##### Table of Contents



UNITED STATESSECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                     to                    .
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Date of event requiring this shell company report ___
 Commission file number: 0-31052
 Gemplus International S.A.
  Not Applicable
 Grand Duchy of Luxembourg
 46a Avenue J.F. Kennedy
L-1855 Luxembourg
Grand Duchy of Luxembourg
 Securities registered or to be registered pursuant to Section 12(b) of the Act:
 Securities registered or to be registered pursuant to Section 12(g) of the Act:
  Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 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:
  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
 þ     Yes
    
    o     No
 If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 o     Yes
    
    þ     No
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
 þ     Yes
    
    o     No
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (check one):
 þ o o
 Indicate by check mark which financial statement item the registrant has elected to follow.
 o     Item 17
    
    þ     Item 18
 If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
 o     Yes
    
    þ     No




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##### 



TABLE OF CONTENTS
 PART I
    
    
    
    
    2Item 1. Identity of Directors, Senior Management and Advisors
    
    
    2Item 2. Offer Statistics and Expected Timetable
    
    
    2Item 3. Key Information
    
    
    2Item 4. Information on the Company
    
    
    16Item 4A. Unresolved Staff Comments
    
    
    32Item 5. Operating and Financial Review and Prospects
    
    
    32Item 6. Directors, Senior Management and Employees
    
    
    49Item 7. Major Shareholders and Related Party Transactions
    
    
    62Item 8. Financial Information
    
    
    64Item 9. The Offer and Listing
    
    
    66Item 10. Additional Information
    
    
    67Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    73Item 12. Description of Securities Other than Equity Securities
    
    
    76PART II
    
    
    
    
    76Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    76Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    76Item 15. Controls and Procedures
    
    
    76Item 16. (Reserved.)
    
    
    77Item 16A. Audit Committee Financial Expert
    
    
    77Item 16B. Code of Ethics
    
    
    77Item 16C. Principal Accountant Fees and Services
    
    
    77Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    78Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    78PART III
    
    
    
    
    78Item 17. Financial Statements
    
    
    78Item 18. Financial Statements
    
    
    78Item 19. Exhibits
    
    
    78EX-1EX-4.6EX-8EX-12EX-13EX-15
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
     1




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PART I
 
 Item 1. Identity of Directors, Senior Management and Advisors
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 SELECTED CONSOLIDATED FINANCIAL DATA
   Year ended as at December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    US$(1)
    
    
    
    
    
    
    
    
    
    
    
    (in millions, except per share amounts or as otherwise stated)INCOME STATEMENT DATA:Net sales
    
    
    939
    
    
    
    1,204
    
    
    
    865
    
    
    
    749
    
    
    
    787
    
    
    
    1,023Cost of sales
    
    
    (629
    )
    
    
    (807
    )
    
    
    (595
    )
    
    
    (542
    )
    
    
    (587
    )
    
    
    (716
    )Gross profit
    
    
    310
    
    
    
    397
    
    
    
    270
    
    
    
    207
    
    
    
    200
    
    
    
    307Research and development expenses
    
    
    (62
    )
    
    
    (79
    )
    
    
    (63
    )
    
    
    (69
    )
    
    
    (92
    )
    
    
    (113
    )Selling and marketing expenses
    
    
    (116
    )
    
    
    (149
    )
    
    
    (101
    )
    
    
    (100
    )
    
    
    (113
    )
    
    
    (165
    )General and administrative expenses
    
    
    (68
    )
    
    
    (87
    )
    
    
    (64
    )
    
    
    (77
    )
    
    
    (90
    )
    
    
    (111
    )Litigation expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )Management severance expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )Restructuring reversals (expenses)
    
    
    3
    
    
    
    4
    
    
    
    (8
    )
    
    
    (62
    )
    
    
    (90
    )
    
    
    (28
    )Other operating income (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Goodwill amortization and impairment
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (33
    )
    
    
    (47
    )
    
    
    (27
    )Operating income (loss)
    
    
    67
    
    
    
    86
    
    
    
    26
    
    
    
    (134
    )
    
    
    (232
    )
    
    
    (181
    )Financial income
    
    
    8
    
    
    
    10
    
    
    
    8
    
    
    
    10
    
    
    
    20
    
    
    
    28Financial expense
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (71
    )
    
    
    (8
    )Share of profit (loss) of associates
    
    
    (1
    )
    
    
    (1
    )
    
    
    (6
    )
    
    
    (8
    )
    
    
    (3
    )
    
    
    (4
    )Other non-operating income (expense), net
    
    
    (2
    )
    
    
    (3
    )
    
    
    (7
    )
    
    
    (11
    )
    
    
    (22
    )
    
    
    55Income (loss) before taxes
    
    
    71
    
    
    
    91
    
    
    
    19
    
    
    
    (144
    )
    
    
    (308
    )
    
    
    (110
    )Income tax benefit (expense)
    
    
    20
    
    
    
    26
    
    
    
    (13
    )
    
    
    (15
    )
    
    
    (9
    )
    
    
    14Net income (loss)
    
    
    91
    
    
    
    117
    
    
    
    6
    
    
    
    (159
    )
    
    
    (317
    )
    
    
    (96
    )Attributable to:Equity holders
    
    
    90
    
    
    
    115
    
    
    
    5
    
    
    
    (161
    )
    
    
    (321
    )
    
    
    (100
    )Minority interest
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    4
    
    
    
    4Net income (loss) per share attributable
to equity holders (2)- Basic
    
    
    0.15
    
    
    
    0.19
    
    
    
    0.01
    
    
    
    (0.27
    )
    
    
    (0.53
    )
    
    
    (0.16
    )- Diluted
    
    
    0.14
    
    
    
    0.18
    
    
    
    0.01
    
    
    
    (0.27
    )
    
    
    (0.53
    )
    
    
    (0.16
    )
 2




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Year ended as at December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    US$(1)
    
    
    
    
    
    
    
    
    
    
    
    (in millions, except per share amounts or as otherwise stated)Operating income (loss) under US GAAP (3)
    
    
    66
    
    
    
    85
    
    
    
    29
    
    
    
    (119
    )
    
    
    (257
    )
    
    
    (117
    )- Net income (loss) under US GAAP (3)
    
    
    89
    
    
    
    114
    
    
    
    11
    
    
    
    (182
    )
    
    
    (280
    )
    
    
    (49
    )- Net income (loss) per share under US GAAP (2)- Basic (3)
    
    
    0.14
    
    
    
    0.18
    
    
    
    0.02
    
    
    
    (0.30
    )
    
    
    (0.46
    )
    
    
    (0.08
    )- Diluted (3)
    
    
    0.14
    
    
    
    0.18
    
    
    
    0.02
    
    
    
    (0.30
    )
    
    
    (0.46
    )
    
    
    (0.08
    )OTHER DATA:Adjusted EBITDA (4)
    
    
    108
    
    
    
    138
    
    
    
    83
    
    
    
    (39
    )
    
    
    (98
    )
    
    
    (60
    )Net cash from (used for) operating activities
    
    
    121
    
    
    
    155
    
    
    
    27
    
    
    
    (10
    )
    
    
    (63
    )
    
    
    (23
    )Net cash (used for) investing activities
    
    
    (84
    )
    
    
    (108
    )
    
    
    (26
    )
    
    
    (17
    )
    
    
    (47
    )
    
    
    (65
    )Net cash from (used for) financing activities
    
    
    (8
    )
    
    
    (10
    )
    
    
    (3
    )
    
    
    (6
    )
    
    
    4
    
    
    
    (35
    )BALANCE SHEET DATA:Cash and cash equivalents
    
    
    418
    
    
    
    536
    
    
    
    388
    
    
    
    391
    
    
    
    417
    
    
    
    491Trade accounts receivable, net
    
    
    183
    
    
    
    235
    
    
    
    149
    
    
    
    155
    
    
    
    145
    
    
    
    189Inventory, net
    
    
    108
    
    
    
    138
    
    
    
    116
    
    
    
    99
    
    
    
    97
    
    
    
    140Derivative financial instruments
    
    
    4
    
    
    
    5
    
    
    
    33
    
    
    
    16
    
    
    
    10
    
    
    
    (5
    )Other current receivables
    
    
    82
    
    
    
    105
    
    
    
    66
    
    
    
    67
    
    
    
    83
    
    
    
    104Total assets
    
    
    1,182
    
    
    
    1,515
    
    
    
    1,025
    
    
    
    1,053
    
    
    
    1,218
    
    
    
    1,531Minority interest
    
    
    13
    
    
    
    16
    
    
    
    11
    
    
    
    12
    
    
    
    15
    
    
    
    17Equity attributable to equity holders
    
    
    825
    
    
    
    1,058
    
    
    
    711
    
    
    
    695
    
    
    
    860
    
    
    
    1,168Total assets under US GAAP
    
    
    1,198
    
    
    
    1,536
    
    
    
    1,039
    
    
    
    1,061
    
    
    
    1,234
    
    
    
    1,441Shareholders equity under US GAAP (3)
    
    
    836
    
    
    
    1,072
    
    
    
    729
    
    
    
    700
    
    
    
    879
    
    
    
    1,078
 
 (1)
    
    Dollar amounts have been translated for convenience at the Noon Buying Rate (as defined below
in the section Exchange Rate Information and The European
Monetary System) on May 31,
2006, of US$1.00 =  0.78.(2)
    
    Basic net income per share attributable to our equity holders under IFRS and US GAAP is
calculated by dividing net income attributable to our equity holders by the weighted average
number of our ordinary shares outstanding during each period, in each case adjusted for a
fifty-for-one share split that took place on June 21, 2000. The weighted average number of
shares used in calculating the basic net income per share was 618,337,539, 606,672,060
605,658,965, 606,222,660 and 636,992,392 for the years ended December 31, 2005, 2004, 2003,
2002 and 2001. Diluted net income per share attributable to our equity holders under IFRS and
US 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
634,794,569, 619,022,472, 605,658,965, 606,222,660, and 636,992,392 for the years ended
December 31, 2005, 2004, 2003, 2002 and 2001.(3)
    
    2003 and 2004 US GAAP figures have been restated. Please refer to Note 40 and 41 to our
Consolidated Financial Statements.(4)
    
    Adjusted EBITDA is defined as earnings attributable to our equity holders before interest
expense (net of interest income), provision for income taxes and depreciation, amortization
expense and impairment of assets. 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 US 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 US GAAP. Because all
companies do not calculate EBITDA identically, the presentation of Adjusted EBITDA contained
herein may not be comparable to similarly titled measures provided by other companies. 3




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2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    US$(1)
    
    
    
    
    
    
    
    
    
    
    
    (in millions)Operating income (loss)
    
    
    67
    
    
    
    86
    
    
    
    26
    
    
    
    (134
    )
    
    
    (232
    )
    
    
    (181
    )Depreciation, amortization and impairment
    
    
    41
    
    
    
    52
    
    
    
    57
    
    
    
    95
    
    
    
    134
    
    
    
    121Adjusted EBITDA
    
    
    108
    
    
    
    138
    
    
    
    83
    
    
    
    (39
    )
    
    
    (98
    )
    
    
    (60
    )
 
 (1)
    
    Dollar amounts have been translated for convenience at the Noon Buying Rate on May 31,
2006, of US$1.00 =  0.78. Exchange Rate
 Information and The European Monetary System
    EurosPeriod-
    
    
    Averageend Rate
    
    
    Rate
    
    
    High
    
    
    Low2001
    
    
    1.12
    
    
    
    1.12
    
    
    
    1.19
    
    
    
    1.052002
    
    
    0.95
    
    
    
    1.06
    
    
    
    1.16
    
    
    
    0.952003
    
    
    0.79
    
    
    
    0.88
    
    
    
    0.97
    
    
    
    0.792004
    
    
    0.74
    
    
    
    0.80
    
    
    
    0.85
    
    
    
    0.732005
    
    
    0.84
    
    
    
    0.80
    
    
    
    0.86
    
    
    
    0.742005December
    
    
    0.84
    
    
    
    0.84
    
    
    
    0.85
    
    
    
    0.832006January
    
    
    0.82
    
    
    
    0.82
    
    
    
    0.83
    
    
    
    0.81February
    
    
    0.84
    
    
    
    0.84
    
    
    
    0.84
    
    
    
    0.83March
    
    
    0.82
    
    
    
    0.83
    
    
    
    0.84
    
    
    
    0.82April
    
    
    0.79
    
    
    
    0.81
    
    
    
    0.83
    
    
    
    0.79May
    
    
    0.78
    
    
    
    0.78
    
    
    
    0.79
    
    
    
    0.78
 RISK FACTORS
 Risks Related to Our Business
 Slow growth or downturns in the wireless communications industry may adversely affect our business.
  4




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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.
  
    
    We are seeking to take advantage of the development of new markets for wireless
communications products and services, including mobile commerce, mobile banking and mobile
Internet services. These markets are still just starting to develop.
    
    We are developing chip card products and services for the financial services market. Chip
card technology has not yet been widely adopted by the financial services industry outside
of France, Germany and the United Kingdom, largely due to the cost of building the necessary
infrastructure, the need for more internationally compatible standards and the relatively
limited capabilities of all but the newest chip cards.
    
    We are investing in identification and security networks products and services, but so
far we have not deployed these products and services on a widespread basis internationally.
Some of our businesses in these markets remain in early-stage operations, and we do not know
whether or when these businesses will be significantly profitable.
 Our success depends upon recruiting and retaining key personnel.
   Chip card technology may not be adopted in new standards for the markets that we target, such that
we may lose some of our existing customers or not be able to obtain new customers.
   
    
    certain wireless communication devices and networks that are currently not equipped to use chip cards;
    
    bank credit and debit card systems, which in most countries still use magnetic stripe cards as their primary technology;
    
    computer equipment, which must include chip card readers as standard equipment if the use
of chip cards for Internet and other applications is to become common;
    
    digital signature information technology security systems; and
 5




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
    
    identity card programs.
  
    
    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.
  We
may need to develop further our position as a provider of software and services to earn higher
margins from our technology.
  We may fail to manage optimally our inventories of microcontroller chips or suffer disruptions in
our supply chain.
    We must manage our chip card production capacities optimally in order to be profitable.
  6




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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.
   Many of our major customers, particularly in our financial services segment, belong to powerful
industry organizations and bodies.
  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.
    
    
    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;
 7




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
    
    the geographical mix of our sales, including the relative extent of our growth in
countries where our products and services are sold at the most attractive prices;
    
    costs related to possible acquisitions of technology or businesses, including costs
related to the integration of acquired businesses into our operations; and
    
    the level of success we achieve in maintaining and enhancing existing relationships and
developing new relationships with strategic partners, including third party software
developers, systems integrators and other implementation partners.
  The period between our initial contact with a potential customer and the sale of our products or
services to that customer tends to be long and may be subject to delays which may have a negative
affect on our revenues.
  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.
   If our strategic relationships terminate or do not develop, we may 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.
  8




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We
might be forced to change our product and service offerings or be forced to pay higher costs
if the third-party technology that we use in our products changes or if the price of such
technology increases.
  
    
    software relating to chip card operating systems;
    
    security and cryptographic technology for chip card operating systems, which help prevent
unauthorized parties from accessing with or tampering with information; and
    
    public key infrastructure technology that is used for Internet transactions and
identification in corporate security networks.
  We have multinational operations that are subject to risks inherent in international operations,
including currency exchange rate fluctuations.
   
    
    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;
 9




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
    
    required compliance with a variety of foreign laws, regulations and standards; and
    
    the difficulty of enforcing legal claims and agreements through certain legal systems.
     
    
    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.
 We operate in many jurisdictions with highly complex and variable tax regimes, and changes in tax
rules and the outcome of tax assessments and audits could cause a material effect on our financial
results.
  Future acquisitions may adversely affect our business.
  We face risks relating to certain partnerships, joint ventures and subsidiaries that we do not
control.
  10




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The integration of us and Gemalto may be difficult and expensive and may not result in the benefits
that we currently expect.
   
    
    loss of key employees;
    
    inconsistencies in standards, controls, procedures and policies, business cultures and
compensation structures between us and Gemalto and the need to implement, integrate and harmonize
various business-specific operating procedures and systems, as well as the financial, accounting,
information and other systems of us and Gemalto; and
    
    diversion of managements attention from its other responsibilities as a result of the need
to deal with integration issues.
  Regulatory authorities have imposed, and may impose additional conditions on our combination that
could reduce the expected benefits of the combination and may affect the price of our securities.
   Change of control provisions in our agreements may be triggered upon a combination with Gemalto and
may lead to adverse consequences for us, including the loss of significant contractual rights and
benefits, the termination of joint venture and/or licensing agreements or the need to renegotiate
financing agreements.
  11




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Our operating results can vary significantly due to impairment of goodwill and other intangible
assets arising from acquisitions, as well as to impairment of assets due to changes in the business
environment.
   
 Changes in International Financial Reporting Standards could affect our reported results.
   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.
    
    
    operating system developers, such as Microsoft and IBM;
 12




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##### Table of Contents




    
    electronic security product and service providers, such as RSA, Vasco and Verisign;
    
    wireless device manufacturers, such as Nokia, Motorola, Samsung and Sony-Ericsson;
    
    systems integrators, such as IBM, Siemens and EDS;
    
    microcontroller chip manufacturers, such as STMicroelectronics, Infineon, Philips, Atmel,
Renesas, Samsung and Sony; and
    
    wireless infrastructure software providers, such as SmartTrust.
  Communications networks may not expand as a commerce and business medium.
   
    
    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 wireless communications networks;
    
    increased government regulation and the taxation of transactions conducted over wireless
communications networks; and
    
    delays in development or adoption of new standards or protocols to handle increased
levels of activity on wireless communication networks.
  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.
   13




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##### Table of Contents



New developments may render our chip card encryption technology inadequate or ineffective.
  The role of chip cards may be relegated to that of simple identity tokens with limited additional
added value.
  
    
    chip cards are technically enabled to play an effective role in applications; and
    
    applications relying on chip cards are actually developed and used.
  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 several of our shareholders own a large percentage of our voting stock, other shareholders
effective voting power may be limited.
  14




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##### Table of Contents



If we are deemed a passive foreign investment company, certain unfavorable U.S. tax rules may
apply.
  Fluctuations in the exchange rate between the U.S. dollar and the euro may reduce the U.S. dollar
market value of our American depositary shares as well as the U.S. dollar value of any dividends we
pay.
  If you hold our American depositary shares rather than our shares, you might not be able to
exercise all the rights provided in our bylaws (statutes) to holders of our shares.
  As a foreign private issuer, we are permitted to file less information with the Securities and
Exchange Commission than a U.S. domestic issuer would, which may limit the information available to
holders of our securities.
  The market for our shares may be less liquid following completion of the proposed combination with
Gemalto, and the market value of our shares may be lower.
  Following consummation of the proposed combination with Gemalto, Gemalto will be a holder of a
significant majority of our outstanding shares and may take actions or make decisions not in the
best interest of our remaining minority shareholders.
 15




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##### Table of Contents



Pursuant to a new Luxembourg law, Gemalto may conduct a squeeze-out merger or use some other
means at some date following the combination to obligate the remaining holders of our securities to
sell their securities to Gemalto for consideration of some
combination of cash and/or Gemalto shares.
 Autorité des marchés financiers offre publique de retrait retrait obligatoire
 We may decide to cease the listing of our shares on the Eurolist exchange of the Euronext
Paris or the quotation of our ADSs on the Nasdaq National Market, and we may decide to cease the
registration of our shares under the 1934 Exchange Act or terminate the depositary agreement
relating to our ADSs, which could negatively affect the value of our shares or ADSs.
    
 Item 4. Information on the Company
 HISTORY AND DEVELOPMENT OF THE COMPANY
    
 16




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##### Table of Contents



Autorité des marchés financiers
  Capital Expenditures and Divestitures
  Year ended December 31,2005
    
    
    2004
    
    
    2003(millions of euros)Property, plant & equipment:Research and development equipment
    
    
    1.0
    
    
    
    1.0
    
    
    
    1.2Manufacturing
    
    
    17.1
    
    
    
    13.3
    
    
    
    9.4Buildings
    
    
    2.6
    
    
    
    5.8
    
    
    
    3.1Other
    
    
    4.4
    
    
    
    2.8
    
    
    
    1.5Total property, plant & equipment
    
    
    25.1
    
    
    
    22.9
    
    
    
    15.2Intangible assets
    
    
    2.7
    
    
    
    1.8
    
    
    
    4.7Total capital expenditures
    
    
    27.8
    
    
    
    24.7
    
    
    
    19.9
 
     
  BUSINESS OVERVIEW
 Overview
   
    
    Telecommunications, which includes our wireless products such as subscriber
identification modules (SIMs), related software and services, and prepaid phonecards for
fixed telephony operators;
 17




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##### Table of Contents




    
    Financial Services, which focuses on applications for the financial services sector to
facilitate secure transactions within a variety of systems; and
    
    Identity and Security, which includes systems and services based on chip card technology
in areas such as national ID, healthcare, drivers licenses, car registration, passport and
visa, e-government secured services, physical and logical access control as well as chip
card readers and interfacing technologies.
       Our Strategy
   Achieving and maintaining profitable growth by continuing to follow through on our restructuring
and efficiency initiatives, and through innovation and continued cost
control
 18




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##### Table of Contents




    
    We are continuing to adapt our cost structure and increase our competitiveness in an
environment where price is an overriding factor.
    
    We are continuing to organize our business to better align to market structures. We are
continuing to enhance our customer-facing front-end and supply chain related back-end
processes to most effectively and efficiently serve our markets.
    
    We are continuing to work on increasing our market share in higher margin products in the
wireless communications and other sectors 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
  
    
    Software and services in wireless communications, including SIM administration, content
delivery, mobile-payment, and over the air (OTA) platforms. 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 for electronic Identity Cards and
e-Passport 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, while being
able to provide complete subsystems for strong authentication and other security functions.
 Getting closer to our customers
  Technology Overview
 Chip Card Technology
   
    
    Memory cards containing chips that provide only secure storage of data can be modified at
a special terminal. Memory cards are used for single applications that do not require
sophisticated data processing functions, such as prepaid phonecards and certain loyalty
cards.
    
    Microcontroller cards containing chips that are capable of storing and processing data
like a miniature computer, can transfer processed data to a network and run software
programs or applets that interact remotely with server-based applications. The most
sophisticated new chip cards, such as subscriber identification modules (SIMs) used in
wireless communications, are all microcontroller cards.
 19




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##### Table of Contents




    
    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.
    
    The development of sophisticated card management software for chip cards to help card
issuers take advantage of new chip card capabilities by enabling the issuers to manage the
cards remotely, and to update, download and install new information or applets as they
become available, without replacing the cards. These new software capabilities have also
created a demand for system design, integration and management services that allow chip card
technology companies to develop closer ties with their customers.
    
    Significant advances in the memory structure and capacity of microcontroller chips,
including the development of flash memory technology. Chips based on this technology are
able to store substantially more information, conduct more sophisticated operations and load
a higher number of applets. In addition to greater memory capacity, flash memory chips can
give card manufacturers increased flexibility to modify the chips operating system.
    
    The development of chip cards designed to work with the most advanced security
technologies, such as public key infrastructure (PKI) systems and secure downloadable
applets. Cards with PKI capability offer a higher level of security
for customers, including individuals or companies that conduct transactions or business over the Internet, and banks
that implement mobile payment systems.
    
    Innovative form factors for embedding of microprocessor technologies in new devices such
as USB dongles, e-tokens, key fobs, flash memory cards, e-passports and other complete high
security IT devices.
    
    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.
    
    The inclusion of flash memory in chip cards that allow for the delivery and storage of
large multi-media files.
  
    
    Security. Chip cards are capable of storing complex algorithms that can be used to
identify a user or to encrypt information, such as a digital certificate. Because a user
needs both a card and an activation mechanism, such as a personal identification number
(PIN), to use a card, security is not entirely compromised by just the loss of a card or the
communication of a PIN. As a result, using chip cards to authenticate mobile and electronic
commerce transactions, can significantly reduce the incidence of fraud. In addition,
microcontroller chip cards can be equipped with sophisticated cryptographic algorithms and
functions that prevent unauthorized parties from tampering with the contents of the card.
    
    Portability. Chip cards can be easily transferred from one device to another. As a
result, for example, a mobile phone subscriber can purchase and immediately use a new mobile
phone without changing his or her service subscription, a feature that mobile phone network
operators find attractive as it reduces customer turnover. Similarly, a chip card used to
authenticate
 20




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##### Table of Contents



the user of a companys computer network can be inserted into any computer equipped with a
reader, and include certain user profile and other information so the user is less dependent
on a particular computer.
 
    
    Flexibility. The newest chip cards can carry and run multiple applets that can be updated
remotely without the need to replace the card. This increases the flexibility of banks and
other companies that 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.
  Use of Our Chip Card Technology in Wireless Communications
  
    
    Wireless 2G standards are the second major type of technology used for wireless
communication. Wireless 2G standards mainly support voice transmission, but also support
some data transmission capability. The global system for mobile (GSM) communications is the
most widely used 2G standard, both in terms of number of subscribers and number of
countries. The GSM standard requires the use of subscriber identification module (SIM)
technology.
    
    Wireless 2.5G standards support higher data transmission capability than GSM and other 2G
standards. Wireless 2.5G standards incorporate identification module technology similar to
that used in 2G SIM cards. The technology is included in a removable card or in the
telephone handset. In the transition from 2G to 2.5G, some operators located outside of
Europe are migrating to the European GSM-originated standard.
    
    Wireless 3G standards, including WCDMA and CDMA2000, which support higher data
transmission capability than 2.5G, are in the process of being deployed. As with 2.5G, the
wireless 3G standards incorporate identification module technology similar to that used in
SIM cards, either as a removable card or in the telephone handset.
  Use of Removable CardTransmission Standard
    
    Principal Regions
    
    Identification Modules2GGSM
    
    Europe, Asia (including China),
several regions in the United
States
    
    YesCDMA
    
    United States, China
    
    NoTDMA
    
    United States
    
    No2.5GGPRS (based on GSM)
    
    Europe, most of Asia
    
    YesCDMAOne
    
    United States, China,South Korea
    
    Yes in China and South KoreaIDEN
    
    United States, Korea
    
    Yes3GWCDMA
    
    Europe, Asia(including Japan),
United States
    
    YesCDMA2000
    
    United States, Asia
    
    Operator-specific
 Industry Overview
  21




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##### Table of Contents



Wireless Segment
   Financial Services Segment
  Identity and Security Segment
  Our Products and Services
  Revenues - Year ended December 31,2005
    
    
    2004
    
    
    2003(in millions of
    
    
    (as a % of total
    
    
    (in millions of
    
    
    (as a % of total
    
    
    (in millions of
    
    
    (as a % of totaleuros)
    
    
    revenues)
    
    
    euros)
    
    
    revenues)
    
    
    euros)
    
    
    revenues)Telecommunications
    
    
    654.5
    
    
    
    70%
    
    
    
    641.8
    
    
    
    74%
    
    
    
    542.5
    
    
    
    72%Financial Services
    
    
    202.9
    
    
    
    22%
    
    
    
    182.2
    
    
    
    21%
    
    
    
    168.2
    
    
    
    23%Identity and Security
    
    
    81.5
    
    
    
    8%
    
    
    
    41.0
    
    
    
    5%
    
    
    
    38.5
    
    
    
    5%Total
    
    
    938.9
    
    
    
    100%
    
    
    
    865.0
    
    
    
    100%
    
    
    
    749.2
    
    
    
    100%
 22




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##### Table of Contents



Revenues - Year ended December 31,2005
    
    
    2004
    
    
    2003(in millions of
    
    
    (as a % of total
    
    
    (in millions of
    
    
    (as a % of total
    
    
    (in millions of
    
    
    (as a % of totaleuros)
    
    
    revenues)
    
    
    euros)
    
    
    revenues)
    
    
    euros)
    
    
    revenues)EMEA
    
    
    491.0
    
    
    
    52%
    
    
    
    443.1
    
    
    
    51%
    
    
    
    407.7
    
    
    
    54%Asia
    
    
    172.7
    
    
    
    19%
    
    
    
    194.3
    
    
    
    23%
    
    
    
    171.9
    
    
    
    23%Americas
    
    
    275.2
    
    
    
    29%
    
    
    
    227.6
    
    
    
    26%
    
    
    
    169.6
    
    
    
    23%Total
    
    
    938.9
    
    
    
    100%
    
    
    
    865.0
    
    
    
    100%
    
    
    
    749.2
    
    
    
    100%
  Delivering a complete solution
  
    
    Chip Card Products. We provide a complete range of chip card products, from low-end to
high-end, with proprietary and open operating systems, offering various amounts of
available memory, some with features and embedded applications dedicated to specific
markets. We also provide conventional government-issued passports and
microcontroller-embedded passports with sophisticated printed security features. Our chip
card reader products and software development tools are a direct complement to our chip
cards.
    
    Software. We provide software that helps us manage the client-server architecture and
enable interactions between the applets stored on chip cards and the card issuers computing
system. We also provide card management systems that enable the tracking of issued cards and
the management of information stored on the chip card.
    
    Technical Support. We provide our customers with a full range of maintenance and
technical support including help desk services for their card solutions. Our regional
service centers are responsible for our help desk services in their region, with several
sub-regional or local technical support staffs as needed.
    
    Consulting, System Design, Customization and Integration. Our consulting services focus
on key topics and issues in the development and implementation of chip card systems,
including marketing and commercial analysis and recommendations, feasibility and security
studies, and the development of possible implementation scenarios. We also provide our
customers with training in chip card technology and software applications.
    
    Our system design services provide our customers with flexibility in the overall design
of chip card systems, including security parameters and detailed component design.
    
    Our customization services include the development of customized software applets for
particular card issuers.
    
    We provide system integration services to deliver complete systems using a project
management approach. This approach involves coordinating with contractors to obtain and
integrate the required system components, including customized software applications and
providing operational system support during acceptance testing, pilot programs and the
roll-out of the final, customized card system.
    
    Personalization. Our personalization services involve the process of loading personal
data or premium value applications onto the memory or microcontroller chips embedded in
cards. We also emboss and print customized card bodies for our customers, and customize the
associated packaging and card carriers used to deliver cards to end-users. Our card printing
capabilities include technically advanced, high quality techniques. We often prepare and
distribute products directly to end-users on behalf of our customers.
    
    Outsourced Operations. We provide a variety of services associated with the
administration of card management systems, including card profile update campaigns, network
management, server management and data encryption and archiving. We also provide other
operational services for our customers chip card system managers, such as mapping and
profiling, certificate authority and management services to work with trusted third party
systems and certification authorities.
 Telecommunications Products and Services
  23




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##### Table of Contents



Wireless Products, Software and Services
   
    
    GemXplore  the card platform and associated software applications. We offer a range of
products for all major wireless network types and generations. Working primarily with open,
Java-based operating systems, we provide developers with software development tools to
create and test applications.
    
    GemConnect  software modules and agents that communicate with remote content and
services. Our open OTA infrastructure is an essential link between subscribers and
personalized content as it provides card, service and handset management.
    
    GemSuite  enables value-added solutions including mobile entertainment, location-based
services, instant messaging and mobile payment. Our wireless partner program, known as
SIMXplore, integrates third party solutions, such as content and application providers.
    
    GemServices  card issuance, professional services and outsourcing. Our professional
services group provides wireless communication operators with the expertise to design,
develop and deploy mobile services. These services cover all phases from consulting,
development and integration to post-installation, support and training. Our outsourced
solutions can increase our customers service portfolios, while limiting infrastructure and
resource investments. Customers can access our equipment, technology and expertise through a
connection to our hosting center.
 Phonecards
  Scratch Cards
  Financial Services
  24




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##### Table of Contents




    
    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
  
    
    GemVision, a range of payment cards developed for banks that are members of Visa International;
    
    GemShare, a range of payment cards developed for members of Europay International and MasterCard International; and
    
    GemValue, a range of payment cards developed in compliance with both Visa and MasterCard specifications.
  Multi-Application Cards
  Loyalty and Retail
 25




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##### Table of Contents



Bank and Retail Conventional Cards
   Other Businesses
  
    
    transportation access, which includes contactless chip systems that are used for highway
tolls and access to public transportation and other transportation facilities;
    
    pay television chip cards, which are used to allow pay television subscribers access to
programs and services over cable and satellite television systems; and
    
    loyalty and identification programs that do not use chip cards.
 Identity and Security Services
  Enterprise Security
  Government ID
  26




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##### Table of Contents




    
    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.
    
    Chip card-based national identification programs involving the issuance of chip cards by
national governments to their residents. For example, in the Sultanate of Oman and United
Arab Emirates, we are currently delivering a national identification program, including
consultancy, project management and integration services, as well as software and chip
cards.
    
    Conventional government-issued passports and visas, and microcontroller-embedded
passports, with sophisticated printed security features. Our business in this area has been
expanded by our acquisition of Setec Oy in 2005.
 GemVentures
  Customers
   Suppliers
    Competition
 27




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##### Table of Contents



Telecommunications Segment
 Wireless Products and Services
    
    
    operating system developers, such as Microsoft and IBM;
    
    electronic security product and service providers, such as RSA, Vasco and Verisign;
    
    wireless device manufacturers, such as Nokia, Motorola, Samsung and Sony-Ericsson;
    
    systems integrators, such as IBM, Siemens and EDS;
 28




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##### Table of Contents




    
    silicon chip manufacturers, such as STMicroelectronics, Infineon, Philips, Renesas, Samsung, Sony and Atmel; and
    
    wireless infrastructure software providers, such as SmartTrust and Sicap.
 Phonecards
  Financial Services Segment
  Identity and Security Segment
  Marketing
   Intellectual Property
   29




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##### Table of Contents



Regulation
 Encryption Technology Controls
   Environmental Matters
   Geographic Organization
  
    
    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 South East Asia, Japan, Korea, and Greater China.
  Organizational Structure
 30




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##### Table of Contents



Name of company
    
    Percentage OwnedGemplus Finance S.A., Swiss Branch, a Swiss branch of a Luxemburg corporation
    
    
    100
    %Gemplus S.A., a French corporation
    
    
    99.8
    %(1)Gemplus Limited, a British corporation
    
    
    100
    %Gemplus Corp., a Delaware (U.S.) corporation
    
    
    100
    %Gemplus Industrial S.A. de C.V., a Mexican corporation
    
    
    100
    %Gemplus Microelectronics Asia Pte Limited, a Singapore corporation
    
    
    100
    %Gemplus Technologies Asia Pte Ltd, a Singapore corporation
    
    
    100
    %Setec Oy, a Finnish corporation
    
    
    100
    %Gemplus GmbH, a German corporation
    
    
    100
    %Gemplus Japan Co. Ltd, a Japanese corporation
    
    
    100
    %
 
 (1)
    
    The remaining shares are held mainly by our employees following the exercise of stock
options; such shares may be contributed to us in exchange for our shares. For accounting
purposes, these shares are already assumed to be a component of shareholders equity. Property, Plant and Equipment
  
    
    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.
    31




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##### Table of Contents



Location
    
    Primary Activities
    
    Gross Floor Area (m2)Cuernavaca, Mexico
    
    embedding, personalization
    
    
    6,664
    *Gemenos, France
    
    embedding, personalization
    
    
    25,502Havant, United
Kingdom
    
    plastic cards, personalization, embedding
    
    
    6,332Madrid, Spain
    
    personalization
    
    
    1,340La Ciotat, France
    
    microcontroller module production andassembly
    
    
    5,871Montgomeryville,
    
    plastic cards, embedding, personalizationPennsylvania, United States
    
    
    
    
    8,535Singapore
    
    microcontroller module assembly, embedding, personalization,
    
    
    20,984
    *contactless cards, Plastic cardsTczew, Poland
    
    embedding, personalization
    
    
    8,393
    *Tianjin,
China1
    
    embedding, personalization, microcontroller module assembly
    
    
    12,730
    **Zhuhai, China2
    
    plastic cards, personalization, embedding, contactless cards
    
    
    2,722
    *Bangkok, Thailand
    
    personalization
    
    
    66Johannesburg, South Africa
    
    personalization
    
    
    330Sao Paulo/Brazil3
    
    personalization
    
    
    403Filderstadt, Germany
    
    embedding, personalization
    
    
    9,424
 
 * Facilities owned by the Company. **
Facilities partially owned and partially leased. All
others are leased. 1
 2
 3
  Activity
    
    CapacityChip card modules
    
    
    888Chip card embedding
    
    
    832Conventional polyvinyl chloride (PVC) plastic cards (including magnetic stripe)
    
    
    572
  
 Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
 32




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##### Table of Contents



OPERATING RESULTS
  Overview
         33




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Factors Affecting Revenues
     Factors Affecting Operating Income
    Effect of Exchange Rates
  34




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##### Table of Contents



(yearly average, in euros, per unit of foreign currency)Years ended December 31
    
    2005
    
    2004
    
    2003British pound
    
    
    0.6851
    
    
    
    0.6773
    
    
    
    0.6887Chinese yuan
    
    
    10.2382
    
    
    
    10.2936
    
    
    
    9.2584US dollar
    
    
    1.2457
    
    
    
    1.2412
    
    
    
    1.1289Japanese yen
    
    
    137.2473
    
    
    
    134.1150
    
    
    
    130.5399
 Seasonality
  Reporting segments
   Recent Developments
  35




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##### Table of Contents



Year ended December 31, 2005, compared to year ended December 31, 2004
 Net sales
  (in millions of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    % change

    
    % change, adjusted(1)Telecommunications
    
    
    654.5
    
    
    
    641.8
    
    
    
    2
    %
    
    
    1
    %Financial Services
    
    
    202.9
    
    
    
    182.2
    
    
    
    11
    %
    
    
    5
    %Identity and Security
    
    
    81.5
    
    
    
    41.0
    
    
    
    99
    %
    
    
    47
    %Total
    
    
    938.9
    
    
    
    865.0
    
    
    
    9
    %
    
    
    4
    %
 
 (1)
    
    Currency adjusted, and adjusted to exclude the effect of the consolidation of Setec.      (in millions of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    % change
    
    % change, adjusted(1)EMEA
    
    
    491.0
    
    
    
    443.1
    
    
    
    11
    %
    
    
    2
    %Asia
    
    
    172.7
    
    
    
    194.3
    
    
    
    (11
    %)
    
    
    (13
    %)Americas
    
    
    275.2
    
    
    
    227.6
    
    
    
    21
    %
    
    
    21
    %Total
    
    
    938.9
    
    
    
    865.0
    
    
    
    9
    %
    
    
    4
    %
 
 (1)
    
    Currency adjusted, and adjusted to exclude the effect of the consolidation of Setec. 36




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##### Table of Contents



Gross profit
   2005
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    % changeYears ended December 31
    
    (in millions of euros)
    
    
    (% of sales)

    
    (in millions of euros)
    
    
    (% of sales)

    
    in gross profitTelecommunications
    
    
    241.4
    
    
    
    36.9
    %
    
    
    220.8
    
    
    
    34.4
    %
    
    
    9
    %Financial Services
    
    
    41.9
    
    
    
    20.6
    %
    
    
    37.7
    
    
    
    20.7
    %
    
    
    11
    %Identity and
Security
    
    
    26.6
    
    
    
    32.5
    %
    
    
    12.0
    
    
    
    29.4
    %
    
    
    120
    %Total
    
    
    309.9
    
    
    
    33.0
    %
    
    
    270.5
    
    
    
    31.3
    %
    
    
    15
    %
    Operating expenses
   37




---



##### Table of Contents



2005

    
    

    
    
    
    
    2004
    
    
    
    
    
    
    % change inYears ended December 31
    
    in millions of euros)
    
    
    (% of sales)
    
    (in millions of euros)
    
    
    (% of sales)
    
    operating expensesTelecommunications
    
    
    158.7
    
    
    
    24.2
    %
    
    
    149.0
    
    
    
    23.2
    %
    
    
    6
    %Financial Services
    
    
    43.2
    
    
    
    21.3
    %
    
    
    63.9
    
    
    
    35.1
    %
    
    
    (32
    %)Identity and Security
    
    
    41.3
    
    
    
    50.7
    %
    
    
    31.3
    
    
    
    76.3
    %
    
    
    32
    %Total
    
    
    243.2
    
    
    
    25.9
    %
    
    
    244.2
    
    
    
    28.2
    %
    
    
    0
    %
    Operating income (loss)
   (in millions of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    Change in operating income (loss)Telecommunications
    
    
    82.9
    
    
    
    71.8
    
    
    
    11.1Financial Services
    
    
    (1.3
    )
    
    
    (26.3
    )
    
    
    25.0Identity and Security
    
    
    (14.8
    )
    
    
    (19.2
    )
    
    
    4.4Total
    
    
    66.8
    
    
    
    26.3
    
    
    
    40.4
  38




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##### Table of Contents



   
   
 Financial income (expense), net
    
 Share of profit (loss) of associates
    
 Other non-operating income (loss), net
       
 Income tax benefit (expense)
     
 Net income
    
 Year ended December 31, 2004, compared to year ended December 31, 2003
 Net sales
  (in millions of euros)2004
    
    
    2003
    
    
    % change

    
    % change, currency adjustedYears ended December 31
    
    
    
    
    
    (Restated)Telecommunications
    
    
    641.8
    
    
    
    542.5
    
    
    
    18
    %
    
    
    24
    %Financial Services
    
    
    182.2
    
    
    
    168.2
    
    
    
    8
    %
    
    
    12
    %
 39




---



##### Table of Contents



(in millions of euros)2004
    
    
    2003
    
    
    % change

    
    % change, currency adjustedYears ended December 31
    
    
    
    
    
    (Restated)Identity and Security
    
    
    41.0
    
    
    
    38.5
    
    
    
    7
    %
    
    
    11
    %Total
    
    
    865.0
    
    
    
    749.2
    
    
    
    15
    %
    
    
    20
    %
  
       (in millions of euros)Years ended December 31
    
    2004
    
    
    2003
    
    
    % change
    
    % change, currency adjustedEMEA
    
    
    443.1
    
    
    
    407.7
    
    
    
    9
    %
    
    
    8
    %Asia
    
    
    194.3
    
    
    
    171.9
    
    
    
    13
    %
    
    
    22
    %Americas
    
    
    227.6
    
    
    
    169.6
    
    
    
    34
    %
    
    
    48
    %Total
    
    
    865.0
    
    
    
    749.2
    
    
    
    15
    %
    
    
    20
    %
  40




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##### Table of Contents



Gross profit
  
  2004
    
    

    
    
    2003
    
    
    
    
    
    
    % changeYears ended December 31
    
    (in millions of euros)
    
    
    (% of sales)
    
    (in millions of euros)
    
    
    (% of sales)

    
    in gross profit(Restated)Telecommunications
    
    
    220.8
    
    
    
    34.4
    %
    
    
    166.8
    
    
    
    30.7
    %
    
    
    32
    %Financial Services
    
    
    37.7
    
    
    
    20.7
    %
    
    
    32.0
    
    
    
    19.0
    %
    
    
    18
    %Identity and
Security
    
    
    12.0
    
    
    
    29.4
    %
    
    
    8.5
    
    
    
    22.2
    %
    
    
    41
    %Total
    
    
    270.5
    
    
    
    31.3
    %
    
    
    207.3
    
    
    
    27.7
    %
    
    
    30
    %
    Operating expenses
 
      
    
 41




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##### Table of Contents



  
  2004
    
    

    
    
    2003
    
    
    
    
    
    
    % changeYears ended December 31
    
    (in millions of euros)
    
    
    (% of sales)

    
    (in millions of euros)
    
    
    (% of sales)

    
    in operating expenses(Restated)Telecommunications
    
    
    (149.0
    )
    
    
    23.2
    %
    
    
    (196.1
    )
    
    
    31.6
    %
    
    
    (24
    %)Financial Services
    
    
    (63.9
    )
    
    
    35.1
    %
    
    
    (88.5
    )
    
    
    52.6
    %
    
    
    (28
    %)Identity and Security
    
    
    (31.3
    )
    
    
    76.3
    %
    
    
    (56.4
    )
    
    
    146.5
    %
    
    
    (45
    %)Total
    
    
    (244.2
    )
    
    
    28.2
    %
    
    
    (341.0
    )
    
    
    45.5
    %
    
    
    (28
    %)
  
  
   
 Operating income (loss)
   
 (in millions of euros)2004
    
    
    2003
    
    
    Change in operating income (loss)Years ended December 31
    
    
    
    
    
    (Restated)Telecommunications
    
    
    71.8
    
    
    
    (29.3
    )
    
    
    101.1Financial Services
    
    
    (26.3
    )
    
    
    (56.6
    )
    
    
    30.3Identity and Security
    
    
    (19.2
    )
    
    
    (47.9
    )
    
    
    28.7Total
    
    
    26.3
    
    
    
    (133.8
    )
    
    
    160.1
   
   
   
 42




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##### Table of Contents



Financial income (expense), net
     
 Share of profit (loss) of associates
      
 Other non-operating income (loss), net
      
 Income tax benefit (expense)
     
 Net income
    
 LIQUIDITY AND CAPITAL RESOURCES
  
      
     
  
   
  43




---



##### Table of Contents



Critical Accounting Estimates and Policies
   Revenue recognition
  Impairment of goodwill and other long-lived assets
   Inventory
  44




---



##### Table of Contents



Research and development
    Income taxes
   Hedge accounting
     45




---



##### Table of Contents



Changes in accounting rules could affect our reported results
  Market Risk
  US GAAP Reconciliation
   Year ended December 31,2005
    
    
    2004
    
    
    2003Restated(in millions of euros)IFRS net income (loss)
    
    
    91.9
    
    
    
    6.3
    
    
    
    (159.0
    )Total differences between US GAAP and IFRS
    
    
    (3.1
    )
    
    
    4.7
    
    
    
    (22.7
    )US GAAP net income (loss)
    
    
    88.8
    
    
    
    11.0
    
    
    
    (181.7
    )
  
   46




---



##### Table of Contents



As of December 31,2005
    
    
    2004
    
    
    2003Restated(in millions of euros)IFRS shareholders equity
    
    
    837.7
    
    
    
    721.3
    
    
    
    707.1Total differences between US GAAP and IFRS
    
    
    (1.2
    )
    
    
    7.3
    
    
    
    (7.0
    )US GAAP shareholders equity
    
    
    836.5
    
    
    
    728.6
    
    
    
    700.1
  RESEARCH AND DEVELOPMENT
          
  TREND INFORMATION
 Trends in the Markets for our Telecommunications Segment
    47




---



##### Table of Contents



Trends in the Markets for our Financial Services Segment
   Trends in the Markets for our Identity and Security Segment
   Trends in Our Development
    48




---



##### Table of Contents



OFF-BALANCE SHEET ARRANGEMENTS
  (in millions of euros)December 31
    
    2005
    
    
    2004
    
    
    2003Performance, down payment and bid bonds
    
    
    11.7
    
    
    
    10.4
    
    
    
    10.8Other bank guarantees related to operations
    
    
    2.5
    
    
    
    3.8
    
    
    
    6.5Total bank guarantees issued to third parties
    
    
    14.2
    
    
    
    14.2
    
    
    
    17.3
 
   
 CONTRACTUAL OBLIGATIONS
 Schedule of payments
    
    
    (in millions of euros)Contractual obligationsas of December 31, 2005
    
    Total
    
    
    Less than 1 year
    
    
    1 to 5 years
    
    
    More than 5 yearsBorrowings
    
    
    0.7
    
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.1Finance lease obligations
    
    
    35.8
    
    
    
    6.6
    
    
    
    20.9
    
    
    
    8.3Operating lease obligations
    
    
    35.8
    
    
    
    10.1
    
    
    
    16.0
    
    
    
    9.7Purchase obligations (1)
    
    
    114.5
    
    
    
    110.6
    
    
    
    3.9
    
    
    
    Total
    
    
    186.8
    
    
    
    127.4
    
    
    
    41.3
    
    
    
    18.1
 
 (1)
    
    Including  69.4 million related to microprocessor chips purchase commitments, and other
purchase commitments for materials..    
 Item 6. Directors, Senior Management and Employees
 BOARD OF DIRECTORS
   49




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##### Table of Contents



Date of
    
    ExpirationName
    
    Age
    
    appointment
    
    of Term
    
    OccupationMr. Dominique Vignon
    
    
    58
    
    
    June 21, 2002
    
    April 2007
    
    Chairman of our board of directorsMr. David Bonderman
    
    
    63
    
    
    December 19, 2001
    
    April 2007
    
    Vice-Chairman of our board of directors;Managing Partner, Texas Pacific GroupMr. Alex Mandl
    
    
    62
    
    
    October 29, 2002
    
    April 2007
    
    Chief Executive OfficerMr. Michel Akkermans
    
    
    46
    
    
    April 27, 2004
    
    April 2007
    
    Founder and Chairman, Clear2PayMr. Geoffrey Fink
    
    
    36
    
    
    October 28, 2003
    
    April 2007
    
    Principal, Texas Pacific GroupMr. Johannes Fritz
    
    
    51
    
    
    December 19, 2002
    
    April 2007
    
    Managing Director, Quandt family officeMr. Kurt Hellström
    
    
    62
    
    
    April 27, 2004
    
    April 2007
    
    Advisor, Investor ABMr. Werner Koepf
    
    
    64
    
    
    October 28, 2003
    
    April 2007
    
    Non-Executive Director, Telent plcLondon UKMr. Peter Kraljic
    
    
    66
    
    
    April 17, 2002
    
    April 2007
    
    Member of the McKinsey Advisory CouncilMr. Daniel Le Gal
    
    
    55
    
    
    April 17, 2002
    
    April 2007
    
    Partner and Managing Director, FinadvanceMr. John Ormerod
    
    
    57
    
    
    June 1, 2004
    
    April 2007
    
    Chairman, Walbrook Group LimitedMr. William S. Price
    
    
    50
    
    
    February 1, 2000
    
    April 2007
    
    Managing Partner, Texas Pacific Group
  Board Committees
   Audit Committee
  50




---



##### Table of Contents



Governance and Nominating Committee
      Compensation Committee
  51




---



##### Table of Contents



M&A and Strategy Committee
    SENIOR MANAGEMENT
     Name
    
    Age
    
    PositionMr. Alex Mandl
    
    
    62
    
    
    Chief Executive OfficerMr. Ernest Berger
    
    
    51
    
    
    Executive Vice President, Gemplus AmericasMr. Stephen Juge
    
    
    52
    
    
    Executive Vice President, General CounselMr. Martin McCourt
    
    
    44
    
    
    Executive Vice President, Gemplus AsiaMr. Jean-François Schreiber
    
    
    33
    
    
    Executive Vice President, StrategyMr. Jacques Seneca
    
    
    46
    
    
    Executive Vice President, President EMEAMr. Frans Spaargaren
    
    
    50
    
    
    Executive Vice President, Chief Financial Officer
 52




---



##### Table of Contents



Name
    
    Age
    
    PositionMr. Emmanuel Unguran
    
    
    41
    
    
    Executive Vice President, OperationsMr. Philippe Vallée
    
    
    41
    
    
    Chief Technology Officer and
Executive Vice President, Product and Marketing
  DIRECTORS AND EXECUTIVE OFFICERS BIOGRAPHIES
 Dominique Vignon
 Alex Mandl
 David Bonderman magna cum
laude
 Michel Akkermans
 53




---



##### Table of Contents



Ernest
Berger
 Philippe
Combes
 Philippe Duranton
 Geoffrey
D. Fink summa cum laude Juris Doctor magna cum laude
 Johannes
Fritz
 Kurt
Hellström
 Werner Karl Koepf
 54




---



##### Table of Contents



Stephen Juge Juris Doctor
 Peter Kraljic
 Daniel Le Gal
 Martin McCourt
 John
Ormerod
 Olivier Piou
 55




---



##### Table of Contents



William S. Price, III
 Jean-Francois Schreiber
 Jacques Seneca was
 Michel Soublin
 Frans Spaargaren
 Emmanuel Unguran
 Philippe Vallée was
 56




---



##### Table of Contents



COMPENSATION OF DIRECTORS AND PRINCIPAL EXECUTIVE OFFICERS
     
  Total amount inName
    
    Thousands of eurosMichel Akkermans
    
    
    50David Bonderman
    
    
    51Geoffrey Fink
    
    
    63Johannes Fritz
    
    
    65Kurt Hellström
    
    
    50Werner Karl Koepf
    
    
    63Peter Kraljic
    
    
    56Alex J.
Mandl1
    
    
    2,033Daniel Le Gal
    
    
    50John Ormerod
    
    
    78William S. Price
    
    
    52Dominique Vignon
    
    
    373Total
    
    
    2,984
 
 1
    
    Includes bonus and housing allowance. See Item 19. Exhibits.       
  57




---



##### Table of Contents



STOCK OPTIONS
 In General
     Plan Administration
  
    
    the persons to whom options are granted (except any grant of options to directors and
senior executive officers, which is under the authority of the Compensation Committee);
    
    the vesting schedule and conditions under which the options may be exercised, including any lockup periods; and
    
    any other matters necessary or desirable for the
administration of the option plans.
  Vesting Period
  Option Exercise Price
  58




---



##### Table of Contents



General Plan Provisions
 Share Counting
 Effect of Termination of Employment
 
    
    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;
    
    in the event 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 .
  Autorité des marchés financiers
 Adjustments upon Change of Control .
 No Assignment or Transfer
 Amendment
 Senior Management Stock Options
  59




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##### Table of Contents




     
 Stock options granted to directors and officers of the Company
 Number ofstock options
    
    
    Number ofgranted and
    
    
    stock optionsnot exercised
    
    
    exercisable
    
    
    Aggregate numberas of
    
    
    as of
    
    
    of shares that may
    
    
    Expiration
    
    
    Exercise priceDecember 31, 2005
    
    
    December 31, 2005
    
    
    be issued
    
    
    date
    
    
    (in euros)David Bonderman
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    04/28/2013
    
    
    
    0.96Alex Mandl
    
    
    8,000,000
    
    
    
    6,000,000
    
    
    
    8,000,000
    
    
    
    08/28/2012
    
    
    
    0.844,000,000
    
    
    
    3,000,000
    
    
    
    4,000,000
    
    
    
    08/28/2012
    
    
    
    2.25Dominique Vignon
    
    
    1,000,000
    
    
    
    750,000
    
    
    
    1,000,000
    
    
    
    13/07/2012
    
    
    
    1.424Peter Kraljic
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    04/28/2013
    
    
    
    0.96Daniel Le Gal
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    04/28/2013
    
    
    
    0.96William S. Price III
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    04/28/2013
    
    
    
    0.96Johannes Fritz
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    04/28/2013
    
    
    
    0.96
 Major grants and exercise of stock options by employees of the Company
  Weighted averageTotal number
    
    
    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 2005 to
the 10 employees
who received the
largest number of
stock options
    
    
    6,700,000
    
    
    
    1.99
    
    
    Plan adopted on November 10, 2000 and June 30, 2005Options for shares in Gemplus
International S.A.
exercised in 2005
by the 10 employees
who, by exercising
stock options,
acquired the
largest number of
shares
    
    
    691,875
    
    
    
    1.36
    
    
    Plan adopted on July 27, 2000 and November 10, 2000  and Rollover plan adopted on December 10, 2002Options for shares in Gemplus S.A.
exercised in 2005
by the 10 employees
who, by exercising
stock options,
acquired the
largest number of
shares
    
    
    5,205
    
    
    
    1.56
    
    
    Plan adopted on December 17, 1997 and July 22, 1998
 SHARE
OWNERSHIP OF DIRECTORS AND PRINCIPAL EXECUTIVE OFFICERS
 60




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##### Table of Contents



 
    EMPLOYEES
  2003
    
    
    2004
    
    
    2005Number of employees
    
    
    5,037
    
    
    
    5,476
    
    
    
    6,347Category of activityManufacturing
    
    
    2,892
    
    
    
    3,261
    
    
    
    3,837Research and Development
    
    
    557
    
    
    
    608
    
    
    
    728Sales and Marketing
    
    
    694
    
    
    
    705
    
    
    
    837Services
    
    
    277
    
    
    
    286
    
    
    
    242General and Administrative
    
    
    617
    
    
    
    616
    
    
    
    703Geographic locationFrance
    
    
    1,702
    
    
    
    1,701
    
    
    
    1,727Rest of Europe, Middle East and Africa
    
    
    1,049
    
    
    
    1,056
    
    
    
    1,455Asia
    
    
    1,603
    
    
    
    1,673
    
    
    
    1,682Americas
    
    
    683
    
    
    
    1,046
    
    
    
    1,483
    61




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##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions
 MAJOR SHAREHOLDERS
  Number of shares
    
    Percentage of outstanding shares
    
    Percentage of voting rightsApril 27, 2004
    
    
    April 26, 2005
    
    
    February 28,

    
    
    April 27,
    
    
    April 26,
    
    
    February 28,
    
    
    April 27,
    
    
    April 26,
    
    
    February 28,2006

    

    2004
    
    
    2005
    
    
    2006
    
    
    2004
    
    
    2005
    
    
    2006Texas Pacific Group(1)
    
    
    159,305,600
    
    
    
    159,305,600
    
    
    
    159,305,600

    
    

    26.2%
    
    

    26.2%
    
    

    25.3%
    
    
    26.3%

    
    
    26.3%

    
    
    23.3%Quandt family(2)
    
    
    115,508,200
    
    
    
    115,508,200
    
    
    
    115,508,200

    
    
    19.0%
    
    
    19.0%
    
    
    18.3%
    
    
    19.1%
    
    
    19.1%
    
    
    18.4%Groupe Dassault
    
    
    32,659,866
    
    
    
    31,990,066
    
    
    
    26,690,066

    
    
    5.4%
    
    
    5.4%
    
    
    4.2%
    
    
    5.4%
    
    
    5.4%
    
    
    4.2%GE Capital
    
    
    24,093,311
    
    
    
    (3)
    
    
    
    (3)

    
    
    4.0%
    
    
    4.0%
    
    
    (3)
    
    

    4.0%
    
    
    4.0%
    
    
    (3)Brunei Investmane Agency
    
    
    15,750,000
    
    
    
    15,750,000
    
    
    
    15,750,000

    
    
    2.6%
    
    
    2.6%
    
    
    2.5%
    
    
    2.6%
    
    
    2.6%
    
    
    2.5%Nordea 1 SICAV
    
    
    
    
    
    
    
    
    
    

    34,267,172
    (4)
    
    
    
    
    
    
    
    
    
    5.4%

    
    
    
    
    
    
    
    
    
    
    5.4%Treasury shares
    
    
    1,290,129
    
    
    
    1,261,465
    
    
    
    761,465

    
    
    0.2%
    
    
    0.2%
    
    
    0.1%
    
    
    n/a

    
    
    n/a

    
    
    n/aOther shareholders
    
    
    258,513,415
    
    
    
    284,995,950
    
    
    
    278,086,776

    
    
    42.6%
    
    
    38.9%
    
    
    44.2%
    
    
    42.6%
    
    
    38.9%
    
    
    44.2%Outstanding shares
    
    
    607,120,521
    
    
    
    608,811,281
    
    
    
    630,369,279

    
    
    100.0%
    
    
    100.0%
    
    
    100.0%
    
    
    100.0%
    
    
    100.0%
    

    
    100.0%
 
 (1)
    
    Texas Pacific Group is a group of investment funds founded by Messrs. David Bonderman, James G. Coulter and William S. Price III to pursue investment opportunities through a variety of means, including leveraged
buyouts, recapitalizations, joint ventures, restructurings and strategic public securities investments. Messrs. Bonderman, Coulter and Price are the shareholders of the general partner of the Texas Pacific Group funds.
Each of Messrs. Bonderman, Coulter and Price disclaims beneficial ownership of the shares of our Company held by Texas Pacific Group. Until June 2, 2006 and the contribution in kind by Texas Pacific Group and the Quandt
family in accordance with the Contribution Agreements with Axalto (see Item 10. Additional InformationMaterial Contracts), Messrs. Bonderman, Price and Fink were 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. On June 2, 2006, affiliates of the Quandt family transferred
their shares in our Company to Gemalto (see Item 10. Additional Information  Material Contracts). 62




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##### Table of Contents



(3)
    
    Further to the notification by GE Capital of a crossing of shareholding threshold dated September 28, 2004, the number of shares held by GE Capital as of September 28, 2004 was equal to 8,469,663 shares representing
approximately 1.4% of the issued capital of our Company.(4)
    
    According to a declaration made by Nordea 1 SICAV on February 2, 2006.    RELATED PARTY TRANSACTIONS
    
   63




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##### Table of Contents




 
  
 
 
 
 
 
 Item 8. Financial Information
 AUDITED CONSOLIDATED FINANCIAL STATEMENTS
  OTHER FINANCIAL INFORMATION
 Legal Proceedings
  64




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##### Table of Contents



             
    
   
   
 Dividend Policy
    SIGNIFICANT CHANGES
  65




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##### Table of Contents



Item 9. The Offer and Listing
 NATURE OF TRADING MARKET
 Premier Marché
 Premier Marché
 Monthly Highs and Lows
 Euronext Paris
    
    
    Nasdaq National Market per share
    
    
    U.S.$ per ADSHigh
    
    
    Low
    
    
    High
    
    
    Low2001
    
    
    9.90
    
    
    
    1.93
    
    
    $
    17.88
    
    
    $
    3.602002
    
    
    3.08
    
    
    
    0.37
    
    
    $
    5.47
    
    
    $
    0.772003
    
    
    1.92
    
    
    
    0.63
    
    
    $
    4.69
    
    
    $
    1.472004
    
    
    2.26
    
    
    
    1.28
    
    
    $
    5.80
    
    
    $
    3.132005
    
    
    2.46
    
    
    
    1.61
    
    
    $
    5.70
    
    
    $
    4.092004First Quarter
    
    
    2.26
    
    
    
    1.62
    
    
    $
    5.80
    
    
    $
    4.08Second Quarter
    
    
    2.20
    
    
    
    1.52
    
    
    
    5.15
    
    
    
    3.61Third Quarter
    
    
    1.79
    
    
    
    1.28
    
    
    
    4.25
    
    
    
    3.13Fourth Quarter
    
    
    1.77
    
    
    
    1.43
    
    
    
    4.73
    
    
    
    3.592005First quarter
    
    
    2.13
    
    
    
    1.71
    
    
    $
    5.35
    
    
    $
    4.52Second quarter
    
    
    1.97
    
    
    
    1.61
    
    
    
    5.05
    
    
    
    4.09Third quarter
    
    
    2.39
    
    
    
    1.82
    
    
    
    5.70
    
    
    
    4.38Fourth quarter
    
    
    2.46
    
    
    
    1.99
    
    
    
    5.69
    
    
    
    4.792006First quarter
    
    
    2.56
    
    
    
    1.91
    
    
    $
    6.17
    
    
    $
    4.602005December
    
    
    2.46
    
    
    
    2.13
    
    
    $
    5.69
    
    
    $
    5.022006January
    
    
    2.40
    
    
    
    2.02
    
    
    $
    5.87
    
    
    $
    4.88February
    
    
    2.23
    
    
    
    1.91
    
    
    
    5.32
    
    
    
    4.60March
    
    
    2.56
    
    
    
    2.04
    
    
    
    6.17
    
    
    
    4.80April
    
    
    2.62
    
    
    
    2.30
    
    
    
    6.48
    
    
    
    5.72May
 Premier Marché
 Premier Marché Second Marché Nouveau Marché     entreprise de marché
 66




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##### Table of Contents



Trading by our Company in its own shares
  
  
 Item 10. Additional Information
 NASDAQ RULE EXEMPTIONS
       67




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##### Table of Contents



ARTICLES OF INCORPORATION
  Directors
  Share Capital
  
   (i)
    
    the issue of a maximum of 20 million shares in exchange for shares in Gemplus S.A.
at a ratio of fifty new shares of our Company for one share of Gemplus S.A.;(ii)
    
    the issue of a maximum of 56,845,700 shares either in exchange for shares of
Gemplus S.A. to be issued under any of the Gemplus S.A. stock option plans in existence
on February 1, 2000 or before or with respect to options to be issued by our Company to
subscribe for shares in our Company upon terms identical to those existing for options
issued under any of the Gemplus S.A. stock option plans in existence
on or prior to February 1, 2000, against surrender or exchange of, or
renunciation of, such latter stock
options in the same amounts on an adjusted basis (subject to the applicable ratio);(iii)
    
    the issue of a maximum of 50 million shares with respect to the options granted to
the employees or officers of our Company (including any subsidiaries or affiliates) in
accordance with the stock option plans as from time to time determined by the board of
directors, subject to such further conditions as may be imposed by the general meeting of
shareholders;(iv)
    
    the issue of a maximum of 60 million shares without nominal
value to senior management, directors and/or executives of our Company by way of stock
options, the terms and conditions to be determined by the
board of directors in its sole discretion, and/or, except in the case of board members,
by way of free shares, of free shares, on terms and conditions determined by the board of
directors in its sole discretion. Upon any issue of free shares, we will be required to
record an amount equal to the accounting par value of these shares in our shareholders
equity
 68




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##### Table of Contents



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.
  Form, Ownership and Transfer
   Voting Rights
   Dividend Rights/Exchange Controls
   MATERIAL CONTRACTS
  69




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##### Table of Contents




   
   TAXATION
  
    
    a dealer in securities or currencies;
    
    a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;
    
    a bank;
    
    a life insurance company;
    
    a tax-exempt organization;
    
    a person that holds ordinary shares or ADSs that are a hedge or that are hedged against interest rate or currency risks;
    
    a person that holds ordinary shares or ADSs as part of a straddle or conversion transaction for tax purposes;
 70




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##### Table of Contents




    
    a person whose functional currency for tax purposes is not the U.S. dollar; or
    
    a person that holds ordinary shares or ADSs and owns or is deemed to own 10% or more of any class of our stock.
  Luxembourg Tax Considerations
  Dividends on Ordinary Shares or ADSs
  Sale or other Disposition of Ordinary Shares or ADSs
  United States Federal Income Tax Considerations
  
    
    the beneficial owner of the ordinary shares or ADSs (and any dividends paid with respect
thereto);
    
    (i) an individual citizen or resident of the United States that has a substantial
presence, permanent home or habitual abode in the United States or (ii) a U.S. corporation;
    
    not also a resident of Luxembourg for Luxembourg tax purposes; and
    
    not subject to an anti-treaty shopping article, which generally apply only under limited circumstances.
   Dividends on Ordinary Shares or ADSs
  71




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##### Table of Contents



Sale or other Disposition of Ordinary Shares or ADSs
  Passive Foreign Investment Company Considerations
  
    
    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%.
    72




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##### Table of Contents



U.S. Information Reporting and Backup Withholding Rules
  
    
    are a corporation or other exempt recipient; or
    
    provide a U.S. taxpayer identification number and certify that no loss of exemption from backup withholding has occurred.
  DOCUMENTS ON DISPLAY
  
 Item 11. Quantitative and Qualitative Disclosures About Market Risk
  Currency risk
      73




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##### Table of Contents



(in thousands of euros (1))December 31
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    2004USD
    
    
    GBP
    
    
    JPY
    
    
    Others(2)
    
    
    USD
    
    
    GBP
    
    
    JPY
    
    
    Others(2)Hedging positions(3)Forward contracts
    
    
    (88,172
    )
    
    
    (7,930
    )
    
    
    (10,807
    )
    
    
    15,970
    
    
    
    (129,656
    )
    
    
    (23,519
    )
    
    
    (12,710
    )
    
    
    5,560Option contracts (4)
    
    
    (64,384
    )
    
    
    (13,786
    )
    
    
    (11,224
    )
    
    
    7,159
    
    
    
    (140,101
    )
    
    
    (25,741
    )
    
    
    (22,849
    )
    
    
    12,204Total
    
    
    (152,556
    )
    
    
    (21,716
    )
    
    
    (22,031
    )
    
    
    23,129
    
    
    
    (269,757
    )
    
    
    (49,260
    )
    
    
    (35,559
    )
    
    
    17,764Exposure(5)Balance sheet items:Commercial transactions
not settled at year end
    
    
    25,718
    
    
    
    (1,174
    )
    
    
    2,675
    
    
    
    (10
    )
    
    
    37,483
    
    
    
    7,414
    
    
    
    6,706
    
    
    
    6,136Forecasted commercial
transactions
    
    
    161,709
    
    
    
    31,209
    
    
    
    29,810
    
    
    
    (12,966
    )
    
    
    252,980
    
    
    
    51,838
    
    
    
    36,598
    
    
    
    (28,485
    )Total
    
    
    187,427
    
    
    
    30,035
    
    
    
    32,485
    
    
    
    (12,976
    )
    
    
    290,463
    
    
    
    59,252
    
    
    
    43,304
    
    
    
    (22,349
    )
 
 (1)
    
    Currency amounts are converted to euros at year end closing rates.(2)
    
    Other currencies include mainly the CHF, NOK, PLN, CAD, AED, ZAR, AUD, KRW
and SGD.(3)
    
    Financial instruments that hedge our commercial currency exposure and that are
effective hedges under IAS 39 qualify as cash flow hedges.(4)
    
    Option hedges qualifying as effective hedges under IAS 39 are purchased options to
sell or buy currency against the euro.(5)
    
    Our policy is to hedge all our actual commercial currency exposure as well as a
time-weighted proportion of forecasted commercial currency exposure.  (in thousands of euros (1))December 31
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    2004USD
    
    
    GBP
    
    
    JPY
    
    
    Others (2)
    
    
    USD
    
    
    GBP
    
    
    JPY
    
    
    Others (2)Forward contracts
    
    
    (8,447
    )
    
    
    
    
    
    
    
    
    
    
    3,350
    
    
    
    
    
    
    
    
    
    
    
    (2,990
    )
    
    
    88Option contracts (3)
    
    
    (4,196
    )
    
    
    
    
    
    
    (974
    )
    
    
    3,021
    
    
    
    (75,882
    )
    
    
    (7,253
    )
    
    
    (10,890
    )
    
    
    7,633Total
    
    
    (12,643
    )
    
    
    
    
    
    
    (974
    )
    
    
    6,371
    
    
    
    (75,882
    )
    
    
    (7,253
    )
    
    
    (13,880
    )
    
    
    7,721
 
 (1)
    
    Currency amounts are converted to euros at year end closing rates.(2)
    
    Other currencies include mainly the CHF, NOK, PLN, CAD, AED, ZAR, AUD, KRW and SGD.(3)
    
    Options that do not qualify as effective hedges under IAS 39 are options that we
sell as part of our combination strategies.  (in thousands of euros)December 31
    
    2005
    
    
    2004
    
    
    2003Fair value of the financial instruments qualifying as cash flow hedges under IAS 39
    
    
    1,488
    
    
    
    33,135
    
    
    
    16,986Fair value of financial instruments not qualifying as effective hedges under IAS 39
    
    
    107
    
    
    
    252
    
    
    
    (560
    )Total fair value of derivative financial instruments
    
    
    1,595
    
    
    
    33,387
    
    
    
    16,426
 74




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##### Table of Contents



(in thousands of euros)December 31
    
    2005
    
    
    2004
    
    
    2003Derivatives financial instruments under Current Assets
    
    
    4,187
    
    
    
    33,387
    
    
    
    16,426Derivatives financial instruments under Current Liabilities
    
    
    (2,592
    )
    
    
    
    
    
    
    Total fair value of derivative financial instruments
    
    
    1,595
    
    
    
    33,387
    
    
    
    16,426
   Interest Rate and Re-investment Risk
      From December 31 , 2005(in thousand of euros(1))
    
    To December 31 , 2006
    
    
    From 1 year to 5 years
    
    
    Beyond 5 yearsFinancial assets
    
    
    418,365
    
    
    
    
    
    
    
    Fixed rate
    
    
    
    
    
    
    
    
    
    
    Floating rate
    
    
    418,365
    
    
    
    
    
    
    
    Financial liabilities
    
    
    (6,610
    )
    
    
    (19,463
    )
    
    
    (6,616
    )Fixed rate
    
    
    
    
    
    
    
    
    
    
    Floating rate
    
    
    (6,610
    )
    
    
    (19,463
    )
    
    
    (6,616
    )Net balance sheet position before hedging
    
    
    411,755
    
    
    
    (19,463
    )
    
    
    (6,616
    )Fixed rate
    
    
    
    
    
    
    
    
    
    
    Floating rate
    
    
    411,755
    
    
    
    (19,463
    )
    
    
    (6,616
    )Hedging
    
    
    
    
    
    
    
    
    
    
    Fixed to floating rate
    
    
    
    
    
    
    
    
    
    
    Floating to fixed rate
    
    
    
    
    
    
    
    
    
    
    Net balance sheet position after hedging
    
    
    411,755
    
    
    
    (19,463
    )
    
    
    (6,616
    )Fixed rate
    
    
    
    
    
    
    
    
    
    
    Floating rate
    
    
    411,755
    
    
    
    (19,463
    )
    
    
    (6,616
    )
 
 (1)
    
    Assets are presented as positive amounts and liabilities as negative amounts. 75




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##### Table of Contents



Equity Risk in Minority Investments
    
 Item 12. Description of Securities Other than Equity Securities
  
 PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
   76




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##### Table of Contents



Item 15. Controls and Procedures
  
 Item 16. (Reserved.)
 
 Item 16A. Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
   
 Item 16C. Principal Accountant Fees and Services
 Réviseur dEntreprises
 Audit Fees
  Audit-Related Fees
  77




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##### Table of Contents



Tax Fees
  All Other Fees
   
 Item 16D. Exemptions from the Listing Standards for Audit Committees
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  
 PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  
 Item 19. Exhibits
  Report of Independent Registered Public Accounting Firm
    
    F-1Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003
    
    F-2Consolidated Balance Sheets as of December 31, 2005, 2004 and 2003
    
    F-3Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
    
    F-4Consolidated Statements of Changes in Shareholders Equity for the Years Ended December 31, 2005, 2004 and 2003
    
    F-5Notes to the Consolidated Financial Statements
    
    F-8
  1
    
    Updated and consolidated Articles of Incorporation of Gemplus International S.A. as amended to date (English
translation).2
    
    Deposit Agreement and Supplemental Agreement to Deposit Agreement, incorporated by reference to the filing on 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 annual
report on Form 20-F dated July 15, 2003.
 78




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##### Table of Contents



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 annual report on Form 20-F dated July 15, 2003.4.3
    
    Amendment dated February 1, 2004, to the Agreement among Gemplus S.A., Gemplus Trading SA, Gemplus Electronics SA,
Gemplus Telematics SARL, Gemplus Support GIE, Gemplus Development GIE, Gemplus Europe Services and Unions U.S.G,
C.F.D.T., C.F.T.C, and C.F.E.-C.G.C. dated May 15, 2003, incorporated by reference to the annual report on Form 20-F dated
June 30, 2004.4.4
    
    Share Purchase Agreement by and among the Holders of Shares
and Stock Options of Setec Oy, Gemplus Nordic Oy and
Gemplus International S.A. concerning the shares and stock options of Setec Oy dated April 22, 2005, incorporated by
reference to the annual report on
Form 20-F dated June 30, 2005.4.5
    
    (a) Patent Cross License Agreement, (b) Patent License Agreement for Terminals and (c) Amendment to Patent License
Agreement between Gemplus International S.A. and Axalto Holdings N.V. and between Gemplus International S.A. and CP8
Technologies S.A. dated January 1, 2005, incorporated by reference to the annual report on Form 20-F dated June 30, 2005.4.6
    
    Combination Agreement among Axalto Holding N.V., Gemplus International S.A., T3 Partners, LP, TPG Giant, LLC, TPG
Partners III, LP, Acton 1. Beteilingungs GMBH, Acton 2. Beteilingungs GMBH, Acton 3. Beteilingungs GMBH, Johanna
Quandt and Stefan Quandt dated December 6, 2005.8
    
    List of significant subsidiaries.12
    
    Certification by the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.13
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.15
    
    Consent of Independent Registered Public Accounting Firm.
 79




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##### Table of Contents



SIGNATURE
   GEMPLUS INTERNATIONAL S.A.By:
    
    /s/ Frans SpaargarenFrans SpaargarenChief Executive Officer and
     Chief Financial Officer
 80




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders, In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of cash flows and of changes in shareholders equity present fairly, in all
material respects, the financial position of Gemplus International SA
and its subsidiaries (the Company) at
December 31, 2005, 2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2005, in accordance with International
Financial Reporting Standards as adopted in the European Union. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. As discussed in Notes 2.4 to
the financial statements, the Company changed the manner in which it
accounts for stock based compensation and goodwill as of
January 1, 2005. International Financial
Reporting Standards adopted in the European Union 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, as restated, is presented in Note 40 to the Consolidated Financial Statements. PricewaterhouseCoopers (PRICEWATERHOUSECOOPERS) Paris, France
March 6, 2006 F-1




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##### Table of Contents



Consolidated Statements of Income
 (in thousands of euros, except shares and per share amounts)Years ended December 31
    
    Notes
    
    
    2005
    
    
    2004
    
    
    2003Net sales
    
    
    (26
    )
    
    
    938,875
    
    
    
    865,034
    
    
    
    749,203Cost of sales
    
    
    
    
    
    
    (628,967
    )
    
    
    (594,533
    )
    
    
    (541,947
    )Gross profit
    
    
    
    
    
    
    309,908
    
    
    
    270,501
    
    
    
    207,256Research and development expenses
    
    
    (13
    )
    
    
    (62,269
    )
    
    
    (62,592
    )
    
    
    (69,223
    )Selling and marketing expenses
    
    
    
    
    
    
    (116,088
    )
    
    
    (101,493
    )
    
    
    (100,181
    )General and administrative expenses
    
    
    
    
    
    
    (67,983
    )
    
    
    (63,895
    )
    
    
    (77,317
    )Restructuring reversals (expenses)
    
    
    (22
    )
    
    
    3,235
    
    
    
    (8,384
    )
    
    
    (61,973
    )Other operating income (expense), net
    
    
    
    
    
    
    (48
    )
    
    
    (101
    )
    
    
    703Goodwill amortization and impairment
    
    
    (12
    )
    
    
    
    
    
    
    (7,718
    )
    
    
    (33,051
    )Operating income (loss)
    
    
    
    
    
    
    66,755
    
    
    
    26,318
    
    
    
    (133,786
    )Financial income (expense), net
    
    
    (28
    )
    
    
    7,659
    
    
    
    5,653
    
    
    
    8,204Share of profit (loss) of associates
    
    
    (15
    )
    
    
    (531
    )
    
    
    (5,970
    )
    
    
    (7,561
    )Other non-operating income (expense), net
    
    
    (29
    )
    
    
    (2,301
    )
    
    
    (6,757
    )
    
    
    (11,139
    )Income (loss) before taxes
    
    
    
    
    
    
    71,582
    
    
    
    19,244
    
    
    
    (144,282
    )Income tax benefit (expense)
    
    
    (30
    )
    
    
    19,816
    
    
    
    (12,953
    )
    
    
    (14,673
    )NET INCOME (LOSS)
    
    
    
    
    
    
    91,398
    
    
    
    6,291
    
    
    
    (158,955
    )Attributable to:Equity holders of the Company
    
    
    
    
    
    
    89,890
    
    
    
    4,674
    
    
    
    (161,107
    )Minority interest
    
    
    
    
    
    
    1,508
    
    
    
    1,617
    
    
    
    2,152Net income (loss) per share attributable to
equity holders of the Company(in euros)Basic
    
    
    (32
    )
    
    
    0.15
    
    
    
    0.01
    
    
    
    (0.27
    )Diluted
    
    
    (32
    )
    
    
    0.14
    
    
    
    0.01
    
    
    
    (0.27
    )Shares used in net income (loss) per share
calculation:Basic
    
    
    
    
    
    
    618,337,539
    
    
    
    606,672,060
    
    
    
    605,658,965Diluted
    
    
    
    
    
    
    634,794,569
    
    
    
    619,022,472
    
    
    
    605,658,965
  F-2




---



##### Table of Contents



Consolidated Balance Sheets
 (in thousands of euros)December 31
    
    Notes
    
    
    2005
    
    
    2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    
    (6
    )
    
    
    418,365
    
    
    
    388,430
    
    
    
    390,684Trade accounts receivable, net
    
    
    (7
    )
    
    
    183,022
    
    
    
    148,512
    
    
    
    154,727Inventory, net
    
    
    (8
    )
    
    
    107,673
    
    
    
    115,610
    
    
    
    98,673Derivative financial instruments
    
    
    (9
    )
    
    
    4,187
    
    
    
    33,387
    
    
    
    16,426Other current receivables
    
    
    (10
    )
    
    
    82,128
    
    
    
    66,160
    
    
    
    66,249Total current assets
    
    
    
    
    
    
    795,375
    
    
    
    752,099
    
    
    
    726,759Non-current assets:Property, plant and equipment, net
    
    
    (11
    )
    
    
    158,284
    
    
    
    148,916
    
    
    
    175,706Goodwill, net
    
    
    (12
    )
    
    
    90,826
    
    
    
    28,197
    
    
    
    37,727Deferred development costs, net
    
    
    (13
    )
    
    
    21,227
    
    
    
    19,222
    
    
    
    17,916Other intangible assets, net
    
    
    (14
    )
    
    
    23,600
    
    
    
    8,965
    
    
    
    16,157Deferred income tax assets
    
    
    (30
    )
    
    
    32,788
    
    
    
    6,264
    
    
    
    31,860Investments in associates
    
    
    (15
    )
    
    
    16,309
    
    
    
    12,864
    
    
    
    19,216Available-for-sale financial assets, net
    
    
    (16
    )
    
    
    2,469
    
    
    
    4,752
    
    
    
    647Other non-current receivables, net
    
    
    (17
    )
    
    
    40,846
    
    
    
    43,900
    
    
    
    27,251Total non-current assets
    
    
    
    
    
    
    386,349
    
    
    
    273,080
    
    
    
    326,480TOTAL ASSETS
    
    
    
    
    
    
    1,181,724
    
    
    
    1,025,179
    
    
    
    1,053,239LIABILITIESCurrent liabilities:Accounts payable
    
    
    
    
    
    
    106,085
    
    
    
    94,025
    
    
    
    95,582Derivative financial instruments
    
    
    (9
    )
    
    
    2,592
    
    
    
    
    
    
    
    Salaries, wages and related items
    
    
    
    
    
    
    62,641
    
    
    
    55,199
    
    
    
    42,742Current portion of provisions and other liabilities
    
    
    (18
    )
    
    
    73,434
    
    
    
    50,217
    
    
    
    78,090Current income tax liabilities
    
    
    (30
    )
    
    
    5,228
    
    
    
    6,581
    
    
    
    1,903Other current tax liabilities
    
    
    
    
    
    
    20,821
    
    
    
    19,127
    
    
    
    12,770Current obligations under finance leases
    
    
    (19
    )
    
    
    5,539
    
    
    
    6,005
    
    
    
    5,928Total current liabilities
    
    
    
    
    
    
    276,340
    
    
    
    231,154
    
    
    
    237,015Non-current liabilities:Non-current obligations under finance leases
    
    
    (19
    )
    
    
    26,425
    
    
    
    33,663
    
    
    
    38,893Non-current portion of provisions
    
    
    (20
    )
    
    
    23,482
    
    
    
    25,696
    
    
    
    57,082Other non-current liabilities
    
    
    (20
    )
    
    
    13,417
    
    
    
    13,353
    
    
    
    13,164Deferred income tax liabilities
    
    
    (30
    )
    
    
    4,354
    
    
    
    
    
    
    
    Total non-current liabilities
    
    
    
    
    
    
    67,678
    
    
    
    72,712
    
    
    
    109,139Shareholders equity:Ordinary shares no legal par value, 1,889,466,226
shares authorized, 630,880,979, 608,482,253,
and 607,312,796 shares issued at December 31,
2005, 2004 and 2003, respectively
    
    
    (23
    )
    
    
    133,466
    
    
    
    128,643
    
    
    
    127,889Additional paid-in capital
    
    
    
    
    
    
    1,063,145
    
    
    
    1,031,558
    
    
    
    1,028,849Retained earnings
    
    
    
    
    
    
    (365,940
    )
    
    
    (459,560
    )
    
    
    (464,221
    )Other comprehensive income
    
    
    (25
    )
    
    
    (4,407
    )
    
    
    11,956
    
    
    
    4,570Less, cost of treasury shares
    
    
    (23
    )
    
    
    (1,395
    )
    
    
    (1,985
    )
    
    
    (2,075
    )Equity attributable to equity holders
of the Company
    
    
    
    
    
    
    824,869
    
    
    
    710,612
    
    
    
    695,012Minority interest
    
    
    
    
    
    
    12,837
    
    
    
    10,701
    
    
    
    12,073Total shareholders equity
    
    
    
    
    
    
    837,706
    
    
    
    721,313
    
    
    
    707,085TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    1,181,724
    
    
    
    1,025,179
    
    
    
    1,053,239
  F-3




---



##### Table of Contents



Consolidated Statements of Cash Flows
 (in thousands of euros)Years ended December 31
    
    
    Notes
    
    
    2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income (loss)
    
    
    
    
    
    
    91,398
    
    
    
    6,291
    
    
    
    (158,955
    )Adjustments to reconcile net income (loss)
to net cash from operating activities:Depreciation, amortization and impairment
    
    
    (36
    )
    
    
    41,369
    
    
    
    56,691
    
    
    
    95,071Changes in non-current portion of provisions and other
liabilities, excluding restructuring
    
    
    (20
    )
    
    
    (3,367
    )
    
    
    (32,930
    )
    
    
    4,228Deferred income taxes (benefit) expense
    
    
    (30
    )
    
    
    (26,851
    )
    
    
    3,661
    
    
    
    8,644(Gain) / loss on sale and disposal of assets
    
    
    
    
    
    
    (4,612
    )
    
    
    2,582
    
    
    
    2,005Share of (profit) loss of associates
    
    
    (15
    )
    
    
    571
    
    
    
    5,970
    
    
    
    9,098Share-based compensation
    
    
    (2.4
    )
    
    
    4,320
    
    
    
    
    
    
    
    Other, net
    
    
    
    
    
    
    (3,651
    )
    
    
    (2,700
    )
    
    
    10,840Changes in operating assets and liabilities:Trade accounts receivable and related current liabilities
    
    
    (36
    )
    
    
    (12,133
    )
    
    
    (2,962
    )
    
    
    (12,292
    )Trade accounts payable and related current assets
    
    
    (36
    )
    
    
    822
    
    
    
    20,774
    
    
    
    32,485Inventories
    
    
    (36
    )
    
    
    22,661
    
    
    
    (19,466
    )
    
    
    (9,189
    )Value-added and income taxes
    
    
    (36
    )
    
    
    (1,021
    )
    
    
    21,288
    
    
    
    6,674Salaries, wages and other
    
    
    (36
    )
    
    
    4,429
    
    
    
    14,161
    
    
    
    3,306Restricted cash
    
    
    (17
    )
    
    
    23,277
    
    
    
    (28,018
    )
    
    
    Restructuring reserve payable
    
    
    (22
    )
    
    
    (15,847
    )
    
    
    (18,307
    )
    
    
    (2,027
    )Net cash (used for) from operating activities
    
    
    
    
    
    
    121,365
    
    
    
    27,035
    
    
    
    (10,112
    )Cash flows from investing activities:(Purchase) / Sale of activities net of cash (acquired) / disposed
    
    
    (5.2
    )
    
    
    (63,457
    )
    
    
    (2,898
    )
    
    
    114Other investments
    
    
    
    
    
    
    (1,674
    )
    
    
    (2,982
    )
    
    
    (931
    )Purchase of property, plant and equipment
    
    
    (11
    )
    
    
    (25,078
    )
    
    
    (22,888
    )
    
    
    (15,237
    )Purchase of other assets
    
    
    
    
    
    
    (2,693
    )
    
    
    (1,725
    )
    
    
    (1,406
    )Proceeds from sale of property and non-current assets
    
    
    
    
    
    
    7,025
    
    
    
    1,300
    
    
    
    Change in non-trade accounts payable and other
    
    
    
    
    
    
    2,074
    
    
    
    3,064
    
    
    
    780Net cash used for investing activities
    
    
    
    
    
    
    (83,803
    )
    
    
    (26,129
    )
    
    
    (16,680
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    
    
    
    
    2,790
    
    
    
    1,479
    
    
    
    173Payments on borrowings
    
    
    
    
    
    
    (1,231
    )
    
    
    
    
    
    
    Proceeds from sale-leaseback operations
    
    
    
    
    
    
    
    
    
    
    956
    
    
    
    2,142Principal payments on obligations under finance leases
    
    
    (19
    )
    
    
    (5,938
    )
    
    
    (5,827
    )
    
    
    (5,973
    )Increase (decrease) in bank overdrafts
    
    
    
    
    
    
    (2,657
    )
    
    
    1,660
    
    
    
    (51
    )Dividends paid by subsidiaries to minority shareholders
    
    
    
    
    
    
    (1,307
    )
    
    
    (1,724
    )
    
    
    (2,627
    )Change in non trade accounts payable on financing activities
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    Change in treasury shares
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    Net cash used for financing activities
    
    
    
    
    
    
    (8,324
    )
    
    
    (3,366
    )
    
    
    (6,336
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    697
    
    
    
    207
    
    
    
    6,586Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    29,238
    
    
    
    (2,461
    )
    
    
    (33,128
    )Cash and cash equivalents, beginning of the year
    
    
    (6
    )
    
    
    388,430
    
    
    
    390,684
    
    
    
    417,226Cash and cash equivalents, end of the year
    
    
    (6
    )
    
    
    418,365
    
    
    
    388,430
    
    
    
    390,684
  F-4




---



##### Table of Contents



Consolidated Statement of Changes in Shareholders Equity
 (in thousands of euros, except number of shares)Attributable to equity holders of the CompanyNotes
    
    
    Number
    
    
    Share
    
    
    Additional
    
    
    Retained earnings
    
    
    Other
    
    
    Treasury
    
    
    Minority
    
    
    Total shareof shares
    
    
    value
    
    
    paid-in
    
    
    Prior
    
    
    Net income
    
    
    comprehensive
    
    
    shares
    
    
    interest
    
    
    holderscapital
    
    
    years
    
    
    (loss)
    
    
    income
    
    
    
    
    
    
    
    
    
    
    equityBalance at December 31, 2002
    
    
    
    
    
    
    637,859,088
    
    
    
    127,644
    
    
    
    1,028,920
    
    
    
    110,533
    
    
    
    (320,891
    )
    
    
    8,571
    
    
    
    (94,326
    )
    
    
    15,167
    
    
    
    875,618Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,333
    )
    
    
    
    
    
    
    (2,619
    )
    
    
    (10,952
    )Net unrealized gain (loss) on hedging
instruments qualifying as effective
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,332
    
    
    
    
    
    
    
    
    
    
    
    4,332Net income (loss) recognized directly
in equity under other comprehensive income
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,001
    )
    
    
    
    
    
    
    (2,619
    )
    
    
    (6,620
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (161,107
    )
    
    
    
    
    
    
    
    
    
    
    2,152
    
    
    
    (158,955
    )Dividend paid to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,627
    )
    
    
    (2,627
    )Allocation of prior year loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (320,891
    )
    
    
    320,891
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus SA pursuant
to share options exercised to be contributed
    
    
    (23
    )
    
    
    17,550
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Contribution of Gemplus SA shares
to Gemplus International SA
    
    
    (23
    )
    
    
    
    
    
    
    207
    
    
    
    (207
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus International SA
pursuant to share options exercised
    
    
    (23
    )
    
    
    179,837
    
    
    
    38
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159Cancellation of 30,743,679 treasury shares
    
    
    (3
    )
    
    
    (30,743,679
    )
    
    
    
    
    
    
    
    
    
    
    (92,756
    )
    
    
    
    
    
    
    
    
    
    
    92,756
    
    
    
    
    
    
    
    Purchase of 487,957 treasury shares
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (505
    )
    
    
    
    
    
    
    (505
    )Balance at December 31, 2003
    
    
    
    
    
    
    607,312,796
    
    
    
    127,889
    
    
    
    1,028,849
    
    
    
    (303,114
    )
    
    
    (161,107
    )
    
    
    4,570
    
    
    
    (2,075
    )
    
    
    12,073
    
    
    
    707,085Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,951
    )
    
    
    
    
    
    
    (1,265
    )
    
    
    (11,216
    )Net unrealized gain (loss) on hedging
instruments qualifying as effective
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,337
    
    
    
    
    
    
    
    
    
    
    
    17,337Net income (loss) recognized directly
in equity under other comprehensive income
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,386
    
    
    
    
    
    
    
    (1,265
    )
    
    
    6,121Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,674
    
    
    
    
    
    
    
    
    
    
    
    1,617
    
    
    
    6,291Dividend paid to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,724
    )
    
    
    (1,724
    )Allocation of prior year loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (161,107
    )
    
    
    161,107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus SA pursuant
to share options exercised to be contributed
    
    
    (23
    )
    
    
    901,250
    
    
    
    
    
    
    
    1,151
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,151Contribution of Gemplus SA shares
to Gemplus International SA
    
    
    (23
    )
    
    
    
    
    
    
    697
    
    
    
    (697
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus International SA
pursuant to share options exercised
    
    
    (23
    )
    
    
    268,207
    
    
    
    57
    
    
    
    271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    328Sale of 28,664 treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    77Minority shareholders contribution
not resulting in a change of subsidiary ownership
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,984
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,984Balance at December 31, 2004
    
    
    
    
    
    
    608,482,253
    
    
    
    128,643
    
    
    
    1,031,558
    
    
    
    (464,234
    )
    
    
    4,674
    
    
    
    11,956
    
    
    
    (1,985
    )
    
    
    10,701
    
    
    
    721,313Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,127
    
    
    
    
    
    
    
    1,448
    
    
    
    14,575Net unrealized gain (loss) on hedging
instruments qualifying as effective
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,490
    )
    
    
    
    
    
    
    
    
    
    
    (29,490
    )Net income (loss) recognized directly
in equity under other comprehensive income
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,363
    )
    
    
    
    
    
    
    1,448
    
    
    
    (14,915
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,890
    
    
    
    
    
    
    
    
    
    
    
    1,508
    
    
    
    91,398Impact of adopting IFRS 2 - Share-based Payment as of January 1, 2005
    
    
    (2.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share-based payments, value of
employee services
    
    
    (2.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,320
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,320Transfer of 500,000 treasury shares
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (590
    )
    
    
    
    
    
    
    
    
    
    
    590
    
    
    
    
    
    
    
    Dividend paid to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,090
    )
    
    
    (1,090
    )Allocation of prior year income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,674
    
    
    
    (4,674
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquisition of Setec
    
    
    (5.2, 23
    )
    
    
    19,000,000
    
    
    
    4,022
    
    
    
    29,666
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    33,958Shares issued by Gemplus SA pursuant
to share options exercised to be contributed
    
    
    (23
    )
    
    
    328,150
    
    
    
    
    
    
    
    464
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464Contribution of Gemplus SA shares
to Gemplus International SA
    
    
    (23
    )
    
    
    
    
    
    
    414
    
    
    
    (414
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued by Gemplus International SA
pursuant to share options exercised
    
    
    (23
    )
    
    
    1,830,376
    
    
    
    387
    
    
    
    1,871
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,258Balance at December 31, 2005
    
    
    
    
    
    
    629,640,779
    
    
    
    133,466
    
    
    
    1,063,145
    
    
    
    (455,830
    )
    
    
    89,890
    
    
    
    (4,407
    )
    
    
    (1,395
    )
    
    
    12,837
    
    
    
    837,706
  F-5




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##### Table of Contents



Notes to the Consolidated Financial Statements
 1. THE COMPANY
      2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  2.1 Basis of presentation
     2.2 Principles of consolidation
 (a) Subsidiaries
    F-6




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##### Table of Contents



(b) Associates
     2.3 Foreign currency
 (a) Functional and presentation currency
  (b) Transactions and balances
   (c) Group companies
      F-7




---



##### Table of Contents



2.4 Change in accounting policies
 Interpretations and amendments to published standards effective in 2005
  
    
    SIC 12 (Amendment), Consolidation  Special purpose entities (effective from January 1,
2005); and
    
    IAS 39 (Amendment), Transition and Initial recognition of Financial Assets and Financial
Liabilities (effective from January 1, 2005)
  Standards effective in 2005 and early application of standards amendments
  
 IFRS 2 (issued 2004) Share-based Payment
   -
    
    The Company has applied this standard to share options granted after
November 7, 2002, and not yet vested at January 1, 2005;-
    
    For all grants of share options to which this standard has not been applied
(e.g. granted on or before November 7, 2002), information required by the
standard has been disclosed in Note 24.
 F-8




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##### Table of Contents



(in thousands of euros except for per share amounts)Retained earningsStock basedcompensationreserve
    
    
    Prior years
    
    
    Net incomeBalance at December 31, 2004
    
    
    
    
    
    
    
    
    
    
    Impact of first adoption of IFRS 2 at January 1, 2005
    
    
    4,513
    
    
    
    (4,513
    )
    
    
    Stock based compensation expense for the year ended
December 31, 2005Cost of sales
    
    
    
    
    
    
    
    
    
    
    (807
    )Research and development expenses
    
    
    
    
    
    
    
    
    
    
    (320
    )Selling and marketing expenses
    
    
    
    
    
    
    
    
    
    
    (1,526
    )General and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (1,667
    )Total impact on net income
    
    
    4,320
    
    
    
    
    
    
    
    (4,320
    )Balance at December 31, 2005
    
    
    8,833
    
    
    
    (4,513
    )
    
    
    (4,320
    )Impact on basic earnings per share (in euros)
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Impact on diluted earnings per share (in euros)
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
  Years ended December 31
    
    2005
    
    
    2004
    
    
    2003(restated)
    
    
    (restated)Net sales
    
    
    938,875
    
    
    
    865,034
    
    
    
    749,203Gross profit
    
    
    309,908
    
    
    
    270,501
    
    
    
    207,256Operating income (loss)
    
    
    66,755
    
    
    
    23,393
    
    
    
    (135,028
    )NET INCOME (LOSS)
    
    
    91,398
    
    
    
    3,366
    
    
    
    (160,197
    )Attributable to:Equity holders of the Company
    
    
    89,890
    
    
    
    1,749
    
    
    
    (162,349
    )Minority interest
    
    
    1,508
    
    
    
    1,617
    
    
    
    2,152Net income (loss) per share attributable to
equity holders of the Company (in euros)Basic
    
    
    0.15
    
    
    
    0.00
    
    
    
    (0.27
    )Diluted
    
    
    0.14
    
    
    
    0.00
    
    
    
    (0.27
    )
  IFRS 3 (issued 2004), IAS 36 (revised 2004) and IAS 38 (revised 2004)
  
    
    Amortized on a straight-line basis over a period ranging from five to twenty years; and
    
    Assessed for an indication of impairment at least at each balance sheet date.
  
    
    The Company discontinued amortization of goodwill from January 1, 2005;
    
    Accumulated amortization as of January 1, 2005, has been eliminated with a corresponding
decrease in the cost of goodwill; and
 F-9




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##### Table of Contents




    
    From the year ended December 31, 2005, onwards, goodwill is tested annually for impairment,
as well as when there are indications of impairment, i.e. whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
  F-10




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##### Table of Contents



(in thousands of euros, except for per share amounts)Years ended December 31
    
    2004
    
    
    2003Decrease in goodwill amortization expense
    
    
    7,718
    
    
    
    7,947Decrease in share of loss of associates
    
    
    2,810
    
    
    
    2,828Increase in net income attributable to equity holders
of the Company
    
    
    10,528
    
    
    
    10,775Increase in basic earnings per share (in euros)
    
    
    0.02
    
    
    
    0.02Increase in diluted earnings per share (in euros)
    
    
    0.02
    
    
    
    0.02
 Standards, interpretations and amendments to published standards that are not yet effective
  
    
    IAS 19 (Amendment), Employee Benefits(effective from January 1, 2006). This amendment
introduces the option of an alternative recognition approach for actuarial gains and
losses. It also adds new disclosure requirements. The Company will consider applying this
amendment from annual periods beginning January 1, 2006.
    
    IAS 39 (Amendment), The Fair Value Option(effective from January 1, 2006). This
amendment provides options that the Company has decided not to apply. Therefore, the
Company has concluded that this amendment is not relevant to the Company.
    
    IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts(effective from January 1,
2006). This amendment requires issued financial guarantees, other than those previously
asserted by the entity to be insurance contracts, to be initially recognised at their fair
value, and subsequently measured at the higher of (a) the unamortized balance of the
related fees received and deferred, and (b) the expenditure required to settle the
commitment at the balance sheet date. Management considered this amendment to IAS 39 and
concluded that it should not have a significant impact on the accounting policies of the
Company.
    
    IFRS 7, Financial Instruments: Disclosures, and a complementary Amendment to IAS 1,
Presentation of Financial Statements  Capital Disclosures(effective from January 1,
2007). IFRS 7 introduces new disclosures to improve the information about financial
instruments. It requires the disclosure of qualitative and quantitative information about
exposure to risks arising from financial instruments, including specified minimum
disclosures about credit risk, liquidity risk and market risk, including sensitivity
analysis to market risk. It is applicable to all entities that report under IFRS. The
amendment to IAS 1 introduces disclosures about the level of an entitys capital and how it
manages capital. The Company assessed the impact of IFRS 7 and the amendment to IAS 1 and
concluded that the main additional disclosures will be the sensitivity analysis to market
risk and the capital disclosures required by the amendment of IAS 1. The Company will apply
IFRS 7 and the amendment to IAS 1 from annual periods beginning January 1, 2007.
    
    IFRIC 4, Determining whether an Arrangement contains a Lease(effective from January 1,
2006). IFRIC 4 requires the determination of whether an arrangement is or contains a lease
to be based on the substance of the arrangement. It requires an assessment of whether: (a)
fulfilment of the arrangement is dependent on the use of a specific asset or assets (the
asset); and (b) the arrangement conveys a right to use the asset. Management is currently
assessing the impact of IFRIC 4, and believes that it should not have a significant impact
on the Companys operations.
    
    IFRIC 6, Liabilities arising from Participating in a Specific Market  Waste Electrical
and Electronic Equipment(effective from December 1, 2005). Management is currently
assessing the impact of IFRIC 6, and believes that it should not have a significant impact
on the Companys operations.
 F-11




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##### Table of Contents



2.5 Revenue recognition
  (a) Sales of goods
  (b) Sales of services
  2.6 Trade receivables
  2.7 Inventory
  2.8 Property, plant and equipment
    Buildings
    
    20-30 yearsEquipment and machinery related to microprocessor chip cards
    
    5 yearsEquipment and machinery related to magnetic stripe cards
    
    7 yearsFurniture and fixtures
    
    5-10 yearsLeasehold improvements
    
    8-12 years
 F-12




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##### Table of Contents



2.9 Intangible assets
 (a) Goodwill
    (b) Patents
  (c) Computer software
   (d) Research and development
  F-13




---



##### Table of Contents



2.10 Impairment of non-financial assets
   2.11 Leases
  2.12
Financial assets
  (a) Financial assets and liabilities at fair value through profit and loss
  (b) Loans and receivables
  (c) Available-for-sale financial assets
  F-14




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##### Table of Contents




    
    If the fair value of unquoted investments in equity securities is determinable by valuation
techniques appropriate for the nature of the security, these items are accounted for at fair
value with changes recognized directly through shareholders equity.
    
    If fair value cannot be reliably measured, these items are accounted for using the cost method.
  2.13 Derivative financial instruments and hedging activities
     2.14 Estimation of fair value of derivatives
   F-15




---



##### Table of Contents



2.15 Cash and cash equivalents
   2.16 Other income
   2.17 Income taxes
   2.18 Research tax credit and government grants
   F-16




---



##### Table of Contents



2.19 Earnings per share
   2.20 Share capital and treasury shares
   2.21 Provisions
  
    
    the Company has a present legal or constructive obligation as a result of past events;
    
    it is more likely than not that an outflow of resources will be required to settle the
obligation;
    
    and the amount has been reliably estimated.
  2.22 Employee benefits
 (a) Pension obligations
     F-17




---



##### Table of Contents



(b) Other post-employment benefits
  (c) Share-based compensation
   2.23 Advertising and promotional costs
   
 2.24 Comparatives
   
    
    Gain (loss) on sales of the Companys fixed assets amounting to  703 thousand in 2003 within
Other operating income (expense), net in the operating income (loss).
    
    Income (loss) on investments in associates amounting to (7,561) thousand in 2003 within
Share of profit (loss) of associates.
    
    Minority interest amounting to (2,152) thousand in 2003 within the allocation of Net income
(loss).
    
    Gain (loss) on investments amounting to (2,487) thousand in 2003 and Foreign exchange gain
(loss) amounting to (8,652) thousand in 2003 within Other non-operating income (expense),
net.
    F-18




---



##### Table of Contents



3. FINANCIAL RISK MANAGEMENT
  3.1 Companys risk exposure
 (a) Currency risks
       (b) Interest rate and re-investment risk
    (c) Financial counter-party risk
  (d) Concentration of credit risk
   4. CRITICAL ACCOUNTING ESTIMATES
  F-19




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##### Table of Contents



(a) Impairment of goodwill
  (b) Income taxes
   (c) Legal claims
  (d) Business combination
  
 F-20




---



##### Table of Contents



5. BUSINESS COMBINATIONS
 5.1 Proposed combination of Gemplus International SA and Axalto NV
  5.2 Acquisition of Setec
  
   (in thousands of euros)Purchase consideration:Cash paid
    
    
    33,400Contingent consideration (see Note 18)
    
    
    30,000Direct costs relating to the acquisition
    
    
    2,202Fair value of 19,000,000 shares issued (see Note 23)
    
    
    34,048Total purchase consideration
    
    
    99,650Fair value of net assets acquired
    
    
    (38,945
    )Goodwill (see Note 12)
    
    
    60,705
   F-21




---



##### Table of Contents



(in thousands of euros)AcquireesNotes
    
    
    Fair value
    
    
    carrying amountCash and cash equivalents
    
    
    
    
    
    
    2,145
    
    
    
    2,145Trade accounts receivables, net
    
    
    (36
    )
    
    
    9,910
    
    
    
    9,910Inventory, net
    
    
    (36
    )
    
    
    10,330
    
    
    
    10,330Property, plant and equipment,net
    
    
    (11
    )
    
    
    16,863
    
    
    
    9,620Acquired technology
    
    
    (14
    )
    
    
    3,200
    
    
    
    Contractual customer relationships
    
    
    (14
    )
    
    
    17,584
    
    
    
    Intangible assets
    
    
    (14
    )
    
    
    214
    
    
    
    214Investment in associates
    
    
    (15
    )
    
    
    4,537
    
    
    
    Available-for-sale investments
    
    
    (16
    )
    
    
    121
    
    
    
    121Other assets
    
    
    
    
    
    
    2,040
    
    
    
    2,040Trade accounts payable
    
    
    (36
    )
    
    
    (5,303
    )
    
    
    (5,303
    )Retirement benefit obligations plans
    
    
    (21
    )
    
    
    (347
    )
    
    
    (347
    )Accrued vacations
    
    
    
    
    
    
    (2,970
    )
    
    
    (2,970
    )Deferred revenue
    
    
    
    
    
    
    (4,550
    )
    
    
    (4,550
    )Borrowings
    
    
    
    
    
    
    (3,798
    )
    
    
    (3,798
    )Warranty provisions
    
    
    (20.1
    )
    
    
    (1,579
    )
    
    
    (1,579
    )Bank overdrafts
    
    
    
    
    
    
    (1,915
    )
    
    
    (1,915
    )Other liabilities
    
    
    
    
    
    
    (3,632
    )
    
    
    (12,403
    )Net deferred tax liabilities
    
    
    
    
    
    
    (5,550
    )
    
    
    Net assets
    
    
    
    
    
    
    39,215
    
    
    
    3,430Minority interest
    
    
    
    
    
    
    (270
    )Net assets acquired
    
    
    
    
    
    
    38,945Purchase consideration settled in cash
    
    
    
    
    
    
    
    
    
    
    65,602Cash and cash equivalents in subsidiary acquired
    
    
    
    
    
    
    
    
    
    
    (2,145
    )Cash outflow on acquisition
    
    
    
    
    
    
    
    
    
    
    63,457
 6. CASH AND CASH EQUIVALENTS
  (in thousands of euros)December 31
    
    2005
    
    2004
    
    2003Cash at bank and on hand
    
    
    36,788
    
    
    23,846
    
    
    45,955Short term investments
    
    
    381,577
    
    
    364,584
    
    
    344,729Cash and cash equivalents
    
    
    418,365
    
    
    388,430
    
    
    390,684
  F-22




---



##### Table of Contents



7. TRADE ACCOUNTS RECEIVABLE
  (in thousands of euros)December 31
    
    2005
    
    
    2004
    
    
    2003Trade accounts receivable, gross
    
    
    189,341
    
    
    
    155,750
    
    
    
    163,621Less, provision for impairment of receivables
    
    
    (6,319
    )
    
    
    (7,238
    )
    
    
    (8,894
    )Trade accounts receivable, net
    
    
    183,022
    
    
    
    148,512
    
    
    
    154,727
    
 8. INVENTORY
  (in thousands of euros)December 31
    
    2005
    
    
    2004
    
    
    2003Raw materials and supplies
    
    
    31,751
    
    
    
    38,208
    
    
    
    27,456Work-in-progress
    
    
    71,505
    
    
    
    74,296
    
    
    
    67,066Finished goods
    
    
    10,746
    
    
    
    10,517
    
    
    
    10,158Inventory, gross
    
    
    114,002
    
    
    
    123,021
    
    
    
    104,680Less, inventory allowance
    
    
    (6,329
    )
    
    
    (7,411
    )
    
    
    (6,007
    )Inventory, net
    
    
    107,673
    
    
    
    115,610
    
    
    
    98,673
   
  
 9. DERIVATIVE FINANCIAL INSTRUMENTS
    
    
    hedging positions in parentheses indicate the Companys forward commitment or option to sell
the currency against the euro; other hedging positions indicate the Companys forward
commitment or option to buy the currency against the euro;
 F-23




---



##### Table of Contents




    
    positive exposures indicate the Companys receivables in the currency, or forecasted sales in
the currency; exposures in parentheses indicate the Companys payables in the currency, or
forecasted purchases in the currency.
 (in thousands of euros (1))December 31
    
    
    2005
    
    2004USD
    
    
    GBP
    
    
    JPY
    
    
    Others(2)
    
    
    USD
    
    
    GBP
    
    
    JPY
    
    
    Others(2)Hedging positions(3)Forward contracts
    
    
    (88,172
    )
    
    
    (7,930
    )
    
    
    (10,807
    )
    
    
    15,970
    
    
    
    (129,656
    )
    
    
    (23,519
    )
    
    
    (12,710
    )
    
    
    5,560Option contracts (4)
    
    
    (64,384
    )
    
    
    (13,786
    )
    
    
    (11,224
    )
    
    
    7,159
    
    
    
    (140,101
    )
    
    
    (25,741
    )
    
    
    (22,849
    )
    
    
    12,204Total
    
    
    (152,556
    )
    
    
    (21,716
    )
    
    
    (22,031
    )
    
    
    23,129
    
    
    
    (269,757
    )
    
    
    (49,260
    )
    
    
    (35,559
    )
    
    
    17,764Exposure(5)Balance sheet items:Commercial transactions
not settled at year end
    
    
    25,718
    
    
    
    (1,174
    )
    
    
    2,675
    
    
    
    (10
    )
    
    
    37,483
    
    
    
    7,414
    
    
    
    6,706
    
    
    
    6,136Forecasted commercial
transactions
    
    
    161,709
    
    
    
    31,209
    
    
    
    29,810
    
    
    
    (12,966
    )
    
    
    252,980
    
    
    
    51,838
    
    
    
    36,598
    
    
    
    (28,485
    )Total
    
    
    187,427
    
    
    
    30,035
    
    
    
    32,485
    
    
    
    (12,976
    )
    
    
    290,463
    
    
    
    59,252
    
    
    
    43,304
    
    
    
    (22,349
    )
 
 (1)
    
    Currency amounts are converted to euros at year end closing rates.(2)
    
    Other currencies include mainly the CHF, NOK, PLN, CAD, AED, ZAR, AUD, KRW
and SGD.(3)
    
    Financial instruments that hedge the Companys commercial currency exposure and that
are effective hedges under IAS 39 qualify as cash flow hedges.(4)
    
    Option hedges qualifying as effective hedges under IAS 39 are purchased options to
sell or buy currency against the euro.(5)
    
    The Companys policy is to hedge all its actual commercial currency exposure as well
as a time-weighted proportion of its forecasted commercial currency exposure.  (in thousands of euros (1))December 31
    
    2005
    
    2004USD
    
    
    GBP
    
    
    JPY
    
    

Others(2)
    
    
    USD
    
    
    GBP
    
    
    JPY
    
    

Others(2)Forward contracts
    
    
    (8,447
    )
    
    
    
    
    
    
    
    
    
    
    3,350
    
    
    
    
    
    
    
    
    
    
    
    (2,990
    )
    
    
    88Option contracts (3)
    
    
    (4,196
    )
    
    
    
    
    
    
    (974
    )
    
    
    3,021
    
    
    
    (75,882
    )
    
    
    (7,253
    )
    
    
    (10,890
    )
    
    
    7,633Total
    
    
    (12,643
    )
    
    
    
    
    
    
    (974
    )
    
    
    6,371
    
    
    
    (75,882
    )
    
    
    (7,253
    )
    
    
    (13,880
    )
    
    
    7,721
 
 (1)
    
    Currency amounts are converted to euros at year end closing rates.(2)
    
    Other currencies include mainly the CHF, NOK, PLN, CAD, AED, ZAR, AUD, KRW and SGD.(3)
    
    Options that do not qualify as effective hedges under IAS 39 are the options that
the Company sells as part of its combination strategies. F-24




---



##### Table of Contents



(in thousands of euros)December 31
    
    2005
    
    
    2004
    
    
    2003Fair value of the financial instruments qualifying as cash
flow hedges under IAS 39
    
    
    1,488
    
    
    
    33,135
    
    
    
    16,986Fair value of financial instruments not qualifying as
effective hedges under IAS 39
    
    
    107
    
    
    
    252
    
    
    
    (560
    )Total fair value of derivative financial instruments
    
    
    1,595
    
    
    
    33,387
    
    
    
    16,426Derivatives financial instruments under Current Assets
    
    
    4,187
    
    
    
    33,387
    
    
    
    16,426Derivatives financial instruments under Current Liabilities
    
    
    (2,592
    )
    
    
    
    
    
    
    Total fair value of derivative financial instruments
    
    
    1,595
    
    
    
    33,387
    
    
    
    16,426
 10. OTHER CURRENT RECEIVABLES
  (in thousands of euros)December 31
    
    2005
    
    
    2004
    
    
    2003Value added tax receivable
    
    
    17,832
    
    
    
    16,679
    
    
    
    18,677Other taxes receivable
    
    
    2,277
    
    
    
    4,111
    
    
    
    11,255Research tax credit (current portion)
    
    
    3,253
    
    
    
    
    
    
    
    Advance facility to supplier
    
    
    
    
    
    
    
    
    
    
    12,001Advance payments to non-trade suppliers
    
    
    1,229
    
    
    
    826
    
    
    
    1,099Prepaid expenses (current portion)
    
    
    13,228
    
    
    
    10,090
    
    
    
    15,780Advance payments to trade suppliers
    
    
    4,099
    
    
    
    3,804
    
    
    
    3,454Restricted cash (current portion)
    
    
    36,222
    
    
    
    27,405
    
    
    
    Other current assets
    
    
    3,988
    
    
    
    3,245
    
    
    
    3,983Total other current receivables
    
    
    82,128
    
    
    
    66,160
    
    
    
    66,249
  
  
   
 F-25




---



##### Table of Contents



 
  
  11. PROPERTY, PLANT AND EQUIPMENT
  (in thousands of euros)Land
    
    
    Buildings
    
    
    Machinery
    
    
    Total 2005
    
    
    Total 2004
    
    
    Total 2003CostAs of January 1
    
    
    6,015
    
    
    
    161,678
    
    
    
    296,328
    
    
    
    464,021
    
    
    
    476,583
    
    
    
    512,677Additions
    
    
    
    
    
    
    2,625
    
    
    
    22,453
    
    
    
    25,078
    
    
    
    22,888
    
    
    
    15,237Disposals
    
    
    (838
    )
    
    
    (10,731
    )
    
    
    (26,453
    )
    
    
    (38,022
    )
    
    
    (28,228
    )
    
    
    (31,669
    )Acquisition (disposal) of subsidiary (see Note 5)
    
    
    
    
    
    
    1,532
    
    
    
    15,331
    
    
    
    16,863
    
    
    
    
    
    
    
    (597
    )Currency adjustments
    
    
    177
    
    
    
    2,762
    
    
    
    10,274
    
    
    
    13,213
    
    
    
    (7,222
    )
    
    
    (19,065
    )As of December 31
    
    
    5,354
    
    
    
    157,866
    
    
    
    317,933
    
    
    
    481,153
    
    
    
    464,021
    
    
    
    476,583Accumulated depreciationAs of January 1
    
    
    
    
    
    
    (63,498
    )
    
    
    (251,607
    )
    
    
    (315,105
    )
    
    
    (300,877
    )
    
    
    (295,733
    )Depreciation
    
    
    
    
    
    
    (9,699
    )
    
    
    (23,437
    )
    
    
    (33,136
    )
    
    
    (42,243
    )
    
    
    (51,064
    )Reversal of impairment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,555Disposals
    
    
    
    
    
    
    6,951
    
    
    
    27,030
    
    
    
    33,981
    
    
    
    23,449
    
    
    
    30,794Disposal of subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192Currency adjustments
    
    
    
    
    
    
    (937
    )
    
    
    (7,672
    )
    
    
    (8,609
    )
    
    
    4,566
    
    
    
    12,379As of December 31
    
    
    
    
    
    
    (67,183
    )
    
    
    (255,686
    )
    
    
    (322,869
    )
    
    
    (315,105
    )
    
    
    (300,877
    )Net book value as of December 31
    
    
    5,354
    
    
    
    90,683
    
    
    
    62,247
    
    
    
    158,284
    
    
    
    148,916
    
    
    
    175,706Including:P, P&E under finance lease contracts, gross
    
    
    2,809
    
    
    
    63,197
    
    
    
    159
    
    
    
    66,165
    
    
    
    69,871
    
    
    
    68,926P, P&E under finance lease contracts, depreciation
    
    
    
    
    
    
    (28,428
    )
    
    
    
    
    
    
    (28,428
    )
    
    
    (26,992
    )
    
    
    (22,689
    )Net book value under finance lease
contracts as of December 31
    
    
    2,809
    
    
    
    34,769
    
    
    
    159
    
    
    
    37,737
    
    
    
    42,879
    
    
    
    46,237
   (in millions of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Europe, Middle East and Africa
    
    
    18,150
    
    
    
    12,846
    
    
    
    9,993Asia
    
    
    2,157
    
    
    
    5,492
    
    
    
    2,723Americas
    
    
    4,771
    
    
    
    4,550
    
    
    
    2,521Total capital expenditures
    
    
    25,078
    
    
    
    22,888
    
    
    
    15,237
 F-26




---



##### Table of Contents



(in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Cost of sales
    
    
    (22,932
    )
    
    
    (30,248
    )
    
    
    (36,884
    )Research and development expenses
    
    
    (3,506
    )
    
    
    (3,638
    )
    
    
    (4,196
    )Selling and marketing expenses
    
    
    (2,380
    )
    
    
    (2,610
    )
    
    
    (3,536
    )General and administrative expenses
    
    
    (4,318
    )
    
    
    (5,747
    )
    
    
    (6,448
    )Restructuring expenses (see Note 22)
    
    
    
    
    
    
    
    
    
    
    2,555Total depreciation expense
    
    
    (33,136
    )
    
    
    (42,243
    )
    
    
    (48,509
    )
 12. GOODWILL
  (in thousands of euros)2004
    
    
    2003CostAs of January 1
    
    
    156,081
    
    
    
    165,443Additions
    
    
    
    
    
    
    5,901Purchase price adjustments
    
    
    (820
    )
    
    
    Disposals and transfers
    
    
    (36,791
    )
    
    
    (9,918
    )Currency adjustments
    
    
    (2,088
    )
    
    
    (5,345
    )As of December 31
    
    
    116,382
    
    
    
    156,081Accumulated depreciation and impairmentAs of January 1
    
    
    (118,354
    )
    
    
    (92,256
    )Impairment charge
    
    
    
    
    
    
    (19,879
    )Amortization
    
    
    (7,718
    )
    
    
    (13,172
    )Disposals and transfers
    
    
    36,791
    
    
    
    4,543Currency adjustments
    
    
    1,096
    
    
    
    2,410As of December 31
    
    
    (88,185
    )
    
    
    (118,354
    )Net book value as of December 31
    
    
    28,197
    
    
    
    37,727
 F-27




---



##### Table of Contents



(in thousands of euros)2005Net book value as of January 1
    
    
    28,197Acquisition of subsidiary (see Note 5)
    
    
    60,705Impairment charge
    
    
    Currency adjustments
    
    
    1,924Net book value as of December 31
    
    
    90,826
  (in thousands of euros)December 31
    
    2005
    
    
    2004
    
    
    2003Telecommunications
    
    
    6,256
    
    
    
    247
    
    
    
    296Financial Services
    
    
    45,762
    
    
    
    24,773
    
    
    
    30,434Identity and Security
    
    
    38,808
    
    
    
    3,177
    
    
    
    6,997Total
    
    
    90,826
    
    
    
    28,197
    
    
    
    37,727
 Impairment tests for goodwill
 
 13. DEFERRED DEVELOPMENT COSTS
  (in thousands of euros)December 31
    
    2005
    
    
    2004
    
    
    2003Gross amount at the beginning of the year
    
    
    55,846
    
    
    
    54,651
    
    
    
    56,658Accumulated amortization at the beginning of the year
    
    
    (36,624
    )
    
    
    (36,735
    )
    
    
    (30,748
    )Balance at the beginning of the year
    
    
    19,222
    
    
    
    17,916
    
    
    
    25,910Deferred during the year
    
    
    10,418
    
    
    
    9,595
    
    
    
    10,757Less, allowances
    
    
    (8,413
    )
    
    
    (8,289
    )
    
    
    (18,751
    )Impact for the year on income before tax
    
    
    2,005
    
    
    
    1,306
    
    
    
    (7,994
    )Balance at the end of the year
    
    
    21,227
    
    
    
    19,222
    
    
    
    17,916Gross amount at the end of the year
    
    
    55,456
    
    
    
    55,846
    
    
    
    54,651Accumulated amortization
    
    
    (34,229
    )
    
    
    (36,624
    )
    
    
    (36,735
    )Balance at the end of the year
    
    
    21,227
    
    
    
    19,222
    
    
    
    17,916
  (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Research and development expenditures
    
    
    69,400
    
    
    
    68,208
    
    
    
    63,918Deferred development costs, net
    
    
    (2,005
    )
    
    
    (1,306
    )
    
    
    7,994Grants received including research tax credit
    
    
    (5,126
    )
    
    
    (4,310
    )
    
    
    (2,689
    )Total research and development expenses
    
    
    62,269
    
    
    
    62,592
    
    
    
    69,223
 F-28




---



##### Table of Contents



14. OTHER INTANGIBLE ASSETS
  (in thousands of euros)Customers
    
    
    
    
    
    
    Patents andAcquired
    
    
    contractual
    
    
    
    
    
    
    patenttechnology
    
    
    relationships
    
    
    Software
    
    
    rights
    
    
    Total 2005
    
    
    Total 2004
    
    
    Total 2003CostAs of January 1
    
    
    
    
    
    
    
    
    
    
    35,289
    
    
    
    6,428
    
    
    
    41,717
    
    
    
    46,864
    
    
    
    54,672Additions
    
    
    
    
    
    
    
    
    
    
    2,693
    
    
    
    
    
    
    
    2,693
    
    
    
    1,779
    
    
    
    4,728Disposals and write-offs
    
    
    
    
    
    
    
    
    
    
    (1,678
    )
    
    
    (34
    )
    
    
    (1,712
    )
    
    
    (6,724
    )
    
    
    (12,018
    )Acquisition
of subsidiary (see Note 5)
    
    
    3,200
    
    
    
    17,584
    
    
    
    214
    
    
    
    
    
    
    
    20,998
    
    
    
    
    
    
    
    Currency adjustments
    
    
    
    
    
    
    
    
    
    
    129
    
    
    
    257
    
    
    
    386
    
    
    
    (202
    )
    
    
    (518
    )As of December 31
    
    
    3,200
    
    
    
    17,584
    
    
    
    36,647
    
    
    
    6,651
    
    
    
    64,082
    
    
    
    41,717
    
    
    
    46,864Accumulated amortization
As of January 1
    
    
    
    
    
    
    
    
    
    
    (26,881
    )
    
    
    (5,871
    )
    
    
    (32,752
    )
    
    
    (30,707
    )
    
    
    (23,938
    )Amortization
    
    
    (311
    )
    
    
    (2,620
    )
    
    
    (5,016
    )
    
    
    (286
    )
    
    
    (8,233
    )
    
    
    (6,730
    )
    
    
    (10,956
    )Disposals and write-offs
    
    
    
    
    
    
    
    
    
    
    822
    
    
    
    
    
    
    
    822
    
    
    
    4,603
    
    
    
    3,957Currency adjustments
    
    
    
    
    
    
    
    
    
    
    (115
    )
    
    
    (204
    )
    
    
    (319
    )
    
    
    82
    
    
    
    230As of December 31
    
    
    (311
    )
    
    
    (2,620
    )
    
    
    (31,190
    )
    
    
    (6,361
    )
    
    
    (40,482
    )
    
    
    (32,752
    )
    
    
    (30,707
    )Net book value
As of December 31
    
    
    2,889
    
    
    
    14,964
    
    
    
    5,457
    
    
    
    290
    
    
    
    23,600
    
    
    
    8,965
    
    
    
    16,157
  (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Cost of sales
    
    
    4,467
    
    
    
    2,031
    
    
    
    2,182Research and development expenses
    
    
    2,082
    
    
    
    2,306
    
    
    
    6,366Selling and marketing expenses
    
    
    792
    
    
    
    893
    
    
    
    914General and administrative expenses
    
    
    892
    
    
    
    1,500
    
    
    
    1,494Restructuring expenses
    
    
    
    
    
    
    
    
    
    
    Total amortization
    
    
    8,233
    
    
    
    6,730
    
    
    
    10,956
 F-29




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##### Table of Contents



15. INVESTMENTS IN ASSOCIATES
  (in thousands of euros)2005
    
    
    2004
    
    
    2003As of January 1
    
    
    12,864
    
    
    
    19,216
    
    
    
    21,008Change in perimeter (1)
    
    
    
    
    
    
    
    
    
    
    7,090Acquisition of subsidiary (see Note 5)
    
    
    4,537
    
    
    
    
    
    
    
    Change in valuation allowance of shares in associates
    
    
    (1,314
    )
    
    
    (5,970
    )
    
    
    (7,561
    )Currency adjustments
    
    
    222
    
    
    
    (382
    )
    
    
    (1,321
    )As of December 31
    
    
    16,309
    
    
    
    12,864
    
    
    
    19,216
 
 (1)
    
    Change in perimeter comprises the impact of changes in ownership interest
leading to reclassifications between subsidiaries, available-for-sale financial assets and
investments in associates. (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Change in valuation allowance of shares in associates
    
    
    (1,314
    )
    
    
    (5,970
    )
    
    
    (7,561
    )Gain on disposal of shares in associates
    
    
    783
    
    
    
    
    
    
    
    Share of (loss) profit of associates
    
    
    (531
    )
    
    
    (5,970
    )
    
    
    (7,561
    )
  
   
  Percentage
    
    
    
    
    
    Percentageof
    
    
    
    
    
    ofName of the company
    
    Country
    
    ownership
    
    Name of the company
    
    Country
    
    ownershipLeigh Mardon Gemplus Pty Ltd
    
    Australia
    
    
    50
    %
    
    CLM GmbH & Co. KG
    
    Germany
    
    
    50
    %Solutions Fides
    
    Canada
    
    
    49
    %
    
    CLM GmbH
    
    Germany
    
    
    50
    %Atchik-Realtime A/S
    
    France
    
    
    23.8
    %
    
    Toppan Gemplus Services Co. Ltd
    
    Japan
    
    
    50
    %Welcome Realtime SA
    
    France
    
    
    49
    %
    
    Concesionaria Renave SA de CV
    
    Mexico
    
    
    20
    %Immotec Systemes SAS
    
    France
    
    
    49
    %
    
    Gemplus EDBV Smart Labs Pte Ltd
    
    Singapore
    
    
    50
    %Gkard SAS
    
    France
    
    
    50
    %
    
    Gemplus EDBV Smart Labs Management Pte Ltd
    
    Singapore
    
    
    50
    %Netsize SA
    
    France
    
    
    24
    %
    
    AB Svenska Pass
    
    Sweden
    
    
    50
    %Setelis SA
    
    France
    
    
    21.6
    %
  F-30




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##### Table of Contents



December 31, 2004
    
    
    December 31, 2003Net sales
    
    
    109,577
    
    
    
    79,209Assets
    
    
    52,232
    
    
    
    41,612Liabilities
    
    
    43,891
    
    
    
    30,530Profit (loss)
    
    
    (6,493
    )
    
    
    (10,622
    )
 16. AVAILABLE-FOR-SALE FINANCIAL ASSETS
  (in thousands of euros)As of December 31
    
    2005
    
    
    2004
    
    
    2003Investments in non-marketable equity securities
    
    
    15,680
    
    
    
    23,512
    
    
    
    18,549Provision for impairment of available-for-sale assets
    
    
    (13,211
    )
    
    
    (18,760
    )
    
    
    (17,902
    )Available-for-sale financial assets, net
    
    
    2,469
    
    
    
    4,752
    
    
    
    647
  (in thousands of euros)2005
    
    
    2004
    
    
    2003As of January 1
    
    
    4,752
    
    
    
    647
    
    
    
    2,080Additions
    
    
    424
    
    
    
    5,300
    
    
    
    1,140Acquisition of subsidiary (see Note 5)
    
    
    121
    
    
    
    
    
    
    
    Disposals
    
    
    (21
    )
    
    
    
    
    
    
    Change in valuation allowance (see Note 29)
    
    
    (2,807
    )
    
    
    (858
    )
    
    
    (2,487
    )Currency adjustments
    
    
    
    
    
    
    (337
    )
    
    
    (86
    )As of December 31
    
    
    2,469
    
    
    
    4,752
    
    
    
    647
  
 17. OTHER NON-CURRENT RECEIVABLES
  (in thousands of euros)As of December 31
    
    Notes
    
    
    2005
    
    
    2004
    
    
    2003Loans receivable from senior management, net of provision
(68,828 in 2005, 69,885 in 2004 and 69,220 in 2003)
    
    
    (37
    )
    
    
    9,937
    
    
    
    8,880
    
    
    
    9,546Research tax credit (non-current portion)
    
    
    
    
    
    
    3,805
    
    
    
    11,259
    
    
    
    10,206Rental deposits
    
    
    
    
    
    
    1,047
    
    
    
    716
    
    
    
    855Employee loans and other related loans
    
    
    
    
    
    
    699
    
    
    
    402
    
    
    
    719Prepaid expenses (non-current portion)
    
    
    
    
    
    
    916
    
    
    
    
    
    
    
    4,329Carry-back receivable from tax authority
    
    
    (20.1
    )
    
    
    22,389
    
    
    
    21,295
    
    
    
    Restricted cash (non-current portion)
    
    
    (10
    )
    
    
    150
    
    
    
    886
    
    
    
    Other loans and assets
    
    
    
    
    
    
    1,903
    
    
    
    462
    
    
    
    1,596Total other non-current receivables
    
    
    
    
    
    
    40,846
    
    
    
    43,900
    
    
    
    27,251
 F-31




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##### Table of Contents



18. CURRENT PORTION OF PROVISIONS AND OTHER LIABILITIES
  (in thousands of euros)As of December 31
    
    2005
    
    
    2004
    
    
    2003Current portion of provisions
    
    
    4,358
    
    
    
    22,196
    
    
    
    44,763Other current liabilities
    
    
    69,076
    
    
    
    28,021
    
    
    
    33,327Total
    
    
    73,434
    
    
    
    50,217
    
    
    
    78,090
  (in thousands of euros)Effect of
    
    
    
    
    
    
    Amount
    
    
    Amount
    
    
    Reclassificationchanges in
    
    
    
    
    
    
    unused
    
    
    used
    
    
    withinCurrent portion
    
    December 31,
    
    
    December 31,
    
    
    exchange
    
    
    Increase in
    
    
    during
    
    
    during the
    
    
    balance
    
    
    December 31,of provisions
    
    2003
    
    
    2004
    
    
    rate
    
    
    current liabilities
    
    
    the period
    
    
    period
    
    
    sheet items
    
    
    2005Provision for restructuring
(see Note 22)
    
    
    38,951
    
    
    
    16,619
    
    
    
    72
    
    
    
    
    
    
    
    (1,948
    )
    
    
    (11,993
    )
    
    
    850
    
    
    
    3,600Allowances for customer claims
    
    
    612
    
    
    
    377
    
    
    
    9
    
    
    
    181
    
    
    
    (115
    )
    
    
    (294
    )
    
    
    
    
    
    
    158Provision for legal action (see Note 37)
    
    
    5,200
    
    
    
    5,200
    
    
    
    
    
    
    
    600
    
    
    
    (5,200
    )
    
    
    
    
    
    
    
    
    
    
    600Total current portion of provisions
    
    
    44,763
    
    
    
    22,196
    
    
    
    81
    
    
    
    781
    
    
    
    (7,263
    )
    
    
    (12,287
    )
    
    
    850
    
    
    
    4,358
  (in thousands of euros)As of December 31
    
    2005
    
    
    2004
    
    
    2003Deferred revenue
    
    
    26,339
    
    
    
    17,317
    
    
    
    19,409Customer deposits
    
    
    5,235
    
    
    
    5,228
    
    
    
    5,690Bank overdrafts
    
    
    979
    
    
    
    1,752
    
    
    
    99Borrowings (current portion)
    
    
    118
    
    
    
    
    
    
    
    Contingent consideration related to the acquisition of Setec (see Note 5)
    
    
    30,000
    
    
    
    
    
    
    
    Other accrued liabilities
    
    
    6,405
    
    
    
    3,724
    
    
    
    8,129Total other current liabilities
    
    
    69,076
    
    
    
    28,021
    
    
    
    33,327
   F-32




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##### Table of Contents



19. CURRENT AND NON-CURRENT OBLIGATIONS UNDER FINANCE LEASES
  (in thousands of euros)Not later than 1 year
    
    
    6,595Later than 1 year and not later than 5 years
    
    
    20,903Later than 5 years
    
    
    8,313Total minimum lease payments
    
    
    35,811Less, amount representing interest
    
    
    (3,847
    )Present value of minimum obligations under finance leases
    
    
    31,964Less, current portion of obligations under finance leases
    
    
    (5,539
    )Non-current obligations under finance leases
    
    
    26,425
  (in thousands of euros)Not later than 1 year
    
    
    6,479Later than 1 year and not later than 5 years
    
    
    18,951Later than 5 years
    
    
    6,534Present value of minimum obligations under finance leases
    
    
    31,964
  
 20. NON-CURRENT PORTION OF PROVISIONS AND OTHER LIABILITIES
 20.1 Non-current portion of provisions
  (in thousands of euros)Effect of
    
    
    
    
    
    
    
    
    
    
    Amount
    
    
    Amount
    
    
    Reclassificationchanges in
    
    
    Acquisition
    
    
    Increase in
    
    
    unused
    
    
    used
    
    
    withinNon-current portion
    
    December 31,
    
    
    December 31,
    
    
    exchange
    
    
    of subsidiary
    
    
    non-current
    
    
    during
    
    
    during the
    
    
    balance
    
    
    December 31,of provisions
    
    2003
    
    
    2004
    
    
    rate
    
    
    (see Note 5)
    
    
    liabilities
    
    
    the period
    
    
    period
    
    
    sheet items
    
    
    2005Provision for patent claims
    
    
    9,000
    
    
    
    9,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000(see Note 37)
Provision for income tax claims
    
    
    41,017
    
    
    
    7,440
    
    
    
    86
    
    
    
    
    
    
    
    895
    
    
    
    (1,555
    )
    
    
    (2,238
    )
    
    
    
    
    
    
    4,628Provision for pension costs
(see Note 21)
    
    
    1,562
    
    
    
    2,845
    
    
    
    111
    
    
    
    347
    
    
    
    1,603
    
    
    
    
    
    
    
    (200
    )
    
    
    
    
    
    
    4,706Provision for restructuring
(see Note 22)
    
    
    
    
    
    
    4,036
    
    
    
    157
    
    
    
    
    
    
    
    
    
    
    
    (974
    )
    
    
    (932
    )
    
    
    (850
    )
    
    
    1,437Other provisions
    
    
    5,503
    
    
    
    2,375
    
    
    
    5
    
    
    
    1,579
    
    
    
    484
    
    
    
    (672
    )
    
    
    (629
    )
    
    
    569
    
    
    
    3,711Total
    
    
    57,082
    
    
    
    25,696
    
    
    
    359
    
    
    
    1,926
    
    
    
    2,982
    
    
    
    (3,201
    )
    
    
    (3,999
    )
    
    
    (281
    )
    
    
    23,482
 Provision for income tax claims
  F-33




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##### Table of Contents



  
  
    
 20.2 Other non-current liabilities
  (in thousands of euros)As of December 31
    
    2005
    
    
    2004
    
    
    2003Unrecognized Government grants
    
    
    2,918
    
    
    
    3,973
    
    
    
    3,618Management compensation and severance liability (see Note 37)
    
    
    9,937
    
    
    
    8,880
    
    
    
    9,546Borrowings ( non-current portion)
    
    
    562
    
    
    
    
    
    
    
    Others
    
    
    
    
    
    
    500
    
    
    
    Total other non-current liabilities
    
    
    13,417
    
    
    
    13,353
    
    
    
    13,164
 21. PENSION PLANS
   
   
   (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Current year service cost
    
    
    1,878
    
    
    
    1,418
    
    
    
    1,217Past service cost
    
    
    106
    
    
    
    
    
    
    
    Interest accrued on pension obligations
    
    
    2,166
    
    
    
    1,669
    
    
    
    1,465Actual loss (return) on plan assets
    
    
    (3,709
    )
    
    
    (1,612
    )
    
    
    (2,049
    )Net amortization and deferral
    
    
    2,790
    
    
    
    763
    
    
    
    1,285Total pension costs
    
    
    3,230
    
    
    
    2,238
    
    
    
    1,918
 F-34




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##### Table of Contents



(in thousands of euros)As of December 31
    
    2005
    
    
    2004
    
    
    2003Accumulated benefit obligation
    
    
    46,384
    
    
    
    34,896
    
    
    
    30,141Projected benefit obligation
    
    
    49,778
    
    
    
    36,981
    
    
    
    30,666Plan assets at fair value
    
    
    26,713
    
    
    
    19,509
    
    
    
    16,828Projected benefit obligation in excess of plan assets
    
    
    (23,065
    )
    
    
    (17,472
    )
    
    
    (13,838
    )Unrecognized net loss
    
    
    18,360
    
    
    
    14,627
    
    
    
    11,681Net payable pension cost(see Note 20.1)
    
    
    (4,706
    )
    
    
    (2,845
    )
    
    
    (2,157
    )
  As of December 31
    
    2005
    
    
    2004
    
    
    2003Discount rate
    
    
    4.00% - 4.75
    %
    
    
    5.00% - 5.25
    %
    
    
    4.50% - 5.50
    %Expected rate of return on plan assets
    
    
    5.25% - 7.00
    %
    
    
    7.00
    %
    
    
    7.00
    %Assumed rate of compensation increase
    
    
    3.00% - 3.75
    %
    
    
    3.00% - 3.75
    %
    
    
    3.00% - 3.75
    %
   (in thousands of euros)2005
    
    
    2004
    
    
    2003Projected benefit obligation as of January 1
    
    
    36,981
    
    
    
    30,666
    
    
    
    29,524Service cost
    
    
    1,878
    
    
    
    1,418
    
    
    
    1,217Interest cost
    
    
    2,166
    
    
    
    1,669
    
    
    
    1,465Acquisition of subsidiary
    
    
    2,330
    
    
    
    
    
    
    
    Plan participants contributions
    
    
    387
    
    
    
    400
    
    
    
    444Actuarial (gain) loss
    
    
    6,016
    
    
    
    3,747
    
    
    
    1,037Benefits paid
    
    
    (888
    )
    
    
    (738
    )
    
    
    (662
    )Currency adjustments
    
    
    908
    
    
    
    (181
    )
    
    
    (2,359
    )Projected benefit obligation as of December 31
    
    
    49,778
    
    
    
    36,981
    
    
    
    30,666
 (in thousands of euros)2005
    
    
    2004
    
    
    2003Fair value of plan assets as of January 1
    
    
    19,509
    
    
    
    16,828
    
    
    
    15,233Actual return on plan assets
    
    
    3,709
    
    
    
    1,612
    
    
    
    2,049Employer contribution
    
    
    1,540
    
    
    
    1,488
    
    
    
    1,045Plan participants contributions
    
    
    387
    
    
    
    400
    
    
    
    444Benefits paid
    
    
    (889
    )
    
    
    (738
    )
    
    
    (662
    )Acquisition on subsidiary
    
    
    1,983
    
    
    
    
    
    
    
    Currency adjustments
    
    
    474
    
    
    
    (81
    )
    
    
    (1,281
    )Fair value of plan assets as of December 31
    
    
    26,713
    
    
    
    19,509
    
    
    
    16,828
 F-35




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##### Table of Contents



22. RESTRUCTURING
  (in thousands of euros)Effect
    
    
    
    
    
    
    Amount
    
    
    AmountProvision for reduction
    
    
    
    
    
    of changes
    
    
    
    
    
    
    unused
    
    
    used
    
    
    Reclassificationof workforce and
    
    January 1,
    
    
    in exchange
    
    
    Increase in
    
    
    during
    
    
    during
    
    
    within balance
    
    
    December 31,other cash outflows
    
    2003
    
    
    rate
    
    
    provision
    
    
    the period
    
    
    the period
    
    
    sheet items
    
    
    2003May 2001 restructuring program
    
    
    2,058
    
    
    
    (263
    )
    
    
    89
    
    
    
    
    
    
    
    (881
    )
    
    
    
    
    
    
    1,003February 2002 restructuring program
    
    
    38,605
    
    
    
    (817
    )
    
    
    246
    
    
    
    (170
    )
    
    
    (27,247
    )
    
    
    
    
    
    
    10,617December 2002 restructuring program
    
    
    312
    
    
    
    (38
    )
    
    
    54,848
    
    
    
    
    
    
    
    (27,791
    )
    
    
    
    
    
    
    27,331Total
    
    
    40,975
    
    
    
    (1,118
    )
    
    
    55,183
    
    
    
    (170
    )
    
    
    (55,919
    )
    
    
    
    
    
    
    38,951Including:Current portion (see Note 18)
    
    
    40,975
    
    
    
    (1,118
    )
    
    
    55,183
    
    
    
    (170
    )
    
    
    (55,919
    )
    
    
    
    
    
    
    38,951Non-current portion (see Note 20)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    40,975
    
    
    
    (1,118
    )
    
    
    55,183
    
    
    
    (170
    )
    
    
    (55,919
    )
    
    
    
    
    
    
    38,951
 (in thousands of euros)Effect
    
    
    
    
    
    
    Amount
    
    
    AmountProvision for reduction
    
    
    
    
    
    of changes
    
    
    
    
    
    
    unused
    
    
    used
    
    
    Reclassificationof workforce and
    
    January 1,
    
    
    in exchange
    
    
    Increase in
    
    
    during
    
    
    during
    
    
    within balance
    
    
    December 31,other cash outflows
    
    2004
    
    
    rate
    
    
    provision
    
    
    the period
    
    
    the period
    
    
    sheet items
    
    
    2004May 2001 restructuring program
    
    
    1,003
    
    
    
    7
    
    
    
    
    
    
    
    (312
    )
    
    
    (589
    )
    
    
    
    
    
    
    109February 2002 restructuring program
    
    
    10,617
    
    
    
    (9
    )
    
    
    143
    
    
    
    (5,579
    )
    
    
    (2,134
    )
    
    
    
    
    
    
    3,038December 2002 restructuring program
    
    
    27,331
    
    
    
    13
    
    
    
    16,395
    
    
    
    (3,664
    )
    
    
    (22,567
    )
    
    
    
    
    
    
    17,508Total
    
    
    38,951
    
    
    
    11
    
    
    
    16,538
    
    
    
    (9,555
    )
    
    
    (25,290
    )
    
    
    
    
    
    
    20,655Including:Current portion (see Note 18)
    
    
    38,951
    
    
    
    12
    
    
    
    15,402
    
    
    
    (9,555
    )
    
    
    (25,290
    )
    
    
    (2,901
    )
    
    
    16,619Non-current portion (see Note 20)
    
    
    
    
    
    
    (1
    )
    
    
    1,136
    
    
    
    
    
    
    
    
    
    
    
    2,901
    
    
    
    4,036Total
    
    
    38,951
    
    
    
    11
    
    
    
    16,538
    
    
    
    (9,555
    )
    
    
    (25,290
    )
    
    
    
    
    
    
    20,655
 (in thousands of euros)Effect
    
    
    
    
    
    
    Amount
    
    
    AmountProvision for reduction
    
    
    
    
    
    of changes
    
    
    
    
    
    
    unused
    
    
    used
    
    
    Reclassificationof workforce and
    
    January 1,
    
    
    in exchange
    
    
    Increase in
    
    
    during
    
    
    during
    
    
    within balance
    
    
    December 31,other cash outflows
    
    2005
    
    
    rate
    
    
    provision
    
    
    the period
    
    
    the period
    
    
    sheet items
    
    
    2005May 2001 restructuring program
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47
    )
    
    
    
    
    
    
    62February 2002 restructuring program
    
    
    3,038
    
    
    
    186
    
    
    
    
    
    
    
    (670
    )
    
    
    (744
    )
    
    
    (403
    )
    
    
    1,407December 2002 restructuring program
    
    
    17,508
    
    
    
    43
    
    
    
    
    
    
    
    (2,252
    )
    
    
    (12,134
    )
    
    
    403
    
    
    
    3,568Total
    
    
    20,655
    
    
    
    229
    
    
    
    
    
    
    
    (2,922
    )
    
    
    (12,925
    )
    
    
    
    
    
    
    5,037Including:Current portion (see Note 18)
    
    
    16,619
    
    
    
    72
    
    
    
    
    
    
    
    (1,948
    )
    
    
    (11,993
    )
    
    
    850
    
    
    
    3,600Non-current portion (see Note 20)
    
    
    4,036
    
    
    
    157
    
    
    
    
    
    
    
    (974
    )
    
    
    (932
    )
    
    
    (850
    )
    
    
    1,437Total
    
    
    20,655
    
    
    
    229
    
    
    
    
    
    
    
    (2,922
    )
    
    
    (12,925
    )
    
    
    
    
    
    
    5,037
 F-36




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##### Table of Contents



(in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Reduction of workforce and other cash outflowsRestructuring expenses
    
    
    
    
    
    
    16,538
    
    
    
    55,183Release of unused provisions
    
    
    (2,922
    )
    
    
    (9,555
    )
    
    
    (170
    )Total
    
    
    (2,922
    )
    
    
    6,983
    
    
    
    55,013Non-cash write-offs of assetsRestructuring expenses
    
    
    
    
    
    
    3,695
    
    
    
    9,515Release of unused provisions
    
    
    (313
    )
    
    
    (2,294
    )
    
    
    (2,555
    )Total
    
    
    (313
    )
    
    
    1,401
    
    
    
    6,960Total restructuring (reversals)expenses
    
    
    (3,235
    )
    
    
    8,384
    
    
    
    61,973
   23. SHAREHOLDERS EQUITY
 23.1 Ordinary shares
 
  
 23.2 Contribution of Gemplus SA shares and issuance of shares following stock option
exercise
  F-37




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##### Table of Contents



23.3 Treasury shares
      Number of treasury sharesAs of December 31, 2002
    
    
    31,727,101Cancellation of treasury shares
    
    
    (30,743,679
    )Purchase of shares pursuant to the 2000 Celocom Limited share purchase agreement
    
    
    487,957As of December 31, 2003
    
    
    1,471,379Sale of treasury shares
    
    
    (28,664
    )As of December 31, 2004
    
    
    1,442,715Grant of restricted shares
    
    
    (500,000
    )As of December 31, 2005
    
    
    942,715
  Number of shares outstanding
    
    
    630,369,279Gemplus SA shares to be contributed (1)
    
    
    511,700Number of shares outstanding including shares to be contributed
    
    
    630,880,979Treasury shares
    
    
    (942,715
    )Basic number of shares outstanding
    
    
    629,938,264Options outstanding
    
    
    78,526,053Warrants outstanding
    
    
    2,561,973Number of shares on a fully diluted basis
    
    
    711,026,290
 F-38




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##### Table of Contents



(1)
    
    This number of shares includes Gemplus SA shares issued following the
exercise of Gemplus SA stock options until December 31, 2005, but that have not yet been
recorded by the Gemplus SA Board of Directors, being specified that part of those shares
(1,240,200) have been contributed to Gemplus International SA, in exchange for shares in
Gemplus International SA.  23.4 Additional paid-in capital
   
 24. STOCK OPTION PLANS
      
 F-39




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##### Table of Contents



Number of optionsauthorized not
    
    
    Number of options
    
    
    
    
    
    
    Average Priceyet granted
    
    
    outstanding
    
    
    Price per share
    
    
    per shareBalances, 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 lapsed
    
    
    
    
    
    
    (10,500
    )
    
    
    0.83
    
    
    
    Options forfeited
    
    
    2,243,169
    
    
    
    (9,675,019
    )
    
    
    0.83 -   6.00
    
    
    
    2.52Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances, December 31, 2003
    
    
    55,238,250
    
    
    
    82,274,913
    
    
    
    0.83 -   6.00
    
    
    
    1.98Options exercised
    
    
    
    
    
    
    (1,169,457
    )
    
    
    0.83 -   1.71
    
    
    
    1.26Options granted
    
    
    (3,200,000
    )
    
    
    3,200,000
    
    
    
    1.45 -   1.82
    
    
    
    1.66Options lapsed
    
    
    
    
    
    
    (65,000
    )
    
    
    1.35
    
    
    
    Options forfeited
    
    
    2,598,602
    
    
    
    (10,168,141
    )
    
    
    0.96 -   6.00
    
    
    
    2.63Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances, December 31, 2004
    
    
    54,636,852
    
    
    
    74,072,315
    
    
    
    0.83 -   6.00
    
    
    
    1.88Options exercised
    
    
    
    
    
    
    (2,158,526
    )
    
    
    0.96 -   1.71
    
    
    
    1.29Options granted
    
    
    (12,363,140
    )
    
    
    12,363,140
    
    
    
    1.73 -   2.02
    
    
    
    1.89Options lapsed
    
    
    
    
    
    
    (74,150
    )
    
    
    1.52
    
    
    
    Options forfeited
    
    
    3,546,565
    
    
    
    (5,676,726
    )
    
    
    0.96 -   6.00
    
    
    
    2.13Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances, December 31, 2005
    
    
    45,820,277
    
    
    
    78,526,053
    
    
    
    0.83 -   6.00
    
    
    
    1.88
 F-40




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##### Table of Contents



Number
    
    
    Weighted
    
    
    NumberExercise prices
    
    
    of options
    
    
    average remaining
    
    
    of options(ineuros)
    
    
    outstanding
    
    
    contractual life (years)
    
    
    exercisable0.83
    
    
    
    2,000,000
    
    
    
    7.6
    
    
    
    1,000,0000.84
    
    
    
    8,000,000
    
    
    
    6.7
    
    
    
    6,000,0000.96
    
    
    
    50,000
    
    
    
    7.3
    
    
    
    50,0001.13
    
    
    
    11,144,664
    
    
    
    6.9
    
    
    
    6,899,1431.14
    
    
    
    20,000
    
    
    
    6.6
    
    
    
    15,0001.23
    
    
    
    1,700,000
    
    
    
    7.6
    
    
    
    875,0001.24
    
    
    
    247,875
    
    
    
    7.6
    
    
    
    52,9231.25
    
    
    
    200,000
    
    
    
    7.5
    
    
    
    100,0001.28
    
    
    
    133,250
    
    
    
    6.7
    
    
    
    89,3501.42
    
    
    
    1,000,000
    
    
    
    6.5
    
    
    
    750,0001.45
    
    
    
    400,000
    
    
    
    8.3
    
    
    
    100,0001.46
    
    
    
    4,038,125
    
    
    
    7.8
    
    
    
    1,550,6251.49
    
    
    
    40,000
    
    
    
    7.8
    
    
    
    20,0001.52
    
    
    
    6,366,400
    
    
    
    7.5
    
    
    
    3,123,9001.58
    
    
    
    1,000,000
    
    
    
    8.4
    
    
    
    250,0001.66
    
    
    
    550,000
    
    
    
    8.8
    
    
    
    137,5001.71
    
    
    
    2,851,700
    
    
    
    2.0
    
    
    
    2,851,7001.73
    
    
    
    1,365,000
    
    
    
    9.4
    
    
    
    1.77
    
    
    
    3,946,800
    
    
    
    9.4
    
    
    
    1.79
    
    
    
    1,000,000
    
    
    
    8.3
    
    
    
    250,0001.82
    
    
    
    650,000
    
    
    
    8.9
    
    
    
    62,5001.99
    
    
    
    39,000
    
    
    
    9.7
    
    
    
    2.00
    
    
    
    5,250,000
    
    
    
    9.4
    
    
    
    2.02
    
    
    
    400,000
    
    
    
    9.7
    
    
    
    2.25
    
    
    
    4,000,000
    
    
    
    6.7
    
    
    
    3,000,0002.29
    
    
    
    12,531,650
    
    
    
    3.3      1
    
    
    
    2,531,6502.60
    
    
    
    74,200
    
    
    
    6.1
    
    
    
    55,6502.68
    
    
    
    235,900
    
    
    
    6.1
    
    
    
    176,9252.87
    
    
    
    15,500
    
    
    
    5.8
    
    
    
    15,5002.90
    
    
    
    376,400
    
    
    
    5.7
    
    
    
    376,4003.17
    
    
    
    35,000
    
    
    
    5.9
    
    
    
    35,0003.18
    
    
    
    50,000
    
    
    
    5.9
    
    
    
    50,0003.51
    
    
    
    6,797,250
    
    
    
    4.5
    
    
    
    6,797,2503.79
    
    
    
    301,213
    
    
    
    5.5
    
    
    
    301,2134.14
    
    
    
    4,650
    
    
    
    5.5
    
    
    
    4,6506.00
    
    
    
    1,711,476
    
    
    
    4.9
    
    
    
    1,711,47678,526,053
    
    
    
    6.4
    
    
    
    49,233,355Weighted average exercise price (options outstanding):
    
    
    
    
    
    
    1.88Weighted average exercise price (options exercisable):
    
    
    
    
    
    
    2.07
  
 F-41




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##### Table of Contents



AverageAverage
    
    
    Gemplus stock
    
    
    Average stock
    
    
    Average risk-contractual
    
    
    price on grant
    
    
    option exercise
    
    
    free interest
    
    
    Averagematurity
    
    
    date
    
    
    price
    
    
    rate
    
    
    volatilityStock options granted in 2002
    
    10 years
    
    
    1.13
    
    
    
    1.13
    
    
    
    3.30
    %
    
    
    53
    %Stock options granted in 2003
    
    10 years
    
    
    1.29
    
    
    
    1.25
    
    
    
    2.34
    %
    
    
    43
    %Stock options granted in 2004
    
    10 years
    
    
    1.79
    
    
    
    1.66
    
    
    
    2.64
    %
    
    
    38
    %Stock options granted in 2005
    
    10 years
    
    
    1.84
    
    
    
    1.89
    
    
    
    2.78
    %
    
    
    34
    %
   Warrants
 
 25. COMPREHENSIVE INCOME
   (in thousands of euros)As of December 31
    
    2005
    
    
    2004
    
    
    2003Cumulative translation adjustment
    
    
    (3,284
    )
    
    
    (16,411
    )
    
    
    (6,460
    )Net unrealized gain (loss) on hedging instruments
qualifying as effective
    
    
    (1,123
    )
    
    
    28,367
    
    
    
    11,030Other comprehensive income
    
    
    (4,407
    )
    
    
    11,956
    
    
    
    4,570
 F-42




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##### Table of Contents



(in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Net income (loss)
    
    
    91,398
    
    
    
    6,291
    
    
    
    (158,955
    )Change in cumulative translation adjustment
    
    
    13,127
    
    
    
    (9,951
    )
    
    
    (8,333
    )Change in fair value of derivatives qualifying
as effective hedging instruments
    
    
    (29,490
    )
    
    
    17,337
    
    
    
    4,332Change in cumulative other comprehensive income
    
    
    (16,363
    )
    
    
    7,386
    
    
    
    (4,001
    )Comprehensive net income (loss)
    
    
    75,035
    
    
    
    13,677
    
    
    
    (162,956
    )
 26. NET SALES
  (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Sales of goods
    
    
    900,357
    
    
    
    826,644
    
    
    
    711,323Sales of services
    
    
    36,658
    
    
    
    35,591
    
    
    
    34,218Other net sales
    
    
    1,860
    
    
    
    2,799
    
    
    
    3,662Total net sales
    
    
    938,875
    
    
    
    865,034
    
    
    
    749,203
  27. EXPENSES BY NATURE
  (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Depreciation, amortization and impairment
    
    
    (41,369
    )
    
    
    (56,691
    )
    
    
    (95,071
    )External labor costs
    
    
    (19,258
    )
    
    
    (41,212
    )
    
    
    (28,254
    )Employee benefit expenses
    
    
    (281,176
    )
    
    
    (263,005
    )
    
    
    (276,507
    )Material costs
    
    
    (367,135
    )
    
    
    (327,080
    )
    
    
    (285,146
    )Other expenses
    
    
    (163,182
    )
    
    
    (150,728
    )
    
    
    (198,011
    )Total expenses
    
    
    (872,120
    )
    
    
    (838,716
    )
    
    
    (882,989
    )
  (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Wages and salaries
    
    
    (255,987
    )
    
    
    (246,588
    )
    
    
    (259,670
    )Pension benefits  Defined contribution plans
    
    
    (11,850
    )
    
    
    (8,922
    )
    
    
    (9,580
    )Pension benefits  Defined benefit plans (see Note 21)
    
    
    (3,230
    )
    
    
    (2,238
    )
    
    
    (1,918
    )Share-based compensation expense (1)
    
    
    (4,320
    )
    
    
    
    
    
    
    Other expenses
    
    
    (5,789
    )
    
    
    (5,257
    )
    
    
    (5,339
    )Total employee benefit expenses
    
    
    (281,176
    )
    
    
    (263,005
    )
    
    
    (276,507
    )
 
 (1)
    
    The Company has adopted IFRS 2 Share-based Payments starting January 1, 2005.  F-43




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##### Table of Contents



28. FINANCIAL INCOME AND EXPENSE, NET
  (in thousands of euros)Years ended December 31
    
    2004
    
    
    2004
    
    
    2003Financial income
    
    
    8,821
    
    
    
    8,245
    
    
    
    10,484Financial expense
    
    
    (1,162
    )
    
    
    (2,592
    )
    
    
    (2,280
    )Financial income (expense), net
    
    
    7,659
    
    
    
    5,653
    
    
    
    (8,204
    )
   29. OTHER NON-OPERATING INCOME AND EXPENSE, NET
  (in thousands of euros)Years ended December 31
    
    Notes
    
    
    2005
    
    
    2004
    
    
    2003Change in valuation allowance of available-for-sale financial assets
    
    
    (16
    )
    
    
    (2,807
    )
    
    
    (858
    )
    
    
    (2,487
    )Gain on disposal of available-for-sale financial assets
    
    
    (16
    )
    
    
    4,782
    
    
    
    
    
    
    
    Net foreign exchange gains (losses)
    
    
    (31
    )
    
    
    (4,276
    )
    
    
    (5,900
    )
    
    
    (8,652
    )Other non-operating income and expense, net
    
    
    
    
    
    
    (2,301
    )
    
    
    (6,758
    )
    
    
    (11,139
    )
  30. INCOME TAX EXPENSE
  (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Current taxes
    
    
    (7,035
    )
    
    
    (9,292
    )
    
    
    (3,329
    )Deferred taxes
    
    
    26,851
    
    
    
    (3,661
    )
    
    
    (11,344
    )Total income tax benefit (expense)
    
    
    19,816
    
    
    
    (12,953
    )
    
    
    (14,673
    )
 F-44




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##### Table of Contents



(in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Income (loss) before taxes
    
    
    71,582
    
    
    
    19,244
    
    
    
    (144,282
    )Income tax calculated at corporate tax rate (1)
    
    
    (21,746
    )
    
    
    (5,846
    )
    
    
    43,833Effect of tax exemption
    
    
    6,668
    
    
    
    1,174
    
    
    
    5,438Effect of different tax rates
    
    
    8,853
    
    
    
    4,679
    
    
    
    12,053Effect of utilization of unrecognized tax assets
    
    
    9,245
    
    
    
    9,706
    
    
    
    1,854Effect of the reassessment of the recognition of deferred tax assets
    
    
    25,767
    
    
    
    (2,901
    )
    
    
    (8,648
    )Effect of unrecognized tax assets
    
    
    (6,474
    )
    
    
    (12,829
    )
    
    
    (53,689
    )Provision for tax risks (see Note 20)
    
    
    660
    
    
    
    (1,559
    )
    
    
    186Discounting of carry back receivable (see Note 20)
    
    
    
    
    
    
    (3,018
    )
    
    
    Effect of expenses non deductible and revenues non taxable and others
    
    
    (3,157
    )
    
    
    (14
    )
    
    
    (5,659
    )Effect of goodwill amortization resulting from
mergers and acquisitions
    
    
    
    
    
    
    (2,345
    )
    
    
    (10,041
    )Income tax benefit (expense)
    
    
    19,816
    
    
    
    (12,953
    )
    
    
    (14,673
    )
 
 (1)
    
    Luxemburg tax rate of 30.38% in 2005, 2004 and 2003.    (in thousands of euros)As of December 31
    
    2005
    
    
    2004
    
    
    2003ASSETSLoss carryforwards
    
    
    24,104
    
    
    
    3,098
    
    
    
    29,223Excess book over tax depreciation and amortization
    
    
    1,844
    
    
    
    1,091
    
    
    
    1,585Other temporary differences
    
    
    10,021
    
    
    
    2,253
    
    
    
    1,635Total(1)
    
    
    35,969
    
    
    
    6,442
    
    
    
    32,443To be recovered after more than 12 months
    
    
    26,922
    
    
    
    3,621
    
    
    
    29,163To be recovered within 12 months
    
    
    9,047
    
    
    
    2,821
    
    
    
    3,280LIABILITIESExcess tax over book depreciation and amortization
    
    
    (7,121
    )
    
    
    (178
    )
    
    
    (294
    )Other temporary differences
    
    
    (414
    )
    
    
    
    
    
    
    (289
    )Total
    
    
    (7,535
    )
    
    
    (178
    )
    
    
    (583
    )Payable after more than 12 months
    
    
    (7,121
    )
    
    
    (178
    )
    
    
    (294
    )Payable within 12 months
    
    
    (414
    )
    
    
    
    
    
    
    (289
    )Deferred tax assets, net
    
    
    28,434
    
    
    
    6,264
    
    
    
    31,860Deferred tax assets
    
    
    32,788
    
    
    
    6,264
    
    
    
    31,860Deferred tax liabilities
    
    
    4,354
    
    
    
    
    
    
    
    
 
 (1)
    
    Unrecognized deferred tax assets amounted to  307,905 thousand at December
31, 2005 ( 328,339 thousand and  212,368 thousand at December 31, 2004 and 2003,
respectively). F-45




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##### Table of Contents



(in thousands of euros)2005
    
    
    2004As of January 1
    
    
    6,264
    
    
    
    31,860Income statement benefit (charge)
    
    
    26,851
    
    
    
    (3,661
    )Acquisition of subsidiaries
    
    
    (5,550
    )Impact of tax loss carryback election (see Note 20)
    
    
    
    
    
    
    (24,040
    )Other balance sheet reclassifications
    
    
    511
    
    
    
    2,178Exchange differences
    
    
    358
    
    
    
    (73
    )As of December 31
    
    
    28,434
    
    
    
    6,264
 Loss carryforwards
  Taxes on undistributed earnings
  F-46




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##### Table of Contents



31. NET FOREIGN EXCHANGE GAINS (LOSSES)
  (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Net sales
    
    
    8,580
    
    
    
    
    
    
    
    Cost of sales
    
    
    
    
    
    
    15,204
    
    
    
    12,494Research and development expenses
    
    
    
    
    
    
    
    
    
    
    Selling and marketing expenses
    
    
    
    
    
    
    
    
    
    
    General and administration expenses
    
    
    
    
    
    
    
    
    
    
    Other non-operating income (expense), net (see Note 29)
    
    
    (4,276
    )
    
    
    (5,900
    )
    
    
    (8,652
    )Total net foreign exchange gains (losses)
    
    
    4,304
    
    
    
    9,304
    
    
    
    3,842
   32. NET INCOME (LOSS) PER SHARE CALCULATION
    (in thousands of euros, except shares and per share data)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Net income (loss) attributable to equity holders
of the Company (numerator)
    
    
    89,890
    
    
    
    4,674
    
    
    
    (161,107
    )Shares used in basic net income (loss) per share
calculation (denominator):Weighted average number of common shares
outstanding
    
    
    618,337,539
    
    
    
    606,672,060
    
    
    
    605,658,965Dilutive effect of stock options
    
    
    16,457,030
    
    
    
    12,350,412
    
    
    
    5,625,142Weighted average diluted number of shares
outstanding
    
    
    634,794,569
    
    
    
    619,022,472
    
    
    
    611,284,107Shares used in diluted net income (loss) per share
(denominator)
    
    
    634,794,569
    
    
    
    619,022,472
    
    
    
    605,658,965Net income (loss) per share attributable to
equity holders of the Company (in euros)Basic
    
    
    0.15
    
    
    
    0.01
    
    
    
    (0.27
    )Diluted
    
    
    0.14
    
    
    
    0.01
    
    
    
    (0.27
    )
 F-47




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##### Table of Contents



33. SEGMENT INFORMATION
 33.1 Primary reporting format  operating segments
         (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Net salesTelecommunications
    
    
    654,516
    
    
    
    641,775
    
    
    
    542,534Financial Services
    
    
    202,870
    
    
    
    182,237
    
    
    
    168,167Identity and Security
    
    
    81,489
    
    
    
    41,022
    
    
    
    38,502Net sales
    
    
    938,875
    
    
    
    865,034
    
    
    
    749,203Gross profitTelecommunications
    
    
    241,517
    
    
    
    220,781
    
    
    
    166,776Financial Services
    
    
    41,873
    
    
    
    37,672
    
    
    
    31,951Identity and Security
    
    
    26,518
    
    
    
    12,048
    
    
    
    8,529Gross profit
    
    
    309,908
    
    
    
    270,501
    
    
    
    207,256Operating expensesTelecommunications
    
    
    (158,657
    )
    
    
    (148,982
    )
    
    
    (196,123
    )Financial Services
    
    
    (43,198
    )
    
    
    (63,948
    )
    
    
    (88,527
    )Identity and Security
    
    
    (41,298
    )
    
    
    (31,253
    )
    
    
    (56,392
    )Operating expenses
    
    
    (243,153
    )
    
    
    (244,183
    )
    
    
    (341,042
    )Operating income (loss)Telecommunications
    
    
    82,859
    
    
    
    71,799
    
    
    
    (29,347
    )Financial Services
    
    
    (1,325
    )
    
    
    (26,276
    )
    
    
    (56,576
    )Identity and Security
    
    
    (14,779
    )
    
    
    (19,205
    )
    
    
    (47,863
    )Operating income (loss)
    
    
    66,755
    
    
    
    26,318
    
    
    
    (133,786
    )
 F-48




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33.2 Secondary reporting format  geographical segments
   (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Europe, Middle East and Africa
    
    
    491,050
    
    
    
    443,141
    
    
    
    407,718Asia
    
    
    172,649
    
    
    
    194,292
    
    
    
    171,860Americas
    
    
    275,176
    
    
    
    227,601
    
    
    
    169,625Net sales
    
    
    938,875
    
    
    
    865,034
    
    
    
    749,203
  34. DIVIDENDS PER SHARE
  35. FINANCIAL ASSETS AND LIABILITIES AT FAIR MARKET VALUE
  36. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Cash paid for:Interest
    
    
    1,666
    
    
    
    1,987
    
    
    
    3,069Income taxes
    
    
    9,591
    
    
    
    36,206
    
    
    
    3,651
  (in thousands of euros)Acquisition ofAs of January 1,
    
    
    Change in
    
    
    Currency
    
    
    subsidiary
    
    
    
    
    
    
    As of December 31,2005
    
    
    working capital
    
    
    adjustments
    
    
    (see Note 5)
    
    
    Transfers
    
    
    2005Trade accounts receivable, net
    
    
    (148,512
    )
    
    
    (15,590
    )
    
    
    (9,010
    )
    
    
    (9,910
    )
    
    
    
    
    
    
    (183,022
    )Related current liabilities
    
    
    22,545
    
    
    
    3,457
    
    
    
    893
    
    
    
    4,679
    
    
    
    
    
    
    
    31,574Trade accounts receivable and
related current liabilities
    
    
    (125,967
    )
    
    
    (12,133
    )
    
    
    (8,117
    )
    
    
    (5,231
    )
    
    
    
    
    
    
    (151,448
    )
 F-49




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(in thousands of euros)Change in
    
    
    
    
    
    
    AcquisitionAs of January 1,
    
    
    Change in
    
    
    non-trade
    
    
    Currency
    
    
    of subsidiary
    
    
    
    
    
    
    As of December 31,2005
    
    
    working capital
    
    
    accounts payable
    
    
    adjustments
    
    
    (see Note 5)
    
    
    Transfers
    
    
    2005Trade accounts payable net
    
    
    94,025
    
    
    
    3,589
    
    
    
    155
    
    
    
    2,146
    
    
    
    5,303
    
    
    
    867
    
    
    
    106,085Related current assets
    
    
    (12,548
    )
    
    
    (2,767
    )
    
    
    (674
    )
    
    
    (402
    )
    
    
    (1,294
    )
    
    
    398
    
    
    
    (17,287
    )Trade accounts payable and
related current assets
    
    
    81,477
    
    
    
    822
    
    
    
    (519
    )
    
    
    1,744
    
    
    
    4,009
    
    
    
    1,265
    
    
    
    88,798
  (in thousands of euros)Change in
    
    
    
    
    
    
    AcquisitionAs of January 1,
    
    
    working
    
    
    Currency
    
    
    of subsidiary
    
    
    
    
    
    
    As of December 31,2005
    
    
    capital
    
    
    adjustments
    
    
    (see Note 5)
    
    
    Transfers
    
    
    2005Inventories
    
    
    (115,610
    )
    
    
    22,661
    
    
    
    (4,394
    )
    
    
    (10,330
    )
    
    
    
    
    
    
    (107,673
    )
  (in thousands of euros)Change inAs of January 1,
    
    
    working
    
    
    Currency
    
    
    Acquisition
    
    
    
    
    
    
    As of December 31,2005
    
    
    capital
    
    
    adjustments
    
    
    of subsidiary
    
    
    Transfers
    
    
    2005Salaries, wages
    
    
    55,198
    
    
    
    2,437
    
    
    
    1,335
    
    
    
    3,844
    
    
    
    (76
    )
    
    
    62,738Other operating (assets) and liabilities
    
    
    (4,191
    )
    
    
    1,992
    
    
    
    (554
    )
    
    
    291
    
    
    
    (1,556
    )
    
    
    (4,018
    )Salaries, wages and other
    
    
    51,007
    
    
    
    4,429
    
    
    
    781
    
    
    
    4,135
    
    
    
    (1,632
    )
    
    
    58,720
  (in thousands of euros)Years ended December 31
    
    Notes
    
    
    2005
    
    
    2004
    
    
    2003Property, plant and equipment, depreciation
    
    
    (11
    )
    
    
    33,136
    
    
    
    42,243
    
    
    
    51,064Goodwill amortization and impairment
    
    
    (12
    )
    
    
    
    
    
    
    7,718
    
    
    
    33,051Other intangible assets depreciation
    
    
    (14
    )
    
    
    8,233
    
    
    
    6,730
    
    
    
    10,956Depreciation, amortization and impairment
    
    
    
    
    
    
    41,369
    
    
    
    56,691
    
    
    
    95,071
  (in thousands of euros)Change inAs of January 1,
    
    
    working
    
    
    Currency
    
    
    Acquisition
    
    
    
    
    
    
    As of December 31,2005
    
    
    capital
    
    
    adjustments
    
    
    of subsidiary
    
    
    Transfers
    
    
    2005Value-added and income taxes
    
    
    4,175
    
    
    
    (1,021
    )
    
    
    95
    
    
    
    2,800
    
    
    
    (699
    )
    
    
    5,350
 F-50




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37. COMMITMENTS AND CONTINGENCIES
 Legal proceedings
       F-51




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Contractual obligations
   Schedule of payments
    (in thousands of euros)Contractual obligationsas of December 31, 2005
    
    Total
    
    
    Less than 1 year
    
    
    1 to 5 years
    
    
    More than 5 yearsBorrowings
    
    
    725
    
    
    
    131
    
    
    
    512
    
    
    
    82Finance lease obligations
    
    
    35,811
    
    
    
    6,595
    
    
    
    20,903
    
    
    
    8,313Operating lease obligations
    
    
    35,778
    
    
    
    10,123
    
    
    
    16,004
    
    
    
    9,651Purchase obligations (1)
    
    
    114,506
    
    
    
    110,612
    
    
    
    3,894
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    186,820
    
    
    
    127,461
    
    
    
    41,313
    
    
    
    18,046
 
 (1)
    
    Including  69,400 thousand related to microprocessor chips purchase commitments. Schedule of payments
    (in thousands of euros)Contractual obligationsas of December 31, 2004
    
    Total
    
    
    Less than 1 year
    
    
    1 to 5 years
    
    
    More than 5 yearsBorrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Finance lease obligations
    
    
    44,549
    
    
    
    7,235
    
    
    
    25,392
    
    
    
    11,922Operating lease obligations
    
    
    18,412
    
    
    
    3,894
    
    
    
    6,119
    
    
    
    8,399Purchase obligations (2)
    
    
    60,934
    
    
    
    60,934
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    123,895
    
    
    
    72,063
    
    
    
    31,511
    
    
    
    20,321
 
 (2)
    
    Including  46,800 thousand related to microprocessor chips purchase commitments. Schedule of payments
    (in thousands of euros)Contractual obligationsas of December 31, 2003
    
    Total
    
    
    Less than 1 year
    
    
    1 to 5 years
    
    
    More than 5 yearsBorrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Finance lease obligations
    
    
    51,151
    
    
    
    7,377
    
    
    
    25,961
    
    
    
    17,813Operating lease obligations
    
    
    16,098
    
    
    
    5,187
    
    
    
    7,446
    
    
    
    3,465Purchase obligations(3)
    
    
    79,202
    
    
    
    78,106
    
    
    
    1,096
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    146,451
    
    
    
    90,670
    
    
    
    34,503
    
    
    
    21,278
 
 (3)
    
    Including  54,500 thousand related to microprocessor chips purchase commitments.  F-52




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Off-balance sheet arrangements
   (in thousands of euros)As of December 31
    
    2005
    
    
    2004
    
    
    2003Performance, down payment and bid bonds
    
    
    11,670
    
    
    
    10,340
    
    
    
    10,817Other bank guarantees related to operations
    
    
    2,514
    
    
    
    3,811
    
    
    
    6,518Total bank guarantees issued to third party
    
    
    14,184
    
    
    
    14,151
    
    
    
    17,335
   38. RELATED PARTY TRANSACTIONS
  a) Key management
 Compensation of key management personnel
  (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Salaries and other short-term employee benefits
    
    
    8,834
    
    
    
    8,052
    
    
    
    6,191Termination benefits
    
    
    1,393
    
    
    
    261
    
    
    
    1,219Post-employment benefits
    
    
    33
    
    
    
    19
    
    
    
    Other long-term benefits
    
    
    
    
    
    
    
    
    
    
    Share-based compensation expense (1)
    
    
    1,694
    
    
    
    
    
    
    
    Total compensation of key management personnel
    
    
    11,954
    
    
    
    8,332
    
    
    
    7,410
 
 (1)
    
    The Company has adopted IFRS 2 Share-based Payments starting January 1,
2005. Accounting for Share-based compensation under IFRS 2 would have resulted in a
compensation expense amounting to  1,416 thousand and  371 thousand for the year ended
December 31, 2004, and 2003 respectively.  F-53




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##### Table of Contents



Loans to key management personnel
   b) Purchases of goods and services
 (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Associates
    
    
    4,277
    
    
    
    3,192
    
    
    
    940Related parties
    
    
    10,844
    
    
    
    6,146
    
    
    
    6,679Total purchases of goods and services
    
    
    15,121
    
    
    
    9,338
    
    
    
    7,619
    c) Sales of goods and services
 (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Associates
    
    
    555
    
    
    
    
    
    
    
    Related parties
    
    
    85
    
    
    
    
    
    
    
    Total sales of goods and services
    
    
    640
    
    
    
    
    
    
    
    
   F-54




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##### Table of Contents



d) Year-end balances arising from sales/purchases of goods and services
 (in thousands of euros)December 31
    
    2005
    
    
    2004
    
    
    2003Receivables from:Associates
    
    
    295
    
    
    
    
    
    
    
    Related parties
    
    
    
    
    
    
    
    
    
    
    Total receivables
    
    
    295
    
    
    
    
    
    
    
    
 (in thousands of euros)December 31
    
    2005
    
    
    2004
    
    
    2003Payables to:Associates
    
    
    279
    
    
    
    405
    
    
    
    173Related parties
    
    
    2,140
    
    
    
    1,379
    
    
    
    1,385Total payables
    
    
    2,419
    
    
    
    1,784
    
    
    
    1,558
 e) Loans receivable from/payable to Associates
  f) Related Party Transactions
    F-55




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##### Table of Contents



39. EVENTS AFTER THE BALANCE SHEET DATE
  F-56




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40. DIFFERENCES BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EU AND
AS ADOPTED BY THE IASB AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
   (in thousands of euros, except shares and per share amounts)Years ended December 31
    
    2005
    
    
    2004 (restated)
    
    
    2003Net income (loss) in accordance with IFRS
    
    
    91,938
    
    
    
    6,291
    
    
    
    (158,955
    )Minority interest
    
    
    (1,508
    )
    
    
    (1,617
    )
    
    
    (2,152
    )Capitalized development costs
    
    
    
    
    
    
    
    
    
    
    7,321Goodwill amortization on consolidated subsidiaries
    
    
    
    
    
    
    7,718
    
    
    
    13,172Goodwill impairment on consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    (34,893
    )Goodwill amortization and impairment on investments in associates
    
    
    
    
    
    
    2,810
    
    
    
    3,199Reversal of restoration of impairment losses on long-lived assets
    
    
    117
    
    
    
    19
    
    
    
    (2,555
    )Stock options accounting
    
    
    2,689
    
    
    
    (6,950
    )
    
    
    (6,399
    )Purchase accounting
    
    
    
    
    
    
    
    
    
    
    (837
    )Discounting of tax carryback receivable
    
    
    (1,095
    )
    
    
    2,754
    
    
    
    Deferred combination costs
    
    
    (3,259
    )
    
    
    
    
    
    
    Other differences
    
    
    (9
    )
    
    
    (57
    )
    
    
    26Deferred tax effect of US GAAP adjustments
    
    
    (35
    )
    
    
    (3
    )
    
    
    393Total differences between US GAAP and IFRS
    
    
    (3,100
    )
    
    
    4,674
    
    
    
    (22,725
    )Net income (loss) in accordance with US GAAP
    
    
    88,838
    
    
    
    10,965
    
    
    
    (181,680
    )Change in cumulative other comprehensive adjustment
in accordance with IFRS
    
    
    (16,364
    )
    
    
    7,386
    
    
    
    (4,001
    )Currency translation adjustment
    
    
    (934
    )
    
    
    (2
    )
    
    
    1Change in minimum pension liability
    
    
    (1,784
    )
    
    
    (659
    )
    
    
    239Other comprehensive income (loss)
in accordance with US GAAP, net of tax
    
    
    (19,082
    )
    
    
    6,725
    
    
    
    (3,761
    )Comprehensive income (loss) in accordance with US GAAP
    
    
    69,756
    
    
    
    17,690
    
    
    
    (185,441
    )Net income (loss) per share in accordance with US GAAP:Basic
    
    
    0.14
    
    
    
    0.02
    
    
    
    (0.30
    )Diluted
    
    
    0.14
    
    
    
    0.02
    
    
    
    (0.30
    )Number of shares:Basic
    
    
    618,337,539
    
    
    
    606,672,060
    
    
    
    605,658,965Diluted
    
    
    634,794,569
    
    
    
    619,022,472
    
    
    
    605,658,965
 F-57




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##### Table of Contents



(in thousands of euros)December 31
    
    2005
    
    
    2004 (restated)
    
    
    2003Shareholders equity in accordance with IFRS
    
    
    837,706
    
    
    
    721,313
    
    
    
    707,085Minority interest
    
    
    (12,837
    )
    
    
    (10,701
    )
    
    
    (12,073
    )Goodwill amortization on consolidated subsidiaries
    
    
    45,883
    
    
    
    45,883
    
    
    
    38,165Goodwill impairment on consolidated subsidiaries
    
    
    (12,769
    )
    
    
    (12,769
    )
    
    
    (12,769
    )Goodwill amortization and impairment on investments in associates
    
    
    8,069
    
    
    
    8,069
    
    
    
    5,259Reversal of restoration of impairment losses
on long-lived assets
    
    
    (2,393
    )
    
    
    (2,148
    )
    
    
    (2,555
    )Non-recourse loans
    
    
    (4,276
    )
    
    
    (4,276
    )
    
    
    (4,276
    )Purchase consideration
    
    
    (11,292
    )
    
    
    (11,292
    )
    
    
    (11,292
    )Currency translation adjustment
    
    
    (81
    )
    
    
    (137
    )
    
    
    (135
    )Minimum pension liability
    
    
    (10,212
    )
    
    
    (8,428
    )
    
    
    (7,769
    )Discounting of tax carryback receivable
    
    
    1,659
    
    
    
    2,754
    
    
    
    Deferred combination costs
    
    
    (3,259
    )
    
    
    
    
    
    
    Other differences
    
    
    10
    
    
    
    19
    
    
    
    76Deferred tax effect of US GAAP adjustments
    
    
    266
    
    
    
    301
    
    
    
    363Total differences between US GAAP and IFRS
    
    
    (1,232
    )
    
    
    7,275
    
    
    
    (7,006
    )Shareholders equity in accordance with US GAAP
    
    
    836,474
    
    
    
    728,588
    
    
    
    700,079
 Restatement of previously issued US GAAP reconciliation
 Accounting for a tax carryback receivable
  F-58




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(in thousands of euros, except shares and per share amounts)Years ended December 31
    
    2004 (as previously reported)
    
    
    2004 (restated)Net income in accordance with IFRS
    
    
    6,291
    
    
    
    6,291Minority interest
    
    
    (1,617
    )
    
    
    (1,617
    )Reversal of restoration of impairment losses on long-lived assets
    
    
    19
    
    
    
    19Stock options accounting
    
    
    (6,950
    )
    
    
    (6,950
    )Goodwill amortization and impairment
    
    
    10,528
    
    
    
    10,528Discounting of tax carryback receivable
    
    
    
    
    
    
    2,754Other differences
    
    
    (57
    )
    
    
    (57
    )Deferred tax effect of US GAAP adjustments
    
    
    (3
    )
    
    
    (3
    )Total differences between US GAAP and IFRS
    
    
    1,920
    
    
    
    4,674Net income in accordance with US GAAP
    
    
    8,211
    
    
    
    10,965Change in cumulative other comprehensive adjustment
in accordance with IFRS
    
    
    7,386
    
    
    
    7,386Change in effect of IFRS/US GAAP adjustments
on other comprehensive income
    
    
    (661
    )
    
    
    (661
    )Other comprehensive income (loss)
in accordance with US GAAP, net of tax
    
    
    6,725
    
    
    
    6,725Comprehensive income in accordance with US GAAP
    
    
    14,936
    
    
    
    17,690Net income per share in accordance with US GAAP:Basic
    
    
    0.01
    
    
    
    0.02Diluted
    
    
    0.01
    
    
    
    0.02Number of shares:Basic
    
    
    606,672,060
    
    
    
    606,672,060Diluted
    
    
    619,022,472
    
    
    
    619,022,472
 (in thousands of euros)December 31
    
    2004
    
    
    2004(as previously reported)
    
    
    (restated)Shareholders equity in accordance with IFRS
    
    
    721,313
    
    
    
    721,313Minority interest
    
    
    (10,701
    )
    
    
    (10,701
    )Reversal of restoration of impairment losses
on long-lived assets
    
    
    (2,148
    )
    
    
    (2,148
    )Non-recourse loans
    
    
    (4,276
    )
    
    
    (4,276
    )Purchase consideration
    
    
    (11,292
    )
    
    
    (11,292
    )Goodwill amortization and impairment
    
    
    41,183
    
    
    
    41,183Other comprehensive income
    
    
    (8,565
    )
    
    
    (8,565
    )Discounting of tax carryback receivable
    
    
    
    
    
    
    2,754Other differences
    
    
    19
    
    
    
    19Deferred tax effect of US GAAP adjustments
    
    
    301
    
    
    
    301Total differences between US GAAP and IFRS
    
    
    4,521
    
    
    
    7,275Shareholders equity in accordance with US GAAP
    
    
    725,834
    
    
    
    728,588
 F-59




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##### Table of Contents



Reporting discontinued operations
   (in thousands of euros, except shares and per share amounts)Years ended December 31
    
    2004
    
    
    
    
    
    2003(as reported
    
    
    2004
    
    
    (as previously
    
    
    2003above)
    
    
    (restated)
    
    
    reported)
    
    
    (restated)Net income (loss) from continuing operations
in accordance with US GAAP
    
    
    10,965
    
    
    
    12,519
    
    
    
    (181,680
    )
    
    
    (146,093
    )Loss on discontinued operations
    
    
    
    
    
    
    (1,554
    )
    
    
    
    
    
    
    (35,587
    )Net income (loss) in accordance with US GAAP
    
    
    10,965
    
    
    
    10,965
    
    
    
    (181,680
    )
    
    
    (181,680
    )Net income (loss) from continuing operations per share in accordance with US GAAP:Basic
    
    
    0.02
    
    
    
    0.02
    
    
    
    (0.30
    )
    
    
    (0.24
    )Diluted
    
    
    0.02
    
    
    
    0.02
    
    
    
    (0.30
    )
    
    
    (0.24
    )Net income (loss) from discontinued operations per share in accordance with US GAAP:Basic
    
    
    
    
    
    
    (0.00
    )
    
    
    
    
    
    
    (0.06
    )Diluted
    
    
    
    
    
    
    (0.00
    )
    
    
    
    
    
    
    (0.06
    )Net income (loss) from per share in accordance with US GAAP:Basic
    
    
    0.02
    
    
    
    0.02
    
    
    
    (0.30
    )
    
    
    (0.30
    )Diluted
    
    
    0.02
    
    
    
    0.02
    
    
    
    (0.30
    )
    
    
    (0.30
    )
 Explanations of certain adjustments
 Minority interest
  Capitalized development costs
 
 Goodwill amortization and impairment
  F-60




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Reversal of restoration of impairment losses on long lived assets
  Stock options accounting
     (in thousands of euros, except for earnings per share)Years ended December 31
    
    2005
    
    
    2004 (restated)
    
    
    2003Net income (loss) in accordance with US GAAP, as reported
    
    
    88,838
    
    
    
    10,965
    
    
    
    (181,680
    )Add: total stock-based compensation expense
included in reported net income, net of related tax effect
    
    
    1,631
    
    
    
    6,950
    
    
    
    6,399Deducted: total stock-based compensation
expense determined under fair value based method for
all awards, net of related tax effects
    
    
    (13,911
    )
    
    
    (27,379
    )
    
    
    (17,674
    )Pro forma US GAAP net income (loss)
    
    
    76,558
    
    
    
    (9,464
    )
    
    
    (192,955
    )Earnings per share:Basic  as reported
    
    
    0.14
    
    
    
    0.02
    
    
    
    (0.30
    )Basic  pro forma
    
    
    0.12
    
    
    
    (0.02
    )
    
    
    (0.32
    )Diluted  as reported
    
    
    0.14
    
    
    
    0.02
    
    
    
    (0.30
    )Diluted  pro forma
    
    
    1.12
    
    
    
    (0.02
    )
    
    
    (0.32
    )
 F-61




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Purchase accounting
   Deferred combination costs
  Non-recourse loans
  Other comprehensive income
  F-62




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41.
OTHER REQUIRED DISCLOSURES UNDER US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
 Income taxes
  (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Domestic (1)
    
    
    7,683
    
    
    
    19,590
    
    
    
    14,195Foreign
    
    
    63,899
    
    
    
    (346
    )
    
    
    (158,477
    )Income (loss) before tax and minority interest
    
    
    71,582
    
    
    
    19,244
    
    
    
    (144,282
    )
 
 (1)
    
    Luxemburg. Presentation of the Consolidated Statement of Income
  (in thousands of euros)Years ended December 31
    
    2005
    
    
    2004
    
    
    2003Operating income (loss) in accordance with IFRS
    
    
    66,755
    
    
    
    26,318
    
    
    
    (133,786
    )Goodwill amortization on consolidated subsidiaries
    
    
    
    
    
    
    7,718
    
    
    
    18,237Reversal of restoration of impairment losses on long-lived
assets
    
    
    117
    
    
    
    19
    
    
    
    (2,555
    )Purchase consideration
    
    
    
    
    
    
    
    
    
    
    (837
    )Capitalized development costs
    
    
    
    
    
    
    
    
    
    
    7,321Stock options accounting
    
    
    2,689
    
    
    
    (6,950
    )
    
    
    (6,399
    )Deferred combination costs
    
    
    (3,259
    )
    
    
    
    
    
    
    Other differences
    
    
    9
    
    
    
    (57
    )
    
    
    26Operating income (loss) in accordance with US GAAP as previously reported
    
    
    66,311
    
    
    
    27,048
    
    
    
    (154,467
    )Loss on discontinued operations
    
    
    
    
    
    
    (1,554
    )
    
    
    (35,587
    )Operating income (loss) in accordance with US GAAP as restated
    
    
    66,311
    
    
    
    28,602
    
    
    
    (118,880
    )
 Recently issued accounting standards under US GAAP, which could affect the reconciliation
   F-63




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F-64




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42. LIST OF SUBSIDIARIES
   Name of the company
    
    CountryGemplus Finance SA
    
    LuxemburgGemplus Argentina SA
    
    ArgentinaGemplus NV
    
    BelgiumGemventures 1 NV
    
    BelgiumGemplus do Brasil Produtos Electronicos, Ltda
    
    BrasilGemplus Bank Note, Ltda
    
    BrasilGemplus Canada Inc
    
    CanadaGemplus International Trading Shanghai Co. Ltd
    
    ChinaGemplus China Investment Co. Ltd
    
    ChinaTianjin Gemplus Smart Card Co. Ltd
    
    ChinaGoldpac Datacard Solutions Zhuhai Co. Ltd
    
    ChinaGoldpac SecurCard Zhuhai Co. Ltd
    
    ChinaGemplus Tianjin New Technologies Co. Ltd
    
    ChinaSilver Dragon Microelectronics Co. Ltd
    
    ChinaGemplus Beijing Electronics R&D Co. Ltd
    
    ChinaGemplus de Colombia SA
    
    ColombiaGemplus SRO
    
    Czech RepublicSetec Danmark A/S
    
    DenmarkGemplus Nordic Oy
    
    FinlandSetec Oy
    
    FinlandSetec Corporate Holding Oy
    
    FinlandGemplus SA
    
    FranceGemplus Trading SA
    
    FranceST GEM GIE
    
    FranceGemplus Participations SA
    
    FranceSLP SAS
    
    FranceGemplus GmbH
    
    GermanyCelo communications GmbH
    
    GermanyZenzus Holdings Ltd
    
    GibraltarGreat Steps Ltd
    
    Hong KongGoldpac Datacard Solutions Co. Ltd
    
    Hong KongGemplus India Ptd Ltd
    
    IndiaCelocom Ltd
    
    IrelandGemplus Italia Srl
    
    ItalyGemplus Japan Co. Ltd
    
    JapanGemcard Sdn BhD Pte Ltd
    
    MalaysiaGemplus Industrial SA de CV
    
    MexicoGemplus BV
    
    NetherlandsCelo communications BV
    
    NetherlandsSetec Norge AS
    
    NorwayGemplus Pologne Sp zo o
    
    PolandPolski Plastik Sp zo o
    
    PolandGemplus Sp zo o
    
    PolandGemrokitki Sp zo o
    
    PolandGemplus LLC
    
    RussiaGemplus Technologies Asia Pte Ltd
    
    SingaporeSecurCard Gemplus Pte Ltd
    
    SingaporeGemplus Microelectronics Asia Pte Ltd
    
    SingaporeGemplus Asia Pacific Pte Ltd
    
    SingaporeGemplus Southern Africa Pty Ltd
    
    South AfricaGemplus Card International España SA
    
    SpainSetec Sverige AB
    
    SwedenSetec Tag AB
    
    SwedenGemplus Management and Trading SA
    
    SwitzerlandSetec Card Ltd
    
    ThailandGemCard (Thailand) Co. Ltd
    
    ThailandGemplus Middle-East FZ-LLC
    
    UAEGemplus Ltd
    
    United KingdomGemplus Associates International Ltd
    
    United KingdomGemplus Corp.
    
    USAGemplus Card International de Venezuela, CA
    
    Venezuela
 F-65