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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 |  |                                                                                               
|   |  |                                                                                               
|x  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934          
|   |  | For the fiscal year ended December 31, 2003                                                   
|   |  |                                                                                               
|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
(Translation of registrants name into English)

Grand Duchy of Luxembourg
(Jurisdiction of incorporation or organization)

46A J.F. Kennedy
L-1855 Luxembourg
Grand Duchy of Luxembourg
(Address of principal executive offices)

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:


|            |  |                                   
|----------- |  | ----------------------------------
|607,120,521 |  | 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.

|       |  |      
|------ |  | -----
|x  Yes |  | o  No

Indicate by check mark which financial statement item the registrant has
elected to follow.

|            |  |             
|----------- |  | ------------
|o   Item 17 |  | x    Item 18

1



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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 Account Fees and Services
    88Item 16D Exemptions from the Listing Standards for Audit Committees
    88PART IIIItem 17. Financial Statements
    88Item 18. Financial Statements
    89Item 19. Exhibits
    90AMENDMENT TO AGREEMENTLIST OF SIGNIFICANT SUBSIDIARIESCERTIFICATION BY CEOCERTIFICATION BY CFOCERTIFICATIONCERTIFICATIONCONSENT OF PRICEWATERHOUSECOOPERS
 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 industrys 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, will, predicts, potential, or continue or the
negative of such terms or other comparable terminology. 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 chip cards (which are also referred
to as smart cards) and related solutions; the development of new
markets for our wireless communications products, financial services
and network systems products using chip card technology; the success
of our restructuring efforts; 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 expectations reflected in our
forward-looking statements are reasonable, 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, in Item 5. Operating and Financial Review and Prospects
and 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. 2




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SUMMARY The following summary should be read together with the more
detailed information regarding Gemplus International S.A. and our
audited consolidated financial statements and notes thereto
appearing elsewhere in this Annual Report. Our Business 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 programs, identification and Internet security
systems. During 2003, we reported in two main business segments:  
    
    Telecommunications, which includes our wireless products and services,
as well as prepaid telephone cards and other related products; and
    
    Financial Services and Security, which includes systems and services
based on chip card technology in areas such as financial services,
identification, health care, corporate security, loyalty programs,
transportation access, pay-television applications, and
e-business security activities as well as magnetic stripe cards for banking
applications. As of January 1, 2004, we began reporting in three business
segments: Telecommunications, Financial Services and Identity and
Security. In our Telecommunications Segment, wireless products and
services are used in the global system for mobile communications
standard, also referred to as GSM, which is the dominant
mobile phone transmission standard in Europe and the most widely
used in the world. Our products are also used in third Generation
(3G) wireless networks and in other transmission standards. Our
wireless products consist primarily of subscriber identity modules
(SIM) cards, which are small plastic modules with embedded
microcontroller chips that are inserted in mobile telephones. These
microcontroller chips are capable of storing and processing data
like a miniature computer, transferring processed data to the
handset and running software programs or applets that interact
remotely with server-based applications. The wireless communication market is entering a new era during
which mobile telephone users increasingly use wireless networks for
data transmission services in addition to voice transmission
services. Data transmission includes short message service (SMS)
text messages. We believe that this shift in the wireless
communication market will accelerate as wireless operators construct
and develop networks that use new wireless transmission standards.
These next generation networks will allow wireless operators to
provide data transmission services including video, high speed
Internet access and mobile commerce. Because of their security,
portability and flexibility, SIM cards have been included in the
specifications for new wireless transmission standards in many
regions around the world. In our Financial Services and Security segment, chip card
technology also offers a platform for a variety of service
applications over other network systems. In the financial services
market, for example, banks can issue credit and debit cards with
embedded chips to reduce fraud and to provide their customers with
premium value services, including e-purse applications (applications
that store cash values that can be used to make purchases) and
mobile banking services. In the identification systems and security
networks markets, plastic cards with embedded chips can be used to
provide more secure access restrictions to restricted facilities or
computer networks and to increase the overall effectiveness of
identification and security systems. In our Telecommunications and Financial Services and Security
segments, we provide a broad range of services that allow our customers
to implement and manage sophisticated systems that take advantage of
our chip card technology. Our services include customization,
technical support, consulting, system design and integration and
operated services. 3




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We also provide non-chip card products and services in other
areas related to our Telecommunications and Financial Services and
Security segments, such as chip card readers and other devices,
magnetic stripe credit cards and authentication and non-repudiation
software. Our revenues totaled 749.2 million in 2003, compared to
787.4 million in 2002. Sales of our wireless products and services in
our Telecommunications segment represented approximately 58% of our
revenues in 2003, compared to approximately 51% in 2002, while sales for 2003 of our chip card products and services in our Financial Services and
Security segment represented approximately 28% of our revenues
compared to approximately 31% in 2002. Based on the 2003 worldwide
chip card vendor shipments ranking of Gartner Dataquest, an industry
analyst, we were the leading provider of chip cards in 2003 with a
global market share of approximately 30% in terms of units sold.
In addition, based on information published in April 2004 by Eurosmart, a chip
card industry association, we estimate that in 2003 our global
market share was approximately 30% in terms of units sold. We are registered with the Registrar of Commerce in Luxembourg
under RC No. B73145. Our registered office is located at 46A Avenue
J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg and our
telephone number is +352.26.00.52.26. Our World Wide Web site
address is www.gemplus.com. The information on our Web site is not
incorporated by reference into this Annual Report. 4




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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) and with International Accounting
Standards (IAS) formulated by its predecessor organization, the
International Accounting Standards Committee (IASC). These
standards differ in certain significant respects from generally
accepted accounting principles in the United States, commonly
referred to as U.S. GAAP. Note 31 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 are in accordance with IFRS except
as otherwise stated. Year ended as at December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    
    
    
    
    
    
    
    
    $ (1)in millions, except per share amounts or as otherwise statedINCOME STATEMENT DATA:Net sales
    
    
    767
    
    
    
    1,205
    
    
    
    1,023
    
    
    
    787
    
    
    
    749
    
    
    
    902Cost of sales
    
    
    (487
    )
    
    
    (751
    )
    
    
    (716
    )
    
    
    (587
    )
    
    
    (542
    )
    
    
    (653
    )Gross profit
    
    
    280
    
    
    
    454
    
    
    
    307
    
    
    
    200
    
    
    
    207
    
    
    
    249Research and development expenses
    
    
    (62
    )
    
    
    (91
    )
    
    
    (113
    )
    
    
    (92
    )
    
    
    (69
    )
    
    
    (83
    )Reversal of research credit allowance
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling and marketing expenses
    
    
    (97
    )
    
    
    (159
    )
    
    
    (165
    )
    
    
    (112
    )
    
    
    (100
    )
    
    
    (120
    )General and administrative expenses
    
    
    (64
    )
    
    
    (90
    )
    
    
    (111
    )
    
    
    (90
    )
    
    
    (77
    )
    
    
    (93
    )Litigation expenses
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    Management severance expenses
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    Restructuring expenses
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    (90
    )
    
    
    (62
    )
    
    
    (75
    )Goodwill amortization and impairments
    
    
    (7
    )
    
    
    (11
    )
    
    
    (27
    )
    
    
    (47
    )
    
    
    (33
    )
    
    
    (40
    )Legal reorganization expense
    
    
    (65
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (15
    )
    
    
    116
    
    
    
    (181
    )
    
    
    (232
    )
    
    
    (134
    )
    
    
    (161
    )Financial income
    
    
    1
    
    
    
    21
    
    
    
    28
    
    
    
    20
    
    
    
    10
    
    
    
    12Financial expense
    
    
    (5
    )
    
    
    (9
    )
    
    
    (8
    )
    
    
    (71
    )
    
    
    (2
    )
    
    
    (2
    )Other income (expense), net
    
    
    (1
    )
    
    
    0
    
    
    
    46
    
    
    
    (29
    )
    
    
    (20
    )
    
    
    (24
    )Income (loss) before taxes
    
    
    (20
    )
    
    
    129
    
    
    
    (114
    )
    
    
    (312
    )
    
    
    (146
    )
    
    
    (176
    )Income tax benefit (expense)
    
    
    (12
    )
    
    
    (30
    )
    
    
    14
    
    
    
    (9
    )
    
    
    (15
    )
    
    
    (18
    )Net income (loss)
    
    
    (32
    )
    
    
    99
    
    
    
    (100
    )
    
    
    (321
    )
    
    
    (161
    )
    
    
    (194
    )Net income (loss) per share (2)- Basic
    
    
    (0.10
    )
    
    
    0.20
    
    
    
    (0.16
    )
    
    
    (0.53
    )
    
    
    (0.27
    )
    
    
    (0.33
    )- Diluted
    
    
    (0.10
    )
    
    
    0.18
    
    
    
    (0.16
    )
    
    
    (0.53
    )
    
    
    (0.27
    )
    
    
    (0.33
    )
 5




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Year ended as at December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    
    
    
    
    
    
    
    
    $ (1)Operating income (loss) under U.S. GAAP
    
    
    (22
    )
    
    
    (111
    )
    
    
    (117
    )
    
    
    (257
    )
    
    
    (153
    )
    
    
    (184
    )- Net income (loss) under U.S. GAAP
    
    
    (44
    )
    
    
    (123
    )
    
    
    (49
    )
    
    
    (280
    )
    
    
    (182
    )
    
    
    (219
    )-
Net income (loss) per share under U.S. GAAP(2)- Basic
    
    
    (0.14
    )
    
    
    (0.25
    )
    
    
    (0.08
    )
    
    
    (0.46
    )
    
    
    (0.30
    )
    
    
    (0.36
    )- Diluted
    
    
    (0.14
    )
    
    
    (0.25
    )
    
    
    (0.08
    )
    
    
    (0.46
    )
    
    
    (0.30
    )
    
    
    (0.36
    )OTHER DATA:Adjusted
EBITDA(3)
    
    
    104
    
    
    
    195
    
    
    
    (60
    )
    
    
    (98
    )
    
    
    (39
    )
    
    
    (47
    )Net cash from (used for) operating activities
    
    
    75
    
    
    
    69
    
    
    
    (23
    )
    
    
    (63
    )
    
    
    (10
    )
    
    
    (12
    )Net cash (used for) investing activities
    
    
    (74
    )
    
    
    (266
    )
    
    
    (65
    )
    
    
    (47
    )
    
    
    (17
    )
    
    
    (20
    )Net cash from (used for) financing activities
    
    
    29
    
    
    
    818
    
    
    
    (35
    )
    
    
    4
    
    
    
    (6
    )
    
    
    (7
    )BALANCE SHEET DATA:Cash and cash equivalents
    
    
    27
    
    
    
    636
    
    
    
    491
    
    
    
    417
    
    
    
    391
    
    
    
    471Trade accounts receivable, net
    
    
    201
    
    
    
    311
    
    
    
    189
    
    
    
    145
    
    
    
    155
    
    
    
    187Other current assets
    
    
    46
    
    
    
    97
    
    
    
    104
    
    
    
    93
    
    
    
    83
    
    
    
    100Inventory, net
    
    
    96
    
    
    
    174
    
    
    
    140
    
    
    
    97
    
    
    
    99
    
    
    
    119Total assets
    
    
    667
    
    
    
    1,909
    
    
    
    1,531
    
    
    
    1,218
    
    
    
    1,053
    
    
    
    1,269Long-term debt, less current portion
    
    
    8
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority interest
    
    
    9
    
    
    
    17
    
    
    
    17
    
    
    
    15
    
    
    
    12
    
    
    
    14Shareholders equity
    
    
    294
    
    
    
    1,385
    
    
    
    1,168
    
    
    
    860
    
    
    
    695
    
    
    
    837Total assets under U.S. GAAP
    
    
    671
    
    
    
    1,767
    
    
    
    1,441
    
    
    
    1,234
    
    
    
    1,061
    
    
    
    1,278Shareholders equity under U.S. GAAP
    
    
    298
    
    
    
    1,243
    
    
    
    1,078
    
    
    
    879
    
    
    
    700
    
    
    
    843
  (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 24,
2004, of U.S. $1.00 =  0.83.  (2)
    
    Basic net income per share under IFRS and U.S. GAAP is calculated by
dividing net income 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
298,523,800, 313,120,400, 497,523,946, 636,992,392, 606,222,660 and
605,658,965 for the years ended December 31, 1999, 2000, 2001, 2002 and
2003. Diluted net income per share 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 307,274,750, 313,120,400,
539,256,206, 636,992,392, 606,222,660 and 605,658,965 for the years ended
December 31, 1999, 2000, 2001, 2002 and 2003.  (3)
    
    Adjusted EBITDA is defined as earnings before interest expense (net of
interest income), provision for income taxes and depreciation and
amortization expense and legal reorganization 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, and because our adjustments
relate to a reorganization that is unique to our company, 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: 6




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1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    
    
    
    
    
    
    
    
    $ (1)Operating income (loss)
    
    
    (15
    )
    
    
    116
    
    
    
    (181
    )
    
    
    (232
    )
    
    
    (134
    )
    
    
    (161
    )Depreciation, amortization
and impairment
    
    
    54
    
    
    
    79
    
    
    
    121
    
    
    
    134
    
    
    
    95
    
    
    
    114Legal reorganization expense
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted EBITDA
    
    
    104
    
    
    
    195
    
    
    
    (60
    )
    
    
    (98
    )
    
    
    (39
    )
    
    
    (47
    )
  (1)
    
    Dollar amounts have been translated for convenience at the Noon Buying
Rate on May 24, 2004, of U.S. $1.00 = 0.83. Exchange Rate Information And The European Monetary System Under the provisions of the Treaty on European Union, an
economic and monetary union, known as EMU, was implemented on
January 1, 1999, and a single European currency, known as the euro,
was introduced. The following 12 member states participate in EMU
and have adopted the euro as their national currency: Austria,
Belgium, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Portugal and Spain. In May 2004,
Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Malta, Poland, Slovakia and Slovenia joined the European Union, but
are not currently members of the EMU. The legal rate of conversion
between French francs and the euro was fixed on December 31, 1998,
at 1.00 = FF 6.55957. 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 = 0.83, the Noon Buying Rate
for the euro on May 24, 2004. 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. Our reporting currency during 1999 was the French franc. We
began reporting in euros on January 1, 2000. The following table
shows the French franc/U.S. dollar and euro/U.S. dollar exchange
rates based on the Noon Buying Rate expressed in French francs per
U.S. dollar and euros per U.S. dollar for the periods indicated. French francs
    
    EurosPeriod-
    
    Average
    
    
    
    
    
    
    
    
    
    Period-
    
    Averageend Rate
    
    Rate(1)
    
    High
    
    Low
    
    end Rate
    
    Rate
    
    High
    
    Low1999(2)
    
    
    6.51
    
    
    
    6.16
    
    
    
    6.56
    
    
    
    5.49
    
    
    
    1.00
    
    
    
    0.94
    
    
    
    1.00
    
    
    
    0.842000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    0.792003December
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.79
    
    
    
    0.81
    
    
    
    0.84
    
    
    
    0.792004January
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.80
    
    
    
    0.79
    
    
    
    0.81
    
    
    
    0.78February
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.80
    
    
    
    0.79
    
    
    
    0.80
    
    
    
    0.78March
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.81
    
    
    
    0.82
    
    
    
    0.83
    
    
    
    0.80April
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.84
    
    
    
    0.83
    
    
    
    0.85
    
    
    
    0.81May
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.82
    
    
    
    0.83
    
    
    
    0.85
    
    
    
    0.81June
  (1)
    
    The average of the Noon Buying Rates on the last business day of each
month (or portion thereof) during the relevant period.  (2)
    
    The Federal Reserve Bank of New York stopped publishing the Noon Buying
Rate for the French franc on January 15, 1999. The Noon Buying Rate for
French francs for periods subsequent to January 15, 1999 was calculated by
applying the fixed rate of legal conversion of FF 6.55957 per 1.00 to
the Noon Buying Rate for euros. 7




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RISK FACTORS Risks Related to Our Business Slow growth in the wireless communications industry may continue to 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 2003, sales of
wireless products and services accounted for approximately 58% of our revenues,
as compared to 51% in 2002. While the wireless communications industry
experienced tremendous growth through 2000, demand for wireless products and
services fell abruptly in 2001 and continued to fall in 2002, particularly in
Europe and the United States. Growth in demand, however, resumed in 2003 but
remains volatile. Due to currency fluctuations and price pressures, however,
our overall revenues declined 4.9% in 2003 compared to 2002, although overall
revenues increased by 4.0% on a currency-adjusted basis (meaning after
adjusting for currency fluctuations, discontinued operations and acquisitions).
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:  
    
    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 only 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. Our businesses in these markets currently
represent start up operations, and we do not know whether these
businesses will be profitable. In 2001 and 2002 we had significant changes in our senior management, and while
we do not expect similar changes to occur in the near term, we cannot be
assured such changes will not occur. We believe that having stable management is important to the success of
our company. In 2001 and 2002 we had rapid and 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. 8




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Our restructuring and repositioning strategies, or our implementation of those
strategies, may fail to provide lasting positive results. We implemented three separate restructuring plans starting in 2001. The
first restructuring plan commenced in the second quarter of 2001, the second
was initiated in February 2002, and the third began in December 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 2003, as compared to 2002, 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 they are not implemented adequately, we may
experience higher losses and difficulties in growing our business. Chip card technology may not be adopted in new wireless transmission standards
or in the financial services industry, such that we may lose some of our
existing customers or not be able to obtain future 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 some or all of 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 that are currently not equipped to read 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 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 platform, and non-portable security devices onto 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 early
success 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. 9




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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. Because the
wireless communications industry has been volatile in the past few years,
experiencing rapid growth in 2000, a sudden downturn in 2001, a continued
slowdown in 2002, and signs of growth in 2003, we have had periods of
difficulty managing our inventory levels of microcontroller chips. Failure to
manage our inventory can cause us to lose business to competitors, and have
lower margin on existing sales, as the price for the chips may increase.
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 2003 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 are some signals
in the marketplace that there may be supply limitations in the future that
could negatively impact our ability to procure microcontroller chips. Until 1999, STMicroelectronics and Infineon were the only two major
silicon suppliers for the chip card industry, covering roughly 90% of market
needs. In 2000, we invested in a multisourcing program to enlarge our supplier
base. In 2003, 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 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
effect our business. The process of developing our products and services is extremely 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. 10




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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 price margins;
    
    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 operating systems developers, systems integrators
and other implementation partners. 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 an impact 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 an impact 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 involve sophisticated decisions that result
in our customers making significant investments and changes to their business
organizations. 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, operating systems and security software
developers, financial institutions and several government agencies and
organizations. 11




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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 relations with us, and could terminate them and either work instead with
our competitors, or terminate their programs that use our products and
technology. 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 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 of 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:  
    
    Third party operating systems;
    
    security and cryptographic technology for card operating systems,
which prevents unauthorized parties from tampering with our cards; 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. 12




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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. Furthermore, our regional businesses are subject to cyclical fluctuations
in the industries and economies in which they operate. Any of the risks above
could adversely affect our results of operations. In 2003, we earned 10% 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. 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.
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 amortization expenses 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. 13




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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. Recently, intense competition has led
to increased pricing pressures on our products which in turn 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 at 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 (formerly part of Schlumberger), Giesecke & Devrient,
Oberthur Card Systems, Incard and Orga Kartensysteme. There have been new
entrants into the industry with low-cost operating models, especially in China,
with aggressive pricing policies that could threaten 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 Baltimore
Technologies, 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 Smart Trust. 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. The Internet and other communications networks may not expand as a commerce and
business medium. Our growth may suffer if the use of the Internet for commercial
transactions does not grow, or if wireless devices do not become a widely used
method of accessing the Internet for commercial transactions. The acceptance and use of the Internet and 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;
    
    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 the Internet and wireless
communications networks;
    
    increased government regulation and the taxation of transactions
conducted over the Internet and wireless communications networks; and 14




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
    
    delays in development or adoption of new standards or protocols to
handle increased levels of activity on the Internet and 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 Internet-based or wireless-based 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 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
    
    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. 15




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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 economically feasible, 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 June 2, 2004, our executive officers, directors and their affiliates
beneficially owned or controlled approximately 0.2% 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 3.1% of our shares. As
of June 2, 2004, Texas Pacific Group and members of the Quandt family owned or controlled
approximately 26.2% and 19.0% of our shares, respectively, or approximately
23.2% and 16.8% 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. 16




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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 in France and elsewhere. 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 SCA. In December 1999, we merged Gemplus
Associates, the general partner of Gemplus SCA, 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, 2003, our company held 99% 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. Our company is organized under the laws of the Grand Duchy of Luxembourg.
Our Companys registered office is located at 46A Avenue J.F. Kennedy, L-1855
Luxembourg, Grand Duchy of Luxembourg, telephone +352.26.00.52.26. 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, 2003. Year ended December 31,2001
    
    2002
    
    2003(millions of euros)Research and development equipment
    
    
    5.2
    
    
    
    1.8
    
    
    
    1.2Manufacturing
    
    
    18.1
    
    
    
    12.1
    
    
    
    9.4Buildings
    
    
    63.0
    
    
    
    17.7
    
    
    
    3.1Other
    
    
    16.3
    
    
    
    0.3
    
    
    
    1.5Total capital expenditures
    
    
    102.6
    
    
    
    31.9
    
    
    
    15.2
 In 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 2003 were made in almost all of our plants, and especially
in our Singapore and La Ciotat, France, micro-controller module assembly
plants. In 2002, capital expenditures were made primarily in Europe, and
included principally 17.7 million related to a 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 these expenditures and have budgeted capital
expenditures of approximately 23 million for the year ending December 31,
2004, including 16 million related to equipment for our manufacturing
activities. 17




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On July 31, 2001, we completed the sale of our Tag electronic smart labels
solutions business to Axa Private Equity, for 3 million. On August 23,
2001, we completed the sale of our subsidiary SkiData A.G., part of our
electronic access-control solutions business, to Kudelski SA, for 117.5
million, of which 33.5 million was received in cash and 84 million was
received in shares in Kudelski, which we immediately resold for 84 million
to a designee of Kudelski. 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. 18




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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 2003, we reported our results in two 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; and
        Financial Services and Security, which focuses on applications for the
financial services sector and corporate and national identity card
programs to facilitate identification and secure transactions within a
variety of systems. As of January 1, 2004, the Company began reporting in three business
segments: Telecommunications, Financial Services and Identity and Security.
See Item 5. Operating and Financial Review and Prospects
 Recent Developments
for a description of business segment reporting. Within our Telecommunications business segment, our wireless products and
services are based on subscriber identification modules (SIM), 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 and Security segments, our chip card
products and services are used by government and 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 (i.e., applications
that store cash values that can be used to make purchases) which applications
can be transacted in person or on-line. In the identification systems and
security networks markets, our products and services are used to provide both
secure access to restricted facilities and computer networks and to increase
the effectiveness of other identification and security systems. In both our Telecommunications and Financial Services and Security
businesses we provide a broad 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 sales are combined and priced or
sold together with sales of these services and software, and therefore we do
not separately report these sales. 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. 19




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Our Strategy We are pursuing our objectives of expanding and enabling the market for
safe electronic services involving our products, including a broad set of
services delivered through wireless or fixed wire networks, while increasing
the use of high-volume, portable, secure and personalizable devices. Our strategy for attaining these objectives is to be a leading provider of
applications and services that employ or that operate using chip cards. We hope
to grow our core businesses, while continuing to restore our profitability.
Simultaneously, we hope to establish stronger positions in promising new
markets for the use of chip cards and related software such as in identity,
corporate security and wireless local area network systems (WLANs). 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 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.
    
    WLANs (wireless local area network). The functionality of this
technology is enhanced by using chip cards as a key to access control
similar to the use of SIM cards in wireless communications. We believe
that our research and development capabilities should help us attain a
leading position in the development of this technology. The deployment
of WLAN, however, is facing concerns regarding security, roaming and
billing. We believe that devices like SIM cards offer an excellent
point of access control for WLAN operators to enable secured
authentication while using the roaming and billing capabilities of the
existing telecom networks. 20




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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 with support from local offices and direct supply chain management on
commodities. Excelling in execution is a key goal We are continuing to re-engineer our organizational structures and
processes in an effort to further improve accountability and monitor and reach
our employee, customer and shareholder satisfaction targets. 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, which contain chips that provide only secure storage of
data, that 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 loyalty cards.
    
    Microcontroller cards, which contain chips that are capable of storing
and processing data like a miniature computer, 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 is expanding. 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, 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 that has been adopted
by the chip card industry. 21




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##### Table of Contents




    
    The development of sophisticated card management software for chip
cards, which helps 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 card technology companies to
develop closer ties with their customers.
    
    Significant advances in the memory structure and capacity of
microcontroller chips with the development of flash memory technology.
Chips based on this technology can be able to store substantially more
information, conduct more sophisticated operations and load a higher
number of applets. In addition to greater memory capacity, the 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 can be
offered to customers requiring a higher level of security, such as
individuals or companies that conduct transactions or business over
the Internet, and banks that are implementing 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 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 either the loss
of a card or the communication of a PIN. As a result, using chip cards
to authenticate mobile and electronic commerce transactions,
significantly reduces 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 churn. 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 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. 22




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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. 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, particularly WCDMA and CDMA2000, which supports
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 Modules2G
GSM
    

Europe, Asia
(including China),
several regions in
the United
States
    
    YesCDMA
    
    United States, China
    
    NoTDMA
    
    United States
    
    No2.5G
GPRS (based on GSM)
    
    Europe, most of Asia
    
    YesCDMAOne
    
    United States, China,
South
Korea
    
    Yes in China and South
KoreaIDEN
    
    United-States
    
    Yes3G
WCDMA
    
    Europe, Asia
(including Japan),
United States
    
    YesCDMA2000
    
    United States, Asia
    
    Operator-specific
 23




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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, 1,898 million
chip cards  including microcontroller cards and memory cards
 were sold worldwide in 2003, and using data provided by Eurosmart we estimate that we are
the worlds largest chip card provider, with 30% of the global market in terms
of volume in 2003. Wireless Market The wireless communications market, particularly the wireless market 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. Since then, growth in the wireless communications market has
slowed significantly as, among other things, the market and the technology for
wireless voice transmission services have matured. Demand, however, returned
in 2003 due to consumer equipment replacement, driven significantly by
color-screen handsets, and growth in emerging markets. According to Eurosmart,
approximately 670 million SIM cards were sold in 2003, as compared to 430
million in 2002. 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
beginning 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 allows 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 and Security Market According to Eurosmart, approximately 205 million chip cards were sold in
the financial services industry 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 22% of the market in terms of
units sold. We believe use of chip card products and services will grow due to
enhanced security requirements and increased fraud rates among conventional
cards. Our Products and Services The following table sets forth our revenues for the year ended December
31, 2003: Revenues - Year ended December 31, 2003(In millions of euros)
    
    (as a % of total revenues)Telecommunications
    
    
    542.5
    
    
    
    72
    %Financial Services and Security
    
    
    206.7
    
    
    
    28
    %Total
    
    
    749.2
    
    
    
    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. 24




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##### Table of Contents



Delivering a complete solution We provide our customers with a portfolio of products, software and
services that enable the delivery of complete solutions:  
    
    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. Our chip card
reader products and software development tools are a direct complement
to our chip cards.
    
    Software. We provide software that help 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 Gemplus 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 studies and
development of possible implementation scenarios. We also provide our
customers with training in chip card technology and software
applications.  
    
    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 consist of 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 that card management system, 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. 25




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##### Table of Contents



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 - value-added solutions including mobile entertainment,
location-based services, instant messaging and mobile payment.
Gempluss 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 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 their 2003 report, we
believe we are one of the worlds leading manufacturers of prepaid phonecards
and associated phonecard security products with a 40% share of the worldwide
phonecard market in 2003. As of June 2, 2004, we had produced over 3 billion
phonecards since our inception in 1988. Our main customers include more than 20
major telecommunications operators, including CANTV, 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. For example, CANTV, the
Venezuelan national telecommunications carrier, currently uses a line of our
prepaid phonecards that allow public telephony customers to use them to pay for
consumer products, such as soft drinks and snacks, at designated points of
sale. 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. 26




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##### Table of Contents



Wireless LAN (WLAN) As part of our business development group, we created a group dedicated to
the WLAN market (also referred to as Wi-Fi market). The main product offering
of our Wi-Fi group is GEMobileIT, a package comprised of software, a chip card
combining a SIM and enterprise security functions, and a chip card reader. The
package is designed to authenticate a WLAN user to the network operator and to
provide secure access to the users corporate network and data. Once installed
on a PC, GEMobileIT manages the operator/end-user authentication over the WLAN,
and then automatically runs the enterprise Virtual Private Network (VPN)
authentication. It provides a secure connection over public hotspots
by linking into the GSM infrastructure, thereby benefiting from the roaming,
billing and authentication infrastructure already deployed by mobile operators.
GEMobileIT stores corporate credentials and authenticates end-users to their
VPN within the same chip card. The GEMobileIT software facilitates access to
the chip card from different locations (USB reader or GPRS/WLAN PC card) and
provides user convenience through single PIN management for both WLAN and VPN
authentication. 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. Payment
cards and e-purse cards are smartcards that 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 smart 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. According to Eurosmart, approximately 205 million chip cards were sold in the
financial services industry in 2003, and based on information from Frost &
Sullivan, we believe that we are one of the largest providers of chip cards in
the banking and retail sectors with 22% of the market in terms of units sold. 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, 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 new 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 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 27




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
    
    GemValue, a range of payment cards developed in compliance with both
Visa and MasterCard specifications. We also have 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 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. We offer a wide range of magnetic stripe and encoding options to meet the
demands of our different customers. We delivered over 250 million magnetic
stripe cards to our customers in the banking sector in 2003. 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. 28




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Identity and Security The chip card is a security device which serves as a component in enabling
identity management systems for governments and corporations. According to
the International Data Corporation, the success of the Internet commerce
depends on the development of secure identification, encryption and transaction
systems. Chip card technology allows users to access corporate and external
networks, identify themselves, send encrypted messages and digitally sign
transactions and documents. The most recent generation of chip cards has been designed to work with
the most sophisticated security technologies, such as public key infrastructure
(PKI) systems, which are used to control access to computer networks and to
secure e-business transactions. Chip cards can store digital certificates that
identify users of computer networks and parties to e-business transactions, as
well as keys or mathematical algorithms that facilitate secure information
exchange between trading partners over the Internet and authenticate
transactions. Microcontroller chip technology also permits certificate
authorities to revoke certificates and change authorization levels remotely,
without issuing new cards. 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 legacy applications to combine logical 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. Because of the special customer demands and opportunities presented by
this market, beginning in 2004, we manage this activity as a distinct operating
segment. We have identified three areas of demands in this market: Enterprise Security In this area, we offer cards, readers, software and services, such as
personalization or consulting. Associated infrastructure can be based on
contact or contactless technology as our cards and readers include digital
signature capabilities for electronic business transactions. Our software
functions with chip card-based password management and chip card-based
user-authentication. In this market, we typically offer solutions and project
management to a customer, and not only card products. Government to Business Using chip card technology, electronic information for government services
can be securely accessed and exchanged. The chip card can help build a secure
network, facilitating authentication, authorization and non-repudiation. Our
customers in this market typically order complete solutions, which are composed
of secure chip cards with digital signatures enabled, the associated readers in
our PC link range for logical access control (ie, readers that connect to
computer serial ports, and other ports such as those complying with universal
serial bus or Personal Computer Memory Card International Association
specifications), and software in our GemSafe line (GemSafe Libraries for user
authentication, GemSafe Logon for password management, and GemSafe eSigner for
card enabled digital signature). We provide server software that manages verification, time stamping and
logging of all operations performed with digital signatures, as well as client
software. These products enable trusted parties such as post offices,
government agencies or major financial institutions to provide the security
levels necessary to support secure, non-repudiable delivery of on-line
documents and the completion of transactions. Government to Citizens In the government to citizens market, programs include identification
(including passports and drivers 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. 29




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Typical 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, enabling authorities to
facilitate the entry of foreign travelers or workers while
helping to ensure compliance with national immigration regulations.
With our Automated Border Clearance system, an electronic visa is
stored on a microcontroller chip embedded in an immigration card,
which interacts with a secure automated access control reader at a
countrys ports of entry using contactless technology. For example,
in Singapore, the Ministry of Home Affairs uses our Automated Border
Clearance system to facilitate entry to cross-border workers from
Malaysia.
    
    Chip card-based national identification programs involving the
issuance of chip cards by national governments to their residents. In
2003, we were awarded a contract to provide chip cards as part of the
national identity program in the United Arab Emirates. In the
Sultanate of Oman, we are currently delivering a national
identification program, including consultancy, project management and
integration services, as well as software and chip cards. Health Care We provide systems integration services that allow health care and
insurance providers to use our chip cards for on-site access to, and management
of, medical and insurance information. Currently, we sell our health care
products primarily in Europe. Our health card systems enable an automated and
secure insurance claim system that allows the electronic transfer of claims
from the point of care to insurance providers, generating significant administrative cost savings and reduced paperwork for
health care providers and insurers. Starting in 2004, we include our
activities in the health care market within our Identity and Security business
segment. Chip Card Readers and Other Devices We provide chip card readers and reader chipset devices that enable the
chip card to interact with computing systems. Our products include both
contact (requiring the insertion of the chip card into the reader device) and
contactless readers (which readers communicate with the contactless chip card
via an embedded antenna on the card). In addition to off-the-shelf chip card
readers, we also manufacture and develop reader chipsets which are included in
third party devices. In 2003, Gemplus introduced a standalone device, called
MySIMCopier, which enables end users to securely copy their phone book, SMS
files and other data from one SIM card to another. MySIMCopier is now used by
over 40 wireless operators. 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. Some of our principal customers in
each of our major business lines include:  
    
    Telecommunications China Mobile, China Telecom, China Unicom,
Cingular, France Telecom, H3G, MTS, Nextel, NTT DoCoMo, Orange, STC,
Telemar, Telmex, T-Mobile, Telefonica, Turkcell and Vodafone; 30




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
    
    Financial Services BNP Paribas, Banco Nacional de Mexico, Banques
Populaires, DSV, EPC, Halifax, ICBC, Lloyds TSB, MBNA Europe, Malayan
Bank Berhad, Raiffeisendrückerei, Société Générale;
    
    Loyalty and Retail Banpol SA, Canal Plus, Compuworks,
Hewlett-Packard Thailand, Royal Dutch/Shell Group, Sao Paulo
Transports, Total France; and
    
    Identity and Security Argentina, France, Germany, HSBC Group, Royal
Oman Police, Sertracen SA, and Singapore. In 2003, no single customer accounted for more than 10% of our revenues.
Our largest customer represented 6% of our total revenues, our five largest
customers together represented 19.6% of our total revenues, our ten largest
customers together represented approximately 30.7% and our fifteen largest
customers together represented approximately 38% 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
electronic silicon chips and plastic cards with other materials used in the
manufacturing process, such as lamination film and inks. We have restructured 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 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. In
2003, we made 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 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 30% in terms of chip card units sold
on a worldwide basis in 2003, followed by Axalto (formerly part of
Schlumberger) with 22%, Giesecke & Devrient with 16%, Oberthur Card Systems
with 7%, Incard with 4% and Orga Kartensysteme with 3%. 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 smart card manufacturing market, particularly in China where
Chinese chip card manufacturers such as Zhuhai Eastcom Peace Smart Card Co.,
Datang Microelectronics Technology Co. and WatchData System Co., 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. 31




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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 potential SIM 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. 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 Baltimore
Technologies, 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 Smart Trust. 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 800 million phonecards were sold worldwide 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. 32




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Financial Services and Security Markets Financial Services 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 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 Gemplus 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. 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 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, and from Bull CP8 with respect to Bull
mask data for banking chip cards. See Item 3. Key
Information  Risk Factors.
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 may not be
adequate and our competitors may independently develop similar technology,
duplicate our products or design around patents issued to us or our other
intellectual property rights. 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. 33




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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 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
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, 2003, we operated 50 sales offices in 35
countries, 16 personalization centers and 11 manufacturing centers in 14
countries worldwide and research and development centers in 4 countries. 34




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Organizational Structure Our company is the sole parent company of its group with approximately 70
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 26
subsidiaries from Gemplus S.A. to Gemplus International S.A. and had no material
impact on our audited consolidated financial statements. The following table sets forth our significant direct and indirect subsidiaries
as of June 2, 2004: Name of Company
    
    Percentage OwnedGemplus Card International de Mexico SA de C.V., a
Mexican corporation
    
    
    100.0
    %Gemplus
Corp., a Delaware (U.S.) corporation
    
    
    100.0
    %Gemplus Finance SA, 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
    
    
    99.0
    %(1)Gemplus Tianjin New Technologies Company Limited, a
Chinese corporation
    
    
    100.0
    %Gemplus Pologne S.P.Z.o.o., a Polish corporation
    
    
    100.0
    %Tianjin Gemplus Smart Card Company Limited, a Chinese corporation
    
    
    51.0
    %
   (1)
    
    The remaining shares are mainly held by our employees pursuant
to the exercise of stock options, who may contribute to our
company the shares of Gemplus S.A. received upon exercise of these
options in exchange for shares of our company. For accounting
purposes, these shares are already assumed to be a component of
the companys shareholders equity. Property, Plants 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. 35




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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, and a reallocation of our
production requirements among our manufacturing and other facilities around the
world. In May 2004, we announced the closure of our factory in Herne, Germany.
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 AreaCuernavaca, Mexico
    
    embedding, personalization
    
    
    6,664
    *Gemenos, France
    
    embedding, personalization
    
    
    23,346Havant, United Kingdom
    
    plastic cards, personalization, embedding
    
    
    6,332Herne, Germany
    
    plastic cards, personalization, embedding
    
    
    7,174La Ciotat, France
    
    microcontroller module assembly
    
    
    5,871Montgomeryville,
Pennsylvania, United States
    
    plastic cards, embedding, personalization
    
    
    8,535Singapore
    
    microcontroller module assembly, embedding, personalization, contactless cards, Plastic cards
    
    
    20,984
    *Tczew, Poland
    
    embedding, personalization
    
    
    10,005
    *Tianjin, China1
    
    embedding, personalization, microcontroller module assembly
    
    
    4,275
    **Zhuhai, China2
    
    plastic cards, personalization, embedding, contactless cards
    
    
    3,250
    *
 * 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, is
divided between a legal entity that we wholly own, and another legal entity in
which we hold 51% of the equity. We have commenced an improvement program
regarding one of the buildings we lease in Tianjin, China, to allow for our
increased utilization of that property. 2 The property and
equipment used in our activities in Zhuhai, China, is held by
a legal entity in which we have a 65% equity interest. As of June 1, 2004, our approximate annual practical capacity in millions of units for the manufacture of the following products is: Activity
    
    CapacityChip card modules
    
    
    888Chip card embedding
    
    
    832


36



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Activity
    
    CapacityConventional 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 13 to our Consolidated Financial Statements. 37




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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, 2003, is derived from the audited consolidated
financial statements included in this Annual Report. You should read the
following discussion together with the audited consolidated financial
statements and related notes. Our audited consolidated financial statements
have been prepared in accordance with IFRS, which differ from U.S. GAAP. Note
31 to our audited 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. Overview In the year ended December 31, 2003, we saw sequential improvement in our
quarterly net sales in each quarter. The results of such improvement, however,
were affected by competition and pricing pressures. 2003 annual net sales
remained relatively stable, declining slightly as compared to 2002. In the
year ended December 31, 2003, we decreased our net loss. In the second half of
2003, we narrowed our operating loss to 18.6 million, after 16.5
million in restructuring charges, compared to an operating loss of 115.9
million in the first half of the year, after 45.4 million in restructuring
charges. We believe this indicates the positive effects of our restructuring
programs combined with increased demand for our products, especially in the
wireless communication market where we shipped 184 million wireless cards in
2003, an increase of 35.3% compared to 2002. Our operating loss in each quarter
of 2003 was also lower than the operating loss we experienced in each
corresponding quarter of 2002. Our net sales declined 5% to 749.2 million in 2003, from 787.4
million in 2002. However, net sales were up 4%, on a currency adjusted basis.
In 2003, our results were negatively affected by the strengthening of the euro,
our reporting currency, in relation to the decline in value of other currencies
in which we sell our products, in particular against the U.S. dollar and
currencies pegged to the U.S. dollar. As a global business, operating in
numerous currencies, changes in exchange rates of the euro may result in an
increase or decrease in our consolidated net sales as reported in our audited
consolidated financial statements. We provide this information to help
investors follow the year-to-year changes in our operations. We calculate
the impact of currency variances by translating the figures from the current
year as reported in their local currencies using the exchange rate for the
previous year. In addition to the affects of currency fluctuations, our results were also
negatively affected by price competition. These pressures included additional
competition from recent entrants into the chip card market, especially those
manufacturers located in China. This additional competition, combined with a
relative lack of differentiation among chip card suppliers for certain low-end
chip card products, has forced us to compete primarily on price in some
markets. We recorded an operating loss of 134.5 million in 2003, compared to an
operating loss of 231.8 million in 2002. Our operating loss was reduced by
the increase in the gross profit in our Telecommunications segment as compared
to 2002, combined with lower costs arising from a reduction in employee
headcount, which was part of our restructuring programs. Both operational and
non-recurring factors affected our operating loss in 2003. The principal
non-recurring factor was the 62.0 million in restructuring expenses
recorded in 2003, compared to 90.0 million in restructuring expenses in
2002. The operational factors were primarily related to pricing pressure in our
Telecommunications segment, weak sales in our Financial Services and Security
segment and unfavorable currency fluctuations. 38




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Despite a decline in selling prices and adverse currency fluctuations in
certain markets, our gross margin increased by 2.3 percentage points, mainly
driven by a favorable business mix (i.e., weighted towards more wireless
products, higher-end products and regions with more favorable pricing), the
benefit of the
restructuring programs and our cost cutting initiatives. In 2003, our research
and development, selling and marketing and general and administrative expenses
declined 16% as compared with 2002, driven by the positive effects of our
restructuring programs and cost cutting measures. Our financial position remained strong in 2003. The net decrease in cash
and cash equivalents during 2003 amounted to 33.1 million, which included
the use of 55.9 million to finance our restructuring programs, compared to
33.4 million in 2002. Our capital expenditures decreased to 15.2
million in 2003, approximately half of the 2002 level, as a result of our
decision to limit expenditures on facility expansions. Cash and cash
equivalents were 390.7 million at December 31, 2003, as compared to
417.2 million at December 31, 2002. 39




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Factors Affecting Revenues Most of our historical 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. Our prices for our most
sophisticated wireless identification modules are higher than our prices for
our earlier generation wireless identification modules. When we introduce a new
chip card, it can initially have the effect of decreasing our average prices,
because our prices decline for our earlier generation cards before sales
volumes migrate to the new card. For our Financial Services and Security segment, which includes systems
and services based on chip card technology in areas such as financial services,
identification, health care, corporate security, loyalty programs,
transportation access, pay-television applications, e-business security
activities as well as magnetic stripe cards for banking applications, our
revenues can vary over the life of our contracts with our customers to design,
develop and implement chip card-based products and systems. For system deliveries, we 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. While margins are still
higher in our Telecommunications segment than in other segments, the difference
has decreased. 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 impacted 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. 40




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Impact of Currency Fluctuations We report our audited consolidated financial statements in euros. Because
we earn a significant portion of revenues and incur expenditures in countries
where the euro is not the local currency, exchange rate movements between the
euro and other currencies can significantly impact our results of operations.
Fluctuations in exchange rates may also affect the reported value of our assets
and the components of shareholders equity. The other currencies include the
U.S. dollar, the Chinese yuan, the Singapore dollar and the British pound. In
2003, we earned 11% of our revenues in the United States, 10% in China, 10% in
the United Kingdom, and 13% in Asia outside China. A substantial portion of our
sales in the rest of Asia, other than China, is denominated in Singapore
dollars and in U.S. dollars. We seek to minimize our currency exposure by
engaging in hedging transactions where we deem it appropriate. We cannot
predict, however, all changes in currency, inflation or other factors, which
could affect our international businesses and, therefore, our results may
continue to be negatively affected by currency fluctuations. 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, 2001, calculated based on
daily indicative fixing publicly supplied by the European Central Bank (ECB)
and indicative quotations supplied on Internet sites of bank counterparties for
currencies on which the ECB does not establish fixing. (in euros, per unit of foreign currency)Years ended December 31
    
    2003
    
    2002
    
    2001British pound
    
    
    0.6887
    
    
    
    0.6294
    
    
    
    0.6218Chinese yuan
    
    
    9.2584
    
    
    
    7.8204
    
    
    
    7.4063U.S. dollar
    
    
    1.1289
    
    
    
    0.9486
    
    
    
    0.8950Singapore dollar
    
    
    1.9553
    
    
    
    1.6928
    
    
    
    1.6038
 Seasonality In prior years, we have experienced limited seasonal fluctuations, where a
greater percentage of our net sales are recorded in the fourth quarter. In
2001 and 2002, this seasonality was offset by global market fluctuations and an
uneven economic recovery. In 2003, we experienced a limited recurrence of this
seasonality. The possible seasonality that we experience in the future may
continue to be affected by factors such as global economic conditions. Reporting segments As of January 1, 2002, we changed the reporting of our business segments.
All of the activities formerly reported as part of our Network Systems segment
have been transferred to our Financial Services and Security segment, except
the access control systems activities of our former subsidiary SkiData and the
electronic smart labels solutions activities of our former Tag subsidiary,
which have been reported separately under Disposed Operations, as they were
sold during the third quarter of 2001. Consequently, the Financial Services and
Security segment includes systems and services based on chip card technology in
areas such as financial services, identification, health care, corporate
security, loyalty programs, transportation access, e-business security,
and pay-television applications, as well as magnetic stripe cards
for banking applications. Our activities in this segment also include the sales
of chip card readers to our customers and chip 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 41




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consistent with the changes in our financial reporting
structure incorporated in our management reporting. For a discussion of recent
developments, see Item 5. Operating and Financial Review
and Prospects  Results
of Operations-Recent Developments. Recent Developments In addition to the restructuring programs that were put into place in
April 2001 and February 2002, we announced a third restructuring and
rationalization program in December 2002. This new program was implemented in
response to further market deterioration and price erosion beyond what was
anticipated. As of December 31, 2003, this program had resulted in a reduction
of 777 employees worldwide and the rationalization of production sites and
office facilities on a worldwide basis. These restructuring and cost cutting
initiatives have been implemented with the objective of achieving annualized
savings of approximately 100 million by the end of 2004. We believe that we
will be able to achieve the costs savings objectives associated with this
restructuring program. However, our ability to reach these objectives will
depend on a number of factors, including the actual expenses that we incur as
the program is fully implemented and the impact of market conditions. As of January 1, 2004, we elected again to change the reporting of our
business segments to better reflect the changing nature of our industry. The
Financial Services and Security segment was divided into two separate units;
Financial Services and Identity and Security. The Financial Services segment includes systems and services based on chip card technology in
financial services as well as magnetic stripe cards for banking applications
while the Identity and Security segment includes chip card technology in areas
such as identification, health care, corporate security, loyalty programs,
transportation access, e-business security, and pay-television applications.
Our activities in the Identity and Security segment also include the sales of
chip card readers to our customers and chip card reader components 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 business segment reporting is
consistent with the changes in our financial reporting structure incorporated
in our management reporting. 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%. The following table shows the breakdown of our net sales in 2003 and 2002
by reporting segment (our reporting segments are described in Note 29 to our
Consolidated Financial Statements): (in millions of euros)Years ended December 31
    
    2003
    
    2002
    
    % changeTelecommunications
    
    
    542.5
    
    
    
    544.5
    
    
    
    0
    %Financial Services and Security
    
    
    206.7
    
    
    
    242.9
    
    
    
    (15
    %)Total
    
    
    749.2
    
    
    
    787.4
    
    
    
    (5
    %)
 Net sales in our Telecommunications segment remained relatively stable,
decreasing slightly to 542.5 million in 2003 from 544.5 million in
2002. On a currency adjusted basis, Telecommunications net sales increased by
9% in 2003 as compared to 2002. Our increase in net sales in 2003, on a
currency adjusted basis, was influenced by more rapid adoption of wireless
communication systems that require SIM cards in the United States, strong
growth in South America and 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 42




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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 competition 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 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. Net sales in our Financial Services and Security segment declined 15% to
206.7 million in 2003, from 242.9 million in 2002. On a currency
adjusted basis, net sales decreased by 8%. The decline in our Financial
Services and Security segment was primarily due to the Geldkarte (i.e., the
German payment card) market shifting to a lower volume replacement cycle,
decreased demand in the Pay-TV market, and lower demand for microcontroller
payment cards in the United States due primarily to the completion of certain
chip card programs. Despite the lower demand for the Geldkarte microcontroller
payment card (i.e., chip card), shipments were up 10%, driven by the ramp-up of
EMV migration in the United Kingdom (EMV is a jointly defined set of
specifications adopted by Europay, MasterCard and Visa, to migrate their bank
cards from conventional magnetic stripe cards to chip cards) which started in
the third quarter of 2003. The Financial Services and Security segment
represented 28% of our revenues in 2003, as compared to 31% in 2002. We organize our operations into three geographic regions: EMEA (Europe,
Middle East and Africa), Asia and the Americas. The following table breaks down our net sales among our three regions: (in millions of euros)Years ended December 31
    
    2003
    
    2002
    
    % changeEMEA
    
    
    407.7
    
    
    
    416.2
    
    
    
    (2
    %)Asia
    
    
    171.9
    
    
    
    199.5
    
    
    
    (14
    %)Americas
    
    
    169.6
    
    
    
    171.7
    
    
    
    (1
    %)TOTAL
    
    
    749.2
    
    
    
    787.4
    
    
    
    (5
    %)
 Primarily due to a mixed performance between our two segments, 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 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 the Financial Services and Security 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, however, due to
decreased demand for the Geldkarte and the weakness in the Pay-TV market. 43




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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 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 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 are adopting SIM card-based systems
because these systems represent a less expensive path toward the implementation
of more advanced communication standards, such as 3G networks, that will allow
carriers to provide enhanced services to their customers. We provide products
to all of the major wireless carriers in the United States that utilize smart
card technology (Cingular Wireless, AT&T Wireless, Nextel Communications, and
T-Mobile). There are also signs of a similar trend towards adoption of smart
card-based technologies in Latin America. Gross profit Gross profit increased 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. The following table breaks down our gross profit and gross margin by
segment: 2003
    
    2002
    
    % changeYears 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 and
Security
    
    
    40.5
    
    
    
    19.6
    %
    
    
    45.2
    
    
    
    18.6
    %
    
    
    (10
    %)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. The 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 and Security segment increased
to 19.6% in 2003, from 18.6% in 2002. This increase was primarily due to higher
volumes shipped of microcontroller payment cards and our restructuring and cost
cutting measures. The increase was partially offset by unfavorable currency
fluctuations in 2003. Operating income (loss) We recorded an operating loss of 134.5 million in 2003, compared to an
operating loss of 231.8 million in 2002. The 2003 operating loss was lower
due to increased volumes of products shipped, improved gross margins in both of
our reporting segments and lower restructuring expenses. Our restructuring
expenses in 2003 amounted to 62.0 million compared to 90.0 million in
2002. Moreover, the 16% decrease of our operating expenses (excluding
restructuring expenses), to 246.7 million in 2003 from 294.4 million in
2002, contributed to the reduction of our operating loss. This reduction in our
operating expenses reflected the effects of our restructuring, combined with
other cost saving programs. 44




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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. We have made progress implementing our restructuring program announced in
December 2002. Under this plan, we reduced our headcount by 777 during all of
2003, most of which occurred in the second half of the year. Annualized savings
from our restructuring and cost cutting initiatives are, as of June 2, 2004,
estimated to be approximately 100 million by the end of 2004. The
restructuring charge of 62.0 million recorded in 2003 included an amount of
61.7 million relating to this restructuring program. We anticipate that
approximately 15.0 million in additional expenses in 2004 will be required
to complete 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 8 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. (SLP) in October 2000 and was due to significantly declining sales of SLP
software. In early 2003, we decided to cease SLP operations. The winding down
is in process and is expected to be completed in 2004. The cessation of SLP
operations will have no negative effect on our Consolidated Financial
Statements in 2004. Financial income and 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 the former Chairman of the Board: in 2000, one
of our indirect subsidiaries granted a loan to Dr. 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. The Company has not
forgiven the loan (see Note 9 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 Dr.
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 6 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. 45




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Other income and expense, net We recorded a net other expense of 20.1 million in 2003, compared to a
net other expense of 28.9 million in 2002. Net other expense in 2003 was
primarily 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), losses on equity investments (7.6 million), losses on
non-marketable investments (2.5 million) and losses in minority interests
(2.2 million). Net other expense in 2002 was primarily attributable to
foreign exchange losses (15.1 million), losses on equity investments
(3.1 million), losses on non-marketable investments (6.4 million) and minority interests expense (4.3 million). Income taxes 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. Net loss We recorded a net loss of 161.1 million in 2003, or 0.27 per
share, as compared to a net loss of 320.9 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 Dr. 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 Dr. 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. Year ended
December 31, 2002, compared to year ended December 31, 2001 Net Sales Net
sales for the year ended December 31, 2002, amounted to 787.4
million, a 23% decrease compared with net sales of 1,023.0 million for the
year ended December 31, 2001. After adjusting for currency fluctuations and
discontinued operations, net sales decreased by 17%. The following table shows the breakdown of our net sales in 2002 and 2001
by market segment: Years ended December 31
    
    2002
    
    2001
    
    % change(in millions of euros)Telecommunications
    
    
    544.5
    
    
    
    681.9
    
    
    
    (20
    %)Financial Services and Security
    
    
    242.9
    
    
    
    296.8
    
    
    
    (18
    %)Disposed Operations (*)
    
    
    
    
    
    
    44.3
    
    
    
    Total
    
    
    787.4
    
    
    
    1,023.0
    
    
    
    (23
    %)
 (*) including SkiData and Tag activities, the divestitures of which occurred during the third quarter of 2001. Net sales in our Telecommunications segment declined 20%, from 681.9
million in 2001 to 544.5 million in 2002. After adjusting for currency
fluctuations, net sales in this segment decreased by 17%. This decrease was
primarily due to a 19% decline in sales of wireless products, from 491.7
million in 2001 to 400.6 million in 2002, resulting mainly from continuous
price competition in this activity. While there was a shift to higher-end
wireless products in 2002 and stronger demand for wireless products, including
software and services, they were not sufficient to overcome the pricing
pressure. Other cards sales decreased significantly in 2002 compared to 2001,
mainly driven by lower demand for phonecard products and stronger price
pressure. Excluding SkiData and Tag activities, the Telecommunications segment
represented 69% of our revenues in 2002, as compared to 70% in 2001. 46




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Net sales in our Financial Services and Security segment declined 18%,
from 296.8 million in 2001 to 242.9 million in 2002 (excluding SkiData
and Tag activities). After adjusting for currency fluctuations, net sales in
this segment decreased by 16%. The decline in our Financial Services and
Security segment resulted mainly from a significant decline in revenues in 2002
from the banking and retail sectors in the United States compared to 2001. The
Financial Services and Security segment represented 31% of our revenues in
2002, as compared to 30% in 2001, excluding SkiData and Tag activities. 47




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The following table breaks down our net sales among our three regions in
2002 and 2001: Years ended December 31
    
    2002
    
    2001
    
    % change(in millions of euros)EMEA
    
    
    416.2
    
    
    
    474.0
    
    
    
    (12
    %)Asia
    
    
    199.5
    
    
    
    273.1
    
    
    
    (27
    %)Americas
    
    
    171.7
    
    
    
    231.6
    
    
    
    (26
    %)Disposed Operations (*)
    
    
    
    
    
    
    44.3
    
    
    
    Total
    
    
    787.4
    
    
    
    1,023.0
    
    
    
    (23
    %)
 (*) including SkiData and Tag activities, the divestitures of which occurred during the third quarter of 2001. The decline in net sales in the EMEA region, which represented 53% of our
revenues in 2002, was primarily due to the poor performance of the wireless
segment, which was partly offset by an increase in sales in the banking sector.
In Asia, lower sales reflected a deterioration of pricing conditions in the
wireless segment. In the Americas, we experienced a significant decrease in our
chip card sales to United States banks and retailers. Gross profit Gross profit decreased by 35% in 2002, from 307.5 million in 2001 to
199.7 million in 2002 (the decrease was 31%, excluding disposed
operations). Our gross margin decreased from 30.1% in 2001 to 25.4% in 2002.
This decrease was mainly due to pricing pressure in the Telecommunications
segment. In addition, in 2001, our gross profit was impacted by a 10.6
million one-time favorable adjustment resulting from the partial reversal of a
provision for a patent claim that was settled in 2001. However, the decline in
our gross profit was partially offset by a better regional and product mix and
the depletion of expensive microcontroller chip inventories purchased during
prior periods, as well as higher sales volumes and productivity gains. The following table breaks down our gross profit and gross margin by
segment. 2002
    
    2001
    
    % changeYears ended December 31
    
    (in millions of euros)
    
    (% of sales)
    
    (in millions of euros)
    
    (% of sales)
    
    in gross profitTelecommunications
    
    
    154.5
    
    
    
    28.4
    %
    
    
    228.8
    
    
    
    33.6
    %
    
    
    (32
    )%Financial Services and
Security
    
    
    45.2
    
    
    
    18.6
    %
    
    
    62.6
    
    
    
    21.1
    %
    
    
    (28
    %)Disposed operations(*)
    
    
    
    
    
    
    
    
    
    
    16.1
    
    
    
    36.3
    %
    
    
    Total
    
    
    199.7
    
    
    
    25.4
    %
    
    
    307.5
    
    
    
    30.1
    %
    
    
    (35
    )%
 (*) including SkiData and Tag activities, the divestitures of which occurred during the third quarter of 2001. The gross margin of our Telecommunications segment decreased from 33.6% in
2001 to 28.4% in 2002. This decrease resulted primarily from the strong price
pressure in the wireless market. This decrease was partially offset by lower
purchase prices for wireless microcontroller chips, and higher sales volumes in
the wireless market, including in related software and services which generate
higher margins. In addition, in 2001, our gross margin was favorably impacted
by the one-time royalty expense adjustment described above. The decrease in our Financial Services and Security segment gross margin,
from 21.1% in 2001 to 18.6% in 2002, resulted primarily from lower sales
volumes, lower prices and an unfavorable product mix and customer mix for smart
card products. The lower purchase prices for microcontroller chips partially
offset this decrease. 48




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Operating income (loss) We recorded an operating loss of 231.8 million in 2002 compared to an
operating loss of 180.8 million in 2001. The 2002 operating loss resulted
from declining sales, declining gross margins in both our segments and higher
restructuring expenses. Restructuring expenses in 2002 amounted to 90.0
million compared to 28.5 million in 2001. This increase was partly offset
by a significant decrease in our operating expenses which were 294.4
million in 2002 compared to 388.8 million in 2001 (excluding goodwill
amortization and impairment in 2002 and 2001 and two one-time items incurred in
2001: management severance expenses amounting to 25.7 million, and
litigation expenses amounting to 18.1 million). The operating expenses
decrease reflected the effect of the restructuring plans announced in 2001 and
in 2002, combined with other cost saving programs. For the year as a whole, research and development expenses decreased by
18%, from 112.9 million in 2001 to 92.2 million in 2002, while general
and administrative expenses decreased by 19%, from 110.7 million in 2001 to
89.9 million in 2002. Selling and marketing expenses decreased 32% from
165.3 million in 2001 to 112.2 million in 2002. Goodwill amortization and impairment amounted to 47.1 million in 2002,
as compared to 27.2 million in 2001. In 2002, goodwill amortization and
impairment included a goodwill write-down of 22.1 million following
impairment testing. This write-down concerned the goodwill generated following
the acquisition of SLP in October 2000, and was due to
significantly declining sales of SLP software. (See Note 8 to our Consolidated
Financial Statements). Goodwill amortization and impairment recorded in 2001
included a one-time 1.1 million charge resulting from a write-off of
goodwill previously recorded from the acquisition of a 21% equity interest in
Softcard due to Softcards decision to cease its operations. Restructuring expenses The deteriorating economic conditions and the continuation of the turmoil
in the telecommunications industry led us to announce a second restructuring
plan in February 2002 and a third plan in December 2002. As in 2001, we
responded to the rapidly changing environment by commencing the implementation
of a program in February 2002, to control our costs and restructure our
activities. The February 2002 program involved a reduction of our workforce and
the rationalization of office operations on a worldwide basis. In 2002 we
recorded a restructuring charge of 90.0 million, of which 80.8 million
was related to our February 2002 restructuring plan. The goal of the program
was to achieve 100 million in annualized cost savings, an objective that we
continue to maintain. Despite progress on cost saving efforts initiated in 2001 and 2002, we
implemented a third restructuring program in response to further market
deterioration and price erosion beyond what we had previously anticipated. This
program was announced in December 2002, and was to impact most parts of the
company. This program was expected to deliver annual savings in the range of
100 million, the full benefit of which was expected to be seen in the
second half of 2004. The restructuring charge of 90.0 million recorded in
2002, included an amount of 7.7 million relating to this plan. 49




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Net financial income and expense We
recorded net financial expense of 51.1 million in 2002, compared to
20.7 million net income in 2001. Net financial expense and income were
impacted by the following specific factors:  
    
    Provision for a loan to the former Chairman of the board. In 2000, one
of our indirect subsidiaries granted a loan to Dr. Lassus, our former
Chairman of the board. Pursuant to an agreement dated December 19,
2001, as of January 10, 2002, Dr. Lassus ceased his office as Chairman
of our board of directors and resigned from all other positions that
he held with our company and any of our companys affiliates, except
for his position as a non-executive director of our company. As of
January 10, 2002, Mr. Lassus was no longer an employee of our company
or any of our company affiliates. Effective June 30, 2002, we recorded
in financial expense a 67.6 million non-cash charge to cover the
risk of possible non-reimbursement of the loan. Our company has not
forgiven the loan and is seeking repayment by Dr. Lassus through legal
proceedings (See Note 9 to our Consolidated Financial Statements).
    
    Interest receivable on loans to senior management. Net financial
expense incurred in 2001 included 4.9 million of interest income
on the loans granted in 2000 by one of our indirect subsidiaries to
Mr. Antonio Perez, our former Chief Executive Officer, and to Dr.
Lassus. During 2001, Mr. Perez partially reimbursed the loans that
were granted to him and the unreimbursed portion of the loans was
charged to our Consolidated Statement of Income. Net interest accrued
in 2002 on the loan granted to Dr. Lassus was 1.7 million
corresponding to interest accrued in the first half of 2002.
    
    Amortized cost of an advance made to a trade supplier. Net interest
income incurred in 2001 included a 2.0 million interest expense
following the measurement at amortized cost of an advance made to a
trade supplier, as compared to 1.9 million of interest income
following such measurement in 2002 (See Note 6 to our Consolidated
Financial Statements). Excluding these specific items, net financial income reported in 2002
amounted to 12.9 million, as compared to net financial income of 17.8
million in 2001, reflecting primarily the decrease in our cash balances and the
decrease in the market interest rate. Other income and expense, net We recorded net other expense of 28.9 million in 2002 compared to a
net other income of 45.7 million in 2001. In 2001, net other income
primarily included a one-time 68.3 million gain generated from the
divestiture of our SkiData and Tag activities, which was only partially offset
by foreign exchange losses and minority interests. Net other expense in 2002
was primarily attributable to foreign exchange losses (15.1 million),
losses on investments (6.4 million) and minority interests (4.3
million). Income taxes We recorded an income tax expense of 9.1 million in 2002. This tax
expense reflected the fact that we did not recognize additional deferred income
taxes on the losses incurred in France in 2002, and that a provision for tax
risks amounting to 5.9 million was recorded following a tax audit in
France. In 2001, we recorded an income tax credit of 14.2 million,
reflecting an effective tax rate of 16.3%. In 2001, our effective tax rate was
impacted by the management severance expenses, which created losses in certain
countries with low effective tax rates and by the one-time 68.3 million
gain from the SkiData and Tag divestitures. Net loss We recorded a net loss of 320.9 million in 2002, or 0.53 per
share, as compared to a net loss of 100.2 million in 2001, or 0.16 per
share. Net loss recorded in 2002 primarily reflected the 90.0 million
restructuring charge, the 67.6 million non-cash write-down of a loan
granted in 2000 to Dr. Lassus and the decline in our gross margin, which were,
however, offset by the reduction of our operating expenses as a result of our
restructuring program. Net loss recorded in 2001 primarily reflected the
decrease of our operating income, the 28.5 million restructuring expense
and the 18.1 million one-time charge for the Humetrix lawsuit (See Note 25
to our Consolidated Financial Statements), which were partially offset by the
impact of the 68.3 million one-time gains from our SkiData and Tag
divestitures. LIQUIDITY AND CAPITAL RESOURCES Our financial position remained strong in 2003. Cash and cash equivalents
were 390.7 million at December 31, 2003, as compared to a 417.2 million
at December 31, 2002. During 2003, net cash decreased mainly due to outlays to
fund our restructuring program, while we used limited amounts of cash to fund
our purchases of property, plant and equipment and investments. 50




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Operating activities used 10.1 million of cash during 2003, as
compared to 62.7 million during 2002. Accounts payable increased by
32.5 million as compared to December 31, 2002, primarily due to our higher
requirements for materials to satisfy our higher sales volumes, particularly in
the latter part of 2003. Accounts receivable increased by 12.3 million as
compared to December 31, 2002, reflecting the higher revenue levels in the
latter part of 2003. Inventory levels as at December 31, 2003, increased by
9.2 million as compared to December 31, 2002, but only represent 82 days of
supply compared to 111 days of supply at the end of December 2002. The year
2003 cash flow was also affected by 55.9 million paid in connection with
our restructuring programs as compared to 33.4 million in 2002. Net cash used in investing activities during the year 2003 was 16.7
million compared to 47.1 million in 2002, primarily due to lower capital
expenditures which were 15.2 million in 2003, compared to 31.9 million
in 2002. Financing activities used 6.3 million of cash in 2003, compared to
3.8 million generated by such activities in 2002. This change resulted
primarily from capital lease financing received in 2002 under the
sale-leaseback transaction regarding our new facilities in La Ciotat, France. 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, 2003, cash and cash equivalents
amounted to 390.7 million. CRITICAL ACCOUNTING ESTIMATES AND POLICIES 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) and with
International Accounting Standards (IAS) formulated by its predecessor
organization the International Accounting Standards Committee (IASC). 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, the Company evaluates its estimates which are based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. The Company believes that the following
represent critical accounting policies of the Company that require significant
management judgments and estimates. For a summary of the Companys significant
accounting policies, including the critical accounting policies discussed
below, please see Note 2 to our Consolidated Financial Statements. Revenue Recognition 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. Procedures exist which are
regularly reviewed to ensure that the policies are consistently applied
throughout our subsidiaries worldwide. Goodwill and impairment of goodwill At each balance sheet date, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable, goodwill is reviewed
for impairment based on expectations of future cash flows, which by definition
are uncertain. Future cash flows are computed based on the associated revenue estimates
for the following five years, and include a terminal value assumption. Whenever
possible, the Company forecast and long range planning data is used
in these 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
evaluating goodwill and impairment of goodwill, 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. Management believes that the estimates of future cash flows
and fair market value are reasonable; however, changes in estimates resulting
in lower future cash flows and fair market value due to unforeseen changes in
business assumptions (for example, a substantial decline in consumer demand)
could negatively affect the valuations of goodwill. Under the current
assumptions, we believe that no further material impairment of goodwill is
required. 51




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Inventory Our industry is highly competitive and influenced by rapid technological
change, frequent new product development, changes in demand and product pricing
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 our 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 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. 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 successful marketing of these products depends on their
acceptance by customers and business associates. Further, the Companys
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 the first to market new
products and services. There can be no assurance that we will successfully develop and 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 our
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. These costs are capitalized through the time the product under
development is produced and its 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. These costs are then amortized on a systematic basis
over the products expected useful lives, which due to the constant development
of new technologies, does not exceed three years. During the development stage,
management must exercise its 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 are engaged, and may continue to engage, in restructuring activities.
This requires our management to utilize significant estimates related to
realizable values of assets made redundant or obsolete and expenses for
severance and other employee separation costs, lease cancellations and other
exit costs. A provision for restructuring is recognized only when a detailed,
formal plan for restructuring exists and the main features of the plan have
been announced. 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 deferred tax assets and liabilities, which are
included in our consolidated balance sheet. 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 must establish a valuation allowance. The valuation allowance 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, our deferred tax assets and liabilities and any valuation
allowance recorded against our deferred tax assets. 52




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Changes in accounting
rules could affect our reported results The
International Accounting Standards Board is in the process of a
critical examination of 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 within the next two years in such areas as the
timing of recognition of sales and other revenues arising from
collaborative agreements with marketing and sales partners,
accounting for share-based compensation, goodwill and intangibles,
employee benefit plans, marketable securities and derivative
financial instruments and classification of balance sheet positions
as debt or equity. It is not possible to predict the impact 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 audited 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 31,2001
    
    2002
    
    2003(millions of euros)IFRS net income (loss)
    
    
    (100.2
    )
    
    
    (320.9
    )
    
    
    (161.1
    )Total differences between U.S. GAAP
and IFRS
    
    
    50.7
    
    
    
    41.2
    
    
    
    (20.6
    )U.S. GAAP net income (loss)
    
    
    (49.5
    )
    
    
    (279.7
    )
    
    
    (181.7
    )
 One of the principal differences affecting the determination of our net
income under U.S. GAAP compared with IFRS resulted in 2000 and 2001 from the
granting of share options to our executive officers and employees. In
accordance with IFRS, the issuance of share options does not have any impact 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. In addition, in connection
with the issuance of stock options to our former Chief Executive Officer and
our former Chairman of the board in the second half of 2000, we made several
loans to these individuals for the exercise of these options, as described
under Item 7. Major Shareholders and Related Party
Transactions  Related Party
Transactions. Because these loans may be prepaid prior to maturity, the amount
of interest to be paid on the loans was uncertain and, as a result, the
ultimate option price was also uncertain. Under U.S. GAAP, the issuance of
stock options with an unknown exercise price must be accounted for as a
variable plan, which requires us to measure compensation in each period based
on the difference between the exercise price and the fair market value of the
shares. Consequently, the accounting for share options in accordance with U.S.
GAAP resulted in a net compensation expense of 6.4 million for the year
ended December 31, 2003, a net compensation expense of 2.9 million for the
year ended December 31, 2002 and a net compensation benefit of 69.3 million
for the year ended December 31, 2001. Another significant difference affecting the determination of our net
income under U.S. GAAP compared with IFRS results from goodwill amortization.
As a result of the adoption of SFAS 142 as of January 1, 2002, our company no
longer amortizes goodwill under U.S. GAAP. 53




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One of the principal differences affecting the determination of our
shareholders equity under U.S. GAAP are the impact of several loans made to
our former Chief Executive Officer and our former Chairman of the board for the
exercise of the stock options granted in the second half of 2000, which, in
aggregate, amounted to 4.9 million, 71.9 million and 143.7 million
and are recorded as a decrease in shareholders equity under U.S. GAAP as at
December 31, 2003, 2002 and 2001, respectively. The following table sets forth our shareholders equity under IFRS and
U.S. GAAP as of the dates indicated. Year ended December 31,2001
    
    2002
    
    2003(millions of euros)IFRS shareholders equity
    
    
    1,167.8
    
    
    
    860.5
    
    
    
    695.0Total differences between U.S. GAAP and
IFRS
    
    
    (89.5
    )
    
    
    18.3
    
    
    
    5.1U.S. GAAP shareholders equity
    
    
    1,078.3
    
    
    
    878.8
    
    
    
    700.1
 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 31 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 the
development of 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, 2003, we
had 562 engineers working in our research and development centers around the
world (plus an additional 50 engineers working in our manufacturing group),
compared to 711 engineers as of December 31, 2002 and 760 engineers as of
December 31, 2001. In 2003, our gross research and development expenditures were 63.9
million, or approximately 8.5% of our net sales, compared to gross research and
development expenditures of 95.3 million, or approximately 12.1% of our net
sales in 2002, and of 124.6 million, or approximately 12.2% of our net
sales in 2001. A portion of these expenditures was financed through grants and
research tax credits available under certain government programs, which
amounted to 2.7 million in 2003, 5.6 million in 2002 and 9.6
million in 2001. We also maintain certain licenses to third parties technologies. See Item
4. Information on the Company  Business Overview  Intellectual Property. TREND INFORMATION Trends in the Markets for our Telecommunications Segment After sharp downturns starting in 2001 and continuing into early 2002,
growth in the markets for our wireless products (primarily SIM cards) started
to re-emerge towards the end of 2002. This corresponded with new demand for
more advanced wireless telecommunications services, including for wireless data
transmission, and growth linked to further adoption of wireless communication
systems using SIM cards, including in developing economies where wireless
telecommunications services continued to become more financially accessible. 54




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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 2003, 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 2004. Growth in our
Telecommunications segment may, however, be somewhat lessened by continued
declines in the demand for public telephony phonecards and by 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. With the adoption of the
EMV standard for chip card-based payment systems, however, we believe there
should be positive momentum in the adoption of chip cards in 2004 and 2005, for
example, in the United Kingdom, South America and Asia. 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. 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 separates 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. The
restructuring programs that we implemented in 2003 are starting to
deliver our strategic objectives and Gemplus now has lower fixed costs. We
intend to continue to keep focusing on managing costs, and are further
implementing processes to control our expenses. Outlook For 2004, we anticipate continued improvement in our operating income for
the year as a whole, although this will be offset to a limited extent by the
completion of the restructuring program that we began in December 2002. This
anticipated improvement, 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 24 to our Consolidated Financial Statements. 55




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For additional information regarding trends, uncertainties, demands or
commitments, please see Item 5 Operating and Financial Review and
Prospects  Results of Operations  Recent Developments and the Special Note
regarding Forward Looking Statements on page 4 of this Annual Report. 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 the Companys financial
condition, revenues, expenses, results of operations, liquidity, capital
expenditures, or capital resources that would be material to our shareholders. (thousands of euros) December 31
    
    2003
    
    2002
    
    2001Performance, downpayment and bid bonds
    
    
    10,817
    
    
    
    15,752
    
    
    
    8,705Guarantees related to operations
    
    
    6,518
    
    
    
    9,405
    
    
    
    4,152Total guarantees issued by the Company
    
    
    17,335
    
    
    
    25,157
    
    
    
    12,857
 As at December 31, 2003, the amount of guarantees delivered by the Company
reached 17,335 thousand and represents mainly performance bonds and bid
bonds, 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.
See Note 25 to our Consolidated Financial Statements. CONTRACTUAL OBLIGATIONS Schedule of payments (in thousands of euros)As at December 31, 2003
    
    Total
    
    Less than 1 year
    
    2 to 3 years
    
    4 to 5 years
    
    More than 5 yearsLong-term debt obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    50,850
    
    
    
    7,377
    
    
    
    13,862
    
    
    
    12,099
    
    
    
    17,512Operating lease obligations
    
    
    16,098
    
    
    
    5,187
    
    
    
    4,438
    
    
    
    3,008
    
    
    
    3,465Purchase obligations(1)
    
    
    79,202
    
    
    
    78,106
    
    
    
    1,096
    
    
    
    
    
    
    
    Total
    
    
    146,150
    
    
    
    90,670
    
    
    
    19,396
    
    
    
    15,107
    
    
    
    20,977
  (1)
    
    including 54,500 thousand, as at December 31, 2003, related to
microcontroller chips purchase commitments. As at December 31, 2003, 2002 and 2001, no obligations or commitments
other than those disclosed in the note above would have a significant impact on
the Companys Consolidated Financial Statements. See Note 25 to our
Consolidated Financial Statements. 56




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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 the board
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 the board 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 met seven times during 2003, with an attendance rate in 2003
(physically or by telephone) of approximately 93%. Prior to April 29, 2003, the
board members were elected by cumulative voting. At the annual general
shareholders meeting held April 29, 2003, our shareholders voted to eliminate
cumulative voting and to accordingly amend our articles of incorporation. As of January 1, 2003, 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. Johannes Fritz, Mr. Abel
Halpern, Dr. Peter Kraljic, Mr. Daniel Le Gal, Mr. Kheng Nam Lee, Mr. Ronald W.
Mackintosh, and Mr. William S. Price III. Mr. Kheng Nam Lee resigned from our board of directors, with effect as of
September 26, 2003. Mr. Abel Halpern resigned from our board of directors as of
October 28, 2003. On October 28, 2003, Mr. Werner Koepf and Mr. Geoffrey Fink
were elected to our board of directors. 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, the companys articles of incorporation, the companys Corporate Governance
Guidelines adopted in February 2004, committee charters and other adopted
practices. As of June 2, 2004, the following individuals comprised our board of
directors: Date of
    
    ExpirationName
    
    Age
    
    appointment
    
    of Term
    
    OccupationMr. Dominique Vignon
    
    
    56
    
    
    June 21, 2002
    
    April 2007
    
    Chairman of our board of directorsMr. David Bonderman
    
    
    61
    
    
    December 19, 2001
    
    April 2007
    
    Vice-Chairman of our board of
directors; Managing Partner, Texas Pacific GroupMr. Alex Mandl
    
    
    60
    
    
    October 29, 2002
    
    April 2007
    
    Chief Executive OfficerMr. Michel Akkermans
    
    
    44
    
    
    April 27, 2004
    
    April 2007
    
    Founder and Chairman, Clear2PayMr. Geoffrey Fink
    
    
    34
    
    
    October 28, 2003
    
    April 2007
    
    Principal, Texas Pacific GroupMr. Johannes Fritz
    
    
    49
    
    
    December 19, 2002
    
    April 2007
    
    Managing Director, Quandt family officeMr. Kurt Hellström
    
    
    60
    
    
    April 27, 2004
    
    April 2007
    
    Advisor, Investor ABDr. Peter Kraljic
    
    
    64
    
    
    April 17, 2002
    
    April 2007
    
    Member of the McKinsey Advisory CouncilMr. Werner Koepf
    
    
    62
    
    
    October 28, 2003
    
    April 2007
    
    Board member, Marconi Corporation plcMr. Daniel Le Gal
    
    
    53
    
    
    April 17, 2002
    
    April 2007
    
    Partner and Managing Director, FinadvanceMr. John Ormerod
    
    
    55
    
    
    June 1, 2004
    
    April 2007
    
    Chairman, Walbrook Group Ltd.Mr. William S. Price
    
    
    48
    
    
    February 1, 2000
    
    April 2007
    
    Managing Partner, Texas Pacific Group
 57




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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 2003, the Audit Committee consisted of Mr. William S. Price III
(Chairman)1, Mr. Randy Christofferson, Mr. Kheng
Nam Lee and Mr. Johannes Fritz
(Mr. Werner Koepf replaced Mr. Kheng Nam Lee effective October 28, 2003). 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.

Our Audit Committee met eight times during 2003, with an attendance rate
in 2003 (physically or by telephone) of approximately 88%. The activities of
the committee are governed by a specific committee charter. Among other things,
this committee reviews our budgets and financial statements and any 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 2003, the
Audit Committee reviewed, among other items, our audited consolidated financial
statements for 2002 and our quarterly statements for 2003, reviewed the
quarterly accounting judgments and the quarterly audit comments made by our
auditors and analyzed related
party transactions.

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 exercises all powers with respect to the
recommendation, compensation, retention and oversight of the work of the
companys independent auditors. The Audit Committee has not currently opted to
establish 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.

Luxembourg law requires our auditors to be appointed by our shareholders;
therefore, our shareholders appoint the auditors upon recommendation of the
Audit Committee.



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1


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Compensation Committee In 2003, the Compensation Committee consisted of Mr. Dominique Vignon
(Chairman), Mr. Thierry Dassault , Mr. David Bonderman and Mr. Kheng Nam Lee.
In June 2004, Mr. Werner Koepf replaced Mr. Thierry Dassault on our
Compensation Committee. This committee met three times during 2003, with an
attendance rate in 2003 (physically or by telephone) of 100%. 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 50% 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 board members and for the selection of our Chairman and
Chief Executive Officer. In 2003, the Stock Administration Committee, acting as a subcommittee to
the Compensation Committee, consisted of Mr. Alex Mandl, Mr. Philippe Duranton,
Mr. Yves Guillaumot and Mr. Stephen Juge. 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
concerning stock option issuances and related matters. In 2003, the Stock
Administration Committee analyzed our future stock options needs, the stock
option plans and the stock option reserve. 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 2003, the Strategy Committee consisted of Mr. Dominique Vignon
(Chairman), Dr. Peter Kraljic, Mr. Daniel Le Gal, Mr. Alex Mandl and Mr.
William S. Price III. The Strategy Committee met one time on October 27, 2003,
with all members in attendance. The Strategy Committees role is to advise the
Board concerning the Companys strategies, major plans of action and
significant acquisitions or divestitures. 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, except for matters that exceed 50 million that must be authorized
by the Board of Directors. 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 November 2002, Mr. Mandl appointed Mr.
Jacques Villières as Executive Vice President Operations, and confirmed Mr.
Stephen Juge as Executive Vice President General Counsel, Mr. Didier Lachaud as
Executive Vice President Human Resources, Mr. Gilles Michel as Executive Vice
President Financial and Security Services Business Unit, Mr. Philippe Vallée as
Executive Vice President Telecommunications Business Unit and Mr. Yves
Guillaumot as interim Chief Financial Officer. In February 2003, Mr. Mandl announced a reorganization, appointing Mr.
Jacques Seneca as Executive Vice President Business Development Group, Mr.
Philippe Combes as Executive Vice President Operations (replacing Mr. Jacques
Villières), and Mr. Guillaumot as Executive Vice President and Chief Financial
Officer. Mr. Tony Engberg resigned as Executive Vice President, Research and
Development as of March 15, 2003, and his responsibilities were transferred to
the companys Business Development Group. On May 24, 2003, Mr. Philippe
Duranton was appointed as Executive Vice President Human Resources, replacing
Mr. Didier Lachaud. On December 19, 2003, Mr. Gilles Michel resigned from his
position as Executive Vice President Financial Services and Security, and his
responsibilities were transferred to Mr. Philippe Combes and Mr. Jacques
Seneca. On January 20, 2004, Mr. Jacques Seneca was appointed as the head of
the newly formed Identity and Security business unit, and Mr. Philippe Combes
was appointed as the head of the Financial Services business unit. 59




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On June 1, 2004, Mr. Frans Spaargaren was appointed as our Chief Financial
Officer, replacing Mr. Yves Guillaumot. The following table sets forth the
name, age and current position of each of our executive officers as of, June 2,
2004: Name
    
    Age
    
    PositionMr. Alex Mandl
    
    
    60
    
    
    Chief Executive OfficerMr. Philippe Combes
    
    
    51
    
    
    Executive Vice President,
Operations and Financial Services Business UnitMr. Philippe Duranton
    
    
    44
    
    
    Executive Vice President, Human ResourcesMr. Stephen Juge
    
    
    50
    
    
    Executive Vice President, General CounselMr. Jacques Seneca
    
    
    44
    
    
    Executive Vice President, Business
Development Group and Security Services Business UnitMr. Frans Spaargaren
    
    
    48
    
    
    Executive Vice President, Chief Financial OfficerMr. Philippe Vallée
    
    
    39
    
    
    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 an M.B.A. from the University of
California at Berkeley and a B.A. 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 60




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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 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 Akkermans has 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 The Capital Markets Company, Data4, Approach, Proficient, and is a
member of the Advisory Board of GIMV. 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 B.S. 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 B.A. 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
Equipements 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 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 61




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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 Doctordegree 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 head 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 ING 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. Abel G. Halpernserved as a director from December 2001 to October 28,
2003 and served as Vice-Chairman of the board of directors from February 2000
to December 2001. Mr. Halpern is a partner with HMD Partners LP, a private
equity investment firm focused on middle market companies in Europe. From 1994
through 2002, Mr. Halpern was with Texas Pacific Group, where he was a partner
and served as Managing Director of their European activities. Mr. Halpern
remains a consultant to Texas Pacific Group. Prior to joining Texas Pacific
Group, Mr. Halpern was a management and strategy consultant with Bain &
Company, an international strategic consultancy firm. Mr. Halpern received a
Masters of Business Administration from Harvard University and a Bachelor of
Arts degree magna cum laudeand with distinction from Yale University. In
addition to Gemplus International S.A., Mr. Halperns directorships include Bally
International and Ducati Motor Holding, among others. 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 Masters of
Science in Electrotechnology. He serves on the Board of Atlas Copco, Bharti
Televentures in India and Kineto Wireless, USA. 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 62




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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 and, since April 2004, he has been Director of ALDATA
Software Oyj in Helsinki. 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 Doctordegree 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 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 the IEDC Bled Management School. Didier Lachaudserved as our Executive Vice President, Human Resources
from September 1997 until May 2003. Prior to joining Gemplus, Mr. Lachaud
served as Corporate Human Resources Manager at Fives-Lille from September 1995
to August 1997. Prior to August 1997, Mr. Lachaud held several senior
management positions at Air Liquide from September 1990, and served as
Personnel Manager at Schlumberger from 1985. Mr. Lachaud holds a Degree from
the Institut dEtudes Politiques de Paris. 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. Kheng Nam Leeserved as a director from October 2000 to September 26,
2003. Mr. Lee is the President of Vertex Group and of Vickers Capital. Prior to
serving as President of the Vertex Group, Mr. Lee managed several venture
capital funds of the Vertex Group since 1988. Prior to joining the Vertex
Group, Mr. Lee served as head of strategic and venture capital investments at
the Singapore Technologies Group. He holds a Bachelor of Science degree in
Mechanical Engineering (with First Class honors) from Queens University,
Canada, and a Master of Science in Operations Research and Systems Analysis
(with distinction) from the U.S. Naval Postgraduate School. Mr. Lee serves on
the boards of directors of Creative Technology Ltd., GRIC Communications Inc.,
Activcard SA, and Innomedia Pte. Ltd. 63




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Ronald W. Mackintosh servedas 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. Dr. Gilles Michelserved as Executive Vice President Financial and
Security Services May 2001 until December 2003. Prior to May 2001, Dr. Michel
served as Executive Vice President, Financial Services from November 2000, and
as Senior Vice President, Strategy, Mergers and Acquisitions from February
2000. Prior to joining Gemplus, Dr. Michel served as Vice President, Regional
Business Segment (North and South America) at Schlumberger from September 1999
to January 2000. Prior to September 1999, Dr. Michel held various senior
management positions at Schlumberger, including Vice President, Marketing and
Vice President, Engineering and Manufacturing. Dr. Michel holds a Degree in
Physics from the Ecole Supérieure de Physique et de Chimie, Paris, France, and
a Ph.D. in Computer Science from the University of Paris VI. John Ormerod, has served as our director since June 1, 2004. Mr. Ormerod
was a Senior Partner in the UK practice of Deloitte, the international
accounting firm. Educated at Oxford, Mr. Ormerod was previously Regional
Managing Partner, UK & Ireland, of Andersen, where he also spent six years as
Head of European Technology, Media & Telecommunications. Mr. Ormerod is a
Chartered Accountant. He serves on the board and audit committee of The
Roundhouse Trust. Mr. Ormerod is presently the Chairman of Walbrook Group
Limited. 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 Bachelors
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s Degree in Business Administration from Henley
Management College, United Kingdom. 64




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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 smart 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
Masters of Science in Marketing Management from ESSEC. COMPENSATION OF DIRECTORS AND PRINCIPAL EXECUTIVE OFFICERS Aggregate compensation paid by our company with respect to our directors
and executive officers as a group for the fiscal year ended December 31, 2003
was approximately 7,393,093. In addition, a total of 3,650,000 options
were granted to our directors and executive officers as a group during 2003. 65




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The following table presents the compensation paid for the fiscal year
ended December 31, 2003 to our mandataires sociaux(as defined under French
law), which legal term includes our Chief Executive Officer and certain
directors of our company1: Total amount inName
    
    EurosDavid Bonderman
    
    
    43,000Randy L. Christofferson
    
    
    47,000Geoffrey Fink
    
    
    10,082Johannes Fritz
    
    
    48,000Abel Halpern
    
    
    29,917Werner Karl Koepf
    
    
    10,082Peter Kraljic
    
    
    40,000Kheng Nam Lee
    
    
    36,917Alex J.
Mandl2
    
    
    1,730,660Daniel Le Gal
    
    
    40,000Ronal Mackintosh
    
    
    40,000William S. Price
    
    
    50,000Dominique Vignon
    
    
    362,492Total
    
    
    2,488,150
 1 Directors not listed did not receive any compensation from our company for the
year 2003. 2
 At the annual meeting of the shareholders held on April 29, 2003, our
shareholders approved the compensation to be paid to our directors in 2003 in
an aggregate amount of up to 1,000 thousand and 100,000 options
that were
granted on April 29, 2003, 20,000 of which expired as of December 31, 2003. On
April 29, 2003, our board of directors decided to allocate compensation to
individual directors amounting to 40 thousand per year per director as
compensation in connection with services performed as a member of our board and
an additional annual payment of 10 thousand to the chairman of each board
committee for services in that capacity and 1 thousand per committee
meeting attendance for each committee member. Mr. Thierry Dassault waived
his compensation in 2003. Our current Chairman of the board, Mr. Dominique Vignon,
receives annual compensation of 300 thousand (net of social charges) plus
ordinary benefits. During 2003, our company issued to directors 10,000 options per Board
member (except the Chairman and the Chief Executive Officer), with the fair
market value at the date of the grant (0.96) and a one year vesting. No
new stock options were granted to Mr. Vignon or Mr. Mandl in 2003. 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,
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. Mr. Thierry Dassault waived his
compensation in 2004. None of the non-employee directors have any agreement with our company
that provides for benefits upon termination of service (Mr. Vignon is an
employee of our company). 66




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STOCK OPTIONS In General On July 27, 2000, we adopted a stock option plan that provides for the
grant of stock options to any employee who is employed by our company or its
affiliates. The term of the options granted under the plan is determined by the
notice of grant, but 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, 2004, 36,141,477 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, 2004, 391,125
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, 2004 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 19,556,250 of our shares. In
addition, certain 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,
2004, 2,596,750 options resulting from the conversion of Gemplus S.A. stock
options were outstanding. Consequently, as at March 31, 2004, a total of
22,153,000 stock options were outstanding in relation to the Gemplus
S.A. stock
options plans. 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 companys 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 number of shares of common stock underlying each option;
    
    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 the companys 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. 67




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Option Exercise Price Our companys 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
16,784,084 stock options granted on December 10, 2002 and July 22, 2003 in the
UK, 13,737,258 stock options were outstanding on March 31, 2004. 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.  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 companys 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 the capitalization of our
company. Adjustments upon Change of Control.Our companys 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 directors
and executive officers of our company (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, 2004, 20,120,000 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. 68




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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). 187,500 of the
stock options granted on December 10, 2002, were outstanding on June 2, 2004. On August 14, 2003, our executive officers were granted 3,550,000 stock
options at an exercise price of 1.23 and 0.83. None of them exercised
any options during 2003. The following table sets forth certain information with respect to: (i)
stock options granted to the ten employees of the company (excluding the
officers identified above) who received the largest number of stock options
granted in 2003; and (ii) the exercise of these options by them: 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 2003
    
    
    1,255,000
    
    
    1.51
    
    Plan adopted on  July 27 , 2000Options for shares
in Gemplus
International S.A.
exercised in 2003
    
    
    0
    
    
    Not applicable
    
    Plan adopted on July 27, 2000Options for shares
in Gemplus S.A.
exercised in 2003
    
    
    170,000
    
    
    0.83
    
    Gemplus S.A. plan adopted on December 23, 1996
 SHARE OWNERSHIP OF DIRECTORS AND OFFICERS As of June 2, 2004, Mr. Alex Mandl owned 503,130 of our common shares,
and had options to purchase 12,000,000 of our common shares. See, Item 19
Exhibits. As of June 2, 2004, Mr. David Bonderman was a Managing Director of Texas
Pacific Group, Mr. William Price was a Managing Director of Texas Pacific
Group, and Mr. Geoffrey Fink was a Principal of Texas Pacific Group. As of June 2, 2004, affiliates of the Texas Pacific
Group held 159,305,600 of our shares, representing 26.2% of the shares
outstanding. Messrs. Bonderman, Fink and Price have disclaimed beneficial
ownership of any of these shares. As of June 2, 2004, Mr. Johannes Fritz was the head of the Quandt family
office. As of June 2, 2004, the members of the Quandt family and its affiliates owned
115,508,200 of our shares, representing 19.0% 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 also Item 7. Major Shareholders and Related
Party Transactions-Major Shareholders. 69




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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, 2001 through 2003: 2001
    
    2002
    
    2003Number of employees
    
    
    6,721
    
    
    
    5,680
    
    
    
    5,037Category of activityManufacturing
    
    
    3,745
    
    
    
    3,241
    
    
    
    2,892Research and Development
    
    
    819
    
    
    
    702
    
    
    
    557Sales and Marketing
    
    
    897
    
    
    
    745
    
    
    
    694Services
    
    
    309
    
    
    
    242
    
    
    
    277General and Administrative
    
    
    951
    
    
    
    750
    
    
    
    617Geographic locationFrance
    
    
    2,778
    
    
    
    2,187
    
    
    
    1,702Rest of Europe, Middle
East and Africa
    
    
    1,340
    
    
    
    1,208
    
    
    
    1,049Asia
    
    
    1,562
    
    
    
    1,527
    
    
    
    1,603Americas
    
    
    1,041
    
    
    
    758
    
    
    
    683
 In
2003, the workers committee of Gemplus S.A. requested that the Marseille
Commercial Court nominate an expert to analyze certain decisions allegedly
taken by the management or the supervisory board of Gemplus S.A., to prohibit
Gemplus S.A. from taking or implementing certain of these alleged decisions and
to appoint a court-designated representative to monitor the requested
prohibition. We believe these allegations have no merit. See Item 8.
Financial Information  Legal Proceedings for additional details. On December 9, 2002, we announced a restructuring program. This
restructuring program affected all areas within the company (manufacturing,
selling, marketing, research and development and general and administrative
functions). The overall reduction of the workforce (including temporary
employees and independent) totaled 1100 employees. The majority of employees
terminated were located in France, Germany, the United States, Singapore and
Mexico. In France and Germany, we are required to engage in consultations with
employee representatives before implementing workforce reductions. In
connection with this plan, on December 18, 2002, Gemplus S.A. initiated the
process of consultation with its workers committee and union representatives
regarding a plan for the reduction of approximately 483 positions in France.
This consultation process was completed in May 2003. 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. 70




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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 2003, we did not employ a significant
number of full time equivalent temporary staff. 
 Item 7. Major Shareholders and Related Party Transactions MAJOR SHAREHOLDERS The capital stock of our company 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
as of April 27, 2004 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. Beneficial ownership of shares after April 27, 2004 is determined in
accordance with the rules of the U.S. Securities and Exchange Commission, based
on factors including voting and investment power with respect to shares. Shares
subject to options currently exercisable, or exercisable within 60 days of the
date of this Annual Report, are deemed outstanding for purposes of computing
the percentage of shares owned by the person holding such options, but are not
deemed outstanding for purposes of computing the percentage of shares owned by
any other person. Unless otherwise indicated in the footnotes to the below
table, the following people have sole voting and sole investment control with
respect to the shares they beneficially own. Number of shares
    
    Percentage of outstanding sharesName of Beneficial Ownership
    
    Dec. 31, 2002
    
    Dec. 31, 2003
    
    April 27, 2004
    
    Dec. 31, 2002
    
    Dec. 31, 2003
    
    April 27, 2004Texas
Pacific Group(1)
    
    
    159,305,600
    
    
    
    159,305,600
    
    
    
    159,305,600
    
    
    
    25.1
    %
    
    
    26.4
    %
    
    
    26.2
    %Quandt family(2)
    
    
    115,508,200
    
    
    
    115,508,200
    
    
    
    115,508,200
    
    
    
    18.2
    %
    
    
    19.1
    %
    
    
    19.0
    %Groupe Dassault
    
    
    28,300,000
    
    
    
    32,659,866
    
    
    
    32,659,866
    
    
    
    4.5
    %
    
    
    5.4
    %
    
    
    5.4
    %GE Capital
    
    
    24,443,311
    
    
    
    24,093,311
    
    
    
    24,093,311
    
    
    
    3.9
    %
    
    
    4.0
    %
    
    
    4.0
    %Centro Bank Group
    
    
    26,977,423
    
    
    
    22,570,681
    
    
    
    22,570,681
    
    
    
    4.3
    %
    
    
    3.7
    %
    
    
    3.7
    %Brunei Investment Agency
    
    
    22,500,000
    
    
    
    15,750,000
    
    
    
    15,750,000
    
    
    
    3.5
    %
    
    
    2.6
    %
    
    
    2.6
    %Treasury shares
    
    
    31,545,751
    (3)
    
    
    1,290,129
    
    
    
    1,290,129
    
    
    
    5.0
    %
    
    
    0.2
    %
    
    
    0.2
    %Sagem
    
    
    60,888,639
    
    
    
    0
    
    
    
    0
    
    
    
    9.6
    %
    
    
    0.0
    %
    
    
    0.0
    %Other shareholders
    
    
    164,102,014
    
    
    
    232,840,209
    
    
    
    235,942,734
    
    
    
    25.9
    %
    
    
    38.6
    %
    
    
    38.9
    %Outstanding shares(4)
    
    
    633,570,938
    
    
    
    604,017,996
    
    
    
    607,120,521
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   [Continued from above table, first column(s) repeated] Percentage of voting rightsName of Beneficial Ownership
    
    Dec. 31, 2002
    
    Dec. 31, 2003
    
    April 27, 2004Texas
Pacific Group(1)
    
    
    26.5
    %
    
    
    26.4
    %
    
    
    26.3
    %Quandt family(2)
    
    
    19.2
    %
    
    
    19.2
    %
    
    
    19.1
    %Groupe Dassault
    
    
    4.7
    %
    
    
    5.4
    %
    
    
    5.4
    %GE Capital
    
    
    4.0
    %
    
    
    4.0
    %
    
    
    4.0
    %Centro Bank Group
    
    
    4.5
    %
    
    
    3.8
    %
    
    
    3.7
    %Brunei Investment Agency
    
    
    3.7
    %
    
    
    2.6
    %
    
    
    2.6
    %Treasury shares
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aSagem
    
    
    10.1
    %
    
    
    0.0
    %
    
    
    0.0
    %Other shareholders
    
    
    27.3
    %
    
    
    38.6
    %
    
    
    38.9
    %Outstanding shares(4)
    
    
    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 public and private
investment opportunities through a variety of methods, 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. 71




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(3)
    
    Including 30,743,679 shares, following the transfer of shares made by our former Chief Executive Officer in 2001, and cancelled as of March 10, 2003.(4)
    
    Excludes ordinary shares issuable upon the contribution of
shares of Gemplus S.A. held by our employees. To our knowledge, there are no other shareholders holding more than 2% of
our voting rights as of April 27, 2004. As of May 31, 2004, there were 9,365,720 of our ADSs outstanding,
representing 18,731,440 ordinary shares, or 3.1% of our total shares
outstanding. As of March 31, 2004, our total amount of shares was divided into
393,086,307 shares held under street name held through Euroclear and
214,034,214 registered shares. In 2003, we ordered a partial bearer share register through Euroclear for
shareholders holding more than 100,000 shares as of November 28, 2003 which
represented 90% of all bearer shares. From this bearer share register we note that less than 2% of our
outstanding shares are held by financial institutions based in Luxembourg. We
do not know of other shareholders who are residents of Luxembourg. As of May 31, 2004, approximately 5.7% of our registered shares were held
by French residents. The percentage of shares held through Euroclear by French
residents cannot be identified. See also 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 the Company and Dassault
Multimedia SAS are minority shareholders of Welcome Real Time S.A. Mr.
Thierry Dassault, one of the Companys former directors, is also the President
of Dassault Multimedia, 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 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
total consideration of 4,000 thousand. 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 a shareholder of our company.
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., 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. 72




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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$2,000 thousand 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. On March 31, 2004, Gemplus Trading S.A., indirectly a wholly owned
subsidiary of our company and Certplus S.A., a company in which Gemplus Trading
S.A. holds 80% of the shares, entered into an agreement with other investors
and with Dassault Multimedia SAS for the creation of a new company in France to
provide electronic certification services. As a result of this agreement, the
assets of Certplus S.A. shall be contributed to the new company. In return
Certplus S.A. shall receive approximately 16% of the shares of the new company.
Thierry Dassault, who was one of the Companys directors until April 27, 2004,
shall become one of the directors and Chairman of the new company and Dassault
Multimedia SAS, one of our shareholders of which Mr. Thierry Dassault is the
president, shall contribute 62,650 to the creation of the new company and
receive 1% of the shares, and shall have a seat on the new companys board (the
board being composed of nine members). The agreement provides for Dassault Multimedia SAS to supply services to the
new company in relation to its creation for the amount of 80 thousand. 
 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, one of our indirect subsidiaries made a loan to Dr. Lassus to
assist Dr. Lassus to exercise stock options, pursuant to his then current terms
of employment. Pursuant to an agreement dated December 19, 2001, as of January
10, 2002 Dr. Lassus resigned as Chairman of our board of directors and resigned
from all other positions that he held with our company and any of our companys
affiliates, except for his position as a non-executive director of our company.
As of January 10, 2002, Mr. Lassus was no longer an employee of our company or
any of its affiliates. We have not yet received the guarantees of reimbursement
(including a pledge of Dr. Lassuss option shares) that Dr. Lassus was required
to provide, inter alia, as confirmed in a letter agreement dated December 19,
2001. Although we recorded an expense of 67.6 million effective June 30,
2002, following the write-down of the loan, we have not forgiven the loan. A
special committee of our board of directors recommended that our indirect
subsidiary initiate legal action to seek security for the loan and its
repayment. Our board of directors agreed with the special committees
recommendations, also based on the opinion of special independent legal
counsel, and an ad hocarbitration proceeding was commenced by our company and
its indirect subsidiary against Dr. Lassus in London, England, in January 2003.
In March 2004, the tribunal issued a final award in favor of the company and
its indirect subsidiary. See Note 25 to our Consolidated Financial Statements. 73




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In 2002, three French subsidiaries of the Company, including Gemplus S.A.,
received a tax assessment from the French tax authority primarily relating to
the fiscal years 1998 through 2000. The major components of the assessment
related to intercompany transactions, including transfer pricing, invoicing of
management fees and forgiveness of intercompany debt, as well as the adequacy
of documentation relating to certain commissions paid to agents. Based on
communications with the French tax authority, the Company has reevaluated its
treatment of deferred tax assets and provisions for tax claims at December 31,
2003. Such reevaluation had a positive effect on the 2003 net income resulting
in the reduction of the tax provision, net of related deferred tax assets, by
1,930 thousand to 10,846 thousand. The timing difference between
payment of the tax assessment to the tax authorities and the recoverability of
associated tax loss carry-backs could impact available cash by up to 37
million, of which approximately 25 million is anticipated to be temporary. In December 1997, Mr. Alain Nicolaï 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
smart card reading system and device in the area of casino slot machines. In
June 2000, the Court found Gemplus S.A. liable for breach, ordered Gemplus S.A. 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. Gemplus S.A. appealed. In April 2003, the expert filed a
preliminary report estimating actual damages within a range of 10,975
thousand to 14,944 thousand. Gemplus S.A. contested the experts
preliminary report on various grounds, including absence of any substantial
market for the products at issue. In August 2003, the expert transmitted to the
parties his definitive report indicating that the amount estimated by him of
the plaintiffs damages would be in the range of 6,792 thousand to
25,100 thousand. Gemplus S.A. maintained its position and contested the
definitive report of the expert and the related estimate of damages, as well as
the merits of this case, on various grounds. Gemplus S.A. maintained its
positions and contested the definitive report of the expert and the related
estimate of damages, as well as the merits of this case, on various grounds.
Based on the experts report, on March 18, 2004, the Marseille Commercial Court
ordered Gemplus S.A. to pay 21,952 thousand to the plaintiffs.
Gemplus S.A.
filed an appeal on the merits. At the further request of Gemplus S.A., on April
2, 2004, the Aix-en-Provence Court of Appeal suspended the order of the
Marseille Commercial Court directing Gemplus S.A. to make the payment to the
plaintiffs, and instead, ordered Gemplus S.A. to make a cash deposit in the same
amount into an escrow account by June 1, 2004, as security pending a decision
on the appeal on the merits. On March 31, 2004, we recorded the amount of this
deposit under the caption Other Non-Current Assets based on the anticipated
timing of the resolution of this litigation. Although there can be no
assurance of how the appellate court may rule or as to the amount of damages
that could be assessed, based on the Companys analysis and advice of counsel,
we recorded a provision for this litigation of 5,200 thousand in the 2003
Consolidated Statement of Income, and recorded such amount in our Consolidated
Balance Sheet under the caption Other Current Liabilities. On March 31, 2004,
we reclassified the amount of this provision in our Consolidated Balance Sheet
to Other Non-Current Liabilities based on the anticipated timing of the
resolution of this litigation. 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 these 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. On May
11, 2004, the Aix-en-Provence Court of Appeal affirmed the decision of the
Marseille Commercial Court. A former director of our company, Mr. Ziad Takieddine, who resigned from
the board of directors on December 19, 2002, has initiated certain legal
proceedings against our company before the commercial court in Luxembourg. On
October 1, 2002, Mr. Takieddine filed an injunction-type lawsuit (or référé
proceeding) seeking the annulment of the board meeting of September 23, 2002,
or alternatively the cancellation or suspension of the effects of the decisions
of the board meeting of September 23, 2002, on various procedural grounds. Such
procedural grounds include: the alleged failure to send documents to board
members sufficiently in advance of the meeting; alleged failure to provide to
the board, or for the board to approve, draft minutes of previous board
meetings; the holding of the meeting by telephone conference call rather than
in person; the alleged unjustified attendance at the meeting of non-board
members; and other procedural grounds. On October 17, 2002, the court ordered
the suspension of the effects of the board meeting of September 23, 2002. At a
meeting on October 29, 2002, the board re-adopted and re-approved a majority of
the decisions of the board meeting of September 23, 2002. On June 24, 2003, the
Luxembourg Court of Appeal dismissed the companys appeal as non-justiciable
because the board meeting of October 29, 2003, had re-approved the decisions of
the September 23, 2002, board meeting. On October 23, 2002, Mr. Takieddine filed a lawsuit challenging the
validity and requesting the annulment of the decisions of the board at its
meetings of July 30, August 29 and September 23, 2002, and the boards decision
on October 29, 2002 to convene a shareholders meeting on November 21, 2002
(later adjourned and re-scheduled for unrelated reasons to
December 19, 2002). At a hearing on January 22, 2003, 74




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which had been set on an expedited basis at
Mr. Takieddines request, this lawsuit was stricken without prejudice from the
current docket by the court for failure by the plaintiff to actively prosecute
the case. Either party may petition the court to set a future hearing date. Our
company has not been informed of any step taken by Mr. Takieddine to request
the court to set a new hearing date. Our company believes that the claims
asserted by Mr. Takieddine in each of these legal proceedings are without
merit. No further action has been taken by Mr. Takieddine since January 2003. British Technology Group (BTG) had offered to transfer to Gemplus a
license on a patent family related to technology called E-SMS. In July 1999,
Gemplus S.A., together with other companies, has lodged an opposition at the
European Patent Office (E.P.O.) concerning the related European patent. On
December 9, 2003, the E.P.O. decided to cancel BTGs European patent. Five
European divisional patent applications of BTG, however, are being examined by
the E.P.O. Prior to 2003, the Company recorded a provision of 9,000
thousand for the risks related to this litigation. Because there are still some
risks outside Europe, and as the five divisional patent applications are still
being examined, the Company has decided to maintain this provision. In 2003, one of our subsidiaries in Singapore received a tax reassessment
primarily relating to potentially non-deductible interest expenses. The amount
of the reassessment was 741 thousand, and we are contesting this
reassessment. In 2002, our subsidiaries in Germany came under tax audit. No assessment
has been received. Based on discussions with the tax authorities, we have
recorded a valuation allowance against other tax assets and a provision in the
total amount of approximately 4,300 thousand. In October 2001, the United States Court of Appeals for the Ninth Circuit
affirmed a District Court judgment against the Company in favor of Humetrix
Inc., based on the claimed breach of an agreement to jointly market products in
the U.S. health care sector. The parties entered into a Mutual Release and
Settlement Agreement on March 25, 2002. As a result of the above decision, the
Company recorded a charge of 18,100 thousand, adversely impacting 2001
operating results, and resulting in a total current liability (including a
previously existing provision) of 19,400 thousand in the balance sheet as
at December 31, 2001. The Company paid all amounts due under the Mutual Release
and Settlement Agreement in 2002, and no further obligations remain. 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. 
 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 75




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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 Marché
and 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
    
    Low2000From December 11,
2000
    
    
    9.99
    
    
    
    6.55
    
    
    $
    18.88
    
    
    $
    12.002001First Quarter
    
    
    9.90
    
    
    
    5.13
    
    
    $
    17.88
    
    
    $
    9.25Second Quarter
    
    
    6.00
    
    
    
    3.20
    
    
    
    10.19
    
    
    
    5.80Third Quarter
    
    
    3.60
    
    
    
    2.42
    
    
    
    6.18
    
    
    
    4.35Fourth Quarter
    
    
    3.86
    
    
    
    1.93
    
    
    
    6.90
    
    
    
    3.602002First Quarter
    
    
    3.08
    
    
    
    3.08
    
    
    $
    5.47
    
    
    $
    3.15Second Quarter
    
    
    2.16
    
    
    
    1.32
    
    
    
    3.88
    
    
    
    2.63Third Quarter
    
    
    1.50
    
    
    
    0.37
    
    
    
    2.86
    
    
    
    0.77Fourth Quarter
    
    
    1.45
    
    
    
    0.45
    
    
    
    3.08
    
    
    
    0.902003First 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
    
    
    2.26
    
    
    
    1.63
    
    
    
    4.69
    
    
    
    3.38December 2003
    
    
    1.92
    
    
    
    1.52
    
    
    
    4.69
    
    
    
    3.852004January
    
    
    2.13
    
    
    
    1.62
    
    
    $
    5.30
    
    
    $
    4.18February
    
    
    2.18
    
    
    
    1.87
    
    
    
    5.80
    
    
    
    4.75March
    
    
    2.26
    
    
    
    1.63
    
    
    
    5.64
    
    
    
    4.08April
    
    
    2.20
    
    
    
    1.72
    
    
    
    5.12
    
    
    
    4.22May
    
    
    2.05
    
    
    
    1.52
    
    
    
    4.72
    
    
    
    3.61
 76




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Trading on the Premier Marché On September 22, 2000, the Société des Bourses Françaises SA(known as the
ParisBourseSBF SA), Amsterdam Exchange N.V. and the Société de la Bourse de
Valeurs Mobilières de Bruxelles SAmerged to create Euronext N.V., a Dutch
holding company and the first pan-European stock exchange. Subsequently,
PariBourseSBF SA changed its name to Euronext Paris. Securities quoted on any
of the stock exchanges participating in Euronext are traded through a common
Euronext platform, with central clearinghouse, settlement and custody
structures. However, these securities remain listed on their respective local
exchanges. Euronext Paris retains responsibility for the admission of
securities to its trading markets, as well as the regulation of these markets. Securities approved for listing by Euronext Paris are traded in one of two
regulated markets, the Bourse de Paris, which in turn comprises the Premier
Marchéand the Second Marché, and the Nouveau Marché. These markets are all
operated and managed by Euronext Paris, a market operator (entreprise de
marché) responsible for the admission of securities and the supervision of
trading in listed securities. Euronext Paris publishes a daily official price
list that includes price information for listed securities. The securities of
most large public companies are listed on the Premier Marché, with the Second
Marchéavailable for small and medium-sized companies. Trading on the Nouveau
Marchéwas introduced in March 1996 to allow small capitalization and start up
companies to access the stock market. In addition, the securities of certain
other companies are traded on a non-regulated, over-the-counter market, the
Marché Libre OTC. Trading by our company in our 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 27,
2004, our shareholders authorized us to repurchase our shares from time to time
through October 26, 2005, 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 6 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. In 2003, we purchased 487,957 shares of our outstanding common stock from
two former Celocom Limited employees pursuant to the provisions of the 2000
Celocom Limited share purchase agreement. See Item 10. Additional Information-Articles of Incorporation. 
 Item 10. Additional Information ARTICLES OF INCORPORATION The following description summarizes several aspects of our articles of
incorporation and our share capital, which consists of ordinary shares only.
For information regarding Organization and Register, Objects and Purposes,
Disclosure of Interests, Indivisibility, General Meetings of Shareholders,
Liquidation, Preferential Subscription Rights, No Limitation on Foreign
Ownership, Change in Control, see our Annual Report on Form 20-F dated July 1,
2002. 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. 77




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Share Capital As of June 2, 2004, our subscribed capital was fixed at 128,545,595.14
consisting of 607,120,521 shares with no par value. As of such date, 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. On November 10, 2000, our shareholders authorized our board of directors
to increase our share capital by a maximum amount of 394 million and issue
up to 1.97 billion new shares on terms and conditions and at such times as it
deems appropriate, during a three-year period from the date of publication of
the minutes of the extraordinary general meeting, except for issues of shares
for any of the purposes listed below, which may occur within five years of this
date. At the extraordinary general meeting of the shareholders held on April
27, 2004, the authorization of the Board to issue shares for purposes other
than those listed below was renewed until the third anniversary of the
publication of the minutes of such meeting:  
    
    the issuance of a maximum of 20 million shares in exchange for shares
of Gemplus S.A. at a ratio of 50 shares of our company for 1 share of
Gemplus S.A.;
    
    the issuance of a maximum of 56,845,700 shares in exchange for shares
of Gemplus S.A. to be issued under any of Gemplus S.A.s stock option
plans in existence on or prior to February 1, 2000, at a ratio of 50
 shares of our company for 1 share of Gemplus S.A., or with respect to
options to be issued by us to subscribe for shares in our company on
terms identical to those existing for options issued under any of
these stock option plans against surrender or exchange of, or
renunciation to, these stock options in the same amounts on an
adjusted basis (subject to the applicable ratio);
    
    the issuance of a maximum of 50 million shares with respect to the
options granted to the employees or officers of our company (including
any of its subsidiaries or affiliates) in
accordance with the stock option plans as from time to time adopted by
the board of directors, subject to such further conditions as may be
imposed by a general meeting of our shareholders; and
    
    the issuance of a maximum of 60 million shares without nominal value
to senior management, board members and/or executives of our company
(including any of its subsidiaries or affiliates) in the form of stock
options or, except in the case of board members, in the form 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. Our shareholders have waived their preemptive subscription rights with
respect to any issuance of these authorized new shares until November 10, 2005. On December 5, 2000, our shareholders authorized our board of directors to
issue a maximum of 30 million shares to be sold in connection with our initial
public offering, with no pre-emptive subscription rights for existing
shareholders until December 5, 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 Our shares are issued in registered form. Pursuant to Luxembourg law, we
keep a register of all of the holders of our registered shares. 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. 78




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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. The shareholders shall vote on each
candidate individually. Board members 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 We entered into a four-year employment agreement with Mr. Alex Mandl,
dated August 29, 2002, the compensation-related terms of which were approved by
our shareholders on December 19, 2002. That agreement provides essentially the
following:  
    
    Mr. Mandl will serve as the President and Chief Executive Officer of
the company with a base salary of 600 thousand and an annual
performance bonus of up to 120% of his base salary, guaranteed for one
year. The company will provide Mr. Mandl with benefits comparable to
those generally made available to senior company executives. The
company also agreed to reimburse Mr. Mandl for his legal and
accounting costs in preparing the agreement up to a maximum of US$50
thousand.
    
    Mr. Mandl is required to and has purchased, directly and indirectly,
company shares having a market value of US$200 thousand at the public
market price. 79




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
    
    Mr. Mandl will be entitled to receive directly or indirectly two
tranches of options to purchase a total of 12,000,000 shares of
company common stock, 8,000,000 of which will be granted with an
exercise price of 0.84 and the remaining 4,000,000 of which will
be granted with an exercise
price equal to 2.25. The options shall vest in equal twenty five
percent annual installments beginning on August 29, 2003, except that
if the company is sold fifty percent of the options shall vest
immediately prior to the consummation of such sale.
    
    The company will reimburse Mr. Mandl for certain costs and losses in
the operation and sale of his home in the United States as a result of
his relocation to Geneva, Switzerland. These amounts, depending on
specific circumstances, may be up to US $4,920 thousand. As of June 2,
2004, Mr. Mandl has not sold his home.
    
    If Mr. Mandls employment is terminated by our company without Good
Cause, by Mr. Mandl for Good Reason (as defined in the agreement,
including if Mr. Mandl is not permitted to sell shares of our company
which he owns, directly or through vested options, in connection with
a sale of more than 50% of the shares of the company by certain major
shareholders) or due to his death or disability, our company will pay
him (or his estate) an amount equal to between one and two years base
salary, incentive bonus, and benefits. He will also receive up to
twenty-four months vesting on his options. If Mr. Mandl voluntarily
terminates his employment with our company or is terminated for Good
Cause, our company will pay him his base salary and annual incentive
bonus through the date of termination. All options that have not
vested as of such date will be forfeited. In the event Mr. Mandl is
subject to any excise tax pursuant to Section 280G of the United
States Internal Revenue Code (due on certain severance payments made
after a change of control of the company), our company will pay Mr.
Mandl a gross-up payment equaling such amount.
    
    Mr. Mandl is bound by a confidentiality agreement, an intellectual
property agreement, a non-competition and non-solicitation agreement
and an arbitration clause. 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 continuing to further the objective of maintaining employment
levels in manufacturing at the Gémenos and La Ciotat sites. See
Item 19. Exhibits. See also 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; 80




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
    
    a person who 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 who holds ordinary shares or ADSs and owns or is deemed to own ten
percent 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 advisers 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 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 by us to you are generally subject to Luxembourg
withholding tax at a 20 percent rate. You may, however, qualify for a reduced
rate of withholding under an applicable income tax treaty. If you so qualify,
you may be able to claim a refund of the difference between the amount
initially withheld and the amount determined by applying the applicable treaty
rate. The income tax treaty between Luxembourg and the United States (the
Treaty) generally provides for Luxembourg withholding tax at a reduced rate
of 15 percent. You should consult your own tax advisers regarding the specific
procedures for claiming a refund of Luxembourg withholding tax. Sale or other Disposition of Ordinary Shares or ADSs Holders
of ordinary shares or ADSs who: (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  underage children,
directly or indirectly) more than 10% of our ordinary shares or ADSs, will not
be subject to Luxembourg tax on capital gains on a disposal of such 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 who 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 that applies under limited circumstances.  The treaty benefits discussed herein generally are not available to
holders who 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. 81




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Comparatively minor changes in our assets or share price could result in
our becoming a passive foreign investment company. See Item 3. Key
Information-Passive Foreign Investment Company Considerations. 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.
This summary incorporates new U.S. tax legislation signed into law on 28 May
2003, which provides capital gain and dividend tax relief. The pertinent
sections of the Jobs and Growth Tax Relief Reconciliation Act of 2003
(JGTRRA) relating to capital gains and dividends are discussed below. Dividends on Ordinary Shares or ADSs The gross amount of any dividends distributed by us with respect to
ordinary shares or ADSs (including 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 generally will 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). If
dividends paid in a foreign currency are converted into 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 dollar
value of the refund differs from the dollar equivalent of that amount on the
date of receipt of the underlying dividend. According to the JGTRRA, certain
dividends received from domestic corporations and qualifying foreign
corporations will be taxed at a maximum rate of 15%. A qualifying foreign
corporation is a corporation that is eligible for benefits of a comprehensive
income tax treaty with the U.S., or a foreign corporation whose shares with
respect to which such dividend is paid are readily tradable on an established
securities market in the U.S. Specifically excluded from the definition of
qualifying foreign corporation are Passive Foreign Investment Companies,
Foreign Investment Companies, and Foreign Personal Holding Companies. To be
eligible for the 15% rate, the shares must be held by the shareholder for more
than 61 days during the 121-day period beginning 60 days before the ex-dividend
date. The new dividend rate is effective for dividends received after 31
December 2002. 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 Item 3. Key Information-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 net amount of long-term capital gain recognized by an
individual U.S. holder generally is subject to taxation at a maximum rate of
20%. The JGTRRA lowers the maximum tax rate on capital gains from 20% to 15%
for regular tax and alternative minimum tax purposes. The new rate is effective
for taxable years ending on or after 6 May 2003, and beginning before 1 January
2009, with special rules for taxable years including 6 May 2003. 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%. 82




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The decline in our market capitalization has increased the relative
proportion of our assets that would be considered to produce passive income for
purposes of the PFIC rules. Comparatively minor changes in our assets or share
price could result in our becoming a PFIC for reasons outside our control.
Although we continue to believe that we should not be classified as a PFIC in
the current year, investors should consult their own tax advisers regarding the
advisability of making a mark-to-market election, as described below. If we are a PFIC in respect of any year, then a U.S. holder who holds
shares 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 from us and on gains realized on a sale of 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. Classification as a
PFIC may also have other adverse tax consequences, including the denial of a
step-up in the basis of ordinary shares and ADSs at death, and the
inapplicability of the lowered maximum U.S. tax rate on dividends of 15% under
the JGTRRA. 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 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 holders with the information necessary to make
a qualified electing fund election. A U.S. holder should consult its own tax 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
United States or by a U.S. related financial intermediary will be subject to
information reporting and may be subject to a backup withholding unless you:  
    
    are a corporation or other exempt recipient; or
    
    provide a 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
may be required to provide certification of non-U.S. status in order to
establish that you are exempt. 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. 
 Item 11. Quantitative and Qualitative Disclosures About Market Risk 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. No market risk sensitive instruments are entered into for trading
purposes. Foreign currency risk is our primary market risk exposure. 83




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Foreign currency risk The Companys sales are primarily denominated in the domestic currency of
our customers. As certain manufacturing sites are located in different
countries, a portion of our costs are also denominated in foreign currencies.
Therefore, the Company is exposed to foreign currency risk on our commercial
transactions. The policy of the Company is to hedge our foreign currency exposure on our
firm and anticipated purchases and sales commitments that are denominated in
currencies other than our subsidiaries functional currencies, for periods
commensurate with our known or forecasted transactions. These contracts generally mature within twelve months. In order to achieve
this objective, the Company uses foreign currency derivative instruments, by
entering into foreign exchange forward contracts and by purchasing or selling
foreign exchange option contracts. 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 any speculative positions. These
derivative instruments are traded over the counter with major financial
institutions. All hedging instruments are allocated to underlying transactions. Most of the financial instruments used by the Company to hedge our
exposure to foreign currency risk are qualified as cash flow hedges under SFAS
133. The financial instruments that do not qualify as effective hedges under
SFAS 133 are mainly options sold as part of the above combination strategies. Outstanding financial instruments qualifying as cash flow hedges under
SFAS 133, as well as the related currency commercial exposure, are described
below. In the amounts reported below:  Hedging positions in parenthesis 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 parenthesis indicate the
Companys payables in the currency, or forecasted purchases in the currency. 84




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(in thousands of euros (1)) 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2002USD and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    USD andDecember 31
    
    USD area(2)
    
    GBP
    
    JPY
    
    ZAR
    
    Others (3)
    
    USD area(2)
    
    GBP
    
    JPY
    
    ZAR
    
    Others(3)Hedging positions(4)Forward contracts
    
    
    (30,874
    )
    
    
    (5,061
    )
    
    
    (4,474
    )
    
    
    (3,890
    )
    
    
    (2,476
    )
    
    
    (27,602
    )
    
    
    (516
    )
    
    
    (1,438
    )
    
    
    (4,990
    )
    
    
    3,052Option contracts(5)
    
    
    (128,379
    )
    
    
    (21,307
    )
    
    
    (15,747
    )
    
    
    
    
    
    
    
    
    
    
    (98,368
    )
    
    
    (12,598
    )
    
    
    
    
    
    
    
    
    
    
    TOTAL
    
    
    (159,253
    )
    
    
    (26,368
    )
    
    
    (20,221
    )
    
    
    (3,890
    )
    
    
    (2,476
    )
    
    
    (125,970
    )
    
    
    (13,114
    )
    
    
    (1,438
    )
    
    
    (4,990
    )
    
    
    3,052Exposure(6)Balance sheet items
(commercial
transactions not
settled at year
end)
    
    
    53,529
    
    
    
    2,220
    
    
    
    1,908
    
    
    
    3,890
    
    
    
    7,818
    
    
    
    54,913
    
    
    
    1,017
    
    
    
    (1,279
    )
    
    
    3,416
    
    
    
    2,310Forecasted
commercial
Transactions
    
    
    154,834
    
    
    
    34,984
    
    
    
    21,548
    
    
    
    1,600
    
    
    
    (13,284
    )
    
    
    98,098
    
    
    
    17,543
    
    
    
    3,403
    
    
    
    5,054
    
    
    
    (20,853
    )TOTAL
    
    
    208,363
    
    
    
    37,204
    
    
    
    23,456
    
    
    
    5,490
    
    
    
    (5,466
    )
    
    
    153,011
    
    
    
    18,560
    
    
    
    2,124
    
    
    
    8,470
    
    
    
    (18,543
    )
  (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) The financial instruments hedging the Companys commercial currency
exposure, and which are effective hedges under SFAS 133, qualify as cash
flow hedges.(5) Option hedges qualifying as effective hedges under SFAS 133 are purchased
options to sell or buy currency against the euro.(6) The Company policy is to hedge all of our actual commercial currency
exposure, as well as a time weighted proportion of our forecasted
commercial currency exposure. Outstanding financial instruments not qualifying as effective hedges under
SFAS 133 are described below. 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)) 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2002USD and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    USD andDecember 31
    
    USD area(2)
    
    GBP
    
    JPY
    
    ZAR
    
    Others (3)
    
    USD area(2)
    
    GBP
    
    JPY
    
    ZAR
    
    Others(3)Forward contracts
    
    
    (8,796
    )
    
    
    (895
    )
    
    
    
    
    
    
    (2,375
    )
    
    
    
    
    
    
    (186,350
    )
    
    
    (1,470
    )
    
    
    (8,059
    )
    
    
    
    
    
    
    Option contracts (4)
    
    
    (46,404
    )
    
    
    (4,261
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,918
    )
    
    
    (3,090
    )
    
    
    
    
    
    
    
    
    
    
    TOTAL
    
    
    (55,200
    )
    
    
    (5,156
    )
    
    
    
    
    
    
    (2,375
    )
    
    
    
    
    
    
    (213,268
    )
    
    
    (4,560
    )
    
    
    (8,059
    )
    
    
    
    
    
    
    
  (1) Currency amounts are converted to euros at year end closing rate.(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 SFAS 133 are the
options that the Company sells as part of our combination strategies. 85




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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 24 to our Consolidated Financial Statements. Interest Rate Risk The following maturity schedule describes the exposure of the Company to
interest rate risk.
Financial assets are short-term investments in money market instruments with a
duration of one week or less. The company financial liabilities are mainly
floating rates leasing. The Company is therefore in a net, short duration,
financial asset position. The Company considers it is not significantly exposed to interest rate
risk fluctuations. Consequently, we have not entered 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 (respectively decreasing). This risk remains un-hedged. In
2003, the average interest rate for the Companys financial
liabilities was 3.61%. See
Item 5. Operating and Financial Review and ProspectsOperating Income
(Loss)Management severance expenses; and Note 24 to our Consolidated
Financial Statements. From December 31 , 2003(in thousand of euros (1))
    
    To December 31 , 2004
    
    From 1 year to 5 years
    
    Beyond 5 yearsFinancial assets
    
    
    390,684
    
    
    
    
    
    
    
    Fixed rate
    
    
    
    
    
    
    
    
    
    
    Floating rate
    
    
    390,684
    
    
    
    
    
    
    
    Financial liabilities
    
    
    (5,928
    )
    
    
    (23,719
    )
    
    
    (15,273
    )Fixed rate
    
    
    
    
    
    
    
    
    
    
    Floating rate
    
    
    (5,928
    )
    
    
    (23,719
    )
    
    
    (15,273
    )Net balance sheet position before hedging
    
    
    384,756
    
    
    
    (23,719
    )
    
    
    (15,273
    )Fixed rate
    
    
    
    
    
    
    
    
    
    
    Floating rate
    
    
    384,756
    
    
    
    (23,719
    )
    
    
    (15,273
    )Hedging
    
    
    
    
    
    
    
    
    
    
    Fixed to floating rate
    
    
    
    
    
    
    
    
    
    
    Floating to fixed rate
    
    
    
    
    
    
    
    
    
    
    Net balance sheet position after hedging
    
    
    384,756
    
    
    
    (23,719
    )
    
    
    (15,273
    )Fixed rate
    
    
    
    
    
    
    
    
    
    
    Floating rate
    
    
    384,756
    
    
    
    (23,719
    )
    
    
    (15,273
    )
 (1) Assets are presented as positive amounts and liabilities as negative
amounts. Equity Risk in Minority Investments We have several minority equity investments in publicly traded companies.
The book value of our minority equity investments in publicly traded companies
was totally provided for, as of December 31, 2003. Because these investments
are relatively small, we currently do not have any outstanding derivative
financial instruments to hedge fluctuations in these marketable equity
investments. 86




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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 Prior to April 29, 2003, the board members were elected by cumulative
voting. On April 29, 2003, our shareholders voted to eliminate cumulative
voting and accordingly, to amend our articles of incorporation. As of November 10, 2000, the board was authorized to issue additional
shares within the authorized capital of the Company 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
November 10, 2005, and for public offerings until December 5, 2005, up to a
limited number of shares. As of such date, the Board was also authorized to
issue further shares within the authorized capital of the Company 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 to issue shares for such
other purposes was renewed until the third anniversary of the publication of
the minutes of such meeting. 
 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-14(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 the Company has at least one
audit committee financial expert. From January 1, 2003 until May 31, 2004, it
was Mr. William Price III. As of June 1, 2004, it was Mr. John Ormerod.
According to the Securities and Exchange Commission, 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 comprehensive Code of Ethics
applicable to all directors, officers and employees of the 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. 87




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Individuals can contact our Investor Relations Department to request a copy of
the Code of Ethics, at no charge, by post at: 2-4, Place des Alpes 1211
Geneva, Switzerland. 
 Item 16C. Principal Accountant Fees and Services PricewaterhouseCoopers has served as our independent public accountant or
each of the financial years in the three-year period ended December 31, 2003,
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 2003 for professional services rendered by
the Companys principal accountant for the audit of the annual financial
statement totaled 1,554 thousand. The aggregate fees billed in 2002 for
professional services rendered by the Companys principal accountant for the
audit of the annual financial statement totaled 1,300 thousand. Audit
fees consist of fees expensed for professional services rendered for the 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 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. The
aggregate fees billed in 2002 for professional services rendered by the
Companys principal accountant for assurance and related services related to
the audit of the financial statements totaled 289 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 2003 for professional services rendered by
the Companys principal accountant for tax services totaled 431 thousand.
The aggregate fees billed in 2002 for professional services rendered by the
Companys principal accountant for tax compliance, tax advice and tax planning
services totaled 919 thousand. These services consist of fees expensed
for tax compliance and tax planning services and tax advice. All Other Fees The aggregate fees billed in 2003 for professional services rendered by
the Companys principal accountant for all other services not reported in the
above sections titled Audit Fees, Audit-Related Fees, and Tax Fees totaled 21
thousand. The aggregate fees billed in 2002 for professional services
rendered by the Companys principal accountant for all other services not
reported in the above sections titled Audit Fees, Audit-Related Fees, and Tax
Fees totaled 235 thousand. In 2002, these services mainly consisted of
fees for information systems services. The Audit Committee of the Company requires prior approval of all audit
and permissible non-audit services to be performed by our auditors and 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 No
exemption from the Nasdaq National Market listing standards for audit committees was
sought or obtained by the Company in 2003. 
 PART III 
 Item 17. Financial Statements Not applicable. 88




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Item 18. Financial Statements See pages F-1 through F-39, incorporated herein by reference. 89




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Item 19. Exhibits (a) List of Financial Statements (incorporated herein by reference) Report of Independent Accountants
    
    
    F-1Consolidated Statements of Income for the Years Ended December 31,
2003, 2002, and 2001
    
    
    F-2Consolidated Balance Sheets as of December 31, 2003, 2002 and 2001
    
    
    F-3Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002 and 2001
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity for the
Years Ended December 31, 2003, 2002 and 2001
    
    
    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,
2003.8.
    
    List of significant subsidiaries.12.1
    
    Certification by Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.12.2
    
    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 2002.99.1
    
    Consent from PricewaterhouseCoopers
 90




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SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant 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 30, 2004 GEMPLUS INTERNATIONAL S.A.By:
    /s/ Frans SpaargarenFrans SpaargarenChief Financial Officer 91




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GEMPLUS INTERNATIONAL S.A. Report of Independent Accountants 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 S.A. and its subsidiaries at December 31, 2003,
2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003, 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 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. 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 31 to the Consolidated Financial Statements. PricewaterhouseCoopers Paris, France
April 2, 2004 F 1




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GEMPLUS INTERNATIONAL S A Consolidated Financial Statements for the years ended December 31, 2003, 2002
and 2001 Consolidated Statements of Income (in thousands of euros, except shares and per share amounts) Years ended December 31
    
    Notes
    
    2003
    
    2002
    
    2001Net sales
    
    
    
    
    
    
    749,203
    
    
    
    787,434
    
    
    
    1,022,986Cost of sales
    
    
    
    
    
    
    (541,947
    )
    
    
    (587,722
    )
    
    
    (715,516
    )Gross profit
    
    
    
    
    
    
    207,256
    
    
    
    199,712
    
    
    
    307,470Research and development expenses
    
    
    (10
    )
    
    
    (69,223
    )
    
    
    (92,240
    )
    
    
    (112,885
    )Selling and marketing expenses
    
    
    
    
    
    
    (100,181
    )
    
    
    (112,227
    )
    
    
    (165,276
    )General and administrative expenses
    
    
    
    
    
    
    (77,317
    )
    
    
    (89,896
    )
    
    
    (110,657
    )Restructuring expenses
    
    
    (15
    )
    
    
    (61,973
    )
    
    
    (90,003
    )
    
    
    (28,466
    )Litigation expenses
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    (18,120
    )Management severance expenses
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    (25,691
    )Operating
income (loss) before goodwill amortization and impairment
    
    
    
    
    
    
    (101,438
    )
    
    
    (184,654
    )
    
    
    (153,625
    )Goodwill amortization and
impairment
    
    
    (8
    )
    
    
    (33,051
    )
    
    
    (47,117
    )
    
    
    (27,162
    )Operating income (loss)
    
    
    
    
    
    
    (134,489
    )
    
    
    (231,771
    )
    
    
    (180,787
    )Financial income (expense), net
    
    
    (16
    )
    
    
    8,204
    
    
    
    (51,092
    )
    
    
    20,702Other income (expense), net
    
    
    (17
    )
    
    
    (20,149
    )
    
    
    (28,904
    )
    
    
    45,681Income (loss) before taxes
    
    
    
    
    
    
    (146,434
    )
    
    
    (311,767
    )
    
    
    (114,404
    )Income tax benefit (expense)
    
    
    (18
    )
    
    
    (14,673
    )
    
    
    (9,124
    )
    
    
    14,184NET INCOME (LOSS)
    
    
    
    
    
    
    (161,107
    )
    
    
    (320,891
    )
    
    
    (100,220
    )Net income (loss) per share
    
    
    (20
    )Basic
    
    
    
    
    
    
    (0.27
    )
    
    
    (0.53
    )
    
    
    (0.16
    )Diluted
    
    
    
    
    
    
    (0.27
    )
    
    
    (0.53
    )
    
    
    (0.16
    )Shares used in net income (loss)
per share calculation
    
    
    (20
    )Basic
    
    
    
    
    
    
    605,658,965
    
    
    
    606,222,660
    
    
    
    636,992,392Diluted
    
    
    
    
    
    
    605,658,965
    
    
    
    606,222,660
    
    
    
    636,992,392
 The accompanying notes are an integral part of the Consolidated Financial
Statements. F 2




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Consolidated Balance Sheets (in thousands of euros) December 31
    
    Notes
    
    2003
    
    2002
    
    2001ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    
    
    390,684
    
    
    
    417,226
    
    
    
    490,652Trade accounts receivable, net
    
    
    (4
    )
    
    
    154,727
    
    
    
    144,913
    
    
    
    188,635Inventory, net
    
    
    (5
    )
    
    
    98,673
    
    
    
    96,513
    
    
    
    139,794Other current assets
    
    
    (6
    )
    
    
    82,675
    
    
    
    93,482
    
    
    
    103,733Total current assets
    
    
    
    
    
    
    726,759
    
    
    
    752,134
    
    
    
    922,814Non-current assets:Property, plant and equipment, net
    
    
    (7
    )
    
    
    175,706
    
    
    
    216,944
    
    
    
    268,784Goodwill, net
    
    
    (8
    )
    
    
    37,727
    
    
    
    73,187
    
    
    
    116,580Other non-current assets
    
    
    (9
    )
    
    
    43,408
    
    
    
    84,819
    
    
    
    150,472Deferred development costs, net
    
    
    (10
    )
    
    
    17,916
    
    
    
    25,910
    
    
    
    28,470Deferred tax assets
    
    
    (18
    )
    
    
    31,860
    
    
    
    41,674
    
    
    
    22,148Investments
    
    
    (11
    )
    
    
    19,863
    
    
    
    23,088
    
    
    
    21,424Total non-current assets
    
    
    
    
    
    
    326,480
    
    
    
    465,622
    
    
    
    607,878TOTAL ASSETS
    
    
    
    
    
    
    1,053,239
    
    
    
    1,217,756
    
    
    
    1,530,692LIABILITIESCurrent liabilities:Accounts payable
    
    
    
    
    
    
    95,582
    
    
    
    80,256
    
    
    
    109,661Salaries, wages and related items
    
    
    
    
    
    
    42,742
    
    
    
    51,188
    
    
    
    55,967Other current liabilities
    
    
    (12
    )
    
    
    78,090
    
    
    
    81,133
    
    
    
    86,411Accrued taxes
    
    
    (18
    )
    
    
    14,673
    
    
    
    27,209
    
    
    
    26,527Current obligations under capital leases
    
    
    (13
    )
    
    
    5,928
    
    
    
    6,098
    
    
    
    3,734Total current liabilities
    
    
    
    
    
    
    237,015
    
    
    
    245,884
    
    
    
    282,300Non-current liabilities:Long-term obligations under capital leases
    
    
    (13
    )
    
    
    38,893
    
    
    
    42,540
    
    
    
    32,581Long-term debt, less current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Other non-current liabilities
    
    
    (14
    )
    
    
    70,246
    
    
    
    53,714
    
    
    
    30,859Total non-current liabilities
    
    
    
    
    
    
    109,139
    
    
    
    96,254
    
    
    
    63,454Minority interest
    
    
    
    
    
    
    12,073
    
    
    
    15,167
    
    
    
    17,176Shareholders equity:Ordinary shares no legal par value,
2,000,000,000 shares authorized,
607,312,796, 637,859,088 and 641,396,497
shares issued at December 31, 2003, 2002
and 2001, respectively
    
    
    (19
    )
    
    
    127,889
    
    
    
    127,644
    
    
    
    127,056Additional paid-in capital
    
    
    
    
    
    
    1,028,849
    
    
    
    1,028,920
    
    
    
    1,027,850Retained earnings
    
    
    
    
    
    
    (464,221
    )
    
    
    (210,358
    )
    
    
    125,016Other comprehensive income
    
    
    (21
    )
    
    
    4,570
    
    
    
    8,571
    
    
    
    (3,968
    )Less, cost of treasury shares
    
    
    
    
    
    
    (2,075
    )
    
    
    (94,326
    )
    
    
    (108,192
    )Total shareholders equity
    
    
    
    
    
    
    695,012
    
    
    
    860,451
    
    
    
    1,167,762TOTAL LIABILITIES
AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    1,053,239
    
    
    
    1,217,756
    
    
    
    1,530,692
 The accompanying notes are an integral part of the Consolidated Financial
Statements. F 3




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Consolidated Statements of Cash Flows (in thousands of euros) Years ended December 31
    
    2003
    
    2002
    
    2001Cash flow from operating activities:Net income (loss)
    
    
    (161,107
    )
    
    
    (320,891
    )
    
    
    (100,220
    )Adjustments to reconcile net income (loss)
to net cash from operating
activities:Depreciation amortization and impairment
    
    
    95,071
    
    
    
    133,359
    
    
    
    120,409Changes in other non-current liabilities
    
    
    4,228
    
    
    
    9,420
    
    
    
    (3,387
    )Provision for deferred income taxes
    
    
    8,644
    
    
    
    (1,234
    )
    
    
    (15,976
    )(Gain) / loss on sale and disposal of assets
    
    
    2,005
    
    
    
    6,051
    
    
    
    (65,996
    )(Gain) / loss on equity investments
    
    
    9,098
    
    
    
    3,164
    
    
    
    386Other, net
    
    
    12,992
    
    
    
    (901
    )
    
    
    1,208Changes in operating assets and liabilities:Trade accounts receivable and related current
liabilities
    
    
    (12,292
    )
    
    
    40,598
    
    
    
    100,063Trade accounts payable and related current assets
    
    
    32,485
    
    
    
    (27,405
    )
    
    
    (126,920
    )Inventories
    
    
    (9,189
    )
    
    
    35,675
    
    
    
    11,509Value-added and income taxes
    
    
    6,674
    
    
    
    (12,656
    )
    
    
    (9,232
    )Other, net
    
    
    3,306
    
    
    
    (2,716
    )
    
    
    14,850Restructuring reserve payable
    
    
    (2,027
    )
    
    
    35,958
    
    
    
    6,177Litigation expenses payable
    
    
    
    
    
    
    (18,120
    )
    
    
    18,120Management severance expenses
    
    
    
    
    
    
    (10,629
    )
    
    
    25,691Provision for a loan to the former Chairman of the
Board
    
    
    
    
    
    
    67,582
    
    
    
    Net cash (used for) from operating activities
    
    
    (10,112
    )
    
    
    (62,745
    )
    
    
    (23,318
    )Cash flows from investing activities:Sale / purchase of activities net of cash disposed /
acquired
    
    
    114
    
    
    
    
    
    
    
    108,731Other investments
    
    
    (931
    )
    
    
    (14,720
    )
    
    
    (42,035
    )Purchase of property, plant and equipment
    
    
    (15,237
    )
    
    
    (31,953
    )
    
    
    (102,555
    )Purchase of other assets
    
    
    (1,406
    )
    
    
    (2,860
    )
    
    
    (19,623
    )Change in non-trade accounts payable and other current
assets
    
    
    780
    
    
    
    2,403
    
    
    
    (9,843
    )Net cash used for investing activities
    
    
    (16,680
    )
    
    
    (47,130
    )
    
    
    (65,325
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    173
    
    
    
    1,657
    
    
    
    7,762Purchase of Gemplus S.A. shares
    
    
    
    
    
    
    
    
    
    
    (14,544
    )Payments on long-term borrowings
    
    
    
    
    
    
    (134
    )
    
    
    (2,301
    )Proceeds from sales-leaseback operations
    
    
    
    
    
    
    15,962
    
    
    
    5,711Principal payments on obligations under capital leases
    
    
    (3,831
    )
    
    
    (3,883
    )
    
    
    (3,373
    )Increase (decrease) in bank overdrafts
    
    
    (51
    )
    
    
    (3,205
    )
    
    
    4,462Dividends paid by subsidiaries to minority shareholders
    
    
    (2,627
    )
    
    
    (4,297
    )
    
    
    (4,256
    )Change in treasury shares
    
    
    
    
    
    
    (617
    )
    
    
    (15,117
    )Interests receivable on loans to senior management
    
    
    
    
    
    
    (1,706
    )
    
    
    (4,877
    )Change in non-trade accounts payables on financing
activities
    
    
    
    
    
    
    
    
    
    
    (8,114
    )Net cash (used for) from financing activities
    
    
    (6,336
    )
    
    
    3,777
    
    
    
    (34,647
    )Effect of exchange rate changes on cash
    
    
    6,586
    
    
    
    32,672
    
    
    
    (22,342
    )Net increase (decrease) in cash and cash equivalents
    
    
    (33,128
    )
    
    
    (106,098
    )
    
    
    (123,290
    )Cash and cash equivalents, beginning of year
    
    
    417,226
    
    
    
    490,652
    
    
    
    636,284Cash and cash equivalents, end of period
    
    
    390,684
    
    
    
    417,226
    
    
    
    490,652
 The accompanying notes are an integral part of the Consolidated Financial
Statements. F 4




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Consolidated Statements of Changes in Shareholders Equity (in thousands of euros, except number of shares) OtherAdditional
    
    
    
    
    
    Net
    
    compreNumber
    
    Share
    
    paid-in
    
    Retained
    
    income
    
    -hensive
    
    TreasuryNotes
    
    of shares
    
    value
    
    capital
    
    earnings
    
    (loss)
    
    income
    
    shares
    
    TotalBalance at December 31, 2000
    
    
    
    
    
    
    636,256,258
    
    
    
    124,263
    
    
    
    1,026,063
    
    
    
    136,894
    
    
    
    99,078
    
    
    
    376
    
    
    
    (1,679
    )
    
    
    1,384,995Allocation of prior year income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,078
    
    
    
    (99,078
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,220
    )
    
    
    
    
    
    
    
    
    
    
    (100,220
    )Effect of adopting IAS 39
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,003
    )
    
    
    
    
    
    
    9,093
    
    
    
    
    
    
    
    4,090Shares issued following
acquisitions of Celocom
Limited and SLP InfoWare S.A.
    
    
    (3
    )
    
    
    4,554,639
    
    
    
    911
    
    
    
    (911
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Contribution
of Gemplus S.A.
shares to Gemplus
International S.A.
    
    
    (3
    )
    
    
    
    
    
    
    1,460
    
    
    
    (1,460
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus
S.A. pursuant to stock options
exercised to be contributed
    
    
    (19
    )
    
    
    2,498,100
    
    
    
    
    
    
    
    4,167
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    4,167Purchase of
Gemplus S.A.
shares by Gemplus International
    
    
    (19
    )
    
    
    (4,029,350
    )
    
    
    
    
    
    
    (9,450
    )
    
    
    (5,094
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,544
    )Shares issued by Gemplus
International S.A. pursuant
to stock options exercised
    
    
    (19
    )
    
    
    2,116,850
    
    
    
    422
    
    
    
    3,311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,733Treasury shares held
following transfer of shares
by senior management
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    6,130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (92,756
    )
    
    
    (86,626
    )Purchase of 4,900,534
shares of treasury shares
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,522
    )
    
    
    (15,522
    )Sale of 636,527 shares
of treasury shares
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (639
    )
    
    
    
    
    
    
    
    
    
    
    1,765
    
    
    
    1,126Change in other
Comprehensive income
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,437
    )
    
    
    
    
    
    
    (13,437
    )Balance at December 31, 2001
    
    
    
    
    
    
    641,396,497
    
    
    
    127,056
    
    
    
    1,027,850
    
    
    
    225,236
    
    
    
    (100,220
    )
    
    
    (3,968
    )
    
    
    (108,192
    )
    
    
    1,167,762Allocation of prior year loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,220
    )
    
    
    100,220
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (320,891
    )
    
    
    
    
    
    
    
    
    
    
    (320,891
    )Shares
issued by Gemplus S.A.
pursuant to stock options
exercised to be contributed
    
    
    (19
    )
    
    
    699,100
    
    
    
    
    
    
    
    992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    992Contribution
of Gemplus S.A.
shares to Gemplus
International S.A.
    
    
    (3
    )
    
    
    
    
    
    
    508
    
    
    
    (508
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus
International S.A. pursuant to
stock options exercised
    
    
    (19
    )
    
    
    398,350
    
    
    
    80
    
    
    
    586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    666Cancellation of treasury shares
    
    
    (19
    )
    
    
    (4,634,859
    )
    
    
    
    
    
    
    
    
    
    
    (14,483
    )
    
    
    
    
    
    
    
    
    
    
    14,483
    
    
    
    Purchase of 656,024 shares
of treasury shares
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (617
    )
    
    
    (617
    )Change in other
comprehensive income
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    12,539
    
    
    
    
    
    
    
    12,539Balance at December 31, 2002
    
    
    
    
    
    
    637,859,088
    
    
    
    127,644
    
    
    
    1,028,920
    
    
    
    110,533
    
    
    
    (320,891
    )
    
    
    8,571
    
    
    
    (94,326
    )
    
    
    860,451
 The accompanying notes are an integral part of the Consolidated Financial
Statements. F 5




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##### Table of Contents



Consolidated Statements of Changes in Shareholders Equity (continued) (in thousands of euros, except number of shares) OtherAdditional
    
    
    
    
    
    Net
    
    compreNumber
    
    Share
    
    paid-in
    
    Retained
    
    income
    
    -hensive
    
    TreasuryNotes
    
    of shares
    
    value
    
    capital
    
    earnings
    
    (loss)
    
    income
    
    shares
    
    TotalBalance
at December 31, 2002
    
    
    
    
    
    
    637,859,088
    
    
    
    127,644
    
    
    
    1,028,920
    
    
    
    110,533
    
    
    
    (320,891
    )
    
    
    8,571
    
    
    
    (94,326
    )
    
    
    860,451Allocation of prior year loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (320,891
    )
    
    
    320,891
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (161,107
    )
    
    
    
    
    
    
    
    
    
    
    (161,107
    )Shares
issued by Gemplus S.A.
pursuant to stock options
exercised to be contributed
    
    
    (19
    )
    
    
    17,550
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Contribution
of Gemplus S.A.
shares to Gemplus
International S.A.
    
    
    (19
    )
    
    
    
    
    
    
    207
    
    
    
    (207
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus
International S.A. pursuant
to stock options exercised
    
    
    (19
    )
    
    
    179,837
    
    
    
    38
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159Cancellation of 30,743,679
Treasury shares
    
    
    (3
    )
    
    
    (30,743,679
    )
    
    
    
    
    
    
    
    
    
    
    (92,756
    )
    
    
    
    
    
    
    
    
    
    
    92,756
    
    
    
    Purchase of 487,957 shares of
treasury shares
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (505
    )
    
    
    (505
    )Change in other
comprehensive income
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,001
    )
    
    
    
    
    
    
    (4,001
    )Balance at December 31, 2003
    
    
    
    
    
    
    607,312,796
    
    
    
    127,889
    
    
    
    1,028,849
    
    
    
    (303,114
    )
    
    
    (161,107
    )
    
    
    4,570
    
    
    
    (2,075
    )
    
    
    695,012
 The accompanying notes are an integral part of the Consolidated Financial
Statements. F 6




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements 1. The Company
    
    
    F-82. Summary of significant accounting policies
    
    
    F-83. Common control transactions, treasury shares, acquired and disposed
operations
    
    
    F-124. Trade accounts receivable
    
    
    F-135. Inventory
    
    
    F-136. Other current assets
    
    
    F-137. Property, plant and equipment
    
    
    F-158. Goodwill
    
    
    F-159. Other non-current assets
    
    
    F-1610. Research and development costs
    
    
    F-1611. Investments
    
    
    F-1712. Other current liabilities
    
    
    F-1713. Capital leases
    
    
    F-1814. Other non-current liabilities
    
    
    F-1815. Restructuring
    
    
    F-1916. Financial income and expense, net
    
    
    F-2017. Other income and expense, net
    
    
    F-2018. Income taxes
    
    
    F-2119. Ordinary shares
    
    
    F-2220. Net income (loss) per share calculation
    
    
    F-2321. Comprehensive income
    
    
    F-2422. Pension plans
    
    
    F-2423. Stock option plans
    
    
    F-2524. Financial instruments and market related exposures
    
    
    F-2725. Commitments and contingencies
    
    
    F-2926. Supplemental disclosure of cash flow information
    
    
    F-3127. Wages, benefits and number of employees (unaudited)
    
    
    F-3128. Related party transactions
    
    
    F-3129. Segment information
    
    
    F-3230. Management severance expenses
    
    
    F-3331. Differences between International Financial Reporting Standards and
US generally accepted accounting principles
    
    
    F-3432. Other required disclosures under US generally accepted accounting
principles
    
    
    F-37
 F 7




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##### Table of Contents



Notes to the Consolidated Financial Statements 1. THE COMPANY Gemplus International S.A., 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
and Financial Services and Security industries. The Company is incorporated in the Grand Duchy of Luxembourg. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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) and with
International Accounting Standards (IAS) formulated by its predecessor
organization the International Accounting Standards Committee (IASC). The IFRS financial statements are in compliance with French GAAP and in
accordance with Luxembourg Regulations, with the exception of applying IAS 39.
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 31. Principles of consolidation The consolidated financial statements include the accounts of Gemplus
International S.A. and its majority owned subsidiaries. All intercompany balances and transactions are eliminated. Investments in associated undertakings are accounted for by the equity method.
These are undertakings over which the Company exercises significant influence
but does not control, and in which the Company has between 20% and 50% of the
voting rights. Non-marketable equity investments in which the Company has less than 20% of the
investees outstanding voting stock are accounted for under the cost method,
because the Company does not have the ability to significantly influence the
operating and financial policies of the investee. Gains or losses recognized on
the sale of equity securities are recorded in the income statement. 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. Foreign currency The Companys reporting currency is the euro. When subsidiaries of the Company
have a functional currency that is different from the euro, assets and
liabilities are translated into the euro at the exchange rates in effect at the
balance sheet date, and income and expenses are translated at average exchange
rates during the year. Translation adjustments arising upon the consolidation
of such subsidiary financial statements are not included in determining net
income for the period, but are included in shareholders equity within other
comprehensive income. For all transactions involving a currency other than the
functional currency, the Companys subsidiaries record the resulting
transaction gains and losses directly to the Consolidated Statement of Income. Change in accounting policies As at January 1, 2001, the Company adopted IAS 39 Financial Instruments:
Recognition and Measurement.
IAS 39 establishes principles for recognizing, measuring and disclosing
information about financial assets and financial liabilities. IAS 39 defines
several categories of financial assets and liabilities. It requires the Company
to measure at fair value assets and liabilities qualified as trading or
available-for-sale. It also requires that changes in fair value of trading
assets and liabilities be recognized through income, while changes in fair
value of available-for-sale assets be recorded either in equity or through
income. IAS 39 requires the Company to recognize all derivative instruments on the
balance sheet at fair value. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of the derivative will either be
offset against the change in fair value of the hedged assets and liabilities
through earnings or recognized directly in equity until the hedged item is
recognized in earnings. Any ineffective portion of a derivatives change in
fair value will be immediately recognized in earnings and any derivatives that
do not qualify as hedges will be adjusted to fair value through income. Adoption of this new standard resulted in a cumulative after tax increase of
shareholders equity as of January 1, 2001 of
4,090 thousand. F 8




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##### Table of Contents



The impact on shareholders equity at January 1, 2001, due to the adoption of
IAS 39, is presented in Note 24 Financial instruments and market related
exposures. Use of estimates The preparation of 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 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,
warranty costs, income taxes and contingencies. Actual results could differ
from these estimates. Revenue recognition 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. 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. 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.
Allowances for obsolescence, scrap and slow-moving inventory and net realizable
value are provided for based upon the Companys periodic review of its
inventory. Property, plant and equipment Property, plant and equipment are carried at cost. Major renewals and
improvements are capitalized while repairs and maintenance are expensed as
incurred. Depreciation is computed over the estimated useful lives of
depreciable assets using the straight-line method. Leasehold improvements are
amortized over the shorter of the life of the improvement or the remaining
lease term. The estimated useful lives are as follows:Buildings
    
    20 yearsEquipment and machinery
    
    5 yearsFurniture and fixtures
    
    5-10 yearsLeasehold improvements
    
    8-12 years
 When the Company leases assets under the terms of a long-term contract or other
arrangement that transfers
substantially all the benefits and risks of ownership to the Company, the fair
market value of the leased property
is capitalized and depreciated (as described above) and the corresponding
obligation is recorded as a liability. Goodwill amortization and impairment The excess of the purchase price over the fair market value of net assets
acquired is recorded as goodwill.
Goodwill amounts are amortized over a period between five and twenty years. 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. 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. 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 life. Impairment of long-lived assets The Company assesses at each balance sheet date whether events or changes in
circumstances that would indicate that the carrying amount of long-lived assets
such as property, plant and equipment, licenses and research and development
have been impaired. If the total of the expected F 9




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##### Table of Contents



discounted cash flows or sales
price, whichever is higher, is less than the carrying amount of the asset, a
loss is recognized for the difference between the greater of the value in use
or sales price and the carrying value of the asset. Research and development Research and development costs are expensed as incurred, except for development
cost where it is expected that the product under development will be produced
and will be profitable, and technical feasibility has been demonstrated. Costs
are capitalized and amortized based on the straight-line method over their
estimated useful life, which normally does not exceed three 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
non-current assets and are amortized over a period not to exceed three 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. 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 ceases to be met. The write-down or write-off is
recognized as an expense in the period in which such determination is made. Cash and cash equivalents The Company considers all highly liquid investments purchased with an original
or remaining maturity of three months or less at the date of purchase to be
cash equivalents. 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. Income taxes The Company accounts for income taxes using the liability method, which
requires the recognition of deferred tax assets and liabilities based on
differences between financial reporting and tax basis of assets and
liabilities, and measures these differences using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to amounts expected to be realized and are reviewed and adjusted
accordingly when there is a change in circumstances that causes a change in
judgment about the realizability of the related deferred tax asset. Research tax credit 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. Earnings per share Basic earnings per share are computed by dividing net income by the weighted
average number of shares outstanding. Diluted earnings per share are computed
by dividing net income 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. Treasury shares From time to time the Company, with the approval of the Companys Board of
Directors, may repurchase a portion of its outstanding ordinary shares. Shares
repurchased by the Company could be used to fulfill its obligations under the
stock option plans or are intended for cancellation. Treasury shares are
recorded at cost and reported as a reduction of shareholders equity. 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, do not
generate any compensation expense and have thus 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 F 10




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##### Table of Contents



taken into account in the calculation of the basic net
income (loss) per share. Derivative financial instruments Foreign currency risk The Company does not enter into contracts for purposes other than hedging its
foreign currency risk. The Company operates both its selling and manufacturing
activities on a worldwide basis. The Companys sales are primarily denominated
in the domestic currency of its customers. As certain manufacturing sites are
located in different countries, a portion of the Companys costs are also
denominated in foreign currencies. Therefore, the Company is exposed to foreign
exchange risk on its commercial transactions. The policy of the Company is to hedge its foreign currency exposure on its firm
and anticipated purchases and sales commitments that are denominated in
currencies other than its subsidiaries functional currencies, for periods
commensurate with its known or forecasted transactions. These contracts generally mature within twelve months. In order to achieve this
objective, the Company uses foreign currency derivative instruments, by
entering into foreign exchange forward contracts and purchasing or selling
foreign exchange option contracts. 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 any speculative positions. These
derivative instruments are traded over the counter with major financial
institutions. All hedging instruments are allocated to underlying 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. 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 our forecasted transactions. For
those hedges associated with forecasted transactions that meet special hedge
accounting criteria, the portion of their change in fair value that is
determined to be an effective hedge is recognized directly in equity under
Other Comprehensive Income, and any ineffective portion is recognized in the
net profit and loss within the foreign exchange gains and losses included in
the line item Other income (expense). The gains or losses that are
accumulated in other comprehensive income are recognized in profit and loss
within the cost of sales in the period in which the hedged forecasted
transaction actually occurs. 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
as foreign exchange gains and losses for the period, in other income and
expense. Interest rate exposure As at December 31, 2003, the Company is not significantly exposed to interest
rate risk fluctuations. Consequently,
it has not entered into any derivative contracts to hedge interest rate risk. Financial counterparty 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. Fair value of derivatives 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. 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 method (such as the 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) market
value of the underlying security; (ii) option strike price; (iii) volatility,
obtained from the Companys banks; (iv) risk-free interest rate; and (v)
expiration date of the option. F 11




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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, 2003, 2002 and 2001.
In 2003, the Company maintained adequate allowances for potential credit losses
and performed ongoing credit evaluations. As at December 31, 2003, the Company
did not have any significant concentration of business transacted with a
particular customer that could, if suddenly eliminated, severely impact our
operations. Advertising and promotional costs The Company expenses the costs of advertising and promotional expenses when
such costs are incurred. Advertising and promotional expense was 5,760
thousand, 5,735 thousand and 6,995 thousand for the years ended
December 31, 2003, 2002, and 2001, respectively. 3. COMMON CONTROL TRANSACTIONS, TREASURY SHARES, ACQUIRED AND DISPOSED
OPERATIONS Common control transactions In February 2000, 95.1% of the shareholders of Gemplus S.A., a French
corporation and former holding company of the group, exchanged their shares of
Gemplus S.A. for shares in Gemplus International S.A., a newly formed
Luxembourg corporation on a one for one basis. This transaction has been
accounted for using historical cost basis accounting. As at December 31, 2003, certain shares held by employees or former employees
had not yet been contributed. Shares still to be contributed correspond to the
equivalent of 3,294,800 Gemplus International S.A. shares representing 0.54% of
the shareholdings of Gemplus International S.A., which in total was represented
by 607,312,796 shares as at December 31, 2003. Since the shares of Gemplus S.A. are not available for sale to the general public but can be converted into
shares of Gemplus International S.A. upon request, it has been considered
certain that the shares will eventually be converted. Thus, they have been
included in both the basic and diluted earnings per share calculations. As at
December 31, 2003, certain options held by employees under the Gemplus S.A. stock option plans had not been exercised. Following exercise of these options,
the corresponding Gemplus S.A. shares will be contributed by their holders to
Gemplus International S.A. Treasury shares In 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 by the then Commission des Opérations de Bourse (which
subsequently became the Autorité des Marchés Financiers) on May 4, 2001. During
2001, the Company repurchased 4,900,534 shares of its outstanding common stock,
at an average price of 3.17 per share. In addition, as described in Note
30, the Companys former Chief Executive Officer, Mr. Perez, returned in 2001
all of the 30,743,679 Gemplus International S.A. shares that he had received in
August and September 2000 to an indirect subsidiary of the Company, in
reimbursement of the loans that such indirect subsidiary had made to him in
2000 and in 2001. At the Extraordinary General Meeting of Shareholders held on April 17, 2002,
shareholders approved the cancellation of 4,634,859 shares held directly
pursuant to the Companys stock repurchase program, as well as the cancellation
of the 30,743,679 shares held by one of its indirect subsidiaries. The 30,743,679 shares were distributed to the Company and cancelled on March
10, 2003. 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 the first quarter of 2003, the Company
purchased, 487,957 shares of its outstanding common stock from five former
Celocom Limited employees pursuant to the provisions of the 2000 Celocom
Limited share purchase agreement. As at December 31, 2003, the Company held
1,471,379 shares of its outstanding common stock. Change in treasury shares is as follows: Number of treasury shares As at December 31, 2001
    
    
    35,705,936Cancellation of treasury shares
    
    
    (4,634,859
    )Purchase of shares pursuant to the 2000 Celocom Limited share purchase agreement
    
    
    656,024As at 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 at December 31, 2003
    
    
    1,471,379
 Acquired and disposed operations During 2003, 2002 and 2001, the Company acquired 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). F 12




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On August 23, 2001, the Company completed the sale of its subsidiary SkiData AG
(SkiData), the Companys electronic access-control solutions business unit,
to Kudelski S.A., for 117,500 thousand. As a result of the transaction,
the Companys 2001 Consolidated Statement of Income only includes SkiDatas
operational results up to August 23, 2001. On July 31, 2001, the Company completed the sale of its Tag electronic smart
labels solutions business (Tag) to Axa Private Equity,
for 3,007 thousand. As a result of the transaction, the Companys 2001 Consolidated
Statement of Income only includes Tag activities operational results up to
July 31, 2001. The disposal of SkiData and Tag net of cash disposed of 3,506 thousand and
fees of 8,270 thousand generated net proceeds of 108,731 thousand and
a net gain of 68,314 thousand. 4. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable consist of the following: (in thousands of euros) December 31
    
    2003
    
    2002
    
    2001Trade accounts receivable, gross
    
    
    163,621
    
    
    
    157,399
    
    
    
    201,481Less, allowances for doubtful accounts
    
    
    (8,894
    )
    
    
    (12,486
    )
    
    
    (12,846
    )Trade accounts receivable, net
    
    
    154,727
    
    
    
    144,913
    
    
    
    188,635
 5. INVENTORY Inventory consists of the following: (in thousands of euros) December 31
    
    2003
    
    2002
    
    2001Raw materials and supplies
    
    
    27,456
    
    
    
    34,098
    
    
    
    63,621Work-in-process
    
    
    67,066
    
    
    
    67,883
    
    
    
    79,394Finished goods
    
    
    10,158
    
    
    
    8,901
    
    
    
    14,738Inventory, gross
    
    
    104,680
    
    
    
    110,882
    
    
    
    157,753Less, inventory allowance
    
    
    (6,007
    )
    
    
    (14,369
    )
    
    
    (17,959
    )Inventory, net
    
    
    98,673
    
    
    
    96,513
    
    
    
    139,794
 6. OTHER CURRENT ASSETS Other current assets include the following: (in thousands of euros) December 31
    
    2003
    
    2002
    
    2001Value added tax receivable
    
    
    18,677
    
    
    
    40,349
    
    
    
    36,209Other taxes receivable
    
    
    11,255
    
    
    
    9,175
    
    
    
    13,870Financial instruments at fair market value
    
    
    16,426
    
    
    
    10,371
    
    
    
    Advance facility to supplier (see also Note 9)
    
    
    12,001
    
    
    
    9,598
    
    
    
    21,539Advance payments to non-trade suppliers
    
    
    1,099
    
    
    
    2,356
    
    
    
    7,816Prepaid expenses
    
    
    15,780
    
    
    
    15,129
    
    
    
    9,646Advance payments to trade suppliers
    
    
    3,454
    
    
    
    3,369
    
    
    
    4,572Prepaid pension cost
    
    
    
    
    
    
    504
    
    
    
    982Other current assets
    
    
    3,983
    
    
    
    2,631
    
    
    
    9,099Total other current assets
    
    
    82,675
    
    
    
    93,482
    
    
    
    103,733
 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 for 37.6 million.
Such advance facility was repayable based on the volumes purchased. Following
the economic downturn in the wireless market, the Company amended the payment
terms of this agreement. As at December 31, 2003, the remaining balance due
amounted to 12,001 thousand, and will be payable in October 2002 in
quarterly installments ending December 2004, with accrued interest pursuant to
such amendment. The increase in the amount of current assets relating to the
advance facility as at December 31, 2003, compared to the prior year, arises
from higher installments becoming due within the following twelve months in
accordance with the agreement. F 13




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##### Table of Contents



The fair market value of the Companys financial instruments is recorded in
other current assets or liabilities. The corresponding changes in fair market value are recognized in earnings or
equity. The Company does not enter into any derivative contract for purposes
other than hedging its foreign currency exposure incurred in the normal course
of business. Most of those derivative contracts are qualified as cash flow
hedges under IAS 39. F 14




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##### Table of Contents



7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment includes the following: (in thousands of euros) BuildingsLand
    
    and equipment
    
    Machinery
    
    Total 2003
    
    Total 2002
    
    Total 2001CostAs at January 1
    
    
    6,838
    
    
    
    172,445
    
    
    
    333,394
    
    
    
    512,677
    
    
    
    526,813
    
    
    
    462,034Additions
    
    
    
    
    
    
    3,086
    
    
    
    12,152
    
    
    
    15,238
    
    
    
    31,953
    
    
    
    102,555Disposals
    
    
    
    
    
    
    (6,858
    )
    
    
    (24,811
    )
    
    
    (31,669
    )
    
    
    (24,521
    )
    
    
    (26,770
    )Changes in consolidation scope
    
    
    
    
    
    
    
    
    
    
    (597
    )
    
    
    (597
    )
    
    
    2,547
    
    
    
    (19,071
    )Currency adjustments
    
    
    (314
    )
    
    
    (3,668
    )
    
    
    (15,084
    )
    
    
    (19,066
    )
    
    
    (24,115
    )
    
    
    8,065As at December 31
    
    
    6,524
    
    
    
    165,005
    
    
    
    305,054
    
    
    
    476,583
    
    
    
    512,677
    
    
    
    526,813Accumulated depreciationAs at January 1
    
    
    
    
    
    
    (53,275
    )
    
    
    (242,458
    )
    
    
    (295,733
    )
    
    
    (258,029
    )
    
    
    (212,118
    )Depreciation
    
    
    
    
    
    
    (12,008
    )
    
    
    (39,056
    )
    
    
    (51,064
    )
    
    
    (72,376
    )
    
    
    (84,160
    )Reversal of impairment loss
    
    
    
    
    
    
    2,555
    
    
    
    
    
    
    
    2,555
    
    
    
    
    
    
    
    Disposals
    
    
    
    
    
    
    5,360
    
    
    
    25,434
    
    
    
    30,794
    
    
    
    22,896
    
    
    
    26,498Changes in consolidation scope
    
    
    
    
    
    
    
    
    
    
    192
    
    
    
    192
    
    
    
    (511
    )
    
    
    13,099Currency adjustments
    
    
    
    
    
    
    1,628
    
    
    
    10,751
    
    
    
    12,379
    
    
    
    12,287
    
    
    
    (1,348
    )As at December 31
    
    
    
    
    
    
    (55,740
    )
    
    
    (245,137
    )
    
    
    (300,877
    )
    
    
    (295,733
    )
    
    
    (258,029
    )Net book value as at December 31
    
    
    6,524
    
    
    
    109,265
    
    
    
    59,917
    
    
    
    175,706
    
    
    
    216,944
    
    
    
    268,784Including:PP&E under finance lease
contracts, gross
    
    
    3,209
    
    
    
    65,623
    
    
    
    94
    
    
    
    68,926
    
    
    
    69,407
    
    
    
    51,842PP&E under finance lease
contracts, depreciation
    
    
    
    
    
    
    (22,603
    )
    
    
    (86
    )
    
    
    (22,689
    )
    
    
    (18,865
    )
    
    
    (15,887
    )Net book value under finance
lease contracts as at December 31
    
    
    3,209
    
    
    
    43,020
    
    
    
    8
    
    
    
    46,237
    
    
    
    50,542
    
    
    
    35,955
 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 2003 and 2001. 8. GOODWILL Goodwill consists of the following: (in thousands of euros) 2003
    
    2002
    
    2001CostAs at January 1
    
    
    165,443
    
    
    
    163,402
    
    
    
    186,080Additions
    
    
    5,901
    
    
    
    6,437
    
    
    
    10,824Disposals and transfers
    
    
    (9,918
    )
    
    
    
    
    
    
    (34,961
    )Currency adjustments
    
    
    (5,345
    )
    
    
    (4,396
    )
    
    
    1,459As at December 31
    
    
    156,081
    
    
    
    165,443
    
    
    
    163,402Accumulated depreciation and impairmentAs at January 1
    
    
    (92,256
    )
    
    
    (46,822
    )
    
    
    (30,271
    )Depreciation and impairment
    
    
    (33,051
    )
    
    
    (47,117
    )
    
    
    (27,162
    )Disposals and transfers
    
    
    4,543
    
    
    
    167
    
    
    
    10,906Currency adjustments
    
    
    2,410
    
    
    
    1,516
    
    
    
    (295
    )As at December 31
    
    
    (118,354
    )
    
    
    (92,256
    )
    
    
    (46,822
    )Net book value as at December 31
    
    
    37,727
    
    
    
    73,187
    
    
    
    116,580
 Goodwill is 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. In 2003, the Company recorded a goodwill impairment charge of 19,879
thousand as a result of its impairment testing.
This write-down resulted from the revision of the business plan of the acquired
activities of Celocom Limited in November 2000. F 15




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In 2002, the Company recorded a goodwill impairment charge of 22,124
thousand as a result of its impairment testing. This write-down related to the
goodwill generated following the acquisition of SLP InfoWare S.A. (SLP) 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. During 2003, the Company
eventually decided to cease SLP operations. The winding down
is in process and is expected to be completed in 2004. The cessation of SLP
operations will have no negative effect
on the Companys Consolidated Financial Statements in 2004. 9. OTHER NON-CURRENT ASSETS Other non-current assets consist of the following: (in thousands of euros) December 31
    
    2003
    
    2002
    
    2001Loans receivable from senior management,
net of provision
(69,220 in 2003, 67,582 in 2002 and 0 in 2001)
    
    
    9,546
    
    
    
    11,183
    
    
    
    75,317Software, net of accumulated amortization
(24,677 in 2003, 19,550 in 2002 and 12,381 in 2001)
    
    
    15,062
    
    
    
    25,364
    
    
    
    31,347Long-term portion of advance facility to supplier (Note 6)
    
    
    
    
    
    
    14,396
    
    
    
    16,154Research tax credit
    
    
    10,206
    
    
    
    13,215
    
    
    
    12,144Patents and patents right, net of accumulated amortization
(6,030 in 2003, 4,388 in 2002 and 4,865 in 2001)
    
    
    1,095
    
    
    
    5,370
    
    
    
    6,150Rental deposit
    
    
    855
    
    
    
    1,902
    
    
    
    1,622Employee loans and other related loans
    
    
    719
    
    
    
    275
    
    
    
    850Prepaid
expenses - long term portion
    
    
    4,329
    
    
    
    8,738
    
    
    
    Other loans and assets
    
    
    1,596
    
    
    
    4,376
    
    
    
    6,888Total other non-current assets
    
    
    43,408
    
    
    
    84,819
    
    
    
    150,472
 As described in Note 30, loans were granted in 2000 and 2001 to Mr. Perez and
to Dr. Lassus. During 2001, Mr. Perez, as part of his severance package,
partially reimbursed the loans that were granted to him and the unreimbursed
portion of the loans was charged to the Companys Consolidated Statement of
Income. During 2002, a provision amounting to 67,582 thousand was recorded to
cover the risk of non-reimbursement of the loan granted to Dr. Lassus, net of a
liability which is in dispute (see Note 14). However, the Company has not
forgiven the loan and is seeking repayment by Dr. Lassus through legal
proceedings. In 2003, the balance of the loan was adjusted for currency
variances as the principal amount of a corresponding disputed liability is
denominated in U.S. dollars. The long-term portion of pre-paid expenses relates to royalties paid in advance
of 11,200 thousand, made in the second quarter 2002 for the license to use
certain software that is integrated in our products. This amount is being
expensed through 2005, proportionally based on number of units sold to our
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 of the volume
decrease. The current portion of 3,739 thousand is included in
other
current assets within prepaid expenses (see Note 6). 10. RESEARCH AND DEVELOPMENT COSTS Deferred development costs can be analyzed as follows: (in thousands of euros) December 31
    
    2003
    
    2002
    
    2001Gross amount at the beginning of the year
    
    
    56,658
    
    
    
    41,357
    
    
    
    34,846Accumulated amortization at the beginning of the year
    
    
    (30,748
    )
    
    
    (12,887
    )
    
    
    (8,497
    )Balance at the beginning of the year
    
    
    25,910
    
    
    
    28,470
    
    
    
    26,349Deferred during the year
    
    
    10,757
    
    
    
    15,301
    
    
    
    6,511Less, allowances
    
    
    (18,751
    )
    
    
    (17,861
    )
    
    
    (4,390
    )Impact for the year on income before tax
    
    
    (7,994
    )
    
    
    (2,560
    )
    
    
    2,121Balance at the end of the year
    
    
    17,916
    
    
    
    25,910
    
    
    
    28,470Gross amount at the end of the year
    
    
    54,651
    
    
    
    56,658
    
    
    
    41,357Accumulated amortization
    
    
    (36,735
    )
    
    
    (30,748
    )
    
    
    (12,887
    )Balance at the end of the year
    
    
    17,916
    
    
    
    25,910
    
    
    
    28,470
 F 16




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##### Table of Contents



Research and development expenses incurred during the year consist of the
following: (in thousands of euros) Years ended December 31
    
    2003
    
    2002
    
    2001Research and development expenditures
    
    
    63,918
    
    
    
    95,288
    
    
    
    124,567Deferred development costs, net
    
    
    7,994
    
    
    
    2,560
    
    
    
    (2,121
    )Grants including research tax credit
    
    
    (2,689
    )
    
    
    (5,608
    )
    
    
    (9,561
    )Total research and development
    
    
    69,223
    
    
    
    92,240
    
    
    
    112,885
 11. INVESTMENTS Investments consist of the following: (in thousands of euros) December 31
    
    2003
    
    2002
    
    2001Equity affiliates, net
    
    
    19,216
    
    
    
    21,008
    
    
    
    4,358Investments in non-marketable equity securities
    
    
    18,549
    
    
    
    17,367
    
    
    
    31,173Valuation allowance on investments
    
    
    (17,902
    )
    
    
    (15,287
    )
    
    
    (14,107
    )Total investments
    
    
    19,863
    
    
    
    23,088
    
    
    
    21,424
 The Company 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. A write-down is recorded when there is
a reason to believe that an impairment in value which is other than temporary
has occurred (i.e., that the business model is questioned or that the business
plan is not met). The Company has no significant flow of transactions with
these companies. 12. OTHER CURRENT LIABILITIES Other current liabilities consist of the following: (in thousands of euros) December 31
    
    2003
    
    2002
    
    2001Restructuring - provision for reduction
of workforce and other cash outlays (see Note 15)
    
    
    38,951
    
    
    
    40,975
    
    
    
    6,177Deferred revenue
    
    
    19,409
    
    
    
    14,088
    
    
    
    5,662Management severance liability (see Note 14)
    
    
    
    
    
    
    9,975
    
    
    
    21,113Tax reimbursement liability on interest forgiven
on loans to senior management (see Note 14)
    
    
    
    
    
    
    1,545
    
    
    
    3,585Customer deposits
    
    
    5,690
    
    
    
    4,554
    
    
    
    8,897Allowances for customer claims
    
    
    612
    
    
    
    2,552
    
    
    
    5,848Short-term debt
    
    
    99
    
    
    
    1,677
    
    
    
    4,840Other accrued liabilities
    
    
    8,129
    
    
    
    5,767
    
    
    
    5,700Litigation
liabilities
    
    
    5,200
    
    
    
    
    
    
    
    19,411Financial instruments at fair market value (see Note 6)
    
    
    
    
    
    
    
    
    
    
    5,178Total other current liabilities
    
    
    78,090
    
    
    
    81,133
    
    
    
    86,411
 As described in Note 30, the Company recorded in its 2001 Consolidated
Statement of Income a 25,691 thousand management severance expense,
resulting in a liability of 9,975 thousand and 21,113 thousand, as at
December 31, 2002 and 2001 respectively. This liability was comprised of a tax
reimbursement payable on the portion of a loan that had been forgiven (2002:
337 thousand, 2001: 6,502 thousand) and termination benefits payable
in cash (2002: 9,638 thousand, 2001: 14,611 thousand). In addition, a
tax reimbursement liability was recognized on interest forgiven, amounting to
1,545 thousand and 3,585 thousand as at December 31, 2002 and 2001
respectively. In 2003, these liabilities amounting to 9,546 thousand in
total have been reclassified to long-term liabilities (see Note 14) due to the
dispute relating to their payments. As described in Note 25,
the Company recorded a charge of 5,200 thousand in its Consolidated
Statement of Income with respect to developments in the
litigation with Mr. Alain Nicolaï. As described in Note 25, the Company recorded a charge of 18,120 thousand
in its 2001 Consolidated Statement of Income with respect to the judgment on
appeal rendered in October 2001 concerning the Humetrix litigation. This charge
resulted in a total current liability (including a previously existing
provision) of 19,411 thousand in the balance sheet as at December 31,
2001. This liability has been settled in 2002. F 17




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##### Table of Contents



Short-term debt consists of overdrafts that 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. 13. CAPITAL LEASES Capital leases obligations outstanding as at December 31, 2003 are analyzed as
follows: (in thousands of euros) 2004
    
    
    7,3772005
    
    
    7,2342006
    
    
    6,6282007
    
    
    6,3372008
    
    
    5,762Thereafter
    
    
    17,813Total minimum lease payments
    
    
    51,151Less, amount representing interest
    
    
    (6,330
    )Present value of minimum obligations under capital leases
    
    
    44,821Less, current portion of obligations under capital leases
    
    
    (5,928
    )Long-term obligations under capital leases
    
    
    38,893
 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 building was under construction as at December 31, 2001 and was
completed in October 2002. The capital lease has a duration of twelve years
ending in September, 2014. The proceeds received amounted to 15,962 thousand in 2002 and 5,711 thousand in 2001.
This sale-leaseback transaction resulted in no gain or loss in the Consolidated
Statement of Income. 14. OTHER NON-CURRENT LIABILITIES Non-current liabilities variation analysis is as follows: (in thousands of euros) Effect of
    
    
    
    
    
    
    
    
    
    Amounts
    
    Amountschanges
    
    Increase in
    
    Reclassification
    
    unused
    
    usedDecember
    
    December
    
    in exchange
    
    long-term
    
    within balance
    
    during
    
    during
    
    December31, 2001
    
    31, 2002
    
    rate
    
    liabilities
    
    sheet items
    
    the period
    
    the period
    
    31, 2003Provision for patents claims
    
    
    9,000
    
    
    
    9,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000Provision for income tax
claims
    
    
    13,727
    
    
    
    37,326
    
    
    
    (11
    )
    
    
    1,925
    
    
    
    2,158
    
    
    
    (381
    )
    
    
    
    
    
    
    41,017Provision for pension costs
    
    
    1,853
    
    
    
    1,780
    
    
    
    (73
    )
    
    
    17
    
    
    
    
    
    
    
    (162
    )
    
    
    
    
    
    
    1,562Other provisions
    
    
    5,882
    
    
    
    3,711
    
    
    
    (19
    )
    
    
    3,722
    
    
    
    184
    
    
    
    (515
    )
    
    
    (1,580
    )
    
    
    5,503Government loans received
    
    
    397
    
    
    
    1,897
    
    
    
    
    
    
    
    1,453
    
    
    
    1,049
    
    
    
    
    
    
    
    (781
    )
    
    
    3,618Management compensation and
severance liability(see
Note 12 and 30)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,546
    
    
    
    
    
    
    
    
    
    
    
    9,546Total
    
    
    30,859
    
    
    
    53,714
    
    
    
    (103
    )
    
    
    7,117
    
    
    
    12,937
    
    
    
    (1,058
    )
    
    
    (2,361
    )
    
    
    70,246
 In 2003, due to the dispute related to the payment of liabilities to senior
management, as discussed in Notes 12 and 30, the Company has reclassified an
amount of 9,546 thousand from Other current liabilities to Other
non-current liabilities. In accordance with an agreement dated December 19,
2001, the Company agreed to pay to Dr. Lassus an amount of US$10,000 thousand
(8,001 thousand as at December 31, 2003) upon fulfillment of certain
specific conditions. Such conditions have not been fulfilled. As at December
31, 2003, the Company has not paid this amount. The Company pays royalties for the use of certain patents. In certain cases,
due to the nature of the technology involved, the portion covered and the
timing during which royalties are paid under the relevant patent license
agreements may be questioned. Based on past experience and known facts and
circumstances as of the balance sheet date, the Company records a provision for
potential claims. From time to time, the Company and its subsidiaries are subject to tax claims
from tax authorities in the jurisdictions where the Company and its
subsidiaries do business. The Company records a provision for tax risk based
upon the most current information available and the managements judgment
regarding the possible outcomes of any tax claim. In 2002, three French subsidiaries of the Company, including Gemplus S.A.,
received a tax assessment from the French tax authority primarily relating to
the fiscal years 1998 through 2000. The major components of the assessment
relate to intercompany transactions, including transfer pricing, invoicing of
management fees and forgiveness of intercompany debt, as well as the adequacy
of documentation relating to certain commissions paid to agents. Based on
communications with the French tax authority, the Company has reevaluated its
treatment of deferred F 18




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##### Table of Contents



tax assets and provisions for tax claims at December 31, 2003. Such reevaluation had a positive effect on the 2003 net
income resulting in the reduction of the tax provision, net of related deferred
tax assets, by 1,930 thousand to 10,846 thousand. The timing
difference between payment of the tax assessment to the tax authorities and the
recoverability of associated tax loss carry-backs could impact available cash
by up to 36 million, of which approximately 25 million is anticipated
to be temporary. Certain subsidiaries of the Company are under tax examinations in Germany, the
United Kingdom and Singapore. Although a tax assessment has been received only
in connection with the examination in Singapore, relating to the deductibility
of interest expense (which is being contested), the Company increased its
provision for tax risks at December 31, 2003 by 1,925 thousand. 15. RESTRUCTURING Following the restructuring program that was implemented in the second quarter
of 2001 (the first restructuring program), the Company announced two
additional restructuring and rationalization programs in 2002, one on February
6 (the second restructuring program), and the other on December 9 (the third
restructuring program). In 2003, the Company recorded a total restructuring
net charge of 61,973 thousand, which was mainly related to the third
restructuring program. Restructuring activity for the years ended December 31, 2003, 2002 and 2001 was
as follows: (in thousands of euros) Reduction of workforce
    
    Non-cash write-offsand other cash outflows
    
    of assets
    
    TotalFIRST RESTRUCTURING PROGRAM2001 restructuring charge
    
    
    22,022
    
    
    
    6,444
    
    
    
    28,466Amounts used in 2001
    
    
    (15,466
    )
    
    
    
    
    
    
    Exchange rate differences
    
    
    (379
    )
    
    
    
    
    
    
    Restructuring reserve as at December 31, 2001
    
    
    6,177
    
    
    
    
    
    
    
    2002 restructuring charge
    
    
    1,514
    
    
    
    
    
    
    
    1,514Amounts used in 2002
    
    
    (5,492
    )
    
    
    
    
    
    
    Exchange rate differences
    
    
    (141
    )
    
    
    
    
    
    
    Restructuring reserve as at December 31, 2002
    
    
    2,058
    
    
    
    
    
    
    
    2003 restructuring charge
    
    
    89
    
    
    
    
    
    
    
    89Amounts used in 2003
    
    
    (881
    )
    
    
    
    
    
    
    Exchange rate differences
    
    
    (263
    )
    
    
    
    
    
    
    Restructuring reserve as at December 31, 2003
    
    
    1,003
    
    
    
    
    
    
    
    SECOND RESTRUCTURING PROGRAM2002 restructuring charge
    
    
    66,919
    
    
    
    13,889
    
    
    
    80,808Amounts used in 2002
    
    
    (27,446
    )
    
    
    
    
    
    
    Exchange rate differences
    
    
    (868
    )
    
    
    
    
    
    
    Restructuring reserve as at December 31, 2002
    
    
    38,605
    
    
    
    
    
    
    
    2003 restructuring charge
    
    
    246
    
    
    
    60
    
    
    
    306Release of unused provision
    
    
    (170
    )
    
    
    
    
    
    
    (170
    )Amounts used in 2003
    
    
    (27,247
    )
    
    
    
    
    
    
    Exchange rate differences
    
    
    (817
    )
    
    
    
    
    
    
    Restructuring reserve as at December 31, 2003
    
    
    10,617
    
    
    
    
    
    
    
    THIRD RESTRUCTURING PROGRAM2002 restructuring charge
    
    
    755
    
    
    
    6,926
    
    
    
    7,681Amounts used in 2002
    
    
    (443
    )
    
    
    
    
    
    
    Restructuring reserve as at December 31, 2002
    
    
    312
    
    
    
    
    
    
    
    2003 restructuring charge
    
    
    54,848
    
    
    
    9,455
    
    
    
    64,303Release of unused provision
    
    
    
    
    
    
    (2,555
    )
    
    
    (2,555
    )Amounts used in 2003
    
    
    (27,791
    )
    
    
    
    
    
    
    Exchange rate differences
    
    
    (50
    )
    
    
    
    
    
    
    Restructuring reserve as at December 31, 2003
    
    
    27,319
    
    
    
    
    
    
    
    TOTAL 2003 restructuring charge
    
    
    55,013
    
    
    
    6,960
    
    
    
    61,973TOTAL 2002 restructuring charge
    
    
    69,188
    
    
    
    20,815
    
    
    
    90,003TOTAL 2001 restructuring charge
    
    
    22,022
    
    
    
    6,444
    
    
    
    28,466Total Restructuring reserve as at December
31, 2003
    
    
    38,939
    
    
    
    
    
    
    
    
 F 19




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First restructuring program (announced on May 2, 2001) In 2003, the Company did not record any significant restructuring charge with
respect to the first restructuring program. The remaining reserve of 1,003
thousand is a provision for ongoing rents for closed sites, mainly in the
United States of America and Germany. Second restructuring program (announced on February 6, 2002) In 2003, the Company did not record any significant additional restructuring
charge with respect to the second restructuring program. As part of the second
restructuring program, the employment of 1,161 employees was terminated in 2002
and 157 in 2003. The total net charge of the second restructuring program
amounts to 80,944 thousand and represents:  
    
    13,949 thousand of fixed assets write downs,  
    
    66,995 thousand with a cash impact linked to worldwide rationalization
of manufacturing plants and sales offices, reduction of the workforce and legal
and professional fees.
The remaining reserve of 10,617 thousand is a provision for ongoing rents
for closed sites (4,395 thousand) and for payment obligations for employee
terminations (6,222 thousand). Third restructuring program (announced on December 9, 2002) In 2003, the Company recorded a 61,748 thousand restructuring charge with
respect to the third restructuring program. The total net charge of the third
restructuring program amounts to 69,429 thousand and represents:  
    
    48,421 thousand in respect of payment obligations for employee
terminations,  
    
    13,852 thousand for write-down of intangible and fixed assets,  
    
    4,382 thousand in respect of rationalization of manufacturing plants and
sales offices,  
    
    2,774 thousand in respect of legal and professional fees and the
transfer of contracts to partners. The employment of 777 employees was terminated in 2003 as part of the third
restructuring program. The reversal of unused provision regarding the third
restructuring plan amounting to 2,555 thousand relates to a change in the
selection of buildings to be closed. The remaining reserve of 27,319
thousand is a provision for ongoing rents for closed sites (2,155
thousand) and for payment obligations for employee terminations (25,164
thousand). The Company anticipates that approximately 15 million in additional
expenses will be required to complete this restructuring program; these
restructuring expenses will be recognized when a detailed formal plan exists
and the main features of the plan are announced. 16. FINANCIAL INCOME AND EXPENSE, NET Financial income and expense, net consists of the following: (in thousands of euros) Years ended December 31
    
    2003
    
    2002
    
    2001Financial income
    
    
    10,484
    
    
    
    19,782
    
    
    
    28,234Financial expense
    
    
    (2,280
    )
    
    
    (70,874
    )
    
    
    (7,532
    )Financial income (expense), net
    
    
    8,204
    
    
    
    (51,092
    )
    
    
    20,702
 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 Dr. Lassus. In 2003, no additional financial expense was recorded
related to this risk (see Note 30). 17. OTHER INCOME AND EXPENSE, NET Other income and expense, net consists of the following: (in thousands of euros) Years ended December 31
    
    2003
    
    2002
    
    2001Gain (loss) on investments
    
    
    (2,487
    )
    
    
    (6,444
    )
    
    
    66,425Income (loss) on equity investments
    
    
    (7,561
    )
    
    
    (3,084
    )
    
    
    (3,505
    )Foreign exchange gain (loss)
    
    
    (8,652
    )
    
    
    (15,106
    )
    
    
    (12,618
    )Gain (loss) on sale and disposal of fixed assets
    
    
    703
    
    
    
    63
    
    
    
    (189
    )Minority interests
    
    
    (2,152
    )
    
    
    (4,333
    )
    
    
    (4,432
    )Other income (expense), net
    
    
    (20,149
    )
    
    
    (28,904
    )
    
    
    45,681
 The 66,425 thousand net gain on investments recorded in 2001 primarily
included a 68,314 thousand one-time gain generated from our SkiData and
Tag divestitures (see Note 3 - Acquired and disposed operations). F 20




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18. INCOME TAXES The components of income tax benefit (expense) are as follows: (in thousands of euros) Years ended December 31
    
    2003
    
    2002
    
    2001Current taxes
    
    
    (3,329
    )
    
    
    (9,667
    )
    
    
    (4,074
    )Deferred taxes
    
    
    (11,344
    )
    
    
    543
    
    
    
    18,258Income tax benefit (expense)
    
    
    (14,673
    )
    
    
    (9,124
    )
    
    
    14,184
 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
    
    2003
    
    2002
    
    2001Income (loss) before taxes
    
    
    (146,433
    )
    
    
    (311,767
    )
    
    
    (114,404
    )Income tax
calculated at corporate tax rate (1)
    
    
    44,486
    
    
    
    94,715
    
    
    
    42,845Effect of tax exemption
    
    
    5,438
    
    
    
    (15,551
    )
    
    
    15,144Effect of different tax rates
    
    
    12,053
    
    
    
    13,434
    
    
    
    (916
    )Effect of release of valuation allowance
    
    
    1,854
    
    
    
    1,351
    
    
    
    4,154Effect of unrecognized tax assets
    
    
    (62,337
    )
    
    
    (79,548
    )
    
    
    (40,533
    )Provision for tax risks
    
    
    186
    
    
    
    (5,932
    )
    
    
    Effect of expenses non deductible and revenues non taxable
    
    
    (6,312
    )
    
    
    (3,900
    )
    
    
    353Effect of goodwill amortization resulting from mergers
and acquisitions (see Note 3)
    
    
    (10,041
    )
    
    
    (13,693
    )
    
    
    (6,863
    )Income tax benefit (expense)
    
    
    (14,673
    )
    
    
    (9,124
    )
    
    
    14,184
 (1) Luxembourg tax rate of 30.38% in 2003 and 2002, 37.45% in 2001. The components of the net deferred tax asset recorded at December 31, 2003,
2002 and 2001 are as follows: (in thousands of euros) December 31
    
    2003
    
    2002
    
    2001ASSETSLoss carryforward
    
    
    226,090
    
    
    
    158,538
    
    
    
    82,978Excess book over tax depreciation and amortization
    
    
    1,137
    
    
    
    4,681
    
    
    
    2,646Other temporary differences
    
    
    40,200
    
    
    
    54,807
    
    
    
    32,674Valuation allowance
    
    
    (219,780
    )
    
    
    (138,229
    )
    
    
    (82,048
    )LIABILITIESExcess tax over book depreciation and amortization
    
    
    (13,839
    )
    
    
    (18,175
    )
    
    
    (4,349
    )Other temporary differences
    
    
    (1,948
    )
    
    
    (19,948
    )
    
    
    (9,753
    )Net deferred tax asset
    
    
    31,860
    
    
    
    41,674
    
    
    
    22,148
 The Company had no deferred tax liability at December 31, 2003, 2002 and 2001. At December 31, 2003, the Company had potential deferred tax assets related to
net operating loss carryforwards totaling 226,090 thousand, of which 36,387 thousand are limited to 20 years. Substantially all of the remainder may
be used indefinitely. The use of approximately
13,400 thousand of the
deferred tax assets related to net operating loss carryforwards may be subject
to change of ownership limitations. The Company previously recorded a full
valuation allowance against these deferred tax assets. In those situations where under generally accepted accounting principles it is
inappropriate to recognize deferred tax assets and other tax benefit items,
management has provided a valuation allowance to reduce net deferred tax assets
to the estimated realizable value. Certain subsidiaries, including Gemplus S.A., incurred significant tax losses
during 2001, 2002 and 2003, a portion
of which is related to restructuring expenses. The use of the operating losses on a carry forward basis will mainly depend
upon the successful implementation
of planned improvements in operating performance and the recovery of the
Companys main business segments, which in some countries is difficult to
predict accurately. Management recognizes that, given the guidelines under
generally accepted accounting principles, future profitability in certain tax
jurisdictions cannot be clearly evidenced taking into account past losses. As a result, in 2002 and 2003, the Company recorded a valuation F 21




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allowance against certain operating losses,
including an amount of 57,699
thousand in 2002 and 37,390 thousand in 2003 relating to the Companys
losses in France. In Germany, due to a change in rules pertaining to the use of net operating
losses, and anticipated changes in the business results of the Companys local
entity, the Company increased the valuation allowance on previous years net
deferred tax assets by 8,648 thousand. This valuation allowance had an
impact on 2003 results because it was related to the net deferred tax assets
generated in previous fiscal years. Deferred income taxes on the undistributed earnings of the Companys foreign
subsidiaries are provided for when
it is intended that these earnings will not be indefinitely reinvested in these
entities. As described in Note 14, the Company is the subject of tax audits in France,
Germany, United Kingdom and Singapore. 19. ORDINARY SHARES Gemplus International S.A. is a corporation incorporated in the Grand Duchy of
Luxembourg. The authorized share capital of the Company is currently 400
million consisting of two billion shares with no legal par value. As part of the purchase price related to the acquisition of Celocom Limited in
November 2000, the Company issued
on February 20, 2001, 4,191,776 shares representing a value of 25,151
thousand. Out of this 25,151 thousand recorded in paid-in capital as at
December 31, 2000, an amount of 838 thousand was allocated to share
capital, as the corresponding shares were issued. As part of the purchase price related to the acquisition of SLP InfoWare S.A. in October 2000, the Company issued on March 13, 2001, 362,863 shares
representing a value of 2,177 thousand. Out of this 2,177 thousand
recorded in paid-in capital as at December 31, 2000, an amount of 73
thousand was allocated to share capital, as the corresponding shares were
issued. During 2001, the Company issued 2,498,100 shares of Gemplus S.A. following the
exercise of Gemplus S.A. stock options held by employees. As described in Note
3 - Common control transactions, these shares are assumed to be a component of
shareholders equity. During 2001, the Company issued 7,296,500 shares following the contribution of
145,930 shares of Gemplus S.A. held mainly by employees. For accounting
purposes, these shares were already assumed to be a component of the
shareholders equity. During 2001, the Company issued 2,116,850 shares following the exercise of
Gemplus International S.A. stock options held by employees. In addition, in 2001, the Company purchased at fair market value 80,587 shares
of Gemplus S.A., equivalent to 4,029,350 shares of Gemplus International S.A.,
held by two former executive officers of the Company, thus reducing the
Companys shareholders equity. During 2002, the Company issued 699,100 shares of Gemplus S.A. following the
exercise of Gemplus S.A. stock options held by employees. As described in Note
3 - Common control transactions, these shares are assumed to be a component of
shareholders equity. During 2002, the Company issued 2,525,150 shares following the contribution of
50,503 shares of Gemplus S.A. held mainly by employees. For accounting
purposes, these shares were already assumed to be a component of shareholders
equity. During 2002, the Company issued 398,350 shares following the exercise of
Gemplus International S.A. stock options held by employees. During 2003, the Company issued 17,550 shares of Gemplus S.A. following the
exercise of Gemplus S.A. stock options held by employees. As described in Note
3 - Common control transactions, these shares are assumed to be a component of
shareholders equity. During 2003, the Company issued 1,010,900 shares following the contribution of
20,218 shares of Gemplus S.A. held mainly by employees. For accounting
purposes, these shares were already assumed to be a component of shareholders
equity. During 2003, the Company issued 179,837 shares following the exercise of
Gemplus International S.A. stock options held by employees. 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 then Commission des
Opérations de Bourse (which subsequently F 22




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##### Table of Contents



became the Autorité des Marchés Financiers). During
2001, the Company repurchased 4,900,534 shares of its outstanding common stock
at an average price of 3.17 per share. In addition, as described in Note
30, the Companys former Chief Executive Officer, Mr. Perez, returned all of
the 30,743,679 Gemplus International S.A. shares that he received in August and
September 2000 to an indirect subsidiary of the Company, in reimbursement of
the loans that such indirect subsidiary made to him in 2000 and in 2001.
Consequently, as at December 31, 2001, the Company held directly 4,780,907
shares of its outstanding common stock and an indirect subsidiary held
30,925,029 shares of its outstanding common stock. At the Extraordinary General Meeting of shareholders held on April 17, 2002,
the shareholders approved the cancellation of 4,634,859 shares that were held
directly by the Company as a result of the stock repurchase program, in
addition to the cancellation of 30,743,679 shares held by its indirect
subsidiary at the time as such shares may be transferred to the Company. The
30,743,679 shares were cancelled on March 10, 2003 without any effect on the
Companys shareholders equity in accordance with accounting principles
described in Note 2 - Treasury shares. 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 the third quarter of 2002 and the first quarter of 2003, the Company
purchased respectively 656,024 and 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 at December 31, 2003, the Company held 1,471,379 of treasury shares. As described in Note 3  Common control transactions, the total number of
shares to be issued by Gemplus International S.A. upon the contribution of
Gemplus S.A. shares amounted to 3,294,800 shares, representing 0.54% of the
shareholdings of Gemplus International S.A., which represented a total of
607,312,796 shares outstanding as at December 31, 2003. The number of shares as at December 31, 2003 can be analyzed as follows: Number of shares outstanding
    
    
    604,017,996Gemplus S.A. shares to be contributed
    
    
    3,294,800Number of shares outstanding including shares to be contributed
    
    
    607,312,796Treasury shares
    
    
    (1,471,379
    )Basic number of shares outstanding
    
    
    605,841,417Options outstanding
    
    
    82,274,913Warrants outstanding
    
    
    2,561,973Number of shares on a fully diluted basis
    
    
    690,678,303
 As at December 31, 2003, 55,238,250 options are authorized but not yet granted
under the different stock option plans (see Note 23). 20. 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, 2002 and 2001, 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 S.A. shares to be contributed are included in the weighted average
number of common shares outstanding (see Note 3  Common Control Transactions). (in thousands of euros, except shares and per share data) Years ended December 31
    
    2003
    
    2002
    
    2001Net
income (loss) (numerator)
    
    
    (161,107
    )
    
    
    (320,891
    )
    
    
    (100,220
    )Shares used in basic net income per share calculation (denominator):Weighted average number of common shares outstanding
    
    
    605,658,965
    
    
    
    606,222,660
    
    
    
    636,992,392Dilutive effect of stock options
    
    
    5,625,142
    
    
    
    1,516,176
    
    
    
    24,661,319Dilutive effect of warrants
    
    
    
    
    
    
    28,073
    
    
    
    1,006,546Dilutive effect of shares to be issued related to acquisitions of
Celocom Limited & SLP
    
    
    
    
    
    
    
    
    
    
    167,936Weighted average diluted number of shares outstanding
    
    
    611,284,107
    
    
    
    607,766,909
    
    
    
    662,828,193Shares used in diluted net income per share (denominator)
    
    
    605,658,965
    
    
    
    606,222,660
    
    
    
    636,992,392Net income (loss) per shareBasic
    
    
    (0.27
    )
    
    
    (0.53
    )
    
    
    (0.16
    )Diluted
    
    
    (0.27
    )
    
    
    (0.53
    )
    
    
    (0.16
    )
 F 23




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##### Table of Contents



21. COMPREHENSIVE INCOME Comprehensive income is the change in equity 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 cumulative other comprehensive income in the shareholders
equity section of the balance sheets as at December 31, 2003, 2002 and 2001,
respectively, were as follows: (in thousands of euros) December 31
    
    2003
    
    2002
    
    2001Cumulative translation adjustment
    
    
    (6,460
    )
    
    
    1,873
    
    
    
    (3,567
    )Net unrealized gain (loss) on hedging instruments qualifying as effective
    
    
    11,030
    
    
    
    6,698
    
    
    
    (401
    )Cumulative other comprehensive income
    
    
    4,570
    
    
    
    8,571
    
    
    
    (3,968
    )
 The components of comprehensive income for the year ended December 31, 2003,
2002 and 2001, respectively,
were as follows: (in thousands of euros) Years ended December 31
    
    2003
    
    2002
    
    2001Net income (loss)
    
    
    (161,107
    )
    
    
    (320,891
    )
    
    
    (100,220
    )Change in cumulative translation adjustment
    
    
    (8,333
    )
    
    
    5,440
    
    
    
    (3,943
    )Effect of adopting IAS 39 as at January 1, 2001
    
    
    
    
    
    
    
    
    
    
    9,093Change in fair value of available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    (286
    )Change in fair value of derivatives qualifying as
effective hedging instruments
    
    
    4,332
    
    
    
    7,099
    
    
    
    (9,208
    )Change in cumulative other comprehensive income
    
    
    (4,001
    )
    
    
    12,539
    
    
    
    (4,344
    )Comprehensive net income (loss)
    
    
    (165,108
    )
    
    
    (308,352
    )
    
    
    (104,564
    )
 22. PENSION PLANS 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 long-term
liability in the balance sheet together with pension liabilities. The pension
obligations in France amounted to 1,176 thousand, 1,388 thousand and
1,295 thousand at December 31, 2003, 2002 and 2001, respectively. The Company also offers an Employee Investment Plan (EIP) to all U.S. employees
under section 401 (k) of the U.S. Internal Revenue Code. Company contributions
to the EIP plan amounted to approximately 898 thousand, 1,240
thousand and 1,903 thousand in 2003, 2002 and 2001, 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. Net periodic pension costs for the principal defined benefit plan for the years
ended December 31, 2003, 2002 and 2001, comprise the following elements: (in thousands of euros) Years ended December 31
    
    2003
    
    2002
    
    2001Current year service cost
    
    
    1,170
    
    
    
    1,549
    
    
    
    1,640Interest accrued on pension obligations
    
    
    1,465
    
    
    
    1,346
    
    
    
    1,275Actual loss (return) on plan assets
    
    
    (2,049
    )
    
    
    2,915
    
    
    
    2,621Net amortization and deferral
    
    
    1,285
    
    
    
    (4,339
    )
    
    
    (4,261
    )Total pension costs
    
    
    1,871
    
    
    
    1,471
    
    
    
    1,275
 F 24




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##### Table of Contents



The following table sets forth the funded status of pension plans: (in thousands of euros) December 31
    
    2003
    
    2002
    
    2001Accumulated benefit obligation
    
    
    28,386
    
    
    
    26,234
    
    
    
    23,880Projected benefit obligation
    
    
    28,911
    
    
    
    27,745
    
    
    
    25,287Plan assets at fair value
    
    
    16,828
    
    
    
    15,233
    
    
    
    18,110Projected benefit obligation in excess of plan assets
    
    
    (12,083
    )
    
    
    (12,512
    )
    
    
    (7,177
    )Unrecognized net loss
    
    
    11,681
    
    
    
    12,951
    
    
    
    8,138Net prepaid (payable) pension cost
    
    
    (402
    )
    
    
    439
    
    
    
    961
 The following weighted average rates were used in the calculation of projected
benefit obligation: December 31
    
    2003
    
    2002
    
    2001Discount rate
    
    
    5.50
    %
    
    
    5.50
    %
    
    
    5.75
    %Expected rate of return on plan assets
    
    
    7.00
    %
    
    
    8.00
    %
    
    
    8.00
    %Assumed rate of compensation increase
    
    
    3.75
    %
    
    
    3.75
    %
    
    
    4.00
    %
 Plan assets are comprised of 75% of equity securities, 20% of corporate bonds
and 5% of fixed interest instruments. The investment strategy generally
consists in 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 2003 is as follows: (in thousands of euros) Projected benefit obligation as at December 31, 2002
    
    
    27,745Service cost
    
    
    1,170Interest cost
    
    
    1,465Plan participants contributions
    
    
    444Actuarial (gain) loss
    
    
    1,037Benefits paid
    
    
    (662
    )Currency adjustments
    
    
    (2,288
    )Projected benefit obligation as at December 31, 2003
    
    
    28,911
 (in thousands of euros) Fair value of plan assets as at December 31, 2002
    
    
    15,233Actual return on plan assets
    
    
    2,049Employer contribution
    
    
    1,045Plan participants contributions
    
    
    444Benefits paid
    
    
    (662
    )Currency adjustments
    
    
    (1,281
    )Fair value of plan assets as at December 31, 2003
    
    
    16,828
 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. 23. STOCK OPTION PLANS The Company may grant, under various employee stock option plans (the Plans),
options to purchase or subscribe 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. F 25




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##### Table of Contents



Stock option activity was as follows: Number ofoptions
    
    Number ofauthorized
    
    options
    
    
    
    Average pricenot yet granted
    
    outstanding
    
    Price per share
    
    per shareBalances, December 31, 2000
    
    
    45,135,999
    
    
    
    108,530,501
    
    
    
    0.77 - 6.00
    
    
    
    3.82Options exercised
    
    
    
    
    
    
    (5,114,850
    )
    
    
    0.77 - 3.51
    
    
    
    1.62Options granted
    
    
    (2,554,590
    )
    
    
    2,554,590
    
    
    
    2.80 - 7.96
    
    
    
    2.97Options terminated unexercised
    
    
    9,208,833
    
    
    
    (11,510,133
    )
    
    
    0.77 - 7.96
    
    
    
    4.66Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances, 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
    
    
    
    1.98
 The following table summarizes information with respect to stock options
outstanding and exercisable at December 31, 2003: Weighted averageNumber
    
    remainingof options
    
    contractual life
    
    Number of optionsExercise prices
    
    outstanding (in euros)
    
    (years)
    
    exercisable0.83
    
    
    2,234,950
    
    
    
    9.6
    
    
    
    234,9500.84
    
    
    8,000,000
    
    
    
    8.7
    
    
    
    2,000,0000.96
    
    
    100,000
    
    
    
    9.3
    
    
    
    1.13
    
    
    14,653,799
    
    
    
    9.0
    
    
    
    3,815,0771.14
    
    
    20,000
    
    
    
    8.6
    
    
    
    5,0001.23
    
    
    2,230,000
    
    
    
    9.6
    
    
    
    1.24
    
    
    265,387
    
    
    
    9.6
    
    
    
    1.25
    
    
    200,000
    
    
    
    9.5
    
    
    
    1.28
    
    
    356,500
    
    
    
    8.8
    
    
    
    71,3751.31
    
    
    160,000
    
    
    
    8.5
    
    
    
    160,0001.35
    
    
    870,200
    
    
    
    1.0
    
    
    
    870,2001.42
    
    
    1,000,000
    
    
    
    8.5
    
    
    
    250,0001.46
    
    
    4,975,000
    
    
    
    9.8
    
    
    
    1.49
    
    
    40,000
    
    
    
    9.8
    
    
    
    1.52
    
    
    6,901,900
    
    
    
    9.3
    
    
    
    416,9001.71
    
    
    3,944,200
    
    
    
    4.0
    
    
    
    3,944,2002.25
    
    
    4,000,000
    
    
    
    8.7
    
    
    
    1,000,0002.29
    
    
    17,725,000
    
    
    
    5.3
    
    
    
    17,591,2502.60
    
    
    74,200
    
    
    
    8.1
    
    
    
    37,1002.68
    
    
    437,400
    
    
    
    8.1
    
    
    
    116,5002.87
    
    
    86,440
    
    
    
    7.8
    
    
    
    43,2202.90
    
    
    391,275
    
    
    
    7.7
    
    
    
    200,5883.17
    
    
    35,000
    
    
    
    7.9
    
    
    
    17,5003.18
    
    
    50,000
    
    
    
    7.9
    
    
    
    25,0003.51
    
    
    10,709,410
    
    
    
    6.4
    
    
    
    8,816,7143.79
    
    
    419,248
    
    
    
    7.5
    
    
    
    260,5674.14
    
    
    18,750
    
    
    
    7.5
    
    
    
    9,3756.00
    
    
    2,376,254
    
    
    
    6.9
    
    
    
    1,880,88882,274,913
    
    
    
    7.5
    
    
    
    41,766,404
 Weighted average exercise price (in euros): 1.98 On April 17, 2002, the Companys Board of Directors voted to approve a 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. F 26




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##### Table of Contents



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. On December 31, 2003, 14,720,246 stock options were outstanding. Warrants In July 2000, in connection with the hiring of its former CEO, Mr. Perez, the
Company entered into a warrant agreement with an executive search firm. Under
this agreement, the Company granted the right to purchase 2,561,973 ordinary
shares at a purchase price of 2.3375 per share, resulting in an underlying
per share value of 3.51 using the Black & Scholes option pricing model
with the following assumptions: dividend yield of 0%, expected volatility of
45%, risk free interest rate of 4% and an expected life of 12 months. The
warrants are exercisable at any time for seven years after the grant date. As
at December 31, 2003, no warrant had been exercised. 24. FINANCIAL INSTRUMENTS AND MARKET RELATED EXPOSURES Adoption of IAS 39 As indicated in Note 2, the Company adopted on January 1, 2001 IAS 39
Financial Instruments: Recognition and Measurement. The adoption of IAS 39 resulted in a cumulative after tax increase of
shareholders equity as of January 1, 2001 of
4,090 thousand. The impact on shareholders equity on January 1, 2001 of
the adoption of IAS 39 is shown below: (in thousands of euros) OtherRetained
    
    comprehensiveearnings
    
    income
    
    TotalHedges not qualifying as effective
    
    
    (5,003
    )
    
    
    
    
    
    
    (5,003
    )Hedges qualifying as effective
    
    
    
    
    
    
    8,807
    
    
    
    8,807Unrealized gains and losses on
available-for-sale securities
    
    
    
    
    
    
    286
    
    
    
    286Impact as at January 1, 2001 on
shareholders equity, net of
deferred income taxes
    
    
    (5,003
    )
    
    
    9,093
    
    
    
    4,090
 In accordance with the transitional requirements of IAS 39, the Company
recorded in 2001 a net loss of 5,003 thousand in retained earnings to
recognize at fair value all derivatives not qualifying as effective hedging
instruments. The Company also recorded a net gain of 8,807 thousand in
other comprehensive income to recognize at fair value all derivatives
qualifying as effective hedging instruments. These amounts were net of deferred
income taxes. The Company also recorded a net gain of 286 thousand in
other comprehensive income to recognize at fair value its available-for-sale
financial assets. Consequently, comprehensive income was impacted by 9,093
thousand as of January 1, 2001. Foreign exchange exposure As indicated in Note 2, the Company uses financial instruments to manage its
foreign currency exposure incurred in the normal course of business. The policy of the Company is to hedge its currency risk exposure arising from
commercial transactions. In order to achieve this objective, the Company uses
foreign currency derivative instruments by entering into foreign exchange swaps
and forward contracts and purchasing or selling foreign exchange option
contracts. 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 any speculative positions. The derivative instruments are
traded over the counter with major financial institutions. The Company does
not enter into any derivative contracts for purposes other than hedging its
foreign exchange risk. 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. The
financial instruments that do not qualify as effective hedges under IAS 39 are
mainly the options sold as part of the above combination strategies. Outstanding financial instruments qualifying as cash flow hedges under IAS 39,
as well as the related currency commercial exposure, are described below. In the amounts reported below: - Hedging positions in parenthesis 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 parenthesis indicate the
Companys payables in the currency, or forecasted purchases in the currency. F 27




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##### Table of Contents



(in thousands of euros
(1)) 2003
    
    2002USD
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    USDand USD
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and USDDecember 31
    
    area (2)
    
    GBP
    
    JPY
    
    ZAR
    
    Others (3)
    
    area (2)
    
    GBP
    
    JPY
    
    ZAR
    
    Others (3)Hedging positions (4)Forward contracts
    
    
    (30,874
    )
    
    
    (5,061
    )
    
    
    (4,474
    )
    
    
    (3,890
    )
    
    
    (2,476
    )
    
    
    (27,602
    )
    
    
    (516
    )
    
    
    (1,438
    )
    
    
    (4,990
    )
    
    
    3,052Option contracts (5)
    
    
    (128,379
    )
    
    
    (21,307
    )
    
    
    (15,747
    )
    
    
    
    
    
    
    
    
    
    
    (98,368
    )
    
    
    (12,598
    )
    
    
    
    
    
    
    
    
    
    
    TOTAL
    
    
    (159,253
    )
    
    
    (26,368
    )
    
    
    (20,221
    )
    
    
    (3,890
    )
    
    
    (2,476
    )
    
    
    (125,970
    )
    
    
    (13,114
    )
    
    
    (1,438
    )
    
    
    (4,990
    )
    
    
    3,052Exposure (6)Balance sheet items
(commercial transactions
not settled at year end)
    
    
    53,529
    
    
    
    2,220
    
    
    
    1,908
    
    
    
    3,890
    
    
    
    7,818
    
    
    
    54,913
    
    
    
    1,017
    
    
    
    (1,279
    )
    
    
    3,416
    
    
    
    2,310Forecasted commercial
transactions
    
    
    154,834
    
    
    
    34,984
    
    
    
    21,548
    
    
    
    1,600
    
    
    
    (13,284
    )
    
    
    98,098
    
    
    
    17,543
    
    
    
    3,403
    
    
    
    5,054
    
    
    
    (20,853
    )TOTAL
    
    
    208,363
    
    
    
    37,204
    
    
    
    23,456
    
    
    
    5,490
    
    
    
    (5,466
    )
    
    
    153,011
    
    
    
    18,560
    
    
    
    2,124
    
    
    
    8,470
    
    
    
    (18,543
    )
  (1) Currency amounts are converted to euros at year end closing rate. (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) The financial instruments hedging 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 policy is to hedge all of its actual commercial currency
exposure, as well as a time weighted proportion of our forecasted commercial
currency exposure. Outstanding financial instruments not qualifying as effective hedges under IAS
39 are described below. 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)) 2003
    
    2002USD
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    USDand USD
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and USDDecember 31
    
    area (2)
    
    GBP
    
    JPY
    
    ZAR
    
    Others (3)
    
    area (2)
    
    GBP
    
    JPY
    
    ZAR
    
    Others(3)Forward contracts
    
    
    (8,796
    )
    
    
    (895
    )
    
    
    
    
    
    
    (2,375
    )
    
    
    
    
    
    
    (186,350
    )
    
    
    (1,470
    )
    
    
    (8,059
    )
    
    
    
    
    
    
    Option contracts (4)
    
    
    (46,404
    )
    
    
    (4,261
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,918
    )
    
    
    (3,090
    )
    
    
    
    
    
    
    
    
    
    
    TOTAL
    
    
    (55,200
    )
    
    
    (5,156
    )
    
    
    
    
    
    
    (2,375
    )
    
    
    
    
    
    
    (213,268
    )
    
    
    (4,560
    )
    
    
    (8,059
    )
    
    
    
    
    
    
    
  (1) Currency amounts are converted to euros at year end closing rate. (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. Net unrealized gain on hedging instruments qualifying as effective As at December 31, 2003, an unrealized gain of 11,030 thousand net of
taxes was recognized in equity, under other comprehensive income, as being the
effective portion of hedging instruments fair value changes associated with
forecasted transactions (see Note 21). Interest rate exposure Since the Company is not significantly exposed to risk associated with interest
rates fluctuations, it has not entered into any derivative contracts to hedge
interest rate risk. F 28




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##### Table of Contents



Financial counterparty 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. Fair value of financial instruments The following table provides information about the carrying amounts and
estimated fair values of certain of the Companys financial instruments,
excluding cash and cash equivalents, cash deposits, accounts receivable,
accounts payable and accrued expenses. Following the adoption of IAS 39 in January 2001, the Company measures at fair
value assets and liabilities qualified as trading or available-for-sale.
Therefore, there is no difference between the carrying amounts and the
estimated fair values of these assets and liabilities as at December 31, 2003,
2002 and 2001. The fair value of investments in available-for-sale securities is determined
based on quoted market prices if companies are publicly listed. If the
companies are not publicly listed, the fair value of investments in equity
securities is determined by valuation techniques appropriate for the nature of
the security. The fair market value of loans, deposits and other non-current
assets is determined by discounting the nominal amount using appropriate
interest rates. The fair value of the Companys fixed rate long-term debt, including capital
leases, is determined by discounting estimated future cash flows using
borrowing rates prevailing at year-end for similar maturities and contracts.
The book values of the Companys long-term floating-rate borrowings approximate
fair value. The fair value of forward exchange contracts and of currency options contracts
is determined as described in Note 2  Derivative financial
instruments. (in thousands of euros) 2003
    
    2002
    
    2001December 31
    
    Fair value
    
    Fair value
    
    Fair valueBalance sheetAssetsInvestments in available-for-sale securities
    
    
    647
    
    
    
    2,080
    
    
    
    17,066Loan, deposits and other non-current assets
    
    
    17,045
    
    
    
    32,132
    
    
    
    99,701Total assets
    
    
    17,692
    
    
    
    34,212
    
    
    
    116,767Liabilities (Long-term debt including current portion and capital lease)Fixed rates
    
    
    
    
    
    
    
    
    
    
    Floating rates
    
    
    44,920
    
    
    
    48,638
    
    
    
    36,329Total liabilities
    
    
    44,920
    
    
    
    48,638
    
    
    
    36,329Financial
instruments at fair market value(1)In other current assets or other current liabilities
    
    
    16,426
    
    
    
    10,371
    
    
    
    (5,178
    )In cash and cash equivalent
    
    
    
    
    
    
    3,266
    
    
    
    2,187Total: financial instruments at fair market value
    
    
    16,426
    
    
    
    13,637
    
    
    
    (2,991
    )
   (1) In the amounts reported above, assets are presented as positive amounts and
liabilities as negative amounts. 25. COMMITMENTS AND CONTINGENCIES Legal proceedings In October 2001, the United States Court of Appeals for the Ninth Circuit
affirmed a District Court judgment against the Company in favor of Humetrix
Inc., based on the claimed breach of an agreement to jointly market products in
the U.S. health care sector. The parties entered into a Mutual Release and
Settlement Agreement on March 25, 2002. As a result of the above decision, the
Company recorded a charge of 18,100 thousand, adversely impacting 2001
operating results, and resulting in a total current liability (including a
previously existing provision) of 19,400 thousand in the balance sheet as
at December 31, 2001. The Company paid all amounts due under the Mutual Release
and Settlement Agreement in 2002, and no further obligations remain. In December 1997, Mr. Alain Nicolaï 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 smart card
reading system and device in the area of casino slot machines. In June 2000,
the Court found Gemplus S.A. liable for breach, ordered Gemplus S.A. 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. Gemplus S.A. appealed. In April 2003, the expert filed a
preliminary report estimating actual damages within a range of 10,975
thousand to 14,944 thousand. Gemplus S.A. contested the experts
preliminary report on various grounds, including absence of any substantial
market for the products at issue. In August 2003, the expert
transmitted to the parties his definitive report indicating that the
amount estimated by him of the plaintiffs damages would be in the
range of 6,792 thousand to 25,100 thousand. Gemplus S.A.
maintained its positions and contested the definitive report of the
expert and the related estimate of damages, as well as the merits of
this case, on various grounds. Based on the expert's report, on March
18, 2004, the Marseille Commercial Court ordered Gemplus S.A. to pay
21,952 thousand to the plaintiffs. Gemplus S.A. filed an appeal
on the merits. At the further request of Gemplus S.A., on April 2,
2004, the Aix-en-Provence Court of Appeal decided to suspend the
order of the Marseille Commercial Court for Gemplus S.A. to make the
payment to the plaintiffs, and instead ordered Gemplus S.A. to make a
cash deposit in the same amount into an escrow account by June 1,
2004, as security pending the decision on the appeal on the merits. Although there can be no assurance of how the appellate court may
rule or as to the amount of damages that could be assessed, based on
the Company's analysis and advice of counsel, the Company recorded a
provision for this litigation of 5,200 thousand in the 2003
Consolidated Statement of Income. F 29




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As described in Note 30, the Company has taken legal action to seek repayment
of the loan due by Dr. Lassus. These proceedings are currently pending, and Dr.
Lassus challenges the existence of the loan and his obligation to repay. The
Company bases its claims for repayment on the December 2001 agreement, as well
as on numerous written confirmations from Dr. Lassus confirming the existence
of the loan and his intention and ability to repay. Regardless of the outcome
of these proceedings, the collection of the loan will depend on the financial
strength of Dr. Lassus, which the Company believes is uncertain at this time. 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
analyse 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 these
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 analyse 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. The Company believes that the workers
committees appeal is without merit. 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 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 at December 31, 2003, 2002 and 2001 are described in the
table below. As at December 31, 2003, 2002, and 2001, the Companys contractual obligations
are as follows: Schedule of payments
    
    (in thousands of euros)
 Contractual obligationsas at December 31, 2003
    
    Total
    
    Less than 1 year
    
    1 to 5 years
    
    More than 5 yearsLong-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital leases obligations
    
    
    50,850
    
    
    
    7,377
    
    
    
    25,961
    
    
    
    17,512Operating lease obligations
    
    
    16,098
    
    
    
    5,187
    
    
    
    7,446
    
    
    
    3,465Purchase
obligations (1)
    
    
    79,202
    
    
    
    78,106
    
    
    
    1,096
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    146,150
    
    
    
    90,670
    
    
    
    34,503
    
    
    
    20,977
  (1)
    
    including 54,500 thousand related to microprocessor chips purchase
commitments. Schedule of payments
    
    (in thousands of euros)
 Contractual obligationsas at December 31, 2002
    
    Total
    
    Less than 1 year
    
    1 to 5 years
    
    More than 5 yearsLong-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital leases obligations
    
    
    60,856
    
    
    
    8,060
    
    
    
    29,758
    
    
    
    23,038Operating lease obligations
    
    
    33,428
    
    
    
    8,490
    
    
    
    22,216
    
    
    
    2,722Purchase obligations (2)
    
    
    39,200
    
    
    
    39,200
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    133,484
    
    
    
    55,750
    
    
    
    51,974
    
    
    
    25,760
  (2)
    
    including 29,700 thousand related to microprocessor chips purchase
commitments. Schedule of payments
    
    (in thousands of euros)
 Contractual obligationsas at December 31, 2001
    
    Total
    
    Less than 1 year
    
    1 to 5 years
    
    More than 5 yearsLong-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital leases obligations
    
    
    44,408
    
    
    
    6,039
    
    
    
    23,192
    
    
    
    15,177Operating lease obligations
    
    
    42,973
    
    
    
    10,737
    
    
    
    25,326
    
    
    
    6,910Purchase obligations (3)
    
    
    34,800
    
    
    
    34,800
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    122,181
    
    
    
    51,576
    
    
    
    48,518
    
    
    
    22,087
  (3)
    
    including 25,000 thousand related to microprocessor chips purchase
commitments. As at December 31, 2003, 2002 and 2001, 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 below) and certain guarantees. F 30




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Other guarantees can be presented as follows: (in thousands of euros) December 31
    
    2003
    
    2002
    
    2001Performance, downpayment and bid bonds
    
    
    10,817
    
    
    
    15,752
    
    
    
    8,705Guarantees related to operations
    
    
    6,518
    
    
    
    9,405
    
    
    
    4,152Total guarantees issued by the Company
    
    
    17,335
    
    
    
    25,157
    
    
    
    12,857
 As at December 31, 2003, the amount of guarantees delivered by the Company
reached 17,335 thousand and represents mainly performance bonds and bid
bonds, 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. 26. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest and income taxes are as follows: (in thousands of euros) Years ended December 31
    
    2003
    
    2002
    
    2001Cash paid for:Interest
    
    
    3,069
    
    
    
    1,175
    
    
    
    2,928Income taxes
    
    
    3,651
    
    
    
    1,729
    
    
    
    14,338
 27. WAGES, BENEFITS AND NUMBER OF EMPLOYEES (UNAUDITED) Wages and benefits including social security taxes amounted to approximately
277 million, 296 million,
and 339 million for the years ended December 31, 2003, 2002 and 2001
respectively. Headcount was 5,037, 5,680 and 6,721 as at December 31, 2003, 2002 and 2001
respectively. 28. RELATED PARTY TRANSACTIONS In 2000 and 2001, one of the Companys indirect subsidiaries granted to Dr.
Lassus and Mr. Perez loans to permit them to exercise stock options. The
Company forgave certain amounts of interest on these loans in 2001 and assumed
the income tax liabilities resulting from such forgiveness (see Note 30). In 2001, the Company entered into a Loan Repayment Agreement with Mr. Perez
regarding the loans made to him (see Note 30). In December 2001, the Company recorded severance expenses in the amount of 25,691 thousand due to Mr. Perez and to Dr. Lassus in connection with their
resignation as Chief Executive Officer of the Company and cessation as Chairman
of the Board of Directors, respectively, as described further below in Note 30. During 2002, the Company paid amounts totaling 10,629 thousand in
connection with the above resignation and cessation, respectively, of Mr. Perez
and Dr. Lassus. During 2001, the Company entered into an agreement with a service company 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 and resigned as Chief Executive Officer of the service company
effective on December 19, 2001. He remains a member of its Board of Directors
and a member of our 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
continued to use the services of this company and the total cost recorded in
its Consolidated Statement of Income in 2002 for this arrangement amounted to
1,737 thousand. During the years 2001 and 2000, the Company had a financial consulting
agreement with a firm that included an individual who served on the Companys
Board of Directors until September 2000. During 2001, the Company incurred 
319 thousand under this consulting agreement, which was terminated December 31,
2001. F 31




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During 2001, the Company reimbursed Dr. Lassus funds that he had advanced in a
project involving a number of consultants who provided smart card and related
business services, including services linked to card operating systems and card
management systems. The funds, in the amount of 160 thousand (GBP 100
thousand), were reimbursed to Dr. Lassus in November 2001. GemVentures 1 N.V., a wholly owned subsidiary of the Company and Dassault
Multimedia S.A.S. are minority shareholders of Welcome Real Time S.A. Mr.
Thierry Dassault, one of the Companys directors, is also the President of
Dassault Multimedia, 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 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. 29. SEGMENT INFORMATION In 2001, disposed operations include the access control systems activities of
the Companys former subsidiary SkiData and the electronic smart labels
solutions activities of the Companys former Tag subsidiary, which were sold
during the third quarter of 2001. Financial Services and Security segment The Financial Services and Security segment includes systems and services based
on chip card technology in areas such as financial services, identification,
health care, corporate security, loyalty programs, transportation access,
pay-television applications, e-business security activities as well as magnetic
stripe plastic cards for banking applications. The Companys activities in this
segment also include the sales of smart card readers to customers as well as
smart card interfacing technologies to device manufacturers. Telecommunications segment The Telecommunications segment includes the Companys wireless solutions, as
well as prepaid telephone cards and other products and services. This segregation in business segment reporting is consistent with the Companys
financial reporting structure incorporated in its management reporting. The
Companys two operating segments, the Telecommunications segment and the
Financial Services and Security segment, have a different customer base, and
each of them has separate financial information available. These segments are
evaluated regularly by the management in deciding how to allocate resources and
in assessing performance. The Companys management makes decisions about
resources to be allocated to the segments and assesses their performance using
revenues and gross margins. The Company does not identify or allocate assets to
the operating or geographic segments and the management does not 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 32




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The following tables present selected data for the years ended December 31,
2003, 2002 and 2001: (in thousands of euros) December 31
    
    2003
    
    2002
    
    2001Net salesTelecommunications
    
    
    542,534
    
    
    
    544,471
    
    
    
    681,933Financial Services and Security
    
    
    206,669
    
    
    
    242,963
    
    
    
    296,775Disposed Operations (1)
    
    
    
    
    
    
    
    
    
    
    44,278Net sales
    
    
    749,203
    
    
    
    787,434
    
    
    
    1,022,986Gross profitTelecommunications
    
    
    166,776
    
    
    
    154,526
    
    
    
    228,814Financial Services and Security
    
    
    40,480
    
    
    
    45,186
    
    
    
    62,594Disposed operations (1)
    
    
    
    
    
    
    
    
    
    
    16,062Gross profit
    
    
    207,256
    
    
    
    199,712
    
    
    
    307,470Research and development expenses
    
    
    (69,223
    )
    
    
    (92,240
    )
    
    
    (112,885
    )Selling and marketing expenses
    
    
    (100,181
    )
    
    
    (112,227
    )
    
    
    (165,276
    )General and administrative expenses
    
    
    (77,317
    )
    
    
    (89,896
    )
    
    
    (110,657
    )Litigation expenses
    
    
    
    
    
    
    
    
    
    
    (18,120
    )Management severance expenses
    
    
    
    
    
    
    
    
    
    
    (25,691
    )Restructuring expenses
    
    
    (61,973
    )
    
    
    (90,003
    )
    
    
    (28,466
    )Goodwill amortization and impairment
    
    
    (33,051
    )
    
    
    (47,117
    )
    
    
    (27,162
    )Operating income (loss)
    
    
    (134,489
    )
    
    
    (231,771
    )
    
    
    (180,787
    )
  (1): Disposed operations include SkiData and Tag activities, which were sold
during the third quarter of 2001. The following is a summary of sales to external customers by geographic area
for the years ended 2003, 2002 and 2001: (in thousands of euros) Years ended December 31
    
    2003
    
    2002
    
    2001Americas
    
    
    169,625
    
    
    
    171,717
    
    
    
    231,606Europe, Middle East, Africa
    
    
    407,718
    
    
    
    416,220
    
    
    
    473,996Asia
    
    
    171,860
    
    
    
    199,497
    
    
    
    273,106Disposed operations (1)
    
    
    
    
    
    
    
    
    
    
    44,278Net sales
    
    
    749,203
    
    
    
    787,434
    
    
    
    1,022,986
  (1): Disposed operations include SkiData and Tag activities, which were sold
during the third quarter of 2001,
and were reported primarily in the Europe, Middle East and Africa region. 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 Luxembourg 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, 2003, 2002 and 2001. 30. MANAGEMENT SEVERANCE EXPENSES In 2001, the Company recorded a total 25,691 thousand charge in its
Consolidated Statement of Income with respect to the changes in its management
decided at its Board meeting of December 19, 2001. There were no accruals in 2002 or 2003 for management severance expenses
relating to Messrs. Perez and Lassus. During 2000, the Company entered into an employment agreement with Mr. Perez,
its former CEO, whereby he was granted 10,247,893 free shares, 10,247,893
service options and 10,247,893 performance options. The stock options had an
exercise price of 3.51 per share. In addition, one of the Companys
indirect finance subsidiaries made loans to Mr. Perez between September 2000
and March 2001 in an aggregate amount of 88.9 million. Each loan bore
interest at the rate provided in Section 1274 (b) (2) (b) of the US Internal
Revenue Code of 1986, which is based on the US Federal short-term rate.
Therefore interest rates ranged from 5.58% to 6.4% per annum. These loans were
made to allow Mr. Perez to exercise the stock options and pay the exercise
price (for an aggregate amount of 71.9 million) and taxes related to the
free shares (for an aggregate amount of 17.0 million). Concurrently with the issuance of free shares and options to Mr. Perez, the
Company issued 10,247,893 free shares and 20,495,786 stock options to Dr.
Lassus, the founder of the Company and former Chairman of the Board of
Directors.
The stock options had an exercise price of 3.51 per share. In addition,
one of the Companys indirect finance subsidiaries made loans to Dr. Lassus in
an aggregate amount of 71.9 million on the same interest and repayment
terms as the loans to Mr. Perez. Dr. Lassus used the loan proceeds to exercise
the stock options that were granted to him. On November 2, 2001, the Company announced that its Chief Executive Officer,
Mr. Perez, had signed an agreement with one of its indirect subsidiaries
pursuant to which he committed to return all of the Gemplus International S.A. shares that he received in August and September 2000 to such indirect
subsidiary of the Company, in reimbursement of the loans that such indirect
subsidiary made to him in 2000 and in 2001. Mr. Perez transferred these shares pursuant to two agreements. The first
agreement was signed on October 20, 2001. Mr. Perez transferred 18,574,306
shares to the Companys indirect subsidiary, at a price of 2.79 per share,
representing 51,822 thousand that was recorded in reimbursement of a
portion of the loans in the same amount. The difference between the value of the shares pursuant to the agreement (2.79 per share) and the market closing price of the Companys shares as at the
time of the effective transfer of the shares (3.12 per share) was
reflected in shareholders equity, resulting in an increase of 6,130
thousand of the caption paid-in capital. The second agreement was signed on December 19, 2001, at the time Mr. Perez
resigned his position as President and Chief Executive Officer of the Company.
Mr. Perez transferred 12,169,373 shares to the Companys indirect subsidiary,
at a price of 2.86 per share, representing the market closing price of the
Companys shares as at December 19, 2001, totaling 34,804 thousand. The
difference between the fair value of the shares and the remaining loan
outstanding was recorded in the Companys Consolidated Statement of Income,
resulting in a charge of 6,838 thousand. F 33




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Mr. Perez was also entitled to a tax reimbursement on the portion of the loan
that was forgiven. Such reimbursement was accrued in 2001 in an
amount of 6,502 thousand. In addition, Mr. Perez is entitled, pursuant to his employment
agreement, to receive a severance payment, that was accrued in 2001 in an
amount of 1,161 thousand. Consequently, the total charges associated with
Mr. Perezs resignation amounted to 14,501 thousand. Such amounts were
paid in 2002, with the exception
of an amount of 337 thousand included under the caption other current
liabilities in the Companys balance sheet as at December 31, 2002 as a reserve
for the tax reimbursement (see Note 12). On December 19, 2001, the Companys Board of Directors accepted the cessation
of Dr. Lassus as its Chairman. In accordance with an agreement signed with Dr.
Lassus in 2000, the replacement of Dr. Lassus as Chairman of the Board required
the Company to make a payment to Dr. Lassus in the amount of US$12 million
(13,450 thousand), such payment representing partly a severance payment
(11,190 thousand) and partly the cost of a pledge of Dr. Lassus
20,495,786 option shares as security for the loans (2,260 thousand). The
cost of the pledge was deferred in the balance sheet as at December 31, 2001.
As discussed in Note 28 Related party transactions, the shares ultimately
were not pledged, and therefore the cost of the pledge was charged to expenses
in the Companys 2002 Consolidated Statement of Income. The total charges for
the fiscal year ended December 31, 2001 associated with Dr. Lassus cessation
as Chairman amounted to 11,190 thousand.
As disclosed in Note 14, at December 31, 2003, an amount of US$10,000 thousand
(8,001 thousand) was payable upon fulfillment of certain specific
conditions pursuant to the agreement with Dr. Lassus dated December 19, 2001,
including the condition of him pledging his option shares. Such conditions have
not been fulfilled. In 2001, the Company also recorded a provision of 1,545 thousand in respect of a tax reimbursement liability on interest forgiven
(see Note 12 and 14). As at December 31, 2003, these liabilities totaling 9,546 thousand have been reclassified to long-term liabilities (see Note 14)
due to the dispute relating to their payment. 31. 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
    
    2003
    
    2002
    
    2001Net income (loss) in accordance with IFRS
    
    
    (161,107
    )
    
    
    (320,891
    )
    
    
    (100,220
    )Capitalized development costs
    
    
    7,321
    
    
    
    (1,803
    )
    
    
    (3,227
    )Reversal of restoration of impairment losses on
long-lived assets
    
    
    (2,555
    )
    
    
    
    
    
    
    Stock options accounting
    
    
    (6,399
    )
    
    
    (2,887
    )
    
    
    69,262Purchase accounting
    
    
    (837
    )
    
    
    (2,351
    )
    
    
    (8,104
    )Goodwill amortization and impairment
    
    
    (18,522
    )
    
    
    49,177
    
    
    
    Other differences
    
    
    26
    
    
    
    360
    
    
    
    564Deferred tax effect of US GAAP adjustments
    
    
    393
    
    
    
    (1,277
    )
    
    
    1,057Total differences between US GAAP and IFRS
    
    
    (20,573
    )
    
    
    41,219
    
    
    
    59,552Net income (loss) per US GAAP
before change in accounting principle
    
    
    (181,680
    )
    
    
    (279,672
    )
    
    
    (40,668
    )Changes in accounting principles: Hedge accounting
    
    
    
    
    
    
    
    
    
    
    (8,807
    )Net income (loss) per US GAAP
    
    
    (181,680
    )
    
    
    (279,672
    )
    
    
    (49,475
    )Change in cumulative other comprehensive adjustment
in accordance with IFRS
    
    
    (4,001
    )
    
    
    12,538
    
    
    
    (4,344
    )Change in effect of IFRS / US GAAP
adjustments on other comprehensive income
    
    
    240
    
    
    
    (3,233
    )
    
    
    (5,054
    )Other comprehensive income (loss), net of tax
    
    
    (3,761
    )
    
    
    9,305
    
    
    
    (9,398
    )Comprehensive income (loss)
    
    
    (185,441
    )
    
    
    (270,367
    )
    
    
    (58,873
    )Net income (loss) per share before changes in
accounting principles:Basic
    
    
    (0.30
    )
    
    
    (0.46
    )
    
    
    (0.06
    )Diluted
    
    
    (0.30
    )
    
    
    (0.46
    )
    
    
    (0.06
    )Changes in accounting principles:Basic
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Diluted
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Net income (loss) per share:Basic
    
    
    (0.30
    )
    
    
    (0.46
    )
    
    
    (0.08
    )Diluted
    
    
    (0.30
    )
    
    
    (0.46
    )
    
    
    (0.08
    )Number of shares:Basic
    
    
    605,658,965
    
    
    
    606,222,660
    
    
    
    636,992,392Diluted
    
    
    605,658,965
    
    
    
    606,222,660
    
    
    
    636,992,392
 F 34




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##### Table of Contents



(in thousands of euros) December 31
    
    2003
    
    2002
    
    2001Shareholders equity in accordance with IFRS
    
    
    695,012
    
    
    
    860,451
    
    
    
    1,167,762Capitalized development costs
    
    
    
    
    
    
    (7,321
    )
    
    
    (5,518
    )Reversal of restoration of impairment losses on long-lived assets
    
    
    (2,555
    )
    
    
    
    
    
    
    Non-recourse loans
    
    
    (4,276
    )
    
    
    (4,918
    )
    
    
    (71,856
    )Purchase consideration
    
    
    (11,292
    )
    
    
    (10,455
    )
    
    
    (8,104
    )Goodwill amortization and impairment
    
    
    30,655
    
    
    
    49,177
    
    
    
    Effect of IFRS / US GAAP adjustments on other comprehensive
income
    
    
    (7,904
    )
    
    
    (8,144
    )
    
    
    (4,911
    )Other differences
    
    
    76
    
    
    
    50
    
    
    
    (310
    )Deferred tax effect of US GAAP adjustments
    
    
    363
    
    
    
    (30
    )
    
    
    1,224Total difference between US GAAP and IFRS
    
    
    5,067
    
    
    
    18,359
    
    
    
    (89,475
    )Shareholders equity in accordance with US GAAP
    
    
    700,079
    
    
    
    878,810
    
    
    
    1,078,287
 Capitalized development costs   Hedge accounting and financial instruments   Stock options accounting   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, 2003, 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. 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, which requires
that the Company disclose 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,
2003, 2002 and 2001, would have been as follows: (in thousands of euros, except for net income per share) Years ended December 31
    
    2003
    
    2002
    
    2001Net income per US GAAP:As reported
    
    
    (181,680
    )
    
    
    (279,672
    )
    
    
    (49,475
    )Pro forma
    
    
    (192,955
    )
    
    
    (254,754
    )
    
    
    (139,700
    )Net income per share per US GAAP - Proforma:Basic
    
    
    (0.32
    )
    
    
    (0.42
    )
    
    
    (0.22
    )Diluted
    
    
    (0.32
    )
    
    
    (0.42
    )
    
    
    (0.22
    )
 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 2003, 2002 and 2001: dividend yields of 0% for all periods; annual
risk-free interest rate of 2.3%, 3.3% and 4.1% for 2003, 2002 and 2001
respectively; expected volatility of 53%, 83% and 79% for 2003, 2002 and 2001
respectively; and the expected option vesting period of four years for all
periods. In 2000, the Company entered into arrangements with Mr. Perez and Dr. Lassus,
whereby each was granted a certain number of free shares and a certain number
of service and performance options (see Note 30). Each of the option agreements
included loan provisions whereby the two individuals could obtain loans
representing 100% of the option exercise price. The loans are treated
for the purposes of applying variable plan F 35




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accounting as non-recourse loans at
origination, and included certain prepayment features. As a result, the related
amount of principal and interest to be paid on the loans was uncertain and,
therefore, the ultimate option price was not determinable. Under US GAAP, when
the number of shares and the option price are unknown, variable plan accounting
must be followed. Under variable plan accounting, compensation cost is
re-measured each period based on the difference between the exercise price and
the fair market value of the stock. This re-measurement occurs up until there
is a measurement date (i.e., the date at which both the number of shares and
the option or award prices are known). Both the service options and performance options
granted to these individuals are accounted for under variable plan accounting
when determining employee compensation expense under US GAAP. A compensation
expense of 94,080 thousand was recorded in 2000 with respect to the
service options and performance options granted to these individuals, which was
reversed in 2001 when the fair market value of the stock went below the
exercise price of the options. No compensation expense or benefit was recorded
in 2002 and 2003 with respect to such issuances. Under US GAAP, pursuant to EITF 95-16 Accounting for Stock Compensation
Arrangements with Loan Features,
the loans are presented as a reduction to shareholders equity, and the
interest on the loans is presented as a reduction of compensation expense. The
Company recorded interest with respect to these loans in the amount of 4,877 thousand in 2001 and 1,706 thousand in 2002 (net of provision). They
were reflected in the Consolidated Statement of Income in interest income under
IFRS and in general and administrative expenses under US GAAP. Purchase consideration   Goodwill amortization and impairment   During 2002 and 2003, 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 recorded a goodwill impairment charge of 55,238
thousand in 2003 for US GAAP purposes. 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. For the year ended December 31, 2001, the net income (loss) adjusted for effect
of no amortization of goodwill is as follows: (in thousands of euros) Year ended December 31
    
    2001Net income (loss) in accordance with US GAAP
    
    
    (49,475
    )Goodwill amortization
    
    
    27,162Net income (loss) adjusted for effect of no amortization of goodwill
    
    
    (22,313
    )Adjusted net income (loss) per shareBasic
    
    
    (0.04
    )Diluted
    
    
    (0.04
    )
 The allocation of goodwill to the Companys reportable segments is required for
the purposes of testing goodwill for impairment under SFAS 142. This
information is not required to be reflected in the Companys segment
information presented in note 29. F 36




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The allocation of goodwill to the Companys reportable segments is as follows: (in thousands of euros) FinancialServicesTelecommunications
    
    and Security
    
    TotalAs at December 31, 2001
    
    
    32,906
    
    
    
    83,674
    
    
    
    116,580Change for acquisitions, disposals and transfers
    
    
    5,511
    
    
    
    1,093
    
    
    
    6,604Exchange rate differences
    
    
    (384
    )
    
    
    (1,340
    )
    
    
    (1,724
    )As at December 31, 2002
    
    
    38,033
    
    
    
    83,427
    
    
    
    121,460Change for acquisitions, disposals and transfers
    
    
    (7,991
    )
    
    
    3,971
    
    
    
    (4,020
    )Goodwill impairment
    
    
    (28,738
    )
    
    
    (26,500
    )
    
    
    (55,238
    )Exchange rate differences
    
    
    (742
    )
    
    
    (4,547
    )
    
    
    (5,289
    )As at December 31, 2003
    
    
    562
    
    
    
    56,351
    
    
    
    56,913
 Other comprehensive income   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. 32. OTHER REQUIRED DISCLOSURES UNDER US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES New accounting pronouncements under US GAAP   SFAS 143 In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). SFAS 143 prescribes the accounting for retirement
obligations associated with tangible long-lived assets, including the timing of
liability recognition and initial measurement of the liability. SFAS 143
requires that an asset retirement cost should be capitalized as part of the
cost of the related long-lived asset and subsequently allocated to expense
using a systematic and rational method. SFAS 143 is effective for fiscal years
beginning after June 15, 2002 (January 1, 2003 for the Company). The adoption
of this standard does not have a material impact on the Companys consolidated
net income and total shareholders equity under US GAAP. SFAS 145 In April 2002, the FASB issued SFAS No. 145, Revision of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Connections
(SFAS 145). Among other amendments and rescissions, SFAS 145 eliminates the
requirement that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related
income tax effect, unless such gains and losses meet the criteria in paragraph
20 of Accounting Principles Board Opinion No. 30, Reporting the Results of
Operation  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
SFAS 145 is partially effective for transactions occurring after May 15, 2002
and partially effective for fiscal years beginning after May 15, 2002. The
adoption of this standard does not have a material impact on the Companys
consolidated net income and total shareholders equity under US GAAP. SFAS 146 In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal activities (SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF 94-3 Liability Recognition for Certain Employee Termination
Benefits and other Costs to Exit an Activity (including Certain Costs Incurred
in a restructuring). SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity to be recognized when the liability is
incurred. SFAS 146 states that a commitment to a plan, by itself, does not
create an obligation that meets the definition of a liability. SFAS No. 146
also addresses recognition of certain costs related to terminating a contract
that is not a capital lease, costs to consolidate facilities or relocate
employees, and termination benefits provided to employees that are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred-compensation
contract. SFAS 146 makes a F 37




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clear distinction between what constitutes a
one-time benefit arrangement and what constitutes an ongoing benefit
arrangement. For plans that are deemed to be ongoing benefit plans, the
guidance in SFAS 112 should be followed. The guidance in SFAS 112 for ongoing
benefit plans will apply to situations where there are statutory requirements
for providing employee benefit arrangements. Under SFAS 112, a liability will
be recorded when it is probable and reasonably estimable that a liability has
been incurred. For employee termination benefits provided over and above
statutory minimums that are not systematic in nature, the requirements in SFAS
146 are followed and the liability would be recorded when communication is made
to employees, provided all other necessary criteria are met. SFAS 146 also
establishes that fair value is the objective for initial measurement of the
liability. SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The adoption of this standard
does not have a material impact on the Companys consolidated net income and
total shareholders equity under US GAAP. SFAS 148 In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure  an amendment of FASB Statement No.
123. SFAS 148 amends FAS 123 to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in the financial statements about
the method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The transition guidance and annual
disclosure provisions of SFAS 148 are effective for financial statements issued
for fiscal years ending after December 15, 2002. The Company has elected to
continue accounting for employee stock-based compensation in accordance with
APB 25 and related interpretations and has applied the disclosure-only
provisions of SFAS 148 in Note 31 of its Consolidated Financial Statements. SFAS 149 In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of this standard does not have a
material impact on the Companys consolidated net income and total
shareholders equity under US GAAP. SFAS 150 In May 2003, FASB issued SFAS 150, Accounting For Certain Financial Instruments
with Characteristics of both Liabilities and Equity. The release establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. This statement reporting requirement shall be effective
for financial instruments entered into or modified after May 31, 2003. The
adoption of this standard does not have a material impact on the Companys
consolidated net income and total shareholders equity under US GAAP. FIN 45 In November 2002, the FASB issued FASB Interpretation No. 45 Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires the guarantor
to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. It also elaborates on
the disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. However, the initial
recognition and initial measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
Adoption of this standard does not currently have a material impact on the
Companys consolidated net income and total shareholders equity under US GAAP. FIN 46 In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,
which addresses consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support; or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. The new
requirements of this Interpretation were effective immediately for new variable
interest entities (VIEs) created after January 31, 2003. In December 2003, the FASB completed deliberations of proposed modifications to
FIN 46 FIN 46R  Revised December 2003) resulting in multiple effective dates
based on the nature as well as the creation date of the VIE. 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 F 38




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these financial statements.
Adoption of FIN 46 in 2003 and the expected adoption of FIN 46R in 2004 does
not currently have a material effect on its Consolidated Financial Statements. Others   In May 2003, the EITF reached a consensus on EITF 01-8, Determining whether an
arrangement contains a lease, relating to new requirements on identifying
leases contained in contracts or other arrangements that sell or purchase
products or services. The evaluation of whether or not an arrangement contains
a lease within the scope of SFAS 13, Accounting for leases, should be based
on the evaluation of whether an arrangement conveys the right to use property,
plant and equipment. Purchasers arrangements which previously would have been
considered service or supply contracts, but are now considered leases, could
affect the timing of their expense recognition and the classification of assets
and liabilities on their balance sheet as well as require footnote disclosure
of lease terms and future minimum lease commitments. This consensus is
effective prospectively for contracts entered into or significantly modified
after July 1, 2003. The adoption of this EITF does not have a material impact
on the Companys consolidated net income and total shareholders equity under
US GAAP. Income taxes   (in thousands of euros) Years ended December 31
    
    2003
    
    2002
    
    2001Domestic(1)
    
    
    14,195
    
    
    
    10,299
    
    
    
    (1,436
    )Foreign
    
    
    (160,629
    )
    
    
    (322,067
    )
    
    
    (112,968
    )Income (loss) before tax
    
    
    (146,434
    )
    
    
    (311,768
    )
    
    
    (114,404
    )
 (1) Luxembourg Presentation of the Consolidated Statement of Income As a result of the adoption of SFAS 142 as of January 1, 2002, the Company no
longer amortizes goodwill under US GAAP. Consequently, goodwill amortization
and impairment no longer represents a presentation difference between operating
income (loss) under IFRS and operating income (loss) under US GAAP. The operating income (loss) would have been as follows under US GAAP: (in thousands of euros) Years ended December 31
    
    2003
    
    2002
    
    2001Operating
income (loss) per IFRS
    
    
    (134,489
    )
    
    
    (231,771
    )
    
    
    (180,787
    )Goodwill amortization and
impairment on consolidated subsidiaries
    
    
    (18,237
    )
    
    
    47,117
    
    
    
    Provision for a loan to the former Chairman of the Board
    
    
    
    
    
    
    (67,582
    )
    
    
    Purchase consideration
    
    
    (837
    )
    
    
    (2,351
    )
    
    
    (8,104
    )Capitalized development costs
    
    
    7,321
    
    
    
    (1,803
    )
    
    
    (3,227
    )Share options accounting
    
    
    (6,399
    )
    
    
    (2,887
    )
    
    
    69,262Interests accrued on loans related to stock options
    
    
    
    
    
    
    1,706
    
    
    
    4,877Other differences
    
    
    26
    
    
    
    360
    
    
    
    564Operating income (loss) per US GAAP
    
    
    (152,615
    )
    
    
    (257,211
    )
    
    
    (117,415
    )
 F 39