
    
    
    
    55
    
    
    
    42,879
    
    
    
    46,237
    
    
    
    50,542
 Interest is capitalized during the new construction or upgrade of qualifying assets. In 2002,
interest was capitalized in the amount of  324 thousand in connection with the construction of a
building located in La Ciotat, France. No interest was capitalized in 2004 and 2003. 11. GOODWILL Goodwill can be analyzed as follows: (in thousands of euros) 2004
    
    
    2003
    
    
    2002CostAs of January 1
    
    
    156,081
    
    
    
    165,443
    
    
    
    163,402Additions
    
    
    
    
    
    
    5,901
    
    
    
    6,437Purchase price adjustments
    
    
    (820
    )
    
    
    
    
    
    
    Disposals and transfers
    
    
    (36,791
    )
    
    
    (9,918
    )
    
    
    Currency adjustments
    
    
    (2,088
    )
    
    
    (5,345
    )
    
    
    (4,396
    )As of December 31
    
    
    116,382
    
    
    
    156,081
    
    
    
    165,443Accumulated depreciation and impairmentAs of January 1
    
    
    (118,354
    )
    
    
    (92,256
    )
    
    
    (46,822
    )Impairment charge
    
    
    
    
    
    
    (19,879
    )
    
    
    (22,124
    )Amortization
    
    
    (7,718
    )
    
    
    (13,172
    )
    
    
    (24,993
    )Disposals and transfers
    
    
    36,791
    
    
    
    4,543
    
    
    
    167Currency adjustments
    
    
    1,096
    
    
    
    2,410
    
    
    
    1,516As of December 31
    
    
    (88,185
    )
    
    
    (118,354
    )
    
    
    (92,256
    )Net book value as of December 31
    
    
    28,197
    
    
    
    37,727
    
    
    
    73,187
 F-20




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##### Table of Contents



As described in Notes 2.9 and 2.10, goodwill is amortized on a straight-line basis and
reviewed for impairment based on expectations of future cash flows at each balance sheet date or
whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. Amortization and impairment charges are included in the
Consolidated Statement of Income
under Goodwill amortization and impairment. Goodwill is allocated to the Companys operating segments as follows: (in thousands of euros)December 31
    
    2004
    
    
    2003
    
    
    2002Telecommunications
    
    
    247
    
    
    
    296
    
    
    
    6,658Financial Services
    
    
    24,773
    
    
    
    30,434
    
    
    
    33,693Identity and Security
    
    
    3,177
    
    
    
    6,997
    
    
    
    32,836Total
    
    
    28,197
    
    
    
    37,727
    
    
    
    73,187
 Impairment tests for goodwill In 2004 the Company did not record any goodwill impairment charge. In 2003 the Company recorded a goodwill impairment charge of  19,879 thousand as a result of its
impairment test. This write-down resulted from the revision of the business plan of the acquired
activities of Celocom Limited in November 2000. In 2002 the Company recorded a goodwill impairment charge for the remaining book value of  22,124
thousand as a result of its impairment test. This write-down related to the goodwill generated
following the acquisition of SLP SA of  36,791 thousand in October 2000. In 2002 the Company
decided to either sell or cease SLP operations due to a significant decline in sales of SLP
software. SLP eventually ceased its activities in 2004. Therefore, the total gross value and
accumulated depreciation have been written off. 12. DEFERRED DEVELOPMENT COSTS Deferred development costs can be analyzed as follows: (in thousands of euros)December 31
    
    2004
    
    
    2003
    
    
    2002Gross amount at the beginning of the year
    
    
    54,651
    
    
    
    56,658
    
    
    
    41,357Accumulated amortization at the
beginning of the year
    
    
    (36,735
    )
    
    
    (30,748
    )
    
    
    (12,887
    )Balance at the beginning of the year
    
    
    17,916
    
    
    
    25,910
    
    
    
    28,470Deferred during the year
    
    
    9,595
    
    
    
    10,757
    
    
    
    15,301Less, allowances
    
    
    (8,289
    )
    
    
    (18,751
    )
    
    
    (17,861
    )Impact for the year on income before tax
    
    
    1,306
    
    
    
    (7,994
    )
    
    
    (2,560
    )Balance at the end of the year
    
    
    19,222
    
    
    
    17,916
    
    
    
    25,910Gross amount at the end of the year
    
    
    55,846
    
    
    
    54,651
    
    
    
    56,658Accumulated amortization
    
    
    (36,624
    )
    
    
    (36,735
    )
    
    
    (30,748
    )Balance at the end of the year
    
    
    19,222
    
    
    
    17,916
    
    
    
    25,910
 Research and development expenses incurred during the year consist of the following: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Research and development expenditures
    
    
    68,208
    
    
    
    63,918
    
    
    
    95,288Deferred development costs, net
    
    
    (1,306
    )
    
    
    7,994
    
    
    
    2,560Grants received including research tax credit
    
    
    (4,310
    )
    
    
    (2,689
    )
    
    
    (5,608
    )Total research and development expenses
    
    
    62,592
    
    
    
    69,223
    
    
    
    92,240
 F-21




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##### Table of Contents



13. OTHER INTANGIBLE ASSETS Other intangible assets consist of the following: (in thousands of euros) December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Software, gross
    
    
    35,289
    
    
    
    39,739
    
    
    
    44,914Software, accumulated amortization
    
    
    (26,881
    )
    
    
    (24,677
    )
    
    
    (19,550
    )Software, net of accumulated amortization
    
    
    8,408
    
    
    
    15,062
    
    
    
    25,364Patents and patent rights, gross
    
    
    6,428
    
    
    
    7,125
    
    
    
    9,758Patents and patent rights, accumulated amortization
    
    
    (5,871
    )
    
    
    (6,030
    )
    
    
    (4,388
    )Patents and patents rights, net of accumulated amortization
    
    
    557
    
    
    
    1,095
    
    
    
    5,370Total other intangible assets, net
    
    
    8,965
    
    
    
    16,157
    
    
    
    30,734
 14. INVESTMENTS IN ASSOCIATES Investments in associates can be analyzed as follows: (in thousands of euros) 2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)As of January 1
    
    
    19,216
    
    
    
    21,008
    
    
    
    4,358Change in
perimeter (1)
    
    
    
    
    
    
    7,090
    
    
    
    19,734Share of (loss) profit
    
    
    (5,970
    )
    
    
    (7,561
    )
    
    
    (3,084
    )Currency adjustments
    
    
    (382
    )
    
    
    (1,321
    )
    
    
    As of December 31
    
    
    12,864
    
    
    
    19,216
    
    
    
    21,008
 
 (1)
    
    Change in perimeter comprises the impact of changes in ownership
interest leading to reclassifications between subsidiaries, available-for-sale financial

assets and investments in associates. The Company has investments in associates in several non-public start-up companies. These
investments are accounted for in accordance with the accounting policies described in Note 2.2. The
Company has no significant flow of transactions with these companies. 15. AVAILABLE-FOR-SALE FINANCIAL ASSETS Available-for-sale financial assets consist of the following: (in thousands of euros) December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Investments in non-marketable equity securities
    
    
    23,512
    
    
    
    18,549
    
    
    
    17,367Provision for impairment of available-for-sale assets
    
    
    (18,760
    )
    
    
    (17,902
    )
    
    
    (15,287
    )Available-for-sale financial assets, net
    
    
    4,752
    
    
    
    647
    
    
    
    2,080
 F-22




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##### Table of Contents



Changes in available-for-sale financial assets are as follows: (in thousands of euros) 2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)As of January 1
    
    
    647
    
    
    
    2,080
    
    
    
    17,066Additions
    
    
    5,300
    
    
    
    1,140
    
    
    
    Change in perimeter
    
    
    
    
    
    
    
    
    
    
    (8,542
    )Gains (losses) on available-for-sale financial assets
    
    
    (858
    )
    
    
    (2,487
    )
    
    
    (6,444
    )Currency adjustments
    
    
    (337
    )
    
    
    (86
    )
    
    
    As of December 31
    
    
    4,752
    
    
    
    647
    
    
    
    2,080
 The Company neither trades nor holds marketable securities and has minority shareholdings in
several non-public start-up companies. These shareholdings are accounted for in accordance with the
accounting policies described in Note 2.12. A write-down is recorded when there is reason to
believe that an impairment in value that is other than temporary has occurred, i.e., that the
business model is questioned or that the business plan is not met. 16. OTHER NON-CURRENT RECEIVABLES Other non-current receivables consist of the following: (in thousands of euros) December 31
    
    Notes
    
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Loans receivable from senior management, net of provision
(69,885 in 2004, 69,220 in 2003, 67,582 in 2002)
    
    
    (35
    )
    
    
    8,880
    
    
    
    9,546
    
    
    
    11,183Non-current portion of advance facility to supplier
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    14,396Research tax credit
    
    
    
    
    
    
    11,259
    
    
    
    10,206
    
    
    
    13,215Rental deposit
    
    
    
    
    
    
    716
    
    
    
    855
    
    
    
    1,902Employee loans and other related loans
    
    
    
    
    
    
    402
    
    

    
    719
    
    
    
    275Prepaid expenses (non-current portion)
    
    
    (9
    )
    
    
    
    
    
    
    4,329
    
    
    
    8,738Carry-back receivable from tax authority
    
    
    (19
    )
    
    
    21,295
    
    
    
    
    
    
    
    Restricted cash
    
    
    (9
    )
    
    
    886
    
    
    
    
    
    
    
    Other loans and assets
    
    
    
    
    
    
    462
    
    
    
    1,596
    
    
    
    4,376Total other non-current receivables
    
    
    
    
    
    
    43,900
    
    
    
    27,251
    
    
    
    54,085
 17. CURRENT PORTION OF PROVISIONS AND OTHER LIABILITIES Current portion of provisions and other liabilities consist of the following: (in thousands of euros) December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Current portion of provisions
    
    
    22,196
    
    
    
    44,763
    
    
    
    43,527Other current liabilities
    
    
    28,021
    
    
    
    33,327
    
    
    
    37,606Total
    
    
    50,217
    
    
    
    78,090
    
    
    
    81,133
 F-23




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##### Table of Contents



Variation analysis of the current portion of provisions is as follows: (in thousands of euros) Effect of
    
    
    
    
    
    
    Amount
    
    
    Amount
    
    
    Reclassificationchanges in
    
    
    Increase in
    
    
    unused
    
    
    used
    
    
    withinCurrent
portion
    
    December 31,
    
    

December
31,
    
    
    exchange
    
    
    current
    
    
    during
    
    
    during the
    
    
    balance
    
    
    December 31,of provisions
    
    2002
    
    
2003
    
    
    rate
    
    
    liabilities
    
    
    the period
    
    
    period
    
    
    sheet items
    
    
    2004(Restated)
    
    
    (Restated)Provision for restructuring
(see Note 21)
    
    

    40,975
    

    
    
    38,951
    
    
    
    12
    
    
    
    15,402
    
    
    
    (9,555
    )
    
    
    (25,290
    )
    
    
    (2,901
    )
    
    
    16,619Allowances for customer claims
    
    
    2,552
    
    


    
    612
    
    
    
    10
    
    
    
    383
    
    
    
    (72
    )
    
    
    (556
    )
    
    
    
    
    
    
    377Provision for litigation (see Note 35)
    
    
    
    
    
    
    5,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,200Total current portion of provisions
    
    
    43,527
    
    
    
    44,763
    
    
    
    22
    
    
    
    15,785
    
    
    
    (9,627
    )
    
    
    (25,846
    )
    
    
    (2,901
    )
    
    
    22,196
 Other current liabilities consist of the following: (in thousands of euros) December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Deferred revenue
    
    
    17,317
    
    
    
    19,409
    
    
    
    14,088Management severance liability
(see Note 35)
    
    
    
    
    
    
    
    
    
    
    9,975Tax reimbursement liability on interest forgiven on loans
to senior management (see Note 35)
    
    
    
    
    
    
    
    
    
    
    1,545Customer deposits
    
    
    5,228
    
    
    
    5,690
    
    
    
    4,554Bank overdrafts
    
    
    1,752
    
    
    
    99
    
    
    
    1,677Other accrued liabilities
    
    
    3,724
    
    
    
    8,129
    
    
    
    5,767Total other current liabilities
    
    
    28,021
    
    
    
    33,327
    
    
    
    37,606
 Deferred revenue mainly relates to cards invoiced to customers but not shipped because the
products require customization to be performed by the Company and to sales to resellers and
distributors for which revenue recognition criteria described in Note 2.5 have not yet been met. Bank overdrafts either result from the daily usage of cash in some of the Companys foreign
locations or from subsidiaries that are not wholly owned and that do not benefit from the Companys
treasury management. 18. CURRENT AND NON-CURRENT OBLIGATIONS UNDER FINANCE LEASES Finance leases obligations outstanding as of December 31, 2004, are analyzed as follows: (in thousands of euros) Not later than 1 year
    
    
    7,235Later than 1 year and not later than 5 years
    
    
    25,392Later than 5 years
    
    
    11,922Total minimum lease payments
    
    
    44,549Less, amount representing interest
    
    
    (4,881
    )Present value of minimum obligations under finance leases
    
    
    39,668Less, current portion of obligations under finance leases
    
    
    (6,005
    )Non-current obligations under finance leases
    
    
    33,663
 F-24




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##### Table of Contents



The present value of finance lease liabilities is as follows: (in thousands of euros) Not later than 1 year
    
    
    6,005Later than 1 year and not later than 5 years
    
    
    22,481Later than 5 years
    
    
    11,182Present value of minimum obligations under finance leases
    
    
    39,668
 In 2001 the Company entered into a sale-leaseback transaction with a major financial
institution related to an office building located in La Ciotat, France. The construction of the
building was completed in October 2002. The capital lease has a duration of 12 years ending in
September 2014. The proceeds received amounted to  956 thousand in 2004,  2,142 thousand in 2003
and  15,962 thousand in 2002. This sale-leaseback transaction resulted in no gain or loss in the
Consolidated Statement of Income. 19. NON-CURRENT PORTION OF PROVISIONS AND OTHER LIABILITIES Variation analysis of the non-current portion of provisions is as follows: (in thousands of euros) Effect of
    
    
    
    
    
    
    Amount
    
    
    Amount
    
    
    Reclassificationchanges in
    
    
    Increase in
    
    
    unused
    
    
    used
    
    
    withinNon-current portion
    
    December 31,
    
    
    December 31,
    
    
    exchange
    
    
    non-current
    
    
    during
    
    
    during the
    
    
    balanceof provisions
    
    2002
    
    
    2003
    
    
    rate
    
    
    liabilities
    
    
    the period
    
    
    period
    
    
    sheet items
    
    

December
31, 2004(Restated)
    
    
    (Restated)Provision for patent claims
(see Note 35)
    
    
    9,000
    
    
    
    9,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000Provision for income tax claims
    
    
    37,326
    
    
    
    41,017
    
    
    
    10
    
    
    
    3,662
    
    
    
    (2,102
    )
    
    
    (34,225
    )
    
    
    (922
    )
    
    
    7,440Provision for pension costs
(see Note 20)
    
    
    1,780
    
    
    
    1,562
    
    
    
    (80
    )
    
    
    753
    
    
    
    
    
    
    
    
    
    
    
    610
    
    
    
    2,845Provision for restructuring
(see Note 21)
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    1,136
    
    
    
    
    
    
    
    
    
    
    
    2,901
    
    
    
    4,036Other provisions
    
    
    3,711
    
    
    
    5,503
    
    
    
    (3
    )
    
    
    1,924
    
    
    
    (1,366
    )
    
    
    (1,930
    )
    
    
    (1,753
    )
    
    
    2,375Total
    
    
    51,817
    
    
    
    57,082
    
    
    
    (74
    )
    
    
    7,475
    
    
    
    (3,468
    )
    
    
    (36,155
    )
    
    
    836
    
    
    
    25,696
 From time to time, the Company is subject to tax claims from tax authorities in jurisdictions
where the Company does business. The Company records a provision for tax risk based upon the most
current information available and managements judgment regarding the likely outcome of any tax
claims. In 2002, certain French subsidiaries of the Company, including Gemplus SA, received a tax
assessment from the French tax authority primarily relating to the fiscal years 1998 through 2000.
In July 2004, the Company finalized an agreement with the French tax authority relating to this tax
assessment:  
    
    The tax assessment resulted in a net income tax charge over the period 2002 to 2004 in an
amount of 
3,990 thousand (a provision of
 5,854 thousand was accounted for in 2002, the
provision was revised downwards in 2003 in an amount of
 1,930 thousand and upwards in 2004
in an amount of  66 thousand).  
    
    The tax assessment resulted in an amount payable by the Company of  34,012 thousand and the
recognition of tax losses carried over amounting to  24,040 thousand.
    
    The accounting impact of the tax assessment over the period 2002 to 2004 can be summarized as
follows: (in thousands of euros) Amount payable in 2004
    
    
    (34,012
    )Recognition of tax losses carried over
    
    
    24,040Income tax payable recognized in 1998, 1999, 2000
    
    
    5,982Income tax charge resulting from the tax assessment
    
    
    (3,990
    )
  
    
    In 2004, the Company made a cash settlement of the amount payable of  34,012 thousand and
elected to carryback the recognized tax losses of  24,040 thousand. The Companys recovery of
the carryback is expected in mid-2007. This carryback has been discounted in accordance with
IFRS, resulting in additional income tax expense of  3,018 thousand and financial income of 
273 thousand in 2004. F-25




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##### Table of Contents



As at December 31, 2004, the present value of the carryback receivable, amounting to  21,295
thousand, is recorded in other non-current receivables. As part of this tax assessment, a certain number of VAT and other tax liabilities have been
recognized for an amount of  506 thousand in 2004 ( 1,859 thousand in year 2003 and prior). Certain of the Companys subsidiaries are under tax audit in Germany and Singapore. The Company
increased its provision for tax risk in Singapore at December 31, 2004, by a net amount of  1,183
thousand. In Germany, as a result of discussions with the German tax authorities, the Company
reduced its related provision for tax risk at December 31, 2004, by  1,727 thousand. In addition, the Company increased its provision for tax risk in 2004 by  2,032 thousand, relating
to potential tax claims in other jurisdictions, in accordance with its accounting policies. Other non-current liabilities consist of the following: (in thousands of euros) December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Government loans received
    
    
    3,973
    
    
    
    3,618
    
    
    
    1,897Management compensation and severance liability (see Note 35)
    
    
    8,880
    
    
    
    9,546
    
    
    
    Others
    
    
    500
    
    
    
    
    
    
    
    Total other non-current liabilities
    
    
    13,353
    
    
    
    13,164
    
    
    
    1,897
 20. PENSION PLANS 20.1 Pensions In France, the Company contributes to the national pension system and its obligations to
employees in terms of pensions are limited to a lump-sum equal to the length of service award
payable on the date the employee reaches retirement age, such award being determined for each
individual based upon years of service provided and projected final salary. The current evaluation
of the future length of service award liability is recorded as a non-current liability in the
balance sheet together with pension liabilities. The pension
obligations in France amounted to
 1,119 thousand,  1,176 thousand and  1,388 thousand at December 31,
2004, 2003 and 2002,
respectively. The Company also offers an Employee Investment Plan (EIP) to all US employees under section 401 (k)
of the US Internal Revenue Code. Company contributions to the EIP plan amounted to approximately 
728 thousand,  898 thousand and
 1,240 thousand in 2004, 2003 and 2002, respectively. The Company operates pension plans in other countries. The Companys principal plan is a defined
benefit plan open to all employees in the United Kingdom. Actuarial valuations have been performed
at December 31, 2004, 2003 and 2002. Net periodic pension costs for the principal defined benefit plan for the years ended December 31,
2004, 2003 and 2002, comprise the following elements: (in thousands of euros) Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Current year service cost
    
    
    1,005
    
    
    
    1,170
    
    
    
    1,549Interest accrued on pension obligations
    
    
    1,669
    
    
    
    1,465
    
    
    
    1,346Actual loss (return) on plan assets
    
    
    (1,612
    )
    
    
    (2,049
    )
    
    
    2,915Net amortization and deferral
    
    
    763
    
    
    
    1,285
    
    
    
    (4,339
    )Total pension costs
    
    
    1,825
    
    
    
    1,871
    
    
    
    1,471
 F-26




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##### Table of Contents



The following tables set forth the funded status of the principal defined benefit plan: (in thousands of euros) December 31
    
    2004
    
    
    2003
    
    
    2002Accumulated benefit obligation
    
    
    32,279
    
    
    
    28,386
    
    
    
    26,234Projected benefit obligation
    
    
    33,262
    
    
    
    28,911
    
    
    
    27,745Plan assets at fair value
    
    
    19,509
    
    
    
    16,828
    
    
    
    15,233Projected benefit obligation in excess of plan assets
    
    
    (13,753
    )
    
    
    (12,083
    )
    
    
    (12,512
    )Unrecognized net loss
    
    
    13,023
    
    
    
    11,681
    
    
    
    12,951Net prepaid (payable) pension cost
    
    
    (730
    )
    
    
    (402
    )
    
    
    439
 The following weighted average rates were used in the calculation of projected benefit obligation: December 31
    
    2004

        
    2003
        
    2002Discount rate
    
    
    5.25
    %
    
    
    5.50
    %
    
    
    5.50
    %Expected rate of return on plan assets
    
    
    7.00
    %
    
    
    7.00
    %
    
    
    8.00
    %Assumed rate of compensation increase
    
    
    3.75
    %
    
    
    3.75
    %
    
    
    3.75
    %
 Plan assets are comprised of 58% of equity securities and 42% of corporate bonds. The
investment strategy generally consists of matching the commitment, considering the age of the
employees, their expected retirement date and the ratio between retired and active employees. The
Company estimates the expected rate of return on plan assets using risk free rates, risk premiums
and average dividend yields corresponding to its investment portfolio. The change in fair value of the plan asset and the projected benefit obligation for 2004 is as
follows: (in thousands of euros) 2004
    
    
    2003Projected benefit obligation as of January 1
    
    
    28,911
    
    
    
    27,745Service cost
    
    
    1,005
    
    
    
    1,170Interest cost
    
    
    1,669
    
    
    
    1,465Plan participants contributions
    
    
    400
    
    
    
    444Actuarial (gain) loss
    
    
    2,143
    
    
    
    1,037Benefits paid
    
    
    (738
    )
    
    
    (662
    )Currency adjustments
    
    
    (128
    )
    
    
    (2,288
    )Projected benefit obligation as of December 31
    
    
    33,262
    
    
    
    28,911
 (in thousands of euros) 2004
    
    
    2003Fair value of plan assets as of January 1
    
    
    16,828
    
    
    
    15,233Actual return on plan assets
    
    
    1,612
    
    
    
    2,049Employer contribution
    
    
    1,488
    
    
    
    1,045Plan participants contributions
    
    
    400
    
    
    
    444Benefits paid
    
    
    (738
    )
    
    
    (662
    )Currency adjustments
    
    
    (81
    )
    
    
    (1,281
    )Fair value of plan assets as of December 31
    
    
    19,509
    
    
    
    16,828
 F-27




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##### Table of Contents



20.2 Post-retirement benefits other than pensions Substantially all of the Companys employees are covered under government-sponsored
post-retirement health and life insurance benefit plans. Accordingly, the Company has no
significant liability to its employees in terms of post-retirement benefits other than pensions and
therefore no provision is made. 21. RESTRUCTURING In the second quarter of 2001, the Company implemented the first of three restructuring and
rationalization programs. The second and third programs were announced in the first and fourth
quarter of 2002, respectively. The primary objective of the restructuring and worldwide
rationalization programs was to reduce operating costs by consolidating, eliminating and/or
downsizing existing operating locations, i.e., manufacturing plants and sales offices. The Company
expects that all actions related to the restructuring will be completed by the end of 2005. There
are no significant remaining activities to be terminated at December 31, 2004 as part of those
restructuring plans. In 2004, the Company recorded a total pre-tax restructuring charge of  20,233 thousand in its
Consolidated Statement of Income, mainly related to the third restructuring program. This 2004
expense was partially offset by a release of unused provisions amounting to  11,849 thousand,
mainly related to the second restructuring plan. As a result, the total pre-tax net restructuring
charge recorded in 2004 amounts to  8,384 thousand. Variation analysis of the restructuring provisions is as follows: (in thousands of euros)Effect
    
    
    
    
    
    
    Amount
    
    
    AmountProvision for reduction
    
    
    
    
    
    of changes
    
    
    
    
    
    
    unused
    
    
    used
    
    
    Reclassificationof workforce and
    
    January 1,
    
    
    in exchange
    
    
    Increase in
    
    
    during
    
    
    during
    
    
    within balance
    
    
    December 31,other cash outflows
    
    2002
    
    
    rate
    
    
    provision
    
    
    the period
    
    
    the period
    
    
    sheet items
    
    
    2002First restructuring program
    
    
    6,177
    
    
    
    (141
    )
    
    
    1,514
    
    
    
    
    
    
    
    (5,492
    )
    
    
    
    
    
    
    2,058Second restructuring program
    
    
    
    
    
    
    (868
    )
    
    
    66,919
    
    
    
    
    
    
    
    (27,446
    )
    
    
    
    
    
    
    38,605Third restructuring program
    
    
    
    
    
    
    
    
    
    
    755
    
    
    
    
    
    
    
    (443
    )
    
    
    
    
    
    
    312Total provision for reduction of
workforce and other cash outflows
    
    
    6,177
    
    
    
    (1,009
    )
    
    
    69,188
    
    
    
    
    
    
    
    (33,381
    )
    
    
    
    
    
    
    40,975Including:Current portion (see Note 17)
    
    
    6,177
    
    
    
    (1009
    )
    
    
    69,188
    
    
    
    
    
    
    
    (33,381
    )
    
    
    
    
    
    
    40,975Non-current portion (see Note 19)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total provision for reduction of
workforce and other cash outflows
    
    
    6,177
    
    
    
    (1,009
    )
    
    
    69,188
    
    
    
    
    
    
    
    (33,381
    )
    
    
    
    
    
    
    40,975
 (in thousands of euros)Effect
    
    
    
    
    
    
    Amount
    
    
    AmountProvision for reduction
    
    
    
    
    
    of changes
    
    
    
    
    
    
    unused
    
    
    used
    
    
    Reclassificationof workforce and
    
    January 1,
    
    
    in exchange
    
    
    Increase in
    
    
    during
    
    
    during
    
    
    within balance
    
    
    December 31,other cash outflows
    
    2003
    
    
    rate
    
    
    provision
    
    
    the period
    
    
    the period
    
    
    sheet items
    
    
    2003First restructuring program
    
    
    2,058
    
    
    
    (263
    )
    
    
    89
    
    
    
    
    
    
    
    (881
    )
    
    
    
    
    
    
    1,003Second restructuring program
    
    
    38,605
    
    
    
    (817
    )
    
    
    246
    
    
    
    (170
    )
    
    
    (27,247
    )
    
    
    
    
    
    
    10,617Third restructuring program
    
    
    312
    
    
    
    (38
    )
    
    
    54,848
    
    
    
    
    
    
    
    (27,791
    )
    
    
    
    
    
    
    27,331Total provision for reduction of
workforce and other cash outflows
    
    
    40,975
    
    
    
    (1,118
    )
    
    
    55,183
    
    
    
    (170
    )
    
    
    (55,919
    )
    
    
    
    
    
    
    38,951Including:Current portion (see Note 17)
    
    
    40,975
    
    
    
    (1,118
    )
    
    
    55,183
    
    
    
    (170
    )
    
    
    (55,919
    )
    
    
    
    
    
    
    38,951Non-current portion (see Note 19)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total provision for reduction of
workforce and other cash outflows
    
    
    40,975
    
    
    
    (1,118
    )
    
    
    55,183
    
    
    
    (170
    )
    
    
    (55,919
    )
    
    
    
    
    
    
    38,951
 F-28




---



##### Table of Contents



(in thousands of euros) Effect
    
    
    
    
    
    
    Amount
    
    
    AmountProvision for reduction
    
    
    
    
    
    of changes
    
    
    
    
    
    
    unused
    
    
    used
    
    
    Reclassificationof workforce and
    
    January 1,
    
    
    in exchange
    
    
    Increase in
    
    
    during
    
    
    during
    
    
    within balance
    
    
    December 31,other cash outflows
    
    2004
    
    
    rate
    
    
    provision
    
    
    the period
    
    
    the period
    
    
    sheet items
    
    
    2004First restructuring program
    
    
    1,003
    
    
    
    7
    
    
    
    
    
    
    
    (312
    )
    
    
    (589
    )
    
    
    
    
    
    
    109Second restructuring program
    
    
    10,617
    
    
    
    (9
    )
    
    
    143
    
    

    
    (5,579
    )
    
    
    (2,134
    )
    
    
    
    
    
    
    3,038Third restructuring program
    
    
    27,331
    
    
    
    13
    
    
    
    16,395
    
    
    
    (3,664
    )
    
    
    (22,567
    )
    
    
    
    
    
    
    17,508Total provision for reduction of
workforce and other cash outflows
    
    
    38,951
    
    
    
    11
    
    
    
    16,538
    
    
    
    (9,555
    )
    
    
    (25,290
    )
    
    
    
    
    
    
    20,655Including:Current portion (see Note 17)
    
    
    38,951
    
    
    
    12
    
    
    
    15,402
    
    
    
    (9,555
    )
    
    
    (25,290
    )
    
    
    (2,901
    )
    
    
    16,619Non-current portion (see Note 19)
    
    
    
    
    
    
    (1
    )
    
    
    1,136
    
    
    
    
    
    
    
    
    
    
    
    2,901
    
    
    
    4,036Total provision for reduction of
workforce and other cash outflows
    
    
    38,951
    
    
    
    11
    
    
    
    16,538
    
    
    
    (9,555
    )
    
    
    (25,290
    )
    
    
    
    
    
    
    20,655
 The impact of restructuring activity on the Consolidated Statement of Income is as follows: (in thousands of euros) Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Reduction of workforce and other cash outflowsRestructuring expenses
    
    
    16,538
    
    
    
    55,183
    
    
    
    69,188Release of unused provisions
    
    
    (9,555
    )
    
    
    (170
    )
    
    
    Total reduction of workforce and other cash outflows
    
    
    6,983
    
    
    
    55,013
    
    
    
    69,188Non-cash write-offs of assetsRestructuring expenses
    
    
    3,695
    
    
    
    9,515
    
    
    
    20,815Release of unused provisions
    
    
    (2,294
    )
    
    
    (2,555
    )
    
    
    Total non-cash write-offs of assets
    
    
    1,401
    
    
    
    6,960
    
    
    
    20,815Total restructuring expenses
    
    
    8,384
    
    
    
    61,973
    
    
    
    90,003Including:First restructuring program
    
    
    942
    
    
    
    89
    
    
    
    1,514Second restructuring program
    
    
    (6,638
    )
    
    
    136
    
    
    
    80,808Third restructuring program
    
    
    14,080
    
    
    
    61,748
    
    
    
    7,681Total restructuring expenses
    
    
    8,384
    
    
    
    61,973
    
    
    
    90,003
 First restructuring program(announced on May 2, 2001) In 2004, the Company recorded a net restructuring charge of  942 thousand with respect to the
first restructuring program, mainly due to the reassessment of the impairment loss of an unused
building in Germany. The remaining restructuring reserve of  109 thousand is a provision for ongoing rents for closed
sites, mainly in the USA and Germany. Of this amount,  43 thousand correspond to the current
portion of lease obligations and which are reported in Current portion of provisions (see Note
17) and  66 thousand, which relate to the non-current portion reported in Non-current portion of
provisions (see Note 19). The cumulative charge related to the first restructuring program amounts to  31,011 thousand and
represents:  
    
     8,476 thousand of fixed asset write-downs without any cash impact; and
    
     22,535 thousand with cash impact linked to worldwide rationalization of manufacturing
plants and sales offices, reduction of the workforce and legal and professional fees. As part of the first restructuring program, 497 employees were terminated. F-29




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##### Table of Contents



Second restructuring program(announced on February 6, 2002) In 2004, the Company recorded a net reversal of restructuring provisions for  6,638 thousand with
respect to the second restructuring plan, mainly due to the collection of a receivable balance
amounting to  1,900 thousand, previously believed to be uncollectible and related to a ceased
activity,  1,100 thousand related to the reduction in the term of the lease for an unused
operating facility and  4,479 thousand primarily related to changes in estimates of amounts
accrued for employee termination costs. This is attributed to the nature of social plans in France
which allow employees to elect their compensation benefit schemes, each of them having different
costs due to the election and timing of payout. Since most employees have now left the Company, the
provision was adjusted to reflect actual decisions. The Company also recorded an additional charge
related to asset write-offs in France amounting to  770 thousand. The remaining restructuring reserve of  3,038 thousand relates primarily to the provision for
ongoing rents for closed sites. Of this amount,  1,067 thousand correspond to the current portion
of this debt and which are reported in Current portion of provisions (see Note 17) and  1,971
thousand, related to the non-current portion reported in
Non-current portion of provisions (see
Note 19). The cumulative charge for the second restructuring program amounted to  74,305 thousand and
represents:  
    
     12,549 thousand of fixed asset write-downs without any cash impact; and
    
     61,756 thousand with cash impact linked to worldwide rationalization of manufacturing
plants and sales offices, reduction of the workforce and legal and professional fees. As part of the second restructuring program, 1,318 employees were terminated. Third restructuring program(announced on December 9, 2002) In 2004, the Company recorded a net  14,080 thousand restructuring charge with respect to the
third restructuring program mainly due to the charge linked to the closure of a plant in Germany
for  14,929 thousand, an accrual of  1,013 thousand for closed sites in the United Kingdom, and a
reversal of restructuring provision of  2,843 thousand related to changes in estimates of amounts
accrued for employee termination costs. This is attributed to the nature of social plans in France
which allow employees to elect their compensation benefit schemes, each of them having different
costs due to the election and timing of payout. Since most employees have now left the Company, the
provision was adjusted to reflect actual decisions. The remaining restructuring reserve of  17,507 thousand is a provision for ongoing rents for
closed sites and for payment obligations for employee termination. Of this amount,  15,508
thousand correspond to the current portion of this debt and are reported in Current portion of
provisions (see Note 17) and  1,999 thousand are reported in Non-current portion of provisions
(see Note 19). The cumulative charge for the third restructuring program amounts to  83,509 thousand and
represents:  
    
     15,177 thousand to write-down intangible and fixed assets without any cash impact; and
    
     68,332 thousand with cash impact linked to worldwide rationalization of manufacturing
plants and sales offices, reduction of the workforce, legal and professional fees and the
transfer of contracts to partners. As part of the third restructuring program, 877 employees were terminated. 777 people left the
Company in 2003, 100 in 2004 and the remaining 66 employees, primarily in Germany, are expected to
leave during the first half year of 2005. 22. ORDINARY SHARES Gemplus International SA is a corporation incorporated in the Grand Duchy of Luxemburg. The
authorized share capital of the Company is currently  400 million consisting of one billion eight
hundred and eighty-nine million four hundred and sixty-six thousand two hundred and twenty-six
shares (1,889,466,226) of no nominal value. 22.1 Contribution of Gemplus SA shares and issuance of shares following stock option
exercise In February 2000, 95.1% of the shareholders of Gemplus SA, a French corporation and former
holding company of the Company, exchanged their shares of Gemplus SA for shares in Gemplus
International SA, a newly formed Luxemburg corporation on a one for one basis. This transaction has
been accounted for using historical cost basis accounting. As of December 31, 2004, certain shares
held by employees or former employees had not yet been contributed. Gemplus SA shares still to be
contributed correspond to the equivalent of 900,250 Gemplus International SA shares representing
0.15% of the shareholdings of Gemplus International SA, which in total was represented by
608,482,253 shares as of December 31, 2004. As of December 31, 2004, certain options held by
employees under the Gemplus SA stock option plans had not been exercised. Following exercise of
these options, the corresponding Gemplus SA shares may be contributed by their holders to Gemplus
International SA. Since the shares of Gemplus SA are not available for sale to the general public
but can be converted into shares of Gemplus International SA upon request, it has been considered
certain that the shares (including shares issued following exercise of Gemplus SA stock-options) will eventually be converted. These shares
are therefore assumed to be a component of shareholders equity. Thus, they have been included in
both the basic and diluted earnings per share calculations. F-30




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##### Table of Contents



During 2002, 2003 and 2004, the Company issued respectively 699,100, 17,550 and 901,250 shares of
Gemplus SA following the exercise of Gemplus SA stock options held by employees. During 2002, 2003 and 2004, the Company issued respectively 2,525,150, 1,010,900 and 3,295,800
shares following the contribution of respectively 50,503, 20,218 and 65,916 shares of Gemplus SA
held mainly by employees. During 2002, 2003 and 2004, the Company issued respectively 398,350, 179,837 and 268,207 shares
following the exercise of Gemplus International SA stock options held by employees. 22.2 Treasury shares During the third quarter of 2001, the Company started the implementation of a share
repurchase program, as approved by the Annual General Meeting held on April 18, 2001 and authorized
on May 4, 2001, by the Commission des Opérations de Bourse (which subsequently became the Autorité
des Marchés Financiers). Within the scope of this share repurchase program, the Company redeemed
6,044,515 shares at an average price of  3.06 per share. On 17 April 2002, the Extraordinary General Meeting cancelled 4,634,859 shares held by the Company
at the time and authorized the Company to cancel, when owning them directly, the 30,743,679 shares
returned by Mr. Perez, a former Chief Executive Officer and held by an indirect subsidiary. In
accordance with this decision, on March 10, 2003, the 30,743,679 shares were cancelled, without any
effect on the Companys shareholders equity in accordance with accounting principles described in
Note 2.18. The cancellation of these shares did not result in a reduction of the issued share
capital of the Company; however it resulted in an increase of the par value of the issued shares. During 2003, the Company purchased 487,957 shares of its outstanding common stock from former
Celocom Limited employees pursuant to the conditions stipulated in the 2000 Celocom Limited share
purchase agreement. As of December 31, 2004, the Company held 1,442,715 shares of its outstanding common stock. Change in treasury shares is as follows: Number of treasury sharesAs of December 31, 2002
    
    
    31,727,101Cancellation of treasury shares
    
    
    (30,743,679
    )Purchase of shares pursuant to the 2000 Celocom
Limited share purchase agreement
    
    
    487,957As of December 31, 2003
    
    
    1,471,379Sale of treasury shares
    
    
    (28,664
    )As of December 31, 2004
    
    
    1,442,715
 The number of shares as of December 31, 2004 can be
analyzed as follows: Number of shares outstanding
    
    
    607,582,003Gemplus SA shares to be contributed
    
    
    900,250Number of shares outstanding including shares to be contributed
    
    
    608,482,253Treasury shares
    
    
    (1,442,715
    )Basic number of shares outstanding
    
    
    607,039,538Options outstanding
    
    
    74,072,315Warrants outstanding
    
    
    2,561,973Number of shares on a fully diluted basis
    
    
    683,673,826
 As of December 31, 2004, 54,636,852 options are authorized but not yet granted under the
different stock option plans (see Note 23). F-31




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##### Table of Contents



23. STOCK OPTION PLANS The Company may grant, under various employee stock option plans (the Plans), options to
purchase or subscribe for ordinary shares to its employees and officers. Under the various Plans,
the exercise price of options granted may be less than the fair market value of the ordinary common
shares at the date of grant. The options must generally be exercised within seven to ten years from
the date of grant and typically vest in equal amounts over a period of three to four years. Stock option activity was as follows: Number of optionsauthorized not
    
    
    Number of options
    
    
    
    
    
    
    Average Priceyet granted
    
    
    outstanding
    
    
    Price per share
    
    
    per shareBalances, December 31, 2001
    
    
    51,790,242
    
    
    
    94,460,108
    
    


    0.77 -
7.96
    
    
    
    3.82Options exercised
    
    
    
    
    
    
    (1,097,450
    )
    
    
    0.83 -
2.29
    
    
    
    1.51Options granted
    
    
    (31,389,884
    )
    
    
    31,389,884
    
    
    
    0.84 -
2.68
    
    
    
    1.24Options terminated unexercised
    
    
    48,734,723
    
    
    
    (48,734,723
    )
    
    
    0.83 -
7.96
    
    
    
    4.71Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances, December 31, 2002
    
    
    69,135,081
    
    
    
    76,017,819
    
    
    
    0.83 -  7.96
    
    
    
    2.17Options exercised
    
    
    
    
    
    
    (197,387
    )
    
    
    0.83 -
1.13
    
    
    
    0.88Options granted
    
    
    (16,140,000
    )
    
    
    16,140,000
    
    
    
    0.83 -
1.52
    
    
    
    1.37Options terminated unexercised
    
    
    2,243,169
    
    
    
    (9,685,519
    )
    
    
    0.83 -
6.00
    
    
    
    2.52Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances, December 31, 2003
    
    
    55,238,250
    
    
    
    82,274,913
    
    
    
    0.83 -
6.00
    
    
    
    1.98Options exercised
    
    
    
    
    
    
    (1,169,457
    )
    
    
    0.83 -
1.71
    
    
    
    1.26Options granted
    
    
    (3,200,000
    )
    
    
    3,200,000
    
    
    
    1.45 -
1.82
    
    
    
    1.66Options terminated unexercised
    
    
    2,598,602
    
    
    
    (10,233,141
    )
    
    
    0.96 -
6.00
    
    
    
    2.63Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances, December 31, 2004
    
    
    54,636,852
    
    
    
    74,072,315
    
    
    
    0.83 -
6.00
    
    
    
    1.88
 F-32




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##### Table of Contents



The following table summarizes information with respect to stock options outstanding and
exercisable at December 31, 2004: Exercise prices
    
    Number
    
    
    Weighted
    
    
    Number(in euros)
    
    of options
    
    
    average contractual
    
    
    of optionsoutstanding
    
    
    contractual life (years)
    
    
    exercisable0.83
    
    
    2,000,000
    
    
    
    8.6
    
    
    
    500,0000.84
    
    
    8,000,000
    
    
    
    7.7
    
    
    
    4,000,0000.96
    
    
    80,000
    
    
    
    8.3
    
    
    
    80,0001.13
    
    
    13,032,120
    
    
    
    7.9
    
    
    
    7,171,9131.14
    
    
    80,000
    
    
    
    7.6
    
    
    
    70,0001.23
    
    
    2,230,000
    
    
    
    8.6
    
    
    
    557,5001.24
    
    
    257,550
    
    
    
    8.6
    
    
    
    66,3471.25
    
    
    200,000
    
    
    
    8.5
    
    
    
    50,0001.28
    
    
    208,500
    
    
    
    7.8
    
    
    
    90,5001.31
    
    
    160,000
    
    
    
    7.5
    
    
    
    160,0001.35
    
    
    263,900
    
    
    
    0.0
    
    
    
    263,9001.42
    
    
    1,000,000
    
    
    
    7.5
    
    
    
    500,0001.45
    
    
    400,000
    
    
    
    9.3
    
    
    
    1.46
    
    
    4,732,500
    
    
    
    8.8
    
    
    
    1,278,1251.49
    
    
    40,000
    
    
    
    8.8
    
    
    
    10,0001.52
    
    
    6,736,850
    
    
    
    8.3
    
    
    
    1,963,1001.58
    
    
    1,000,000
    
    
    
    9.4
    
    
    
    1.66
    
    
    550,000
    
    
    
    9.8
    
    
    
    1.71
    
    
    3,138,700
    
    
    
    3.0
    
    
    
    3,138,7001.79
    
    
    1,000,000
    
    
    
    9.3
    
    
    
    1.82
    
    
    250,000
    
    
    
    9.3
    
    
    
    2.25
    
    
    4,000,000
    
    
    
    7.7
    
    
    
    2,000,0002.29
    
    
    14,122,217
    
    
    
    4.3
    
    
    
    14,122,2172.60
    
    
    74,200
    
    
    
    7.1
    
    
    
    37,1002.68
    
    
    343,425
    
    
    
    7.1
    
    
    
    208,5252.87
    
    
    52,220
    
    
    
    6.8
    
    
    
    47,7202.90
    
    
    377,513
    
    
    
    6.7
    
    
    
    376,4003.17
    
    
    35,000
    
    
    
    6.9
    
    
    
    26,2503.18
    
    
    50,000
    
    
    
    6.9
    
    
    
    37,5003.51
    
    
    7,416,314
    
    
    
    5.5
    
    
    
    7,416,3143.79
    
    
    310,038
    
    
    
    6.5
    
    
    
    233,8524.14
    
    
    11,700
    
    
    
    6.5
    
    
    
    10,5386.00
    
    
    1,919,568
    
    
    
    5.9
    
    
    
    1,919,56874,072,315
    
    
    
    6.8
    
    
    
    46,336,069Weighted average exercise price (options outstanding):
    
    
     1.88Weighted average exercise price (options exercisable):
    
    
     2.20
 On April 17, 2002, the Companys Board of Directors voted to approve a rollover plan whereby
the employees were offered an option to cancel stock options previously granted under plans adopted
in 2000 and received reissued options at a new exercise price. This plan was launched on May 23,
2002 and 17,106,162 stock options with an average exercise price of  4.52 were cancelled on June
5, 2002. 17,034,084 new stock options were granted on December 10, 2002 at an exercise price of 
1.13 corresponding to the market price of the Companys shares on the date of the grant. As of
December 31, 2004, 13,091,670 of the stock options resulting from the rollover were outstanding. Warrants The Company has issued certain warrants which have not been exercised and remain outstanding
as of December 31, 2004. These warrants give right to purchase 2,561,973 ordinary shares at a
purchase price of  2.3375 per share at any time before July 2007. F-33




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##### Table of Contents



24. COMPREHENSIVE INCOME Comprehensive income is the change in equity attributable to equity holders of the Company
during the year due to transactions and other events, other than dividends paid, treasury stock and
common stock transactions. It includes net income and other comprehensive income for the year.
Other comprehensive income is composed of: (i) the current years currency translation adjustment;
(ii) the current years unrealized gains and losses on available-for-sale securities, net of tax;
and (iii) the changes in fair value of effective hedges, net of tax. The components of other comprehensive income in the shareholders equity section of the balance
sheets as of December 31, 2004, 2003 and 2002, respectively, were as follows: (in thousands of euros)December 31
    
    2004
    
    
    2003
    
    
    2002Cumulative translation adjustment
    
    
    (16,411
    )
    
    
    (6,460
    )
    
    
    1,873Net unrealized gain (loss) on hedging instruments
qualifying as effective
    
    
    28,367
    
    
    
    11,030
    
    
    
    6,698Other comprehensive income
    
    
    11,956
    
    
    
    4,570
    
    
    
    8,571
 The components of comprehensive income for the years ended December 31, 2004, 2003 and 2002,
respectively, were as follows: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Net income (loss)
    
    
    6,291
    
    
    
    (158,955
    )
    
    
    (316,558
    )Change in cumulative translation adjustment
    
    
    (9,951
    )
    
    
    (8,333
    )
    
    
    5,440Change in fair value of derivatives qualifying
as effective hedging instruments
    
    
    17,337
    
    
    
    4,332
    
    
    
    7,099Change in cumulative other comprehensive income
    
    
    7,386
    
    
    
    (4,001
    )
    
    
    12,539Comprehensive net income (loss)
    
    
    13,677
    
    
    
    (162,956
    )
    
    
    (304,019
    )
 25. NET SALES Analysis of net sales by category is as follows: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Sales of goods
    
    
    801,668
    
    
    
    689,835
    
    
    
    718,902Sales of services
    
    
    60,567
    
    
    
    55,706
    
    
    
    64,062Other net sales
    
    
    2,799
    
    
    
    3,662
    
    
    
    4,470Total net sales
    
    
    865,034
    
    
    
    749,203
    
    
    
    787,434
 License fees and royalties are included in other net sales. F-34




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##### Table of Contents



26. EXPENSES BY NATURE Expenses by nature are as follows: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Depreciation, amortization and impairment
    
    
    (56,691
    )
    
    
    (95,071
    )
    
    
    (133,359
    )External labor costs
    
    
    (41,212
    )
    
    
    (28,254
    )
    
    
    (34,183
    )Employee benefit expenses
    
    
    (263,005
    )
    
    
    (276,507
    )
    
    
    (296,283
    )Material costs
    
    
    (327,080
    )
    
    
    (285,146
    )
    
    
    (287,861
    )Other expenses
    
    
    (150,728
    )
    
    
    (198,011
    )
    
    
    (267,456
    )Total expenses
    
    
    (838,716
    )
    
    
    (882,989
    )
    
    
    (1,019,142
    )
 Employee benefit expenses by nature are as follows: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Wages and salaries
    
    
    (246,588
    )
    
    
    (259,670
    )
    
    
    (275,272
    )Pension benefits
    
    
    (11,160
    )
    
    
    (11,498
    )
    
    
    (13,053
    )Other expenses
    
    
    (5,257
    )
    
    
    (5,339
    )
    
    
    (7,959
    )Total employee benefit expenses
    
    
    (263,005
    )
    
    
    (276,507
    )
    
    
    (296,283
    )
 Headcount was 5,476, 5,037 and 5,680 as of December 31, 2004, 2003 and 2002 respectively. 27. FINANCIAL INCOME AND EXPENSE, NET Financial income and expense, net, consists of the following: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Financial income
    
    
    8,245
    
    
    
    10,484
    
    
    
    19,782Financial expense
    
    
    (2,592
    )
    
    
    (2,280
    )
    
    
    (70,874
    )Financial income (expense), net
    
    
    5,653
    
    
    
    8,204
    
    
    
    (51,092
    )
 In 2002, net financial income and expense included a  67,582 thousand non-cash charge to
cover the risk of possible non-reimbursement of a loan granted to Mr. Lassus. In 2004 and 2003, no
additional financial expense was recorded related to this risk (see Note 35). Financial income is mainly composed of interest received on short-term deposits (see Note 5). Financial expense is mainly composed of finance lease interest (see Note 18). 28. OTHER NON-OPERATING INCOME AND EXPENSE, NET Other non-operating income and expense, net, consists of the following: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Gains (losses) on available-for-sale financial assets (see Note 15)
    
    
    (858
    )
    
    
    (2,487
    )
    
    
    (6,444
    )Net foreign exchange gains (losses) (see Note 30)
    
    
    (5,900
    )
    
    
    (8,652
    )
    
    
    (15,106
    )Other non-operating income and expense, net
    
    
    (6,758
    )
    
    
    (11,139
    )
    
    
    (21,550
    )
 F-35




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##### Table of Contents



Foreign exchange gains (losses) is mainly composed of exchange gains and losses on
transactions of subsidiaries whose currency exposure is not managed at the Companys treasury level
and of the ineffective portion of hedging instruments. Exchange gains and losses on commercial
transactions and effective portion of hedging instruments are reported in Cost of sales (see Note
30). 29. INCOME TAX EXPENSE The components of income tax expense are as follows: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Current taxes
    
    
    (9,292
    )
    
    
    (3,329
    )
    
    
    (9,667
    )Deferred taxes
    
    
    (3,661
    )
    
    
    (11,344
    )
    
    
    543Total tax expense
    
    
    (12,953
    )
    
    
    (14,673
    )
    
    
    (9,124
    )
 A reconciliation between the reported income tax expense and the theoretical amount that
would arise using a standard tax rate is as follows: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Income (loss) before taxes and minority interest
    
    
    17,626
    
    
    
    (146,433
    )
    
    
    (311,767
    )Income tax calculated at corporate tax rate (1)
    
    
    (5,355
    )
    
    
    44,486
    
    
    
    94,715Effect of tax exemption
    
    
    1,174
    
    
    
    5,438
    
    
    
    (15,551
    )Effect of different tax rates
    
    
    4,679
    
    
    
    12,053
    
    
    
    13,434Effect of utilization of unrecognized tax assets
    
    
    9,706
    
    
    
    1,854
    
    
    
    1,351Effect of unrecognized tax assets
    
    
    (15,730
    )
    
    
    (62,337
    )
    
    
    (79,548
    )Provision for tax risks
    
    
    (1,559
    )
    
    
    186
    
    
    
    (5,932
    )Discounting of carryback receivable (see Note 19)
    
    
    (3,018
    )
    
    
    
    
    
    
    Effect of expenses non deductible and revenues non taxable
    
    
    (505
    )
    
    
    (6,312
    )
    
    
    (3,900
    )Effect of goodwill amortization resulting from mergers and
acquisitions (see Note 3)
    
    
    (2,345
    )
    
    
    (10,041
    )
    
    
    (13,693
    )Income tax expense
    
    
    (12,953
    )
    
    
    (14,673
    )
    
    
    (9,124
    )
 
 (1)
    
    Luxemburg tax rate of 30.38 % in 2004, 2003 and 2002. Deferred income tax assets and liabilities are offset when there is a legally enforceable
right to set off a current tax asset against a current tax liability which relate to income taxes
levied by the same taxation authority and the taxation authority permits the Company to make or
receive a single net payment. F-36




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##### Table of Contents



The components of the net deferred tax assets recorded at December 31, 2004, 2003 and 2002 are as
follows: (in thousands of euros)December 31
    
    2004
    
    
    2003
    
    
    2002ASSETSLoss carryforward
    
    
    3,098
    
    
    
    29,223
    
    
    
    38,376Excess book over tax depreciation and amortization
    
    
    1,091
    
    
    
    1,585
    
    
    
    2,622Other temporary differences
    
    
    2,253
    
    
    
    1,635
    
    
    
    3,469Total (1)
    
    
    6,442
    
    
    
    32,443
    
    
    
    44,467To be recovered after more than 12 months
    
    
    3,621
    
    
    
    29,163
    
    
    
    39,827To be recovered within 12 months
    
    
    2,821
    
    
    
    3,280
    
    
    
    4,640LIABILITIESExcess tax over book depreciation and amortization
    
    
    (178
    )
    
    
    (294
    )
    
    
    (1,203
    )Other temporary differences
    
    
    
    
    
    
    (289
    )
    
    
    (1,590
    )Total
    
    
    (178
    )
    
    
    (583
    )
    
    
    (2,793
    )To be recovered after more than 12 months
    
    
    (178
    )
    
    
    (294
    )
    
    
    (1,203
    )To be recovered within 12 months
    
    
    
    
    
    
    (289
    )
    
    
    (1,590
    )Deferred tax assets, net
    
    
    6,264
    
    
    
    31,860
    
    
    
    41,674
 
 (1)
    
    Unrecognized deferred tax assets amount to  335,135 thousand at December 31, 2004 (
219,780 thousand and  138,229 thousand at December 31, 2003 and 2002 respectively). The Company had no net deferred tax liability at December 31, 2004, 2003 and 2002. The use of the deferred tax assets will mainly depend upon the Companys results of operations,
which are difficult to accurately predict in certain tax jurisdictions. Under generally accepted
accounting principles, future profitability in those jurisdictions cannot be clearly evidenced,
taking into account the Companys losses in 2001, 2002 and 2003. As a result, in 2002, 2003 and
2004, certain deferred tax assets for amounts of  138,229 thousand,  219,780 thousand and
 335,135 thousand respectively, have not been recognized. The gross variation in deferred income tax assets is as follows: (in thousands of euros)2004As of January 1
    
    
    31,860Income statement charge
    
    
    (3,661
    )Impact of the election to carry-back of unused tax losses (see Note 19)
    
    
    (24,040
    )Other reclassifications within balance sheet
    
    
    2,178Exchange differences
    
    
    (73
    )As of December 31
    
    
    6,264
 Loss carryforward At December 31, 2004, the Company had potential deferred tax assets related to net operating
loss carryforwards totalling
 324,443 thousand, of which  24,080 thousand are limited to 20 years. Substantially all of
the remainder may be used indefinitely. The use of approximately  6,800 thousand of the
deferred tax assets related to net operating loss carryforwards may be subject to change of
ownership limitations. These deferred tax assets have not been recognized. In Germany and Mexico, due to business changes, the Company decreased the amount of deferred tax
assets recognized in previous years by  1,401 thousand and  1,500 thousand, respectively. Income tax on undistributed earnings Deferred income taxes on the undistributed earnings of the Companys foreign subsidiaries are
provided for unless the Company intends to indefinitely reinvest the earnings in the subsidiaries.
The Company does intend to indefinitely reinvest undistributed earnings of its foreign subsidiaries
in most jurisdictions. In jurisdictions where the Company does not have that intention, such a
distribution of earnings would not trigger taxes. Therefore, the Company did not provide for deferred income taxes on these
earnings and believes that the determination of this amount is not practicable. F-37




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##### Table of Contents



Tax audit As described in Note 19, the Company is under tax audit in Germany and Singapore. 30. NET FOREIGN EXCHANGE GAINS (LOSSES) The exchange differences (charged) credited to the Consolidated Statement of Income are
included as follows: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003Net sales line
    
    
    
    
    
    
    Cost of sales line
    
    
    15,204
    
    
    
    12,494Effective portion of qualified hedging instruments
    
    
    14,888
    
    
    
    21,526Exchange gains and losses on commercial transactions
    
    
    316
    
    
    
    (9,032
    )Research and development expenses line
    
    
    
    
    
    
    Selling and marketing expenses line
    
    
    
    
    
    
    General and administration expenses line
    
    
    
    
    
    
    Other non-operating income (expense), net line
    
    
    (5,900
    )
    
    
    (8,652
    )Ineffective portion of qualified hedging instruments and
exchange gains and losses on non-qualified hedging instruments
    
    
    (5,772
    )
    
    
    (6,275
    )Exchange gains and losses on transactions of subsidiaries whose
currency exposure is not managed at Group Treasury level
    
    
    (128
    )
    
    
    (2,377
    )Total net foreign exchange gains (losses)
    
    
    9,304
    
    
    
    3,842
 F-38




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##### Table of Contents



31. NET INCOME (LOSS) PER SHARE CALCULATION A reconciliation of the numerator and denominator of basic and diluted net income per share
is provided as follows: As net losses have been reported in 2003 and 2002, the dilutive effects of stock options, warrants
and shares to be issued were excluded from the net loss per share calculation in these periods, as
the effect would be anti-dilutive. Gemplus SA shares to be contributed are included in the weighted average number of common shares
outstanding (see Note 22). (in thousands of euros, except shares and per share data)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Net income (loss) attributable to equity holders
of the Company (numerator)
    
    
    4,674
    
    
    
    (161,107
    )
    
    
    (320,891
    )Shares used in basic net income (loss) per share
calculation (denominator):Weighted average number of common shares
outstanding
    
    
    606,672,060
    
    
    
    605,658,965
    
    
    
    606,222,660Dilutive effect of stock options
    
    
    12,350,412
    
    
    
    5,625,142
    
    
    
    1,516,176Dilutive effect of warrants
    
    
    
    
    
    
    
    
    
    
    28,073Weighted average diluted number of shares
outstanding
    
    
    619,022,472
    
    
    
    611,284,107
    
    
    
    607,766,909Shares used in diluted net income (loss) per share
(denominator)
    
    
    619,022,472
    
    
    
    605,658,965
    
    
    
    606,222,660Net
income (loss) per share attributable to
equity holders of the Company (in euros)Basic
    
    
    0.01
    
    
    
    (0.27
    )
    
    
    (0.53
    )Diluted
    
    
    0.01
    
    
    
    (0.27
    )
    
    
    (0.53
    )
 32. SEGMENT INFORMATION 32.1 Primary reporting format  operating segments In 2004, the Company realigned its reporting segments in three operating segments: (i)
Telecommunications segment, (ii) Financial Services segment, and (iii) Identity and Security
segment, according to its new operating structure. The Telecommunications segment remains unchanged and includes the wireless products and services,
comprising wireless microprocessor cards and related applications (embedded software and
Over-The-Air platforms) and services (system integration and operated services), prepaid phone
cards and scratchcards. The former Financial Services and Security segment has been divided into:  
    
    the Financial Services segment, comprising systems and services based on chip card technology
for applications such as financial services, retail, transport, pay-TV, as well as magnetic
stripe plastic cards for all applications;
    
    the Identity and Security segment, comprising systems and services based on chip card
technology for applications such as national ID, healthcare, drivers license, car
registration, passport and visa, e-government secured services, physical and logical access
control as well as smart card readers and interfacing technologies. These three segments have a different customer base, and each of them has separate financial
information available. The management evaluates these segments regularly, decides how to allocate
resources and assesses performance. The Companys management makes decisions about resources to be
allocated to the segments and assesses their performance using net sales, gross profit and
operating income (loss). The Company does not identify or allocate assets to the operating or
geographic segments nor does management evaluate the segments on this criterion on a regular basis. The accounting policies of the segments are substantially the same as those described in the
summary of significant accounting policies as discussed in Note 2. F-39




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##### Table of Contents



The following tables present selected data for the years ended December 31, 2004, 2003 and 2002: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Net salesTelecommunications
    
    
    641,775
    
    
    
    542,534
    
    
    
    544,471Financial Services
    
    
    182,237
    
    
    
    168,167
    
    
    
    195,063Identity and Security
    
    
    41,022
    
    
    
    38,502
    
    
    
    47,900Net sales
    
    
    865,034
    
    
    
    749,203
    
    
    
    787,434Gross profitTelecommunications
    
    
    220,781
    
    
    
    166,776
    
    
    
    154,526Financial Services
    
    
    37,672
    
    
    
    31,951
    
    
    
    34,678Identity and Security
    
    
    12,048
    
    
    
    8,529
    
    
    
    10,508Gross profit
    
    
    270,501
    
    
    
    207,256
    
    
    
    199,712Operating expensesTelecommunications
    
    
    (148,982
    )
    
    
    (196,123
    )
    
    
    (273,788
    )Financial Services
    
    
    (63,948
    )
    
    
    (88,527
    )
    
    
    (110,886
    )Identity and Security
    
    
    (31,253
    )
    

    
    (56,392
    )
    
    
    (46,746
    )Operating expenses
    
    
    (244,183
    )
    
    
    (341,042
    )
    
    
    (431,420
    )Operating income (loss)Telecommunications
    
    
    71,799
    
    
    
    (29,347
    )
    
    
    (119,262
    )Financial Services
    
    
    (26,276
    )
    
    
    (56,576
    )
    
    
    (76,208
    )Identity and Security
    
    
    (19,205
    )
    
    
    (47,863
    )
    
    
    (36,238
    )Operating income (loss)
    
    
    26,318
    
    
    
    (133,786
    )
    
    
    (231,708
    )
 32.2 Secondary reporting format  geographical segments The Companys three business segments operate in three main geographical areas, even though
they are managed on a worldwide basis. The following is a summary of sales to external customers by geographic area for the years ended
2004, 2003 and 2002: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Europe, Middle East and Africa
    
    
    443,141
    
    
    
    407,718
    
    
    
    416,220Asia
    
    
    194,292
    
    
    
    171,860
    
    
    
    199,497Americas
    
    
    227,601
    
    
    
    169,625
    
    
    
    171,717Net sales
    
    
    865,034
    
    
    
    749,203
    
    
    
    787,434
 Revenues from external customers are based on the customers billing location. Accordingly,
there are no sales transactions between operating segments. The Company does not allocate
long-lived assets by location for each geographic area. The Companys country of domicile is
Luxemburg in which sales to customers are insignificant. No single customer accounted for more than 10% of the Companys sales during the years ended
December 31, 2004, 2003 and 2002. 33. DIVIDENDS PER SHARE The Company did not pay any dividend during 2004, 2003 and 2002. 34. FINANCIAL ASSETS AND LIABILITIES AT FAIR MARKET VALUE Derivative financial instruments (forward exchange contracts; currency options contracts) are
accounted for at fair value. The carrying amount of financial assets and liabilities is a
reasonable approximation of fair value. F-40




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##### Table of Contents



35. COMMITMENTS AND CONTINGENCIES Legal proceedings In December 1997, Mr. Alain Nicolaï brought a legal action before the Marseille Commercial
Court against Gemplus SA, the main French subsidiary of the Company, and other parties alleging a
breach of contract relating to the promotion of a smart card reading system and device in the area
of casino slot machines. In June 2000, the Court found Gemplus SA liable for breach, ordered
Gemplus SA to make a provisional payment of  137 thousand as an advance on damages, and
appointed an expert to make an analysis and provide a report on estimated actual damages. Based on
the experts report, on March 18, 2004, the Marseille Commercial Court ordered Gemplus SA to pay
 21,952 thousand to the plaintiffs. Gemplus SA appealed this decision and on April 2, 2004, the
Aix-en-Provence Court of Appeal suspended the order of the Marseille Commercial Court, and instead,
ordered Gemplus SA to make a cash deposit in the same amount into an escrow account as security
pending a decision on the appeal. As of December 31, 2004, this deposit is recorded under the
caption Other current receivables based on the anticipated timing of the resolution of the
litigation (see Note 9). The ruling of the Court of Appeal is expected for the beginning of the
second quarter of 2005. Although there can be no assurance as to how the Court of Appeal may rule
or as to the amount of damages that may be assessed, the Company recorded a provision for this
litigation in the amount of  5,200 thousand in 2003 under the caption Current portion of
provisions and other liabilities (see Note 17). In 2000, an indirect subsidiary of the Company, Zenzus Holdings Ltd, granted a loan to a then
director and executive of the Company, Marc Lassus. In December 2001, as a result of the
reorganization of the management group, the Company agreed to pay to Mr. Lassus, an amount of USD
10,000 thousand ( 7,335 thousand,  8,001 thousand and  9,638 thousand as at December
31, 2004, 2003 and 2002, respectively) upon fulfilment of certain specific conditions. In 2002, as
a result of Mr. Lassuss failure to confirm his intent and ability to reimburse the loan, the
Company recorded a provision amounting to  67,582 thousand to cover the risk of
non-reimbursement of the loan. In 2003, the Company submitted the matter to binding arbitration. In
April 2004, the arbitral tribunal issued a final award in favor of the Company and its indirect
subsidiary in the amount of  71,900 thousand, plus accrued interest of approximately  7,000
thousand and attorneys fees and costs. The Company has considered that the potential for any
repayment of the loan depends on the financial strength of Mr. Lassus, which is uncertain. The
provision corresponds to the amount of the loan outstanding net of all the amounts payable to
Mr. Lassus, including an amount of  1,545 thousand corresponding to past employment
obligations. The Company considers that such payments are conditioned to the reimbursement of the
loan. The Company has not forgiven the loan and is seeking repayment by Mr. Lassus through
enforcement procedures. Prior to 2004, the Company recorded a provision of  9,000 thousand for the risks related to a
patent litigation with British Technology Group under the caption Non-current portion of
provisions (see Note 19). Because some risks remain in certain areas, and as five divisional
patent applications are still being examined by the European Patent Office, the Company has decided
to maintain this provision. In addition to the litigation and claims mentioned above, the Company is subject to legal
proceedings, claims and litigation arising in the ordinary course of business. The Companys
management does not expect that the ultimate costs to resolve these other matters will have a
material adverse effect on the Companys consolidated financial position, results of operations or
cash flows. Contractual obligations The Company leases some of its manufacturing and office space under non-cancelable operating
leases. These leases contain various expiration dates and renewal options. Future minimum lease
payments under all non-cancelable operating leases as of December 31, 2004, 2003 and 2002 are
described in the table below. F-41




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##### Table of Contents



As of December 31, 2004, 2003, and 2002, the Companys contractual obligations are as follows: Schedule of payments
       

(in
thousands of euros)
 Contractual obligationsas of December 31, 2004
    
    Total
    
    
    Less than 1 year
    
    
    1 to 5 years
    
    
    More than 5 yearsLong-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Finance lease obligations
    
    
    44,549
    
    
    
    7,235
    
    
    
    25,392
    
    
    
    11,922Operating lease obligations
    
    
    18,412
    
    
    
    3,894
    
    
    
    6,119
    
    
    
    8,399Purchase obligations (1)
    
    
    60,934
    
    
    
    60,934
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    123,895
    
    
    
    72,063
    
    
    
    31,511
    
    
    
    20,321
 
 (1) Including  46,800 thousand related to microprocessor chips purchase
commitments Schedule of payments
       

(in
thousands of euros)
 Contractual obligationsas of December 31, 2003
    
    Total
    
    
    Less than 1 year
    
    
    1 to 5 years
    
    
    More than 5 yearsLong-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Finance lease obligations
    
    
    51,151
    
    
    
    7,377
    
    
    
    25,961
    
    
    
    17,813Operating lease obligations
    
    
    16,098
    
    
    
    5,187
    
    
    
    7,446
    
    
    
    3,465Purchase obligations (2)
    
    
    79,202
    
    
    
    78,106
    
    
    
    1,096
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    146,451
    
    
    
    90,670
    
    
    
    34,503
    
    
    
    21,278
 
 (2) Including  54,500 thousand related to microprocessor chips purchase
commitments. Schedule of payments
       

(in
thousands of euros)
 Contractual obligationsas of December 31, 2002
    
    Total
    
    
    Less than 1 year
    
    
    1 to 5 years
    
    
    More than 5 yearsLong-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Finance lease obligations
    
    
    60,856
    
    
    
    8,060
    
    
    
    29,758
    
    
    
    23,038Operating lease obligations
    
    
    33,428
    
    
    
    8,490
    
    
    
    22,216
    
    
    
    2,722Purchase obligations (3)
    
    
    39,200
    
    
    
    39,200
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    133,484
    
    
    
    55,750
    
    
    
    51,974
    
    
    
    25,760
 
 (3) Including  29,700 thousand related to microprocessor chips purchase
commitments. As of December 31, 2004, 2003 and 2002, no obligations or commitments other than those
disclosed in the note above would have a significant impact on the Companys Consolidated Financial
Statements. Off-balance sheet arrangements The Company enters into certain off-balance sheet arrangements in the ordinary course of its
business. These arrangements include purchase and lease obligations, operating leases (presented in
the tabular disclosure of contractual obligations above) and certain guarantees. Other guarantees can be presented as follows: (in thousands of euros)  December 31
    
    2004
    
    
    2003
    
    
    2002Performance, downpayment and bid bonds
    
    
    10,340
    
    
    
    10,817
    
    
    
    15,752Guarantees related to operations
    
    
    3,811
    
    
    
    6,518
    
    
    
    9,405Total guarantees issued by the Company
    
    
    14,151
    
    
    
    17,335
    
    
    
    25,157
 F-42




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##### Table of Contents



As of December 31, 2004, the amount of guarantees, mainly representing performance bonds and
bid bonds, amounted to  10,340 thousand. These guarantees are primarily made as part of normal
operations where the Companys customers demand such guarantees to secure the Companys performance under contracts or tenders for business which become payable based
upon non-performance of the Company. As of December 31, 2004, guarantees related to operations included an amount of  2,658 thousand
relating to a potential liability in respect of the restricted cash in China (see Notes 9 and 37).
These guarantees also included an amount of  887 thousand (DKK 6,600 thousand) relating to a
stand-by letter of credit issued by the Company in favor of Realtime A/S (see Note 37). 36. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest and income taxes are as follows: (in thousands of euros)  Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Cash paid for:Interest
    
    
    1,987
    
    
    
    3,069
    
    
    
    1,175Income taxes
    
    
    36,206
    
    
    
    3,651
    
    
    
    1,729
 In October 2001, the Company recorded an expense of  18,120 thousand as a result of a
judgment rendered by a United States Court of Appeals against the Company arising from a claimed
breach of an agreement. The cash settlement of this matter occurred in 2002. Changes in trade accounts receivable and related current liabilities are as follows: (in thousands of euros)  As of January 1,
    
    
    Change in
    
    
    Currency
    
    
    
    
    
    
    As of December 31,2004
    
    
    working capital
    
    
    adjustments
    
    
    Transfers
    
    
    2004Trade accounts receivable, net
    
    
    (154,727
    )
    
    
    (541
    )
    
    
    5,243
    
    
    
    1,513
    
    
    
    (148,512
    )Related current liabilities
    
    
    25,100
    
    
    
    (2,422
    )
    
    
    (133
    )
    
    
    
    
    
    
    22,545Trade accounts receivable and related
current liabilities
    
    
    (129,627
    )
    
    
    (2,962
    )
    
    
    5,110
    
    
    
    1,513
    
    
    
    (125,967
    )
 Changes in trade accounts payable and related current assets are as follows: (in thousands of euros)  Change inAs of January 1,
    
    
    Change in
    
    
    non-trade
    
    
    Currency
    
    
    
    
    
    
    As of December 31,2004
    
    
    working capital
    
    
    accounts payable
    
    
    adjustments
    
    
    Transfers
    
    
    2004Trade accounts payable net
    
    
    95,582
    
    
    
    1,311
    
    
    
    (1,461
    )
    
    
    (1,026
    )
    
    
    (381
    )
    
    
    94,025Related current assets
    
    
    (28,044
    )
    
    
    19,463
    
    
    
    
    
    
    
    236
    
    
    
    (4,203
    )
    
    
    (12,548
    )Trade accounts payable and
related current assets
    
    
    67,538
    
    
    
    20,774
    
    
    
    (1,461
    )
    
    
    (790
    )
    
    
    (4,584
    )
    
    
    81,477
 Changes in inventories are as follows: (in thousands of euros)  Change inAs of January 1,
    
    
    working
    
    
    Currency
    
    
    
    
    
    
    As of December 31,2004
    
    
    capital
    
    
    adjustments
    
    
    Transfers
    
    
    2004Inventories
    
    
    (98,673
    )
    
    
    (19,466
    )
    
    
    2,529
    
    
    
    
    
    
    
    (115,610
    )
 F-43




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##### Table of Contents



Changes in salaries, wages and other include mainly the following: (in thousands of euros) Change inAs of January 1,
    
    
    working
    
    
    Currency
    
    
    
    
    
    
    As of December 31,2004
    
    
    capital
    
    
    adjustments
    
    
    Transfers
    
    
    2004Salaries, wages
    
    
    42,742
    
    
    
    13,972
    
    
    
    (826
    )
    
    
    (690
    )
    
    
    55,198Other operating assets and liabilities
    
    
    (3,045
    )
    
    
    189
    
    
    
    46
    
    
    
    (1,381
    )
    
    
    (4,191
    )Salaries, wages and other
    
    
    39,697
    
    
    
    14,161
    
    
    
    (780
    )
    
    
    (2,071
    )
    
    
    51,007
 Depreciation, amortization and impairment include the following: (in thousands of euros) Years ended December 31
    
    Notes
    
    
    2004
    
    
    2003
    
    
    2002Property, plant and equipment, depreciation
    
    
    (10
    )
    
    
    42,243
    
    
    
    51,064
    
    
    
    72,376Goodwill amortization and impairment
    
    
    (11
    )
    
    
    7,718
    
    
    
    33,051
    
    
    
    47,117Other intangible assets depreciation
    
    
    
    
    
    
    6,730
    
    
    
    10,956
    
    
    
    13,866Depreciation, amortization and impairment
    
    
    
    
    
    
    56,691
    
    
    
    95,071
    
    
    
    133,359
 Changes in value-added and income taxes are as follows: (in thousands of euros) Change inAs of January 1,
    
    
    working
    
    
    Currency
    
    
    
    
    
    
    As of December 31,2004
    
    
    capital
    
    
    adjustments
    
    
    Transfers
    
    
    2004Value-added and income taxes
    
    
    (17,710
    )
    
    
    21,288
    
    
    
    (79
    )
    
    
    676
    
    
    
    4,175
 37. RELATED PARTY TRANSACTIONS The following transactions were carried out with related parties: Compensation of key management
The compensation of key management personnel (persons having the authority and responsibility
for planning, directing and controlling the activities of the Company, directly or indirectly,
including any director - whether executive or otherwise - of the Company) paid in 2004, 2003 and
2002 by the Company is summarized as follows: (in thousands of euros) Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Salaries and other short-term employee benefits
    
    
    8,052
    
    
    
    6,191
    
    
    
    13,211Termination benefits
    
    
    261
    
    
    
    1,219
    
    
    
    2,215Post-employment benefits
    
    
    19
    
    
    
    
    
    
    
    Other long-term benefits
    
    
    
    
    
    
    
    
    
    
    Total compensation of key management personnel
    
    
    8,332
    
    
    
    7,410
    
    
    
    15,426
 During 2004, 2003 and 2002, the Company has issued, respectively, 2,400,000, 3,650,000 and
13,397,500 stock options to the members of its key management personnel. F-44




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##### Table of Contents



Purchases of goods and services (in thousands of euros) Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Associates
    
    
    3,192
    
    
    
    940
    
    
    
    161Related parties
    
    
    49
    
    
    
    120
    
    
    
    1,737Total purchases of goods and services
    
    
    3,241
    
    
    
    1,060
    
    
    
    1,898
 During 2002, the Company paid amounts totalling  10,629 thousand in connection with the
resignation and cessation of
Mr. Perez and Mr. Lassus as, respectively, Chief Executive Officer and Chairman of the Company. During 2001, the Company entered into an agreement with a service company Differentis whose Chief
Executive Officer,
Mr. Ronald Mackintosh, also served on our Board of Directors. Mr. Mackintosh served as our interim
Chief Executive Officer from December 19, 2001 to August 31, 2002. He resigned as Chief Executive
Officer of the service company effective on December 19, 2001 but had remained a member of its
Board of Directors. In addition, Texas Pacific Group, a shareholder of the Company, is a major
shareholder of the service company. This service company was appointed to provide an independent
review of the Companys management, information, organization and business systems as well as
identification and recommendation of improvements. In 2002, the Company recorded in its
Consolidated Statement of Income a total cost amounted to  1,737 thousand for this arrangement.
The service of Differentis stopped being used by the Company at the end of 2002. GemVentures 1 NV, a wholly owned subsidiary of the Company and Dassault Multimedia SAS are minority
shareholders of Welcome Real Time SA. Mr. Thierry Dassault, who was one of the Companys directors
until April 2004, is also the Chairman of Dassault Multimedia, which is part of Groupe Industriel
Marcel Dassault, which is a shareholder of the Company. On October 9, 2003, GemVentures and
Dassault Multimedia entered into an agreement providing for a loan by GemVentures to Dassault
Multimedia of Welcome Real Time shares constituting 1.5% of Welcome Real Times capital. The loan
grants Dassault Multimedia the dividend and voting rights associated with the shares in exchange
for the right to receive a certain percentage of any dividends that Dassault Multimedia might
receive in respect of the loaned shares. Upon expiration of the agreement on September 30, 2009,
Dassault Multimedia is obligated to return the shares to GemVentures. Upon the occurrence of
certain events set forth in the agreement, GemVentures may request that the shares will be returned
within two months from the date of the event. On the same date, GemVentures also entered into
another agreement with an unrelated party for the loan of the same number of Welcome Real Time
shares on identical arms-length terms. The Company is the guarantor for a stand-by letter of credit issued at its demand by Deutsche Bank
in favor of Nordea Bank Danmark for the guarantee of obligations (with a maximal amount of DKK
6,600 thousand) of Realtime A/S, a Danish company. GemVentures 1 NV, a wholly owned subsidiary of
the Company, is a minority shareholder of Realtime with board representation (see Note 35). On March 9, 2004, Apeera Inc. entered into a share and asset purchase agreement with Intuwave Ltd
by which the shares of Apeera France SAS, a wholly owned subsidiary of Apeera Inc., and certain
assets were sold to Intuwave for a consideration payable in shares of  3,000 thousand, plus an
additional  1,000 thousand upon fulfillment of certain technological and commercial conditions.
GemVentures (a wholly owned subsidiary of the Company) and TPG Ventures, L.P., both shareholders of
Apeera Inc., were parties to such agreement for the purposes of guaranteeing the obligations of
Apeera Inc., in respect of the warranties and indemnities given by Apeera Inc. TPG Ventures, L.P.
is managed by Texas Pacific Group, which is a shareholder of our Company. Three of our Directors
are respectively managing partners and a principal of Texas Pacific Group. On July 30, 2004, Certplus SA, a French company in which Gemplus Trading SA, indirectly a wholly
owned subsidiary of the Company, holds 99.9% of the shares, and Infrasec, a French company, entered
into a contribution agreement. As a result of this agreement, Certplus contributed to Infrasec its
certification services operator business division. In return, Certplus received 19.1% of the shares
of Infrasec. Dassault Multimedia, which is part of Groupe Industriel Marcel Dassault, which is a
shareholder of the Company, became shareholder of Infrasec with 1.2% of the share capital of
Infrasec, and Mr. Thierry Dassault, who was one of the Companys directors until April 2004, has
become Chairman of the Board of Directors of Infrasec. Thereafter Infrasec was renamed as
Keynectis. F-45




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Tianjin Gemplus Smart Card Co. Ltd (TGSC) is a joint venture established initially between a
French subsidiary of the Company, Gemplus SA, owning 51% of the total equity interest in TGSC, and
Tianjin Telephone Equipments Factory (TTEF) owning the remaining 49% of the total equity interest
in TGSC. Gemplus (Tianjin) New Technologies Co. Ltd (GTNT), an indirectly wholly-owned subsidiary
of the Company, has agreed to make a time deposit with China Everbright Bank (the Bank) following
a pledge, in favor of the Bank, by TTEF of 30% of the total equity interest to secure a loan of CNY
90,000 thousand made by the Bank to TTEF. Afterwards, TTEF transferred its whole equity interest
held in TGSC to a parent company named Tianjin Zhong Tian Telecommunications Co. Ltd (ZT) with
Gemplus SA consent subject to an increase of the pledge from 30% to 45.8% of the total equity
interest in TGSC. In the event of (i) a failure to comply with conditions and warranties agreed by
TTEF and/or Shanghai Post Telecommunications Equipment (SPTE) which are the co-shareholders of
ZT, and (ii) the subsequent activation of the pledge, GTNT or the Company would have to purchase
back the whole equity interest held by ZT in TGSC, using the amount of the time-deposit. As of
December 31, 2004, CNY 30,000 thousand ( 2,658 thousand as of December 31, 2004) remains to be
reimbursed by TTEF under the loan agreement, secured by a corresponding time deposit amount made by
GTNT (see Note 35). 38. EVENTS AFTER THE BALANCE SHEET DATE In connection with the litigation with Mr. Alain Nicolaï and other parties (see Note 35), the
Aix-en-Provence Court of Appeal rendered a decision in favor of the Company, reversing the judgment
of the Marseille Commercial Court of March 18, 2004. Following the decision of the Aix-en-Provence Court of Appeal, on May 26, 2005, and based on advice
of counsel and the approval of its Audit Committee, the Company decided to release its provision in
the amount of  5.2 million related to this matter. This release of the provision will be recorded
in the Companys consolidated accounts in June 2005, and will therefore have a positive effect on
its operating income (line item General and administrative expense). This provision was
originally recorded in the Companys 2003 consolidated accounts with a corresponding charge under
the line item General and administrative expense. The Court of Appeal had previously ordered the Company to make a cash deposit of  22 million into
an escrow account as security pending the decision on the appeal, and the Company reported this
amount under the line item Other current receivables as of December 31, 2004 (see Note 9). As a
result of the May 26, 2005 appeal decision, this escrow deposit has been released to the Company,
and this amount will be reported under the line item Cash and cash equivalents in the Companys
consolidated accounts in June 2005. 39. DIFFERENCES BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS AND US GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES The Companys Consolidated Financial Statements are prepared in accordance with IFRS, which
differ in certain respects from generally accepted accounting principles in the United States (US
GAAP). The principal differences between IFRS and US GAAP are presented below together with explanations
of certain adjustments that affect consolidated net income and total shareholders equity: (in thousands of euros, except shares and per share amounts) Years ended December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Net income (loss) in accordance with IFRS
    
    
    6,291
    
    
    
    (158,955
    )
    
    
    (316,558
    )Minority interest
    
    
    (1,617
    )
    
    
    (2,152
    )
    
    
    (4,333
    )Capitalized development costs
    
    
    
    
    
    
    7,321
    
    
    
    (1,803
    )Reversal of restoration of impairment losses on long-lived assets
    
    
    19
    
    
    
    (2,555
    )
    
    
    Stock options accounting
    
    
    (6,950
    )
    
    
    (6,399
    )
    
    
    (2,887
    )Purchase accounting
    
    
    
    
    
    
    (837
    )
    
    
    (2,351
    )Goodwill amortization and impairment
    
    
    10,528
    
    
    
    (18,522
    )
    
    
    49,177Other differences
    
    
    (57
    )
    
    
    26
    
    
    
    360Deferred tax effect of US GAAP adjustments
    
    
    (3
    )
    
    
    393
    
    
    
    (1,277
    )Total differences between US GAAP and IFRS
    
    
    1,920
    
    
    
    (22,725
    )
    
    
    36,886Net income (loss) in accordance with US GAAP
    
    
    8,211
    
    
    
    (181,680
    )
    
    
    (279,672
    )Change in cumulative other comprehensive adjustment
in accordance with IFRS
    
    
    7,386
    
    
    
    (4,001
    )
    
    
    12,538Change in effect of IFRS/US GAAP adjustments
on other comprehensive income
    
    
    (661
    )
    
    
    240
    
    
    
    (3,233
    )Other comprehensive income (loss)
in accordance with US GAAP, net of tax
    
    
    6,725
    
    
    
    (3,761
    )
    
    
    9,305Comprehensive income (loss) in accordance with US GAAP
    
    
    14,936
    
    
    
    (185,441
    )
    
    
    (270,367
    )Net income (loss) per share in accordance with US GAAP:Basic
    
    
    0.01
    
    
    
    (0.30
    )
    
    
    (0.46
    )Diluted
    
    
    0.01
    
    
    
    (0.30
    )
    
    
    (0.46
    )Number of shares:Basic
    
    
    606,672,060
    
    
    
    605,658,965
    
    
    
    606,222,660Diluted
    
    
    619,022,472
    
    
    
    605,658,965
    
    
    
    606,222,660
 F-46




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(in thousands of euros) December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Shareholders equity in accordance with IFRS
    
    
    721,313
    
    
    
    707,085
    
    
    
    875,618Minority interest
    
    
    (10,701
    )
    
    
    (12,073
    )
    
    
    (15,167
    )Capitalized development costs
    
    
    
    
    
    
    
    
    
    
    (7,321
    )Reversal of restoration of impairment losses
on long-lived assets
    
    
    (2,148
    )
    
    
    (2,555
    )
    
    
    Non-recourse loans
    
    
    (4,276
    )
    
    
    (4,276
    )
    
    
    (4,918
    )Purchase consideration
    
    
    (11,292
    )
    
    
    (11,292
    )
    
    
    (10,455
    )Goodwill amortization and impairment
    
    
    41,183
    
    
    
    30,655
    
    
    
    49,177Effect of IFRS/US GAAP adjustments on other
comprehensive income
    
    
    (8,565
    )
    
    
    (7,904
    )
    
    
    (8,144
    )Other differences
    
    
    19
    
    
    
    76
    
    
    
    50Deferred tax effect of US GAAP adjustments
    
    
    301
    
    
    
    363
    
    
    
    (30
    )Total differences between US GAAP and IFRS
    
    
    4,521
    
    
    
    (7,006
    )
    
    
    3,192Shareholders equity in accordance with US GAAP
    
    
    725,834
    
    
    
    700,079
    
    
    
    878,810
 Minority interest Under IAS 1 (revised 2003), minority interest is required to be presented in the Consolidated
Balance Sheet within equity. Currently, under US GAAP, minority interest is classified as a
mezzanine item between liabilities and equity. Capitalized development costs The Company capitalizes certain research and development costs (other than for software
development) where it is expected that the product under development will be produced and will be
profitable. Such capitalized research and development costs are amortized over a period no longer than three years. Under US GAAP, research and
development costs (other than for software development) are expensed as incurred. Stock options accounting Certain of the Companys stock option plans (see Note 23) are treated as compensatory plans
under US GAAP. For the purpose of this reconciliation, the Company has adopted Accounting Principles Board Opinion
No. 25 Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employees stock options. Under APB 25, unearned compensation is recognized as a reduction in shareholders equity when the
exercise price of stock options is below the fair value of the underlying shares on the grant date.
Unearned compensation is amortized to compensation expense over the vesting period of the
applicable options. From 1989 to December 31, 2004, the Company granted stock options to employees,
which generally vest over four years, with exercise prices at or below the fair value of the
underlying shares at the date of grant. For purposes of financial reporting under US GAAP, the Company is required to follow the disclosure
provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensation, amended by FAS 148, Accounting for
Stock-Based Compensation - Transition
and Disclosure, which requires that the Company discloses pro forma net income and earnings per
share as if the Companys compensation expense had been calculated using the minimum value method
prescribed by SFAS 123. Had compensation expense for the Plans been determined based upon the estimated grant date fair
value using the fair value method as provided by SFAS 123, the Companys net income and earnings
per share for the years ended December 31, 2004, 2003 and 2002, would have been as follows: F-47




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(in thousands of euros, except for earnings per share) Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Net income (loss) in accordance with US GAAP, as reported
    
    
    8,211
    
    
    
    (181,680
    )
    
    
    (279,672
    )Add: total stock-based compensation expense
included in reported net income, net of related tax effect
    
    
    6,950
    
    
    
    6,399
    
    
    
    2,887Deducted: total stock-based compensation
expense determined under fair value based method for
all awards, net of related tax effects
    
    
    (27,379
    )
    
    
    (17,674
    )
    
    
    22,031Pro forma US GAAP net income (loss)
    
    
    (12,218
    )
    
    
    (192,955
    )
    
    
    (254,754
    )Earnings per share:Basic - as reported
    
    
    0.01
    
    
    
    (0.30
    )
    
    
    (0.46
    )Basic - pro forma
    
    
    (0.02
    )
    
    
    (0.32
    )
    
    
    (0.42
    )Diluted - as reported
    
    
    0.01
    
    
    
    (0.30
    )
    
    
    (0.46
    )Diluted - pro forma
    
    
    (0.02
    )
    
    
    (0.32
    )
    
    
    (0.42
    )
 The fair value of each option grant is estimated on the date of grant using the Black &
Scholes option pricing model, with the following assumptions for grants made during 2004, 2003 and
2002: dividend yields of 0% for all periods; annual risk-free interest rate of 2.3%, 2.3% and 3.3%
for 2004, 2003 and 2002 respectively; expected volatility of 44%, 53% and 83% for 2004, 2003 and
2002 respectively; and expected option vesting period of four years for all periods. In 2000, the Company entered into arrangements with certain executives, whereby they were granted a
certain number of options, and loans for their exercise. The loans were treated, for accounting
purposes only, as non-recourse loans at origination, which resulted in the application of variable
plan accounting. Under variable plan accounting, compensation cost is re-measured each period based
on the difference between the fair market value and the exercise price of the stock unless the
exercise price exceeds the fair market value, which was the case in 2002, 2003 and 2004. No
compensation expense or benefit was recorded in such years. Purchase consideration Under US GAAP, certain considerations exchanged in a business combination that requires
continued employment of the selling shareholders are treated as compensation expenses. Under IFRS,
these considerations are treated as part of the purchase price allocation. Under IFRS, when accounting for business combinations, additional consideration which is contingent
on achieving specified earnings levels in future period is estimated based on the most probable
amount payable. Under US GAAP, the fair value of the consideration is recorded only when the
contingency is resolved. As of December 31, 2004, additional consideration amounting to  500
thousand is recorded under IFRS in other non-current liabilities against goodwill ( 1,000
thousand as of December 31, 2003) in relation to an earn-out provision . This additional
consideration is not recorded under US GAAP. Consequently, goodwill and other non-current
liabilities would be reduced. This difference between IFRS and US GAAP has no impact on net income
or shareholders equity. Goodwill amortization and impairment On January 1, 2002 the Company adopted the provisions of the Statement of Financial
Accounting Standard SFAS No 142, Goodwill and Other Intangible Assets, issued by the Financial
Accounting Standards Board (FASB) in July 2001. SFAS 142 requires that goodwill and intangible
assets with indefinite lives no longer be amortized but be tested for impairment at least annually
at the reporting unit level. A reporting unit is an operating segment or one level below an
operating segment (i.e. a component) as defined in SFAS No 131, Disclosures about Segments of an
Enterprise and Related Information. Statement 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives to their estimated
residual values and be reviewed for impairment in accordance with SFAS No 144, Accounting for the
impairment or Disposal of Long-Lived Assets, which was also adopted on January 1, 2002.
Under US GAAP reversals of impairment losses are prohibited whereas under IFRS they are permitted
under certain circumstances. During 2002, 2003 and 2004, as a result of its adoption, the Company did not recognize amortization
expense under US GAAP. The Company has reassessed the useful lives of its intangible assets and has not made any
adjustment. The Company did not reclassify any indefinite-life intangible assets from goodwill, nor did the
Company reclassify any intangible assets as goodwill. As a result of applying the provisions of
SFAS 142 when performing its impairment testing, the Company did not record a goodwill impairment
charge in 2004 for US GAAP purposes (2003:  55,238 thousand). Under IFRS, the Company performed
its impairment testing at the level of the cash-generating units, which are the smallest identifiable
group of assets that generate cash inflows. As a result, the Company recorded a goodwill impairment
charge of  19,879 thousand in 2003 and  22,124 thousand in 2002 for IFRS purposes. F-48




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The allocation of goodwill to the Companys reportable segments is presented in Note 11. Under US
GAAP, following the adoption of FAS 142 where goodwill is no longer amortized, the impact on the
net book value of goodwill is  26,904 thousand as of December 31, 2004 ( 19,186 thousand
and  48,273 thousand as of December 31, 2003 and 2002, respectively). Other comprehensive income After implementation of IAS 39, there are no reconciling items between IFRS and US GAAP
related to other comprehensive income, except for the accounting for pensions ( 8,428 thousand
in 2004,  7,769 thousand in 2003,  8,008 thousand in 2002) and for the foreign currency
translation adjustment effect of US GAAP adjustments ( 137 thousand in 2004,  135 thousand
in 2003 and  136 thousand in 2002). FASB Statement No. 87, Employers Accounting for Pension, requires the Company to recognize a
minimum pension liability equal to the amount by which the actuarial present value of the
accumulated benefit obligations exceeds the fair value of plans assets, i.e. the unfunded amount.
This liability is recorded, net of tax, within other comprehensive income. 40.
OTHER REQUIRED DISCLOSURES UNDER US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Recently issued accounting standards under US GAAP, which could affect the reconciliation In December 2003, the FASB issued Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities (VIE). This interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises
of certain variable interest entities. This interpretation explains how to identify variable interest entities and how an enterprise
assesses its interests in a variable interest entity to decide whether to consolidate that entity.
It requires existing unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among parties involved. Variable
interest entities that effectively disperse risks will not be consolidated unless a single party
holds an interest or combination of interests that effectively recombines risks that were
previously dispersed. An enterprise that consolidates a variable interest entity is the primary beneficiary of the
variable interest entity. The primary beneficiary of a variable interest entity is the party that
absorbs a majority of the entitys expected losses, receives a majority of its expected residual
returns, or both, as a result of holding variable interests, which are the ownership, contractual,
or other monetary interests in an entity that change with changes in the fair value of the entitys
net assets excluding variable interests. This interpretation requires the primary beneficiary of a
variable interest entity, and an enterprise that holds significant variable interests in a variable
interest entity but is not the primary beneficiary, to make certain disclosures about the variable
interest entity. Application of this interpretation is required in Consolidated Financial Statements of public
entities that have interests in variable interest entities or potential variable interest entities
commonly referred to as special-purpose entities for periods ending after December 15, 2003.
Application by public entities (other than small business issuers) for all other types of entities
is required in Consolidated Financial Statements for periods ending after March 15, 2004. The Company has performed a review of potential VIEs and has determined that it does not have any
interests in VIEs as of the issuance of these Consolidated Financial Statements. Adoption of FIN 46
in 2003 and the adoption of FIN 46R in 2004 did not have a material impact on the Companys
consolidated net income and total shareholders equity under US GAAP. In December 2003, the FASB revised SFAS No. 132, Employers Disclosures about Pensions and Other
Postretirement Benefits, to require additional disclosure about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit
post retirement plans. These disclosure requirements were effective for the 2004 year-end and have
been included since then in Note 20 of our Consolidated Financial Statements included in this
report. In November 2004, the FASB issued SFAS 151, Inventory Costs-an amendment of ARB No. 43, Chapter 4,
Inventory Pricing. This Statement amends the guidance in ARB No. 43, Chapter 4, Inventory
Pricing, to clarify that the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) should be recognized as current period charges. In
addition, this Statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The provisions of this
Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005 and are required to be applied prospectively. The Company does not expect the adoption of this
pronouncement to have a material impact on the Companys consolidated net income and total
shareholders equity under US GAAP. F-49




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In December 2004, the Financial Accounting Standards Board (FASB) issued FAS 123(R), Share-Based
Payment (revised 2004) an amendment of FASB Statements which addresses the accounting for equity
based compensation arrangements. FAS 123(R) eliminates the ability to account for share-based
compensation transactions using Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees and replaces some of the existing requirements under FASB No. 123, Accounting
for Stock-Based Compensation. The statement requires that such arrangements are accounted for
using a fair-value-based method of accounting and the related cost expensed over the corresponding
service period. This statement will be effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005 (July 1, 2005 to the Company). The Company is
currently considering the early adoption of FAS 123 R as of January 1, 2005. In December 2004, FASB issued SFAS No. 153 (FAS 153), Exchanges of Nonmonetary Assets- Accounting
Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions(APB 29). The new standard
is the result of the convergence project between the FASB and the International Accounting
Standards Board (IASB). FAS 153 states that nonmonetary asset exchanges should be recorded and
measured at the fair value of the assets exchanged, with certain exceptions. FAS 153 amends APB 29
to eliminate the fair-value exception for nonmonetary exchanges of similar productive assets and
replace it with a general exception for nonmonetary exchanges, that do not have commercial
substance. It is effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. Others In May 2003, the Emerging Issue Task Force (EITF) issued Consensus No. 03-6 (EITF 03-6),
Participating Securities and the Two-class Method under FASB No. 128, Earnings Per Share. EITF
03-6 considers how a participating security should be defined for purposes of applying paragraphs
60 and 61 of Financial Accounting Standards Board (FASB) Statement No. 128, and whether paragraph
61 of FASB Statement No. 128 requires an entity to use the two-class method in computing EPS based
on the presence of a nonconvertible participating security, regardless of the characteristics of
that participating security. EITF 03-6 is effective for fiscal periods beginning after March 31,
2004. The adoption of EITF 03-6 is not expected to have a material impact on the Companys
consolidated net income and total shareholders equity under US GAAP. In March 2004, the Emerging Issue Task Force reached a consensus on issue 03-01, The Meaning of
Other-Than-Temporary Impairments and Its Application to Certain Investments (EITF 03-01). EITF
03-01 includes new guidance on determining when a debt or equity security is impaired and whether
that impairment is other than temporary. Impairment was defined as when the fair value of a debt or
equity security is less than its cost. Per EITF 03-01, the impairment is other than temporary if
the Company does not have the ability to hold onto the investment for a reasonable period of time
to allow for recovery of fair value up to the cost of the investment and evidence exists that the
investment will probably not recover its fair value within a reasonable period of time. If an
investment is determined to have an other than temporary impairment, the Company is required to
recognize an impairment loss equal to the difference between the investments cost and fair value.
EITF 03-01 also required additional disclosures for those other than temporary impaired
investments. The recognition and disclosure requirements of EITF 03-01 were originally effective
for reporting periods ending after June 15, 2004. However, in September, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position 03-01-1, Effective Date of Paragraphs 10-20 of
EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairments and Its Application to
Certain Investments, which suspends for further discussion the recognition criteria of EITF 03-01.
However, the disclosure guidance of EITF 03-01 remains in effect. At September 26, 2004, the
Company did not have any temporary investments that were in an unrealized loss position. In October 2004, the FASB ratified EITF 04-08, The Effect of Contingently Convertible Instruments
on Diluted Earnings per Share. Certain debt instruments, commonly referred to as Co-Cos, are
contingently convertible into the common shares of the issuer after the common share price has
exceeded a predetermined threshold for a specified period of time. Under the EITF guidance, Co-Cos
must be included in diluted earnings per share calculations regardless of whether or not the
contingency threshold has been met. The impact of this EITF should be retroactively applied to
instruments outstanding as of December 31, 2004. The adoption of EITF 04-08 is not expected to have
a material impact on the Companys net income per share under US GAAP. F-50




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Income taxes The components of income (loss) before tax and minority interest are as follows: (in thousands of euros) Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Domestic (1)
    
    
    19,590
    
    
    
    14,195
    
    
    
    10,299Foreign
    
    
    (1,964
    )
    
    
    (160,628
    )
    
    
    (322,066
    )Income (loss) before tax and minority interest
    
    
    17,626
    
    
    
    (146,433
    )
    
    
    (311,767
    )
 
 (1) Luxemburg. Presentation of the Consolidated Statement of Income The operating income (loss) would have been as follows under US GAAP: (in thousands of euros) Years ended December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Operating income (loss) in accordance with IFRS
    
    
    26,318
    
    
    
    (133,786
    )
    
    
    (231,708
    )Goodwill amortization on consolidated subsidiaries
    
    
    7,718
    
    
    
    (18,237
    )
    
    
    47,117Reversal of restoration of impairment losses on long-lived
assets
    
    
    19
    
    
    
    (2,555
    )
    
    
    Provision for a loan to a former director and executive
    
    
    
    
    
    
    
    
    
    
    (67,582
    )Purchase consideration
    
    
    
    
    
    
    (837
    )
    
    
    (2,351
    )Capitalized development costs
    
    
    
    
    
    
    7,321
    
    
    
    (1,803
    )Stock options accounting
    
    
    (6,950
    )
    
    
    (6,399
    )
    
    
    (2,887
    )Interests accrued on loans related to stock options
    
    
    
    
    
    
    
    
    
    
    1,706Other differences
    
    
    (57
    )
    
    
    26
    
    
    
    360Operating income (loss) in accordance with US GAAP
    
    
    27,048
    
    
    
    (154,467
    )
    
    
    (257,148
    )
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41. DIFFERENCES BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS AND FRENCH AND LUXEMBURG
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES For the purpose of the reconciliations presented below, the Company has adopted accounting
policies that are compliant with French and Luxemburg generally accepted accounting principles
(GAAP). Net income and Shareholders equity (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Net income (loss) in accordance with IFRS
    
    
    6,291
    
    
    
    (158,955
    )
    
    
    (316,558
    )Minority interest
    
    
    (1,617
    )
    
    
    (2,152
    )
    
    
    (4,333
    )Net income (loss) per French / Luxemburg GAAP
    
    
    4,674
    
    
    
    (161,107
    )
    
    
    (320,891
    )
 (in thousands of euros)December 31
    
    2004
    
    
    2003
    
    
    2002Shareholders equity in accordance with IFRS
    
    
    721,313
    
    
    
    707,085
    
    
    
    875,618Minority interest
    
    
    (10,701
    )
    
    
    (12,073
    )
    
    
    (15,167
    )Net unrealized (gain) loss on hedging instruments
    
    
    (28,367
    )
    
    
    (11,030
    )
    
    
    (6,698
    )Shareholders equity in accordance
with French / Luxemburg GAAP
    
    
    682,245
    
    
    
    683,982
    
    
    
    853,753
 Net income (loss) in accordance with IFRS includes both net income attributable to equity
holders of the Company and minority interest. Under French and Luxemburg GAAP, net income (loss)
corresponds only to net income attributable to equity holders. Similarly, shareholders equity in
accordance with IFRS includes minority interest. Minority interest is excluded from shareholders
equity under French and Luxemburg GAAP. For the purpose of this reconciliation, the Company has adopted accounting policies regarding
foreign currency hedging which are compliant with IAS 39 except for the reassessment of the
effective portion of hedging instruments at fair value on the face of the balance sheet. Under
IFRS, this effective portion is marked to market on the face of the balance sheet with the
corresponding entry in Other comprehensive income until the underlying forecasted transactions
occur. Under French and Luxemburg GAAP, this effective portion is accounted for and presented as an
off-balance sheet item until the underlying forecasted transactions occur. Operating income In France, GAAP recommend to present goodwill amortization and certain other items below
operating income. Operating income (loss) in accordance with French GAAP would be as follows: (in thousands of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Operating income (loss) in accordance with IFRS
    
    
    26,318
    
    
    
    (133,786
    )
    
    
    (231,708
    )Goodwill amortization and impairment
    
    
    7,718
    
    
    
    33,051
    
    
    
    47,117Other operating (income) expense, net
    
    
    101
    
    
    
    (703
    )
    
    
    (63
    )Operating income (loss) in accordance with French GAAP
    
    
    34,137
    
    
    
    (101,438
    )
    
    
    (184,654
    )
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##### Table of Contents



42. LIST OF SUBSIDIARIES AND ASSOCIATES In 2004, 2003 and 2002, the Company acquired interests in various companies, mainly with
activities related to its core business. The impact of these acquisitions, individually and in
aggregate, was immaterial to the Consolidated Financial Statements (net sales, net income and total
assets). As of December 31, 2004, the list of subsidiaries and associates was as follows: Subsidiaries Name of the company
    
    CountryGemplus International SA
    
    LuxemburgGemplus Finance SA
    
    LuxemburgGemplus Argentina SA
    
    ArgentinaGemplus NV
    
    BelgiumGemventures 1 NV
    
    BelgiumGemplus do Brasil Produtos Electronicos, Ltda
    
    BrasilGemplus Bank Note, Ltda
    
    BrasilGemplus Canada Inc
    
    CanadaGemplus International Trading Shanghai Co. Ltd
    
    ChinaGemplus China Investment Co. Ltd
    
    ChinaTianjin Gemplus Smart Card Co. Ltd
    
    ChinaGoldpac Datacard Solutions Zhuhai Co. Ltd
    
    ChinaGoldpac SecurCard Zhuhai Co. Ltd
    
    ChinaGemplus Tianjin New Technologies Co. Ltd
    
    ChinaSilver Dragon Microelectronics Co. Ltd
    
    ChinaGemplus Beijing Electronics R&D Co. Ltd
    
    ChinaGemplus de Colombia SA
    
    ColombiaGemplus S.R.O.
    
    Czech RepublicGemplus SA
    
    FranceGemplus Trading SA
    
    FranceST GEM GIE
    
    FranceSCI Font de Sereine
    
    FranceCertplus SA
    
    FranceSLP SA
    
    FranceGemplus GmbH
    
    GermanyGemplus MIDS GmbH
    
    GermanyGemplus Mobile Technology GmbH
    
    GermanyCelo communications GmbH
    
    GermanyZenzus Holdings Ltd
    
    GibraltarGreat Steps Ltd
    
    Hong KongGoldpac Datacard Solutions Co. Ltd
    
    Hong KongGemplus India Ptd Ltd
    
    IndiaCelocom Ltd
    
    IrelandCelo communications Ltd
    
    IrelandCelo communications R&D Ltd
    
    IrelandGemplus Italia Srl
    
    ItalyGemplus Japan Co. Ltd
    
    JapanGemcard Sdn BhD Pte Ltd
    
    MalaysiaGemplus Industrial SA de CV
    
    MexicoGemplus BV
    
    NetherlandsCelo communications BV
    
    NetherlandsGemplus Pologne Sp.zo.o.
    
    PolandPolski Plastik Sp.zo.o.
    
    PolandGemplus Sp.zo.o.
    
    PolandGemrokitki Sp.zo.o.
    
    PolandGemtczew Sp.zo.o.
    
    PolandGemplus LLC
    
    RussiaGemplus Technologies Asia Pte Ltd
    
    SingaporeSecurCard Gemplus Pte Ltd
    
    SingaporeGemplus Microelectronics Asia Pte Ltd
    
    SingaporeGemplus Asia Pacific Pte Ltd
    
    SingaporeGemplus Southern Africa Pty Ltd
    
    South AfricaGemplus Card International Espana SA
    
    SpainGemplus Management and Trading SA
    
    SwitzerlandGemCard (Thailand) Co. Ltd
    
    ThailandGemplus Middle-East FZ-LLC
    
    UAEGemplus Ltd
    
    United KingdomGemplus Associates International Ltd
    
    United KingdomGemplus Corp.
    
    USAGemplus Card International de Venezuela, CA
    
    Venezuela
 Associates Name of the company
    
    CountryLeigh Mardon Gemplus Pty Ltd
    
    AustraliaGemware Technology Ltd
    
    BVISolutions Fides
    
    CanadaRealtime A/S
    
    DenmarkWelcome Realtime SA
    
    FranceImmotec Systemes Sàrl
    
    FranceIsmap SA
    
    FranceGkard SAS
    
    FranceNetsize SA
    
    FranceSetelis SA
    
    FranceCLM GmbH & Co. KG
    
    GermanyToppan Gemplus Services Co. Ltd
    
    JapanConcesionaria Renave SA de CV
    
    MexicoGemplus EDBV Smart Labs Pte Ltd
    
    SingaporeGemplus EDBV Smart Labs Management Pte Ltd
    
    SingaporeAju Data Services Co. Ltd
    
    South KoreaSoftcard Solutions Ltd
    
    United Kingdom
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