##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 20-F/A (Amendment No. 2)
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934          
                  For the fiscal year ended December 31, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to
 Commission file number: 000-28508 Flamel Technologies S.A.
  
  Not Applicable  
  Republic of France  
  Parc Club du Moulin a Vent
33, avenue du Docteur Georges Levy
69693 Venissieux Cedex France  
  Securities registered or to be registered pursuant
to Section 12(b) of the Act.
    
    Title of each class Name of each exchange
on which registeredNone
    
    NoneSecurities registered or to be registered pursuant to Section 12(g) of the Act.
 American Depositary Shares (as evidenced by American Depositary Receipts), each representing one Ordinary Share
(Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None  
  Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report. 21,391,590 Ordinary Shares, nominal value 0.122 Euros per Ordinary Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes      þ      No      o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17      o      Item 18      þ




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##### 



EXPLANATORY NOTE This Amendment No. 2 to the Annual Report on Form 20-F/A (Amendment No. 2) for Flamel
Technologies S.A. (the Company) for the fiscal year ended December 31, 2003, is being filed to
amend and restate the items described below contained in the Companys Annual Report on Form 20-F
originally filed with the Securities and Exchange Commission (SEC) on April 26, 2004, as amended
by Amendment No. 1 on Form 20-F/A (Amendment No. 1) filed with the SEC on April 22, 2005. This Amendment No. 2 makes changes to Item 3, Key Information, Item 5, Operating and Financial
Review and Prospects, Item 18, Financial Statements and Item 19 Exhibits to reflect the accounting
treatment of the Companys investments in monetary SICAVs (Société dInvestissement à Capital
Variable). Monetary SICAVs are highly liquid investments with financial institutions and represent
units of ownership in a portfolio of investments. The underlying investments of monetary SICAVs are
comprised of low risk investments with a short-term fixed maturity date such as government bonds,
certificates of deposit, and Euro Commercial paper. The Company historically accounted for these
as cash and cash equivalents. Our investments in SICAVs are equity securities and therefore do
not have specific maturity dates even though there is a high degree of liquidity. Consequently, we
have determined that the SICAVs we hold should be classified as marketable securities and, thus,
are subject to the Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. According to our accounting policy, such investments
should be accounted for as Available for Sale and therefore unrealized holding gains relating to
the SICAVs is excluded from earnings and reported in a separate component of shareholders equity,
other comprehensive income, until realized. We have therefore restated the financial results we had previously released for FY 2003.
Unrealized holding gains relating to the SICAVs is excluded from earnings and reported in a
separate component of shareholders equity, other comprehensive income, until realized. The
restated balance sheet now reflects cash and cash equivalents totaling $1.199 million (previously
reported as $109.617 million) as well as marketable securities totaling $108.418 million. Similarly
the cash flow statement for 2003 has been updated to reflect purchases and sales of marketable
securities as cash flows from investing activities. As a result of the foregoing, the Companys net loss related to the fiscal year 2003 is
increased by $430,000. The restated loss in 2003 totaled ($3,924) million or ($0.22) per share
compared to ($3.494) million or ($0.20) per share as reported in the original Form 20-F filed on
April 26, 2004 i




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##### 



ITEM 3. Key Information Selected Financial Data The selected consolidated financial data for each of the five years in the period ended
December 31, 2003 are derived from the Consolidated Financial Statements of the Company, which have
been prepared in accordance with U.S. GAAP and audited by Ernst
& Young Audit, an independent
registered public accounting firm. The selected consolidated financial data of the Company set
forth below are qualified by reference to, and should be read in conjunction with, Item 5.
Operating and Financial Review and Prospects and the Consolidated Financial Statements and the
Notes related thereto appearing elsewhere in this Annual Report. Statement of Operations Data: *
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003(restated)**Revenues
    
    $
    11,040
    
    
    $
    10,902
    
    
    $
    13,087
    
    
    $
    18,406
    
    
    $
    25,167Cost and Expenses
    
    
    (18,040
    )
    
    
    (16,107
    )
    
    
    (16,242
    )
    
    
    (18,629
    )
    
    
    (29,866
    )Loss from Operations
    
    
    (7,000
    )
    
    
    (5,205
    )
    
    
    (3,155
    )
    
    
    (223
    )
    
    
    (4,699
    )Interest and other expenses, net
    
    
    322
    
    
    
    375
    
    
    
    295
    
    
    
    149
    
    
    
    (856
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,525
    
    
    
    1,128Income (loss) before income tax and the
cumulative effect of a change in
accounting principle
    
    
    6,678
    
    
    
    (4,834
    )
    
    
    (2,860
    )
    
    
    2,452
    
    
    
    (4,427
    )Income tax benefit (charge)
    
    
    (16
    )
    
    
    (50
    )
    
    
    (14
    )
    
    
    553
    
    
    
    503Cumulative effect on prior years (to
December 31,1999) of changing method of
revenue recognition ***
    
    
    
    
    
    
    (4,577
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (6,694
    )
    
    $
    (9,461
    )
    
    $
    (2,874
    )
    
    $
    3,005
    
    
    $
    (3,924
    )Earning (loss) per share before
cumulative effect of change in accounting
principle
    
    $
    (0.52
    )
    
    $
    (0.32
    )
    
    $
    (0.18
    )
    
    $
    0.19
    
    
    $
    (0.22
    )Basic earnings (loss) per ordinary share
    
    $
    (0.52
    )
    
    $
    (0.62
    )
    
    $
    (0.18
    )
    
    $
    0.19
    
    
    $
    (0.22
    )Diluted earnings (loss) per ordinary share
    
    $
    (0.52
    )
    
    $
    (0.62
    )
    
    $
    (0.18
    )
    
    $
    0.18
    
    
    $
    (0.22
    )Basic weighted average number of shares
outstanding (in thousands)
    
    
    12,939
    
    
    
    15,331
    
    
    
    16,198
    
    
    
    16,198
    
    
    
    17,762Diluted weighted average number of shares
outstanding (in thousands)
    
    
    12,939
    
    
    
    15,331
    
    
    
    16,198
    
    
    
    16,711
    
    
    
    17,762Dividends per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 *  (in thousands of US dollars, except per share data) Balance Sheet Data:*
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003 (as restated)Cash , Cash
equivalents and
Marketable
securities **
    
    $
    5,210
    
    
    $
    10,137
    
    
    $
    5,309
    
    
    $
    14,527
    
    
    $
    109,617Working capital****
    
    
    4,257
    
    
    
    7,948
    
    
    
    7,338
    
    
    
    12,202
    
    
    
    102,867Total assets
    
    
    14,920
    
    
    
    20,360
    
    
    
    18,144
    
    
    
    23,076
    
    
    
    127,252Long term
liabilities
(excluding deferred
revenues)
    
    
    2,358
    
    
    
    1,891
    
    
    
    1,299
    
    
    
    2,329
    
    
    
    3,123Shareholders equity
    
    
    9,067
    
    
    
    10,882
    
    
    
    7,509
    
    
    
    12,286
    
    
    
    92,061
 
 *    (in thousands of US dollars)**  The Company has historically accounted for certain investments, known as monetary SICAVs
(Société dInvestissement à Capital Variable), as cash and cash equivalents. Monetary SICAVs are
highly liquid investments with financial institutions and represent unit of ownership in a
portfolio of investments. The underlying investments of monetary SICAVs are comprised of low risk
investments with a short-term fixed maturity date such as government bonds, certificates of deposit
and Euro Commercial paper. Our investments in SICAVs are equity securities and therefore do not
have specific maturity dates even though there is a high degree of liquidity. Consequently, we have
determined that the SICAVs we hold should be classified as marketable securities and, thus, are
subject to the Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. According to our accounting policy, such investments
should be accounted for as Available for Sale and therefore unrealized holding gains relating to
the SICAVs is excluded from earnings and reported in a separate component of shareholders equity, other
comprehensive income, until realized.




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##### 



The restated balance sheet now reflects cash and cash equivalents totaling $1.199 million
(previously reported as $109.617 million) as well as marketable securities totaling $108.418
million . Similarly the cash flow statement for 2003 has been updated to reflect purchases and
sales of marketable securities as cash-flows from investing activities. As a result of the correction of the 2003 financial statements, the Companys net loss related to
the fiscal year 2003 is increased by $430,000. The restated loss in 2003 totaled ($3,924) million
or ($0.22) per share compared to ($3.494) million or ($0.20) per share as reported in the original
2003 Form 20-F (See Note 2 of the Financial Statements). *** The Company has historically recognized non-refundable technology access fees received from
its collaboration agreements as revenue when received. In December 1999, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition
in Financial Statements. Among other things, SAB No. 101 describes the SEC staffs position on
the recognition of certain non-refundable up-front fees received in connection with research
collaborations. The Company has evaluated the applicability of SAB No. 101 in conjunction with its
existing collaborative agreements. As a result, effective January 1, 2000, the Company changed its
method of accounting for the receipt of such fees to recognize revenue over the term of the related
development period. The Company recorded the cumulative effect of a change in accounting principle
of ($4,577,000) for the year ended December 31, 2000. For the years ended December 31, 2001 and
December 31, 2000, the Company has recorded $2,812,000 and $1,508,000 of license and research
revenue, which were included in the cumulative effect adjustment recorded on January 1, 2000. **** (current assets - current liabilities) Exchange Rates Flamel publishes its financial statements in dollars. However, currently a significant portion
of the Companys expenses are denominated in Euros. For information regarding the effects of
currency fluctuations on the Companys results, see Item 5. Operating and Financial Review and
Prospects. On January 1, 1999, eleven member states of the European Union (Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain) introduced a
single currency, the Euro, to replace their national currencies. Pursuant to the Treaty on European
Union, fixed exchange rates against the Euro were established for each of the currencies of the
participating member states. The rate of conversion for the French franc was fixed at FF6.55957 per
Euro. The following table sets forth the high, low and average exchange rates for the Euro against
the U.S. dollar in each of the last five years and in each of the previous six months. Year Ended December 31,Euro to U.S. Dollar:
    
    High
    
    
    Low
    
    
    Average Rate12003
    
    
    1.246
    
    
    
    1.036
    
    
    
    1.1322002
    
    
    1.0485
    
    
    
    0.8594
    
    
    
    0.94952001
    
    
    0.9548
    
    
    
    0.8388
    
    
    
    0.89582000
    
    
    1.0334
    
    
    
    0.8269
    
    
    
    0.92071999
    
    
    0.9984
    
    
    
    0.8465
    
    
    
    0.9443
 Previous Six Months,Euro to U.S. Dollar:
    
    High
    
    
    Low
    
    
    AverageMarch, 2004
    
    
    1.229
    
    
    
    1.214
    
    
    
    1.221February, 2004
    
    
    1.285
    
    
    
    1.243
    
    
    
    1.264January, 2004
    
    
    1.285
    
    
    
    1.239
    
    
    
    1.264December, 2003
    
    
    1.260
    
    
    
    1.196
    
    
    
    1.230November, 2003
    
    
    1.200
    
    
    
    1.142
    
    
    
    1.171October, 2003
    
    
    1.183
    
    
    
    1.160
    
    
    
    1.171
 
 1  

Annual totals represent the average of the
noon buying rates for Euros on the last business day of each month during the
relevant period. Monthly totals represent the average of the noon buying rates
for Euros for each business day during the relevant month. The exchange rate for the Euro against the U.S. dollar as of March 31, 2004 was  1.2292 to
$1.00. The Company makes no representation that Euro amounts have been, could have been or could
be converted into dollars at any of the exchange rates referred to herein as of a given date.




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##### 



ITEM 5. Operating and Financial Review and Prospects The following should be read in conjunction with the restated financial statements set forth
in this Form 20-F/A. Overview Flamel is a biopharmaceutical company principally engaged in the development of two unique
polymer based delivery systems for medical applications. Flamels Medusa® nano-encapsulation
technology is designed to deliver therapeutic proteins. The Companys lead product, Basulin®, a
long-acting insulin for the treatment of diabetes, is the first application of this patented
delivery system. The Company recently licensed Basulin® to Bristol Myers. Micropump® is a
controlled-release technology for the oral administration of small molecules. Genvir, our lead
product using our Micropump® technology, is a controlled-release formulation of acyclovir for the
treatment of genital herpes. We have licensed Genvir  to Biovail. Flamels innovative
technologies have also been instrumental in the development of a photochromic eyeglass lens product
that was launched by Corning in 1999. In 2003, the Companys internally funded development efforts were focused on the pre-clinical
and initial clinical testing of one formulation of Basulin®, and the application of the Medusa®
system to other important therapeutic proteins, including interferon alpha, interleukin-2, human
growth hormone and erythropoietin (EPO). Activities related to photochromic technologies were
fully funded by collaborative partners. Asacard, a controlled release aspirin, has been approved
for sale in the United Kingdom and several other European countries. In 2003, the Company recognized revenue from receipt of royalty payments related to the sales
of Cornings photochromic sunglasses lenses containing technology developed by Flamel. Royalty
payments are expected to continue, but will fluctuate according to the success of Corning in
commercializing these products. As in previous years, in 2003, a major part of Flamels revenues
came from licensing fees and contract research payments paid by corporate partners. Our core technologies are focused on improving delivery properties of existing products. We
have established long-term development and commercialization partnerships with leading
biopharmaceutical companies to maximize the breadth of our technology and leverage the capabilities
of our partners. As in previous years, in 2003, a major part of our revenue came from licensing fees and
contract research payments received from our biotechnology and pharmaceutical company partners. In
recent years, revenue from the sale of products and performance of services included a mix of
revenue from a contract manufacturing agreement with GlaxoSmithKline and other major pharmaceutical
companies, the sale of photochromic material to Corning, and the performance of various analytical
and manufacturing services for other customers. Until our manufacturing capabilities are needed to
produce the proprietary products currently in development, we will seek to utilize our
manufacturing capacity and to cover our related costs by building a manufacturing services business
and by transferring our manufacturing chemical production capability from the Venissieux pilot
plant to the Pessac site. In the future, we expect that our costs of goods sold may increase as a result of an increase
in manufacturing costs. We also expect that research and development may decrease as a percentage
of revenues. In 2003, the majority of the Companys expenses were incurred in Euros. However, a
significant portion of the Companys revenues were, and will continue to be, denominated in U.S.
dollars. In 2003, 81% of revenues were denominated in U.S. dollars; in 2002, 66% of revenues were
denominated in U.S. dollars; and in 2001, 41% of revenues were denominated in U.S. dollars. In
each of these years, fluctuations in the value of the Euro relative to the dollar caused
dollar-translated amounts to vary from one period to another affecting the Companys reported
results. Comparisons in financial statement line items between the years ended December 31, 2003
and December 31, 2002 were affected by a 19.72% average increase in the value of the Euro relative
to the U.S. dollar during the year and a 20.43% increase in the Euro relative to the U.S. dollar at
year-end. The conversion of the Companys financial accounts to U.S. dollars is calculated in accordance with the value of the Euro to the U.S. dollar. See Item 3. Key
InformationExchange Rates. The Company does not engage in any hedging activities with respect to
the risk of exchange rate fluctuations.




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The Company has incurred substantial losses since its inception, and through December 31,
2003, had an accumulated deficit of approximately $60.3 million. For the year ended December 31,
2003, the Company reported a net loss of $3.9 million. Flamel expects to continue its investment
spending in its research and development activities and to maintain its primary facilities and
business infrastructure. Thus, there can be no assurance that the Company will not incur further
losses, at least for the next two years, when the growth of revenue may not increase sufficiently
to cover expenditures. Flamels business is subject to substantial risks, including the uncertainties associated with
the research and development of new products or technologies, the length and uncertainty linked to
the results of clinical trials and regulatory procedures, uncertainties relating to collaborative
arrangements with large companies, difficulties in the scale-up and manufacturing of its products,
and the uncertainty relating to the market acceptance of new products based on its technologies.
The time required for the Company to achieve profitability, and consequently, the amount of future
losses, is highly uncertain. Operating losses may also fluctuate from quarter to quarter as a
result of differences in timing of revenues recognized or expenses incurred. See Item 3. Key
Information - Risk Factors. Critical Accounting Policies Revenue Recognition The Company recognizes revenue from contracts arrangements, products sales and royalties
earned. Revenue arrangements with multiple elements are divided into separate units of accounting
if certain criteria are met, including whether the delivered element has stand-alone value to the
customer and whether there is objective and reliable evidence of the fair value of the undelivered
elements. The consideration received is allocated among the separate units based on their
respective fair values, and the applicable revenue recognition criteria are applied to each of the
separate units. Contract revenue generally includes upfront licensing fees, milestone payments and
reimbursements of research and development costs. Non-refundable technology access fees received
from collaboration agreements that require the Companys continuing involvement in the form of
development efforts are recognized as revenue ratably over the development period. The Company
recognizes milestone-related revenues only when performance of the milestone under the terms of the
collaboration is achieved and there are no further performance obligations. Research and
laboratory analysis services revenue is recognized as the research and development work is
performed. Costs incurred under these contracts are considered costs in the period incurred.
Payments received in advance of performance are recorded as deferred revenue and recognized in
revenue as services are rendered. The Company receives financial support for various research and investment projects from
governmental agencies. The Company recognizes proceeds from unconditional grants related to
investment projects as a reduction of the carrying amount of the assets subsidized. Revenue from
conditional grants received is recognized in other income when all conditions stated in the grant
have been met and the funding has been received. The Company recognizes revenue from product sales when there is persuasive evidence that an
arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility
is reasonably assured. The Company receives royalty revenues under a license agreement with a third party that sells
products based on technology developed by the Company. There are no future performance obligations
on the part of the Company under this license agreement. The license agreements provide for the
payment of royalties to the Company based on sales of the licensed product. The Company records
these revenues based on actual sales that occurred during the relevant period.




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##### 



Results of Operations Years Ended December 31, 2003, 2002 and 2001 Operating Revenues The Company had total revenues of $25.2 million in 2003, $18.4 million in 2002, and $13.1
million in 2001. 2001
    
    2002
    
    2003License and Research Revenues
    
    
    
    
    9.9
    
    
    
    14.6
    
    
    
    21Research
    
    
    
    
    7.0
    
    
    
    6.5
    
    
    
    13Research
    
    Servier
    
    
    
    
    
    
    2.3
    
    
    
    1.4GSK other
    
    
    
    
    
    
    
    
    
    
    4.4GSK Augmentin
    
    
    
    
    
    
    0.1BMS
    
    
    
    
    
    
    
    
    
    
    3.8Corning
    
    
    0.9
    
    
    
    0.8
    
    
    
    0.4MRT
    
    
    0.2Novo
    
    
    3.0
    
    
    
    0.6undisclosed partners
    
    
    2.9
    
    
    
    2.7
    
    
    
    3.0Licenses
    
    
    
    
    2.9
    
    
    
    8.1
    
    
    
    8.0Up front payment
    
    Servier
    
    
    0.1
    
    
    
    1.0
    
    
    
    1.3GSK other
    
    
    
    
    
    
    
    
    
    
    0.5GSK Augmentin
    
    
    
    
    
    
    0.2
    
    
    
    1.4BMS
    
    
    
    
    
    
    
    
    
    
    1.3Novo
    
    
    2.8Undisclosed partners
    
    
    
    
    
    
    
    
    
    
    0.2Milestones
    
    Servier
    
    
    
    
    
    
    5.4
    
    
    
    0.5GSK other
    
    
    
    
    
    
    
    
    
    
    2.8GSK Augmentin
    
    
    
    
    
    
    1.5Total
    
    
    
    
    9.9
    
    
    
    14.6
    
    
    
    21Servier
    
    
    0.1
    
    
    
    8.7
    
    
    
    3.2GSK other
    
    
    
    
    
    
    
    
    
    
    7.7GSK Augmentin
    
    
    
    
    
    
    1.8
    
    
    
    1.4Corning
    
    
    0.9
    
    
    
    0.8
    
    
    
    0.4MRT
    
    
    0.2BMS
    
    
    
    
    
    
    
    
    
    
    5.1Novo

    
    
    5.8
    
    
    
    0.6Undisclosed partners
    
    
    2.9
    
    
    
    2.7
    
    
    
    3.2
 In 2003, license and research payments from the Companys various partners totalled $21
million. Similar license and research payments in 2002 and 2001 totalled $14.6 million and $9.9
million, respectively. In 2003, license payments totalled $8.0 million; research and development
revenue totalled $13 million. In 2002, license payments totalled $8.1 million and research and
development revenue totalled $6.5 million. In 2001, license payments totalled $2.9 million and
research and development revenue totalled $7.0 million. License revenues in 2003 consisted primarily of $4.7 million from GlaxoSmithKline (of which
$1.9 million represents amortization of initial up-front payments), $1.8 million from Servier (of
which $1.3 million represents up-front payment amortization) and $1.3 million from Bristol-Myers
Squibb which represents the amortized portion of the $20 million upfront payment. License revenues
in 2002 consisted primarily of $6.4 million from Servier and $1.7 million from GlaxoSmithKline.
License revenues in 2001 included $2.8 million from Novo Nordisk.




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##### 



Research and development revenues in 2003 consisted primarily of $3.8 million from
Bristol-Myers Squibb, $4.4 million from GlaxoSmithKline, and $1.4 million from Servier. Research
and development revenues in 2002 consisted primarily of $2.3 million from Servier, $0.6 million
from Novo Nordisk, and $0.1 from Beecham Pharmaceuticals. In 2001, research and development
revenue consisted primarily of $3.0 million from Novo Nordisk. In 2003, product sales and services revenues totaled $3.4 million and included $115,000 from
GlaxoSmithKline for the manufacture of cimetidine and Tagamet, $396,000 from Corning for research
and development and the sale of pilot batches, and $2.8 million from clinical batches and tall
manufacturing with various customers. In 2002, product sales and services revenues totaled $2.9
million and included $121,000 from GlaxoSmithKline for the manufacture of cimetidine, $539,000 from
Corning for replenishment inventories of photochromic material and $2.2 million from clinical
batches and tall manufacturing with various customers. In 2001, product sales and services
revenues totaled $2.0 million and included $0.3 million from GlaxoSmithKline for the manufacture of
cimetidine and $1.4 million from Corning for replenishment inventories of photochromic material.
Product sales and service revenues have grown over the past three years due to increased demand,
primarily for clinical batches, consistent with the increased number of partnerships into which the
Company has entered. Other revenues of $778,000 in 2003 consisted primarily of royalties from Corning related to
the sale of photochromic lenses, incorporating Flamels technology. Other revenues of $948,000 in
2002 consisted primarily of royalties from Corning related to the sale of photochromic lenses
incorporating Flamel technology. Other revenues of $1,220,000 in 2001 included $961,000 in
royalties from Corning related to the sales of photochromic lenses, incorporating Flamel
technology, and $219,000 related to the forgiveness of a French government agency loan. It appears
to us that Corning has de-emphasized its sales of photochromic eyeglass lenses in order to focus
greater attention on other areas of their business. Operating Expenses The Company had total costs and expenses of $29.9 million in 2003, $18.6 million in 2002, and
$16.2 million in 2001. In 2003, research and development costs represent the most significant operating expenses of
the Company. These totaled $20.2 million in 2003 (or 80% of recognized revenues), $12.2 million in
2002 (or 66% of recognized revenues) and $10.7 million in 2001 (or 81% of recognized revenues).
Research and Development costs have increased broadly in keeping with the Companys license and
other revenues. Because the Companys base of operations is in France, these costs are denominated
in Euros. Consequently, the increase in the value of the Euro during the last three years has
contributed to higher dollar-denominated costs. Beyond that, increased interest in the Companys
technology platforms have resulted in more projects being undertaken in conjunction with partners.
The Company has also undertaken several projects on its own initiative. In 2002, research and development costs increased by approximately $1.5 million over 2001 (or
14%). To the extent that the increase was not attributable to the 5.66% increase in the average
exchange rate between the US dollar and the Euro, the increase was due to a number of new
partnerships obtained during the year and particularly to the active pursuit of self-funded
programs, especially Basulin®. Costs of goods and services sold were $3.7 million in 2003, $2.4 million in 2002, and $2.2
million in 2001, of which services sold represented $578,000, $319,000, and $378,000, respectively.
These costs include the direct and indirect labor, materials, outside services, overhead costs
relevant to contract manufacturing and other services provided to third parties at the Pessac
facility and at the Companys Venissieux pilot plant. The fluctuation in costs year-to-year is the
result of changes year-to-year in both the mix and volume of products produced and services
rendered. The figures show an increase of 30% at a comparable exchange rate in 2003 compared to an
increase of 10% in 2002. While gross margins for contract manufacturing and services were negative
in 2003 (largely due to exchange rate fluctuations), these activities have been useful to the
Company in that they enabled us to maintain our facilities and make use of idle capacity, as well
as to maintain scientific expertise. As the Company ramps up the work to develop the Medusa® and
Micropump® platforms, in conjunction with our partners and on its own, we intend to de-emphasize
contract manufacturing and services. Selling, general and administrative expenses increased to $5.6 million in 2003 from $4.0
million in 2002 and $3.4 million in 2001. During 2003, salaries increased approximately 20%; fees
increased nearly $150,000; tax increased by over $100,000; insurance expenses increased by over
$50,000. These increases were exacerbated as a result of changes in the Euro/dollar exchange rate,
which increased by 18%. Increases in 2002 over 2001 SG&A expenses were largely attributable to salary increases (approximately 20%); and increased taxes (approximately $100,000). Stock
compensation expenses were $355,000 in 2003, $18,000 in 2002 and $23,000 in 2001.




---



##### 



Non-Operating Items Other income of $1.1 million in 2003 consisted mainly of recognition of $823,000 from
conditional grants received from French public agencies. The requirements related to the grants
consisted principally in maintaining certain levels of employment, which were achieved in 2003.
The remaining $0.3 million resulted from the sale of the equipment of its pilot plant of
Vénissieux. Other income of $2.5 million in 2002 consisted of the amount received from the
Wellcome Foundation in settlement of certain litigation with respect to our product, Genvir . The French government provides tax credits to companies for annual increased spending for
innovative research and development. Income tax benefits correspond to these French research tax
credits, which are credited against income taxes payable in each of the four years after being
incurred or, if not so utilized, are recoverable in cash. As of December 31, 2003, Flamel had
total research tax credits receivable of $1.35 million. If these credits are not applied against
future income taxes, they will be received as cash payments in the fourth year after the credit is
earned, i.e. $0.76 million in 2006 and $0.59 million in 2007 . The Company earned a research and
development credit in 2003 of $0.5 million and of $ 0.6 million in 2002 and did not have any such
credit in 2001. As a result, the Company recognized a tax benefit of $0.5 million in 2003, which
resulted primarily from French research and development credits and paid the statutory minimum
income tax expense of $24,500 for 2003. As of December 31, 2003, the Company had $22,498,000 in French net operating loss
carry-forwards. Due to a change in French tax law in 2003, we have been informed that the above
carry-forwards no longer have an expiration date. See Note 15 to the Consolidated Financial
Statements. Interest income earned on the Companys cash balance was$ 192,000 in 2003, $297,000 in 2002
and $292,000 in 2001. The changes in interest earned year-to-year are primarily the result of
fluctuating average cash balances invested year-to-year and declining interest rates in 2003.
Interest expense was $29,000 in 2003 $49,000 in 2002 and $52,000 in 2001 and is primarily related
to the interest applicable to the Companys equipment leases. Net Profit/Loss For the year ended December 31, 2003, the Company reported a net loss of $3.9 million, or
$(0.22) per share. The net profit reported for the year ended December 31, 2002 was $3.0 million,
or $0.18 per share on a diluted basis, and the net loss reported for the year ended December 31,
2001 was $2.9 million or $(0.18) per share. Liquidity and Capital Resources On December 31, 2003 the Company had $1.2 million in cash and cash equivalents as compared to
$0.3 million on December 31, 2002. Net cash provided by (used in) operating activities was $11.4 in 2003, $8.5 million in 2002
and $(2.9) million in 2001. In 2003 net cash provided by operating activities reflected a net loss
of $3.9 million, a $17.3 million increase in deferred revenues reflecting the BMS up-front payment,
a $4.0 million increase in accounts receivable due to payments of amounts invoiced in 2003 and a
$2.5 million increase in accounts payable. Net cash used in investing activities was
$82.8 million in 2003 and was primarily spent on
marketable securities operations (net difference between the proceeds and the purchase), and also
at the Pessac plant to provide the capacity needed for the ongoing development of the Companys
products. Net cash used in investing activities amounted to $10.1 million in 2002 and $1.2 million
in 2001. As of December 2003, the Company held marketable securities classified as available-for-sale
and recorded at fair value. Total marketable securities amounted $108.4 million in 2003 and $14.3
million in 2002. Net cash provided by financing activities was $74.4 million in 2003, $0.4 million in 2002, and
not material for 2001. In 2003, the financing activities show an increase in cash of $75 million
resulting in large part from 2,000,000 shares sold within the public offering in October ($62.2
million), the exercise of warrants from investors and directors ($10.2 million) and the exercise of
options from employees ($2.1 million).




---



##### 



Since its inception, the Companys operations to date have consumed substantial amounts of
cash and are expected to continue to do so, at least for the next two years. The Company believes
that ongoing research and product development programs are adequately funded for the next year.
The Company also believes current financial resources and cash from various grants, royalty
payments and licenses will be sufficient to meet the Companys cash requirements for at least the
next two years. As in previous years, in 2003, a major part of our revenue came from licensing fees and
contract research payments received from our biotechnology and pharmaceutical company partners. In
recent years, revenue from the sale of products and performance of services included a mix of
revenue from a contract manufacturing agreement with GlaxoSmithKline and other major pharmaceutical
companies, the sale of photochromic material to Corning, and the performance of various analytical
and manufacturing services for other customers. Until our manufacturing capabilities are needed to
produce the proprietary products currently in development, we will seek to utilize our
manufacturing capacity and to cover our related costs by building a manufacturing services business
and by transferring our manufacturing chemical production capability from the Venissieux pilot
plant to the Pessac site. In the future, we expect that our costs of goods sold may increase as a result of an increase
in manufacturing costs. We also expect that research and development may decrease as a percentage
of revenues. As of December 2003, the Company had loans of $1.1 million from Anvar, an agency of the French
government that provides financing to French companies for research and development. These loans
do not bear interest and are repayable only in the event that the research is successful
technically or commercially. See Note 9 to the Consolidated Financial Statements. Further, the
Company received a loan from the French Ministry of Industry for a Proteozome research project in
2002 which was valued at $559,000 as of December 31, 2003. The Company does not maintain any credit lines with financial institutions. The contractual cash obligations of the Company are as follows: Payments Due Per PeriodLess than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More than(in thousands of US)
    
    1 year
    
    
    years
    
    
    years
    
    
    5 years
    
    
    TotalLong-Term Debt
    
    $
    
    
    
    $
    827
    
    
    $
    848
    
    
    $
    
    
    
    $
    1,675Capital Lease Obligation
    
    
    257
    
    
    
    261
    
    
    
    
    
    
    
    
    
    
    
    518Operating Leases
    
    
    366
    
    
    
    298
    
    
    
    
    
    
    
    
    
    
    
    664Total Contractual Cash Obligations
    
    $
    623
    
    
    $
    1,386
    
    
    $
    848
    
    
    
    
    
    
    $
    2,857
 As of December 31, 2003, the Company has no other commercial commitments. As of
December 31, 2003, the Company has no off-balance sheet arrangements.




---



##### 



PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2002 and 2003
    
    F-3Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2002 and 2003
    
    F-4Consolidated Statements of Shareholders Equity for the
Years Ended December 31, 2001, 2002 and 2003
    
    F-5Consolidated Statements of Cash flows for the Years Ended
December 31, 2001, 2002 and 2003
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
 F-1




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Flamel Technologies, S.A. We have audited the accompanying consolidated balance sheets of Flamel Technologies, S.A. (the
Company) as of December 31, 2002 and 2003 (as restated) and the (as restated) related consolidated
statements of operations, changes in shareholders equity and cash flows for each of the three
years in the period ended December 31, 2003. 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 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at December 31, 2002 and 2003
and the consolidated results of its operations and its cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles generally accepted in
the United States. As more fully described in Note 2 to the financial statements, the Company restated its 2003
financial statements. ERNST & YOUNG Audit /s/
JEAN-LUC DESPLAT Represented byJean-Luc Desplat Lyon, France
April 7, 2004
except for Note 2, as to which the date is June 14, 2005 F-2




---



##### 



FLAMEL TECHNOLOGIES S.A. CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars except share data) December 31,2002
    
    
    2003(restated  See Note 2)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    276
    
    
    $
    1,199Marketable securities
    
    
    14,251
    
    
    
    108,418Accounts receivable
    
    
    3,462
    
    
    
    8,367Inventory
    
    
    375
    
    
    
    1,057Prepaid expenses and other current assets
    
    
    347
    
    
    
    1,694Total current assets
    
    
    18,711
    
    
    
    120,735Property and equipment, net
    
    
    3,405
    
    
    
    5,085Other assets:Research and development tax credit receivable
    
    
    890
    
    
    
    1,348Other long-term assets
    
    
    70
    
    
    
    84Total other assets
    
    
    960
    
    
    
    1,432Total assets
    
    $
    23,076
    
    
    $
    127,252LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    693
    
    
    $
    Current portion of capital lease obligations
    
    
    229
    
    
    
    257Accounts payable
    
    
    1,322
    
    
    
    4,397Current portion of deferred revenue
    
    
    1,805
    
    
    
    9,623Advances from customers
    
    
    361
    
    
    
    344Accrued expenses
    
    
    2,028
    
    
    
    3,159Other current liabilities
    
    
    71
    
    
    
    88Total current liabilities
    
    
    6,509
    
    
    
    17,868Long-term debt, less current portion
    
    
    1,391
    
    
    
    1,675Capital lease obligations, less current portion
    
    
    149
    
    
    
    261Deferred revenue, less current portion
    
    
    1,952
    
    
    
    14,200Other long-term liabilities
    
    
    789
    
    
    
    1,187Total long-term liabilities
    
    
    4,281
    
    
    
    17,323Commitments and contingencies:
    
    
    
    
    
    
    Shareholders equity:Ordinary shares: 16,197,590 issued and outstanding at December 31, 2002
and 21,391,000 at December 31, 2003
    
    
    2,366
    
    
    
    3,081Additional paid-in capital
    
    
    71,178
    
    
    
    147,679Accumulated deficit
    
    
    (56,381
    )
    
    
    (60,305
    )Deferred compensation
    
    
    (14
    )
    
    
    (2,388
    )Accumulated other comprehensive income (loss)
    
    
    (4,863
    )
    
    
    3,994Total shareholders equity
    
    
    12,286
    
    
    
    92,061Total liabilities and shareholders equity
    
    $
    23,076
    
    
    $
    127,252
 See notes to consolidated financial statements F-3




---



##### 



FLAMEL TECHNOLOGIES S.A. CONSOLIDATED INCOME STATEMENTS
(Amounts in thousands of dollars except share data) Year ended December 31,2001
    
    
    2002
    
    
    2003(Restated See Note 2)Revenue:License and research revenue
    
    $
    9,858
    
    
    $
    14,593
    
    
    $
    20,978Product sales and services
    
    
    2,009
    
    
    
    2,865
    
    
    
    3,411Other revenues
    
    
    1,220
    
    
    
    948
    
    
    
    778Total revenue
    
    
    13,087
    
    
    
    18,406
    
    
    
    25,167Costs and expenses:Cost of goods and services sold
    
    
    (2,166
    )
    
    
    (2,373
    )
    
    
    (3,676
    )Research and development
    
    
    (10,662
    )
    
    
    (12,239
    )
    
    
    (20,223
    )Selling, general and administrative
    
    
    (3,414
    )
    
    
    (4,017
    )
    
    
    (5,967
    )Total
    
    
    (16,242
    )
    
    
    (18,629
    )
    
    
    (29,866
    )Loss from operations
    
    
    (3,155
    )
    
    
    (223
    )
    
    
    (4,699
    )Interest expense
    
    
    (52
    )
    
    
    (49
    )
    
    
    (29
    )Interest income
    
    
    292
    
    
    
    297
    
    
    
    192Foreign exchange gain (loss)
    
    
    55
    
    
    
    (99
    )
    
    
    (1,019
    )Other income
    
    
    
    
    
    
    2,526
    
    
    
    1,128Income (loss) before income taxes
    
    
    (2,860
    )
    
    
    2,452
    
    
    
    (4,427
    )Income tax benefit (expense)
    
    
    (14
    )
    
    
    553
    
    
    
    503Net income (loss)
    
    $
    (2,874
    )
    
    $
    3,005
    
    
    $
    (3,924
    )Earnings (loss) per shareBasic earnings (loss) per ordinary share
    
    $
    (0.18
    )
    
    $
    0.19
    
    
    $
    (0.22
    )Diluted earnings (loss) per share
    
    $
    (0.18
    )
    
    $
    0.18
    
    
    $
    (0.22
    )Weighted average number of shares outstanding (in thousands):Basic
    
    
    16,198
    
    
    
    16,198
    
    
    
    17,762Diluted
    
    
    16,198
    
    
    
    16,711
    
    
    
    17,762
 See notes to consolidated financial statements F-4




---



##### 



FLAMEL TECHNOLOGIES S.A. CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Amounts in thousands of dollars except share data) AccumulatedOtherOrdinary Shares
    
    
    Additional
    
    
    
    
    
    
    Deferred
    
    
    Comprehen-Paid-in
    
    
    Accumulated
    
    
    Compen-
    
    
    sive Income
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Sation
    
    
    (Loss)
    
    

   EquityBalance at January 1, 2001
    
    
    16,197,590
    
    
    $
    2,366
    
    
    $
    71,177
    
    
    $
    (56,512
    )
    
    $
    (55
    )
    
    $
    (6,094
    )
    
    $
    10,882Issuance of 70,000 warrants at
0.00 per warrant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amort. deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    23Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,874
    )
    
    
    
    
    
    
    
    
    
    
    (2,874
    )Other comprehensive lossTranslation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (522
    )
    
    
    (522
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,396
    )Balance at December 31, 2001
    
    
    16,197,590
    
    
    $
    2,366
    
    
    $
    71,177
    
    
    $
    (59,386
    )
    
    $
    (32
    )
    
    $
    (6,616
    )
    
    $
    7,509Issuance of 80,000 warrants at
0.01 per warrant
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Issuance of 40,000 warrants at
0.01 per warrant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amort. deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    18Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,005
    
    
    
    
    
    
    
    
    
    
    
    3,005Other comprehensive incomeTranslation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,753
    
    
    
    1,753Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,758Balance at December 31, 2002
    
    
    16,197,590
    
    
    $
    2,366
    
    
    $
    71,178
    
    
    $
    (56,381
    )
    
    $
    (14
    )
    
    $
    (4,863
    )
    
    $
    12,286Issuance of ordinary shares on exercise of stock-options
    
    
    327,500
    
    
    
    45
    
    
    
    2,048
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,093Issuance of ordinary shares on exercise of warrants
    
    
    2,866,500
    
    
    
    382
    
    
    
    9,846
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,228Issuance of ordinary shares at 26,73 ($31,58)
    
    
    2,000,000
    
    
    
    288
    
    
    
    62,874
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,162Shares issuance costs
    
    
    
    
    
    
    
    
    
    
    (996
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (996
    )Deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    2,729
    
    
    
    
    
    
    
    (2,729
    )
    
    
    
    
    
    
    0Amort. deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    355
    
    
    
    
    
    
    
    355Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,924
    )
    
    
    
    
    
    
    
    
    
    
    (3,924
    )Unrealized gains on securities available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    479
    
    
    
    479Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,378
    
    
    
    8,378Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,933Balance December 31, 2003 (Restated  See
Note 2)
    
    
    21,391,590
    
    
    $
    3,081
    
    
    $
    147,679
    
    
    $
    (60,305
    )
    
    $
    (2,388
    )
    
    $
    3,994
    
    
    $
    92,061
 See notes to consolidated financial statements F-5




---



##### 



FLAMEL TECHNOLOGIES S.A. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars except share data) Year ended December 31,2001
    
    
    2002
    
    
    2003 (Restated -see note 2)Cash flows from operating activities:Net income (loss)
    
    $
    (2,874
    )
    
    $
    3,005
    
    
    $
    (3,924
    )Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:Depreciation of property and equipment
    
    
    1,270
    
    
    
    1,460
    
    
    
    1,712Gain on disposal of property and equipment
    
    
    
    
    
    
    
    
    
    
    (380
    )Gain on sales of marketable securities
    
    
    (102
    )
    
    
    (252
    )
    
    
    (322
    )Grants recognized in other income
    
    
    
    
    
    
    
    
    
    
    (823
    )Stock compensation expense
    
    
    23
    
    
    
    18
    
    
    
    355Provision for accounts receivable
    
    
    
    
    
    
    
    
    
    
    273Increase (decrease) in cash from:Accounts receivable
    
    
    (5,184
    )
    
    
    5,021
    
    
    
    (4,032
    )Inventory
    
    
    251
    
    
    
    271
    
    
    
    (569
    )Prepaid expenses and other current assets
    
    
    78
    
    
    
    37
    
    
    
    (1,143
    )Deferred revenue
    
    
    1,089
    
    
    
    (845
    )
    
    
    17,280Accounts payable
    
    
    (259
    )
    
    
    (101
    )
    
    
    2,511Accrued expenses
    
    
    1,179
    
    
    
    (1,429
    )
    
    
    468Research and development tax credit receivable
    
    
    1,568
    
    
    
    938
    
    
    
    (247
    )Other long-term assets and liabilities
    
    
    75
    
    
    
    396
    
    
    
    316Net cash provided by (used in) operating activities
    
    
    (2,886
    )
    
    
    8,519
    
    
    
    11,475Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,178
    )
    
    
    (1,435
    )
    
    
    (2,841
    )Proceeds from disposal of property and equipment
    
    
    3
    
    
    
    3
    
    
    
    918Proceeds from sales of marketable securities
    
    
    6,371
    
    
    
    12,636
    
    
    
    24,367Purchase of marketable securities
    
    
    (6,374
    )
    
    
    (21,275
    )
    
    
    (105,293
    )Net cash used in investing activities
    
    
    (1,178
    )
    
    
    (10,071
    )
    
    
    (82,849
    )Cash flows from financing activities:Repayment of loans or advances
    
    
    (110
    )
    
    
    
    
    
    
    (99
    )Proceeds from loans or capital leases
    
    
    330
    
    
    
    860
    
    
    
    175Principal payments on capital lease obligations
    
    
    (416
    )
    
    
    (459
    )
    
    
    (230
    )Shares issuance costs
    
    
    
    
    
    
    
    
    
    
    (898
    )Cash proceeds from issuance of ordinary shares and warrants
    
    
    
    
    
    
    1
    
    
    
    75,482Net cash provided by (used in) financing activities
    
    
    (196
    )
    
    
    (402
    )
    
    
    74,430Effect of exchange rate changes on cash and cash equivalents
    
    
    (458
    )
    
    
    53
    
    
    
    (2,133
    )Net increase (decrease) in cash and cash equivalents
    
    
    (4,718
    )
    
    
    (1,097
    )
    
    
    923Cash and cash equivalents, beginning of year
    
    
    6,091
    
    
    
    1,373
    
    
    
    276Cash and cash equivalents, end of year
    
    $
    1,373
    
    
    $
    276
    
    
    $
    1,199Supplemental disclosures of cash flow informationNon cash transactions:Capital lease obligations incurred
    
    
    305
    
    
    
    236
    
    
    
    341
 See notes to consolidated financial statements F-6




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1.1. Nature of business Flamel Technologies, S.A. (the Company) is organized as a Société Anonymeor limited liability
corporation under the laws of The Republic of France. The Company was founded in 1990. The
Company is engaged in the development of advanced polymer technologies for unique life
science applications. The Company operates primarily in France. 1.2. Principles of consolidation The accompanying consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States (USGAAP). The preparation of consolidated financial statements in conformity with USGAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The accompanying consolidated financial statements include the Company and its wholly-owned
subsidiary in the United States. All inter-company accounts and transactions have been
eliminated. 1.3. Translation of financial statements of foreign entities The reporting currency of the Company and its wholly-owned subsidiary is the U.S. dollar. All
assets and liabilities in the balance sheets of the Company, whose functional currency is the
Euro, except those of the U.S. subsidiary whose functional currency is the U.S. dollar, are
translated into U.S. dollar equivalents at exchange rates as follows: (1) asset and liability
accounts at year-end rates, (2) income statement accounts at weighted average exchange rates for
the year, and (3) shareholders equity accounts at historical rates. Corresponding translation
gains or losses are recorded in shareholders equity. Transaction gains and losses are reflected in the statement of operations. The Company has not
undertaken hedging transactions to cover its currency translation exposure. 1.4. Revenue recognition In December 2003, the SEC issued Staff Accounting Bulletin No. 104, Revenue Recognition(SAB
104), which updates the previously issued revenue recognition guidance in SAB 101, based on the
Emerging Issues Task Force Issue 00-21, Revenue Arrangements with Multiple Deliverables. Revenue
arrangements with multiple elements are divided into separate units of accounting if certain
criteria are met, including whether the delivered element has stand-alone value to the customer
and whether there is objective and reliable evidence of the fair value of the undelivered items.
The consideration received is allocated among the separate units based on their respective fair
values, and the applicable revenue recognition criteria are applied to each of the separate
units. EITF 00-21 is applicable to agreements entered into in fiscal periods beginning after
June 15, 2003. The Company adopted EITF 00-21 on July 1, 2003. The issuance of SAB 104 and EITF
00-21 has not had any impact on the Companys results of operations, its financial position or
its cash flows. F-7




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS Contract revenue generally includes upfront licensing fees, milestone payments and
reimbursements of research and development costs. Non-refundable technology access fees
received from collaboration agreements that require the Companys continuing involvement in the
form of development efforts are recognized as revenue ratably over the development period. The
Company recognizes milestone-related revenues only when performance of the milestone under the
terms of the collaboration is achieved and there are no further performance obligations.
Research and laboratory analysis services revenue is recognized as the research and development
work is performed. Costs incurred under these contracts are considered costs in the period
incurred. Payments received in advance of performance are recorded as deferred revenue and
recognized in revenue as services rendered. The Company receives financial support for various research and investment projects from
governmental agencies. The Company recognizes proceeds from unconditional grants related to
investment projects as a reduction of the carrying amount of the assets subsidized. Revenue from
conditional grants received is recognized in other income when all conditions stated in the
grant have been met and the funding has been received. The Company recognizes revenue from product sales when there is persuasive evidence that an
arrangement exists, delivery has occurred, the price is fixed and determinable, and
collectibility is reasonably assured. The Company receives royalty revenues under a license agreement with a third party that sells
products based on technology developed by the Company. There are no future performance
obligations on the part of the Company under this license agreement. The license agreements
provide for the payment of royalties to the Company based on sales of the licensed product. The
Company records these revenues based on actual sales that occurred during the relevant period. 1.5. Research and development costs Research and development (R&D) expenses comprise the following types of costs incurred in
performing R&D activities: salaries, allocated overhead and occupancy costs, clinical trial and
related clinical manufacturing costs, contract and other outside service fees. R&D expenses
consist of independent R&D costs and costs associated with collaborative R&D and in-licensing
arrangements. Research and development expenditures are charged to operations as incurred. 1.6. Concentration of credit risk The Companys cash and cash equivalents are deposited with Crédit Commercial de France (CCF,
member of HBSC), Crédit Lyonnais and Crédit Agricole, major French banks. The Companys revenues are derived mainly from collaborative research and development
contracts with pharmaceutical and chemical companies based in Europe and the United States.
All significant customers are discussed in Note 3. The Company performs ongoing credit evaluations of its customers and maintains provisions
for potential credit losses as considered necessary. The Company generally does not require
collateral. Historically, the Company has not experienced significant credit losses on its
customer accounts. At December 31, 2001 and December 31, 2002, there was no allowance for
doubtful accounts recorded. In 2003, a total amount of $304,000 has been recorded for
doubtful accounts. 1.7. Earnings per share Basic earnings per share is computed by dividing income available to common shareholders by the
weighted average number of shares of common stock outstanding for the period. Diluted earnings
per share reflects potential dilution that could occur if securities or other contracts to issue F-8




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS common stock were exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. The dilutive effect of the Companys
common stock options and warrants is determined using the treasury stock method to measure the
number of shares that are assumed to have been repurchased using the average market price during
the period, which is converted from U.S. dollars at the average exchange rate for the period. 1.8. Cash and cash equivalents Cash and cash equivalents consist of highly liquid investments with a maturity of three months
or less at the date of purchase. Cash and cash equivalents consist of cash on deposit and cash
on hand. 1.9 Marketable securities Marketable securities consist of highly liquid investments in money market mutual funds. As of
December 2003, Flamel Technologiess marketable securities are classified as
available-for-sale securities in accordance with Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS
115). These investments are recorded at fair value, which is based on quoted market
prices. Accordingly, unrealized gains and losses are included in accumulated other
comprehensive income until realized. 1.10. Accounts Receivable Accounts receivable are stated at cost net of allowances for doubtful accounts.The Company
makes judgments as to its ability to collect outstanding receivables and provide allowances
for the portion of receivables when collection becomes doubtful. Provision is made based
upon a specific review of all significant outstanding invoices. 1.11. Inventories Inventories consist principally of raw materials and finished products, which are stated at the
lower of cost (first-in, first-out) or market. 1.12. Property and equipment Property and equipment is stated at historical cost less accumulated depreciation. Depreciation
and amortization are primarily computed using the straight-line method over the following
estimated useful lives: Land and buildings
    
    20 yearsLaboratory
equipment
    
    4 - 5 yearsOffice and computer equipment
    
    3 yearsFurniture and fixture
    
    5-10 years
 Assets under capital leases are amortized over the economic life of the asset or the remaining
lease term, whichever is shorter. Amortization of capital leases is included in
depreciation expense. 1.13. Impairment of Long-Lived Assets Property and equipment and other long-lived assets to be held and used are reviewed for
impairment whenever events or circumstances indicate that the carrying amount of such assets may
not be recoverable. Determination of recoverability is based on an estimate of undiscounted
future cash flows resulting from the use of the asset and its eventual disposition. If
undiscounted F-9




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS expected future cash flows are less than the carrying value of the assets, an impairment loss
will be recognized based on the excess of the carrying amount over the fair value of the assets.
Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value
less cost to sell. 1.14. Income taxes The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes (SFAS 109). Under SFAS 109, deferred tax assets are determined based on the difference
between the financial reporting and tax basis of assets and liabilities, applying enacted
statutory tax rates in effect for the year in which the tax differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of changes in the tax
laws and rates on the date of enactment. 1.15. Employee stock options and warrants The company accounts for stock options granted to employees and warrants granted to non-employee
board members under the recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees(APB 25), and related Interpretations. In accordance with APB 25,
the Company recognizes stock-based employee compensation cost over the vesting period when the
options or the warrants granted have an exercise price lower than the market value of the
underlying common stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the company had applied the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation,to stock-based employee
compensation. Year Ended December 31(In thousands of U.S. dollars except share data)
    
    2001
    
    
    2002
    
    
    2003Net income (loss), as reported
    
    
    (2,874
    )
    
    
    3,005
    
    
    
    (3,924
    )Add: Stock-based employee compensation expense
included in reported net income (loss), net of
related tax effects
    
    
    23
    
    
    
    18
    
    
    
    355Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (1,021
    )
    
    
    (1,748
    )
    
    
    (3,277
    )Pro forma net income (loss)
    
    
    (3,872
    )
    
    
    1,275
    
    
    
    (6,846
    )Earnings per share:Basic, as reported
    
    
    (0.18
    )
    
    
    0.19
    
    
    
    (0.22
    )Basic, pro forma
    
    
    (0.24
    )
    
    
    0.08
    
    
    
    (0.39
    )Diluted, as reported
    
    
    (0.18
    )
    
    
    0.18
    
    
    
    (0.22
    )Diluted, pro forma
    
    
    (0.24
    )
    
    
    0.08
    
    
    
    (0.39
    )
 The fair value of each stock option and warrant granted during the year is estimated on
the date of grant using the Black-Scholes option pricing model with the following assumptions: Year Ended December 312001
    
    
    2002
    
    
    2003Weighted-average expected life (years)
    
    
    7.7
    
    
    
    7.4
    
    
    
    4.9Expected volatility rates
    
    
    100.6
    %
    
    
    91.07
    %
    
    
    115.08
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Risk-free interest rate
    
    
    5
    %
    
    
    4.25
    %
    
    
    3.50
    %
 F-10




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS The weighted-average fair value and the weighted average exercise price of options and
warrants granted during 2001, 2002 and 2003 were as follows: Year Ended December 31(In U.S. dollars)
    
    2001
    
    
    2002
    
    
    2003Weighted
    
    
    Weighted
    
    
    Weighted
    
    
    Weighted
    
    
    Weighted
    
    
    Weightedavg. Fair

    
    avg. Exer.

    avg. Fair
    
    
    avg. Exer.
    
    avg. Fair
    
    
    avg. Exer.value2
    
    
    Price1
    
    
    value1
    
    
    Price1
    
    
    value1
    
    
    Price1Options or warrants
whose price equaled
market price of the
underlying shares on
the date of grant
    
    
    1.58
    
    
    
    1.88
    
    
    
    2.03
    
    
    
    2.49
    
    
    
    13.89
    
    
    
    16.78Options or warrants
whose price was less
than the market price
of the underlying
shares on the date of
grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21.21
    
    
    
    11.29
 1.16. Comprehensive Income Other comprehensive income for the Company consists solely of translation adjustments and is
shown separately in the consolidated statements of shareholders equity. 1.17. New Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation of Variable
Interest Entities. FIN No. 46 sets forth the criteria used in determining whether an investment
in a variable interest entity (VIE) should be consolidated and is based on the general premise
that a company that controls another entity through interests other than voting interests should
consolidate the controlled entity. In December 2003, the FASB published a revision to FIN No. 46
(FIN46R) to clarify some of the provisions of the interpretation and defer the effective date
of implementation for certain entities. Under the guidance of FIN46R, entities that do not have
interests in structures that are commonly referred to as special purpose entities are required
to apply the provisions of the interpretation in financial statements for periods ending after
March 14, 2004. The Company does not have an interest in any structure that would be considered
a special-purpose entity. Adoption of this interpretation is not expected to have a material
impact on the Companys results of operations or financial position. 2. RESTATEMENT OF FINANCIAL STATEMENTS The Company has historically accounted for certain investments, known as monetary SICAVs (Société
dInvestissement à Capital Variable), as cash and cash equivalents. Monetary SICAVs are highly
liquid investments with financial institutions and represent units of ownership in a portfolio of
investments. The underlying investments of monetary SICAVs are comprised of low risk investments
with a short-term fixed maturity date such as government bonds, certificates of deposit and Euro
Commercial paper. Our investments in SICAVs are equity securities and therefore do not have
specific maturity dates even though there is a high degree of liquidity. Consequently, we have
determined that the SICAVs we hold should be classified as marketable securities and, thus, are
subject to the Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. According to our accounting policy, such
investments 
 2 
Historical exchange rate F-11




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS should be accounted for as Available for Sale and therefore unrealized holding gains
relating to the SICAVs is excluded from earnings and reported in a separate component of
shareholders equity, other comprehensive income, until realized. The restated balance sheet now reflects cash and cash equivalents totaling $1.199 million
(previously reported as $109.617 million) as well as marketable securities totaling $108.418
million. Similarly the cash flow statement for 2003 has been updated to reflect purchases and sales
of marketable securities as cash-flows from investing activities. As a result of the correction, the Companys net loss related to the fiscal year 2003 is increased
by $430,000. The restated loss in 2003 totaled ($3,924) million or ($0.22) per share compared to
($3.494) million or ($0.20) per share as reported in the original 2003 Form 20-F. Fiscal Year Ended December 31,2003(as previously

    
    
    
    
    
    
    2003reported)
    
    
    Adjustments

    
    
    (as restated)Consolidated balance SheetCurrent assets:Cash and cash equivalents
    
    $
    109,617
    
    
    
    ($108,418
    )
    
    $
    1,199Marketable securities
    
    
    
    
    
    
    108,418
    
    
    
    108,418Shareholders equityAccumulated deficit
    
    
    (59,875
    )
    
    
    (430
    )
    
    
    (60,305
    )Accumulated other comprehensive income (loss)
    
    
    3,564
    
    
    
    430
    
    
    
    3,994Consolidated Statement of OperationsInterest income
    
    
    622
    
    
    
    (430
    )
    
    
    192Loss before income taxes
    
    
    (3,997
    )
    
    
    (430
    )
    
    
    (4,427
    )Net loss
    
    
    (3,494
    )
    
    
    (430
    )
    
    
    (3,924
    )Basic loss per share
    
    
    ($0.20
    )
    
    
    ($0.02
    )
    
    
    ($0.22
    )Consolidated Statement of Cash FlowCash provided by operating activities
    
    
    12,227
    
    
    
    (752
    )
    
    
    11,475Cash used in investing activities
    
    
    (1,923
    )
    
    
    (80,926
    )
    
    
    (82,849
    )Cash provided by financing activities
    
    
    74,430
    
    
    
    
    
    
    
    74,430Cash and cash equivalents end of the year
    
    
    109,617
    
    
    
    (108,418
    )
    
    
    1,199
 3. SUBCONTRACTING AGREEMENT In accordance with the terms of a subcontracting agreement signed with SmithKline in
December 1996, the Company recognized product sales consisting mainly of Cimetidine
formulations for a total amount of $322,000 in 2001 and $121,000 in 2002. This agreement
was renewed for 2003 and the sales to SmithKline totaled $115,000. 4. LICENSE, RESEARCH AND CONSULTING AGREEMENTS Bristol-Myers Squibb On August 27, 2003, Flamel Technologies and Bristol-Myers Squibb (BMS) entered into a
licensing and commercialization agreement to develop and market Basulin®, a controlled release
unmodified human insulin. The agreement was subject to antitrust clearance, which was obtained
on October 17, 2003. F-12




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS In consideration for the agreement, BMS made a $20 million initial payment and agreed to make
additional milestone payments upon achievement of certain events. The $20,000,000 initial

payment is being recognized on a straight-line basis over the term of the development period of
three years. The Company recognized licensing fees of $1,315,000 in 2003 with respect to this
initial payment. In addition, Flamel also recognized research and development revenues of
$3,811,000 in 2003 under this agreement. SB Pharma Puerto Rico Inc. In March 2003, Flamel Technologies and SB Pharma Puerto Rico Inc (SB Pharma) entered into a
license agreement whereby the Company agreed to license its controlled-release Micropump® in
order to develop a new formulation for an undisclosed existing product. In accordance with this
license agreement, the Company recognized research and development revenues of $4,379,000 and
licensing fees of $3,311,000. These licensing fees include two milestones payments of $967,000
and $1,822,000. The remaining $522,000 relates to the $2,000,000 upfront payment received in
March 2003, which is being recognized as revenue on a straight-line basis over the term of the
development period. Biovail In February 2003, Flamel Technologies entered into a license agreement with Biovail whereby the
Company agreed to license to Biovail the exclusive North America rights to Flamels oral solid
controlled release formulation of acyclovir.



In consideration for this license, the Company received $500,000, which is being recognized on a
straight-line basis over the development period. The Company recognized $104,000 under this
arrangement during the year ended December 31, 2003. Beecham Pharmaceuticals In June 2002, Flamel Technologies entered into a license agreement with Beecham Pharmaceuticals
(Pte) Limited, (Beecham) whereby the Company agreed to license its controlled-release
Micropump® technology to Beecham in connection with the sachet formulation of its drug
Augmentin®. In consideration for the license, Beecham agreed to make an upfront payment of $1.5
million, additional milestone payments upon achievement of certain events and royalty payments
on sale of the product. The $1,500,000 upfront payment was being recognized on a straight-line
basis over the term of anticipated development of the product (i.e. 3 years). The Company
recognized licensing fees of $168,000 in 2002 with respect to this upfront payment and
recognized a $1.5 million milestone payment as a milestone was achieved and research and
development revenues of $123,000 related to the performance of agreed upon research and
development. In September 2003, Beecham gave notice of the termination of the license agreement with Flamel.
As the Company had fulfilled all of its substantive obligations under this contract as of
December 31, 2003, the remaining amount of the up-front payment of $1,418,000 was recognized as
licensing fees in 2003. Servier In December 2001, Flamel Technologies and Laboratoires Servier, (Servier) entered into a
license and development agreement whereby the Company agreed to license its Micropump® control
release technology to Servier for use with an undisclosed product of Servier. In consideration for the agreement, Servier agreed to make a $3 million initial payment and
additional milestone payments upon achievement of certain events. The $3,000,000 initial F-13




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS payment has been recognized on a straight-line basis over the term of anticipated development of the
product (i.e. 3 years). The Company recognized licensing fees of $42,000 in 2001, $955,000 in
2002 and $1,283,000 in 2003 with respect to this initial payment. In addition, Flamel recognized
one milestone payment of $484,000 as licensing revenue in 2003. Flamel also recognized research
and development revenues of $1,381,000 in 2003. Novo Nordisk In December 1999, the Company signed a development and licensing agreement with Novo
Nordisk for Flamels Basulin long-acting basal insulin product. Pursuant to the terms of
the agreement, Flamel received licensing fees, regular research payments, and is eligible
to receive milestone payments and royalties on future product sales. Novo Nordisk acquired,
during the term of the agreement, world wide development and marketing rights to Basulin. In December 2001, Novo Nordisk gave notice of the termination of the license agreement
with Flamel. As the Company has fulfilled all of its substantive obligations under this
contract as of December 31, 2001, it accelerated the recognition of the remainder of the
upfront license fee. The Company recognized research and development revenues of $2,971,000
and $595,000 in 2001 and 2002, respectively, and licensing fees of $2,812,000 in 2001. The
Company did not recognize any revenues from Novo Nordisk in 2003. Corning In December 1998, the Company signed a long-term research and product development
agreement with Corning France and Corning Incorporated. Pursuant to the terms of this
agreement, Flamel receives regular research payments and royalties on the sales of Corning
products that utilize Flamels innovations. The Company recognized research revenue and
sales of pilot batches of $870,000, $757,000 and $396,000 in 2001, 2002 and 2003,
respectively. The Company recognized sales of specialty material for ophthalmic lenses of $651,000 in
2001, $539,000 in 2002 and $0 in 2003 and recognized royalties on Cornings sales of
$961,000 in 2001, $895,000 in 2002 and $719,000 in 2003. Ministry of Research and Technology In June 1998, the Company entered into an agreement with the French Ministry of Research and
Technology for a research project related to the development of an oral insulin. The Company
received payments representing 50% of the total expenses incurred on this project over a
three-year period. In accordance with the contract, the Company recognized revenues $378,000 in
2001, which represented the final installment due under the arrangement. This contract expired
in December 2001. No revenue was recorded in 2002 and 2003. The $198,000 remaining balance of
the grant receivable was paid in 2003. The contract is closed. Others The Company recognized research and development revenues on several feasibility studies with
undisclosed partners for an amount of $2,968,000 in 2001, $2,776,000 in 2002 and $2,970,000 in
2003. 5. OTHER INCOME Other income of $1.1 million in 2003 consisted mainly of recognition of $823,000 from
conditional grants received from French public agencies. The requirements related to the grants
consisted principally in maintaining certain levels of employment, which were achieved in 2003. F-14




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS The remaining $0.3 million resulted from the sale of the equipment of its pilot plant in
Vénissieux. In 2002, the Company recognized revenue of $2,526,000 related to the settlement of litigation
with the Wellcome Foundation concerning Genvir®. This settlement is classified as other income in
the statements of operations for the year ended December 31, 2002. 6. CASH AND CASH EQUIVALENTS Cash consist of cash on deposit held in several major banks and cash on hand.



Cash and cash equivalents, includes: December,(In thousands of U.S. dollars)
    
    2002
    
    
    2003Cash on deposit
    
    $
    276
    
    
    $
    1,199Total cash and cash equivalents
    
    $
    276
    
    
    $
    1,199
 7. MARKETABLE SECURITIES Marketable securities are classified as available-for-sale securities and are recorded at fair
market value. Unrealized gains and losses are recorded as other comprehensive income in
shareholders equity, net of income tax effects. December,(In thousands of U.S. dollars)
    
    2002
    
    
    2003Marketable securities
    
    $
    14,251
    
    
    $
    108,418Total Marketable securities
    
    $
    14,251
    
    
    $
    108,418
 Gross realized gains on sales of these available-for-sale securities amounted to $278,000,
$252,000 and $322,000 for the years ended December 31, 2001, 2002 and 2003, respectively.
Unrealized gains amounted to $479,000 for the year ended December 31, 2003. Unrealized gains
were not material for the years ended December 31, 2001 and 2002. 8. INVENTORY The components of inventories were as follows: December 31,(In thousands of U.S. dollars)
    
    2002
    
    
    2003Raw materials
    
    
    375
    
    
    
    828Finished goods
    
    
    
    
    
    
    229Inventories, net
    
    
    375
    
    
    
    1,057
 F-15




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS 9. PROPERTY AND EQUIPMENT The components of property and equipment were as follows: December 31,(In thousands of U.S. dollars)
    
    2002
    
    
    2003Land and buildings
    
    
    93
    
    
    
    113Laboratory equipment
    
    
    11,257
    
    
    
    14,038Office and computer equipment
    
    
    970
    
    
    
    1,148Furniture and fixtures
    
    
    2,537
    
    
    
    3,451Total property and equipment
    
    
    14,857
    
    
    
    18,750Less accumulated depreciation and amortization
    
    
    (11,452
    )
    
    
    (13,665
    )Property and equipment, net
    
    
    3,405
    
    
    
    5,085
 Depreciation expense related to property and equipment amounted to $1,270,000, $1,460,000
and $1,712,000 for the years ended December 31, 2001, 2002 and 2003, respectively. Capitalized costs of $3,064,000 and $4,037,000 are included in property and equipment at
December 31, 2002 and 2003. Accumulated amortization of these leased assets was approximately
$2,586,000 and $3,547,000 at December 31, 2002 and 2003, respectively. Depreciation expense on
assets held under capital leases is included in total depreciation expense for the years ended
December 31, 2001, 2002 and 2003 and amounted to $385,000, $493,000 and $386,000,
respectively. 10. ACCRUED EXPENSES Accrued expenses comprise the following: December 31,(In thousands of U.S. dollars)
    
    2002
    
    
    2003Accrued compensation
    
    
    816
    
    
    
    1,812Accrued social charges
    
    
    1,055
    
    
    
    1,220Other
    
    
    157
    
    
    
    127Total accrued expenses
    
    
    2,028
    
    
    
    3,159
 11. LONG-TERM DEBT Long-term debt comprises: December 31,(In thousands of U.S. dollars)
    
    2002
    
    
    2003Anvar loans:Asacard program
    
    
    719
    
    
    
    866Other programs
    

    
    208
    
    
    
    250Grants from Datar and other agencies
    
    
    693
    
    
    
    French Ministry of Industry
    
    
    464
    
    
    
    559Total
    
    
    2,084
    
    
    
    1,675Current portion
    
    
    693
    
    
    
    Long-term portion
    
    
    1,391
    
    
    
    1,675
 F-16




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##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS Anvar is an agency of the French government that provides financing to French companies for
research and development. At December 31, 2002 and 2003, the Company had outstanding loans
from Anvar of $927,000 and $1,116,000, respectively. These loans do not bear interest and
are repayable only in the event the research project is technically or commercially
successful. In 2001, the Company renegotiated the timing for the potential repayment of
those loans, which was initially scheduled between 2002 and 2005. Potential repayment is
now scheduled to occur from 2005 through 2008. In 2001, the Company recognized $219,000 in other income related to the forgiveness by Anvar of
its loan on the Collagene research project due to the commercial failure of the project. Grants from Datar and other French public agencies are linked to investments in the development
of the Pessac facility from June 1997 to June 2002, under which the Company received
$693,000. In 2003, the Company received an additional grant of $195,000 following the
achievement of the investment and employment objectives described in the development plan
of the plant submitted to those public agencies. As a result of the achievement of the
grants objectives in 2003, revenue of $823,000 has been recognized in other income in
2003. One grant of $110,000 was repaid to Datar as there was only partial achievement of
the objectives. In 2002, the Company received a loan of $464,000 from the French Ministry of Industry on a
research project (the Proteozome project) related to the development of new Medusa
applications. Pursuant to the agreement, the Company will be granted a total amount representing
50% of the total expenses incurred on this project over a three-year period beginning on January
2, 2002. Total expenses for the project are estimated at $3,093,000. One third of this loan is
due for repayment in July 2008 with the remainder due on July 2011. The loan is non-interest
bearing. No additional amount was received in 2003. The difference between the 2002 and 2003
balance is due to fluctuation in foreign exchange rates. Future payments on long-term debt for the years ending December 31 (assuming the underlying
project is commercially or technically successful for governmental research loans, but
without considering possible success-based payment on the Collagene project, and assuming
no reimbursement of other agencies) are as follows: December(In thousands of U.S. dollars)
    
    31,2005
    
    
    2022006
    
    
    2792007
    
    
    3462008
    
    
    8481,675
 12. CAPITAL LEASE OBLIGATIONS The Company leases certain of its equipment under capital leases. Future payments on capital
lease for the years ending December 31 are as follows: December(In thousands of U.S. dollars)
    
    31,2004
    
    
    2722005
    
    
    1142006
    
    
    902007
    
    
    73Total
    
    
    549Less amounts representing interest
    
    
    (32
    )Capital lease
    

    
    517Less current portion
    
    
    (257
    )Long -term portion
    
    
    261
 F-17




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##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS Interest paid in the years ended December 31, 2001, 2002 and 2003 was approximately
$50,000, $46,000 and $27,000, respectively. 13. EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations: Year ended December 31,2001
    
    
    2002
    
    
    2003(In thousands, except per share amounts)Numerator:Net income (loss)
    
    $
    (2,874
    )
    
    $
    3,005
    
    
    $
    (3,924
    )Denominator:Weighted average shares
outstanding used for basic
earnings (loss) per share
    
    
    16,197,590
    
    
    
    16,197,590
    
    
    
    17,762,050Effect of dilutive securities:Stock-options and warrants
    
    
    
    
    
    
    513,410
    
    
    
    Weighted average shares
outstanding and dilutive
securities used for diluted
earnings (loss) per share
    
    
    16,197,590
    
    
    
    16,711,000
    
    
    
    17,762,050Basic earnings (loss) per share
    
    $
    (0,18
    )
    
    $
    0,19
    
    
    $
    (0,22
    )Diluted earnings (loss) per share
    
    $
    (0,18
    )
    
    $
    0,18
    
    
    $
    (0,22
    )
 For the years ended December 31, 2001 and 2003, the effects of dilutive securities were
excluded from the calculation of earnings per share as a net loss was reported in those periods. 14. SHAREHOLDERS EQUITY 14.1. General At December 31, 2003 and 2002, the issued and outstanding share capital of the Company consisted
of 21,391,590 and 16,197,590 ordinary shares, respectively, with a nominal value of 0.122 per
share. Over the first nine months of 2003, as a result of exercises of stock options, the Company
issued 227,500 ordinary shares, with a nominal value of 0.122 ($0.138) per share. Over the same period, as a result of exercises of warrants by Directors, the Company issued
90,000 ordinary shares, with a nominal value of 0,122 ($0.138) per share. In September 2003, as
a result of the exercise of 1,099,000 Class A, 392,500 Class B and 1,285,000 Class C warrants,
the Company issued 2,776,500 ordinary shares, with a nominal value of 0,122 ($0.133) per share. On October 2, 2003, as a result of the public offering described in the Registration
Statement filed with the SEC, the Company issued 2,000,000 ordinary shares, at a price of 
26.7319 ($ 31.58) per share. F-18




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS On October 23, 2003, as a result of exercises of stock options, the Company issued 32,500
ordinary shares, with a nominal value of 0.122 ($0.138) per share. On November 6, 2003, as a result of exercises of stock options, the Company issued 67,500
ordinary shares, with a nominal value of 0.122 ($0.138) per share. 14.2. Preemptive subscription rights Shareholders have preemptive rights to subscribe for additional shares issued by the Company for
cash on a pro ratabasis. Shareholders may waive such preemptive subscription rights at an
extraordinary general meeting of shareholders under certain circumstances. Preemptive
subscription rights, if not previously waived, are transferable during the subscription
period relating to a particular offer of shares. 14.3. Dividends Dividends may be distributed from the statutory retained earnings, subject to the requirements
of French law and the Companys by-laws. The Company has not distributed any dividends
since its inception. The accumulated deficit for statutory purposes totaled approximately
$38.1 million at December 31, 2003. Dividend distributions, if any, will be made in euros.
The Company has no plans to distribute dividends in the foreseeable future. 14.4. Warrants On April 6, 2000, the Company issued warrants at a price of 0.00 (FRF0.01) per warrant to
purchase up to 3,726,500 ordinary shares to certain private investors, including the venture
capital funds and affiliates of Biotechnology Value Fund, Alta Partners and Chase Capital
Partners. These warrants provide for physical settlement in unregistered shares and convey no
other rights. This issuance included 1,799,000 Class A warrants 642,500 Class B warrants and
1,285,000 Class C warrants. These warrants have a five-year term. The Class A and Class B
warrants are exercisable at 5.96 per share and the Class C warrants are exercisable at 0.122
per share. The number of Class B Warrants and Class C warrants that may be exercised has been
determined in relation to the closing price of the Companys ADSs on the Nasdaq National Market
in 2000. In September 2003, the Company issued 1,285,000 shares as a result of the exercise of Class C
warrants by Biotechnology Value Fund (500,000), Alta Partners (750,000) and Chase Capital
Partners (35,000). On September 3, 2003, the Company issued 1,425,000 shares as a result of the exercise by Alta
Partners of 1,050,000 Class A warrants and 375,000 of Class B warrants. On September 12, 2003, the Company issued 66,500 shares as a result of the exercise by Chase
Capital Partners of 49,000 Class A warrants and 17,500 of Class B warrants. At December 31, 2003, 700,000 Class A and 250,000 Class B warrants remained exercisable, subject
to the vesting provisions. On June 14, 2000 the Company issued, at a price of 0.00 per warrant, 120,000 warrants to
certain Directors of the Company giving them the right to subscribe to 120,000 ordinary shares
at the price of 4.88 per share. These warrants are issued for a five-year period and vest ratably
over four years from the date of issuance. During 2003, 60,000 warrants were exercised and
10,000 warrants were cancelled due to the departure of certain Directors. As of December 31,
2003, 10,000 warrants remained exercisable, subject to the vesting provisions. F-19




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS On July 19, 2001, the Company issued, at a price of 0.00 (FRF0.01) per warrant, 70,000 warrants
to certain Directors of the Company giving them the right to subscribe to 70,000 ordinary shares
at the price of 5.95 per share. These warrants are issued for a five-year period and will vest
ratably over four years from the date of issuance. During 2003, 10,000 warrants were exercised
and 5,000 were cancelled. As of December 31, 2003, 5,000 warrants remain exercisable, subject
to the vesting provisions. On June 20, 2002, the Company issued, at a price of 0.01 per warrant, 80,000 warrants to
certain Directors of the Company giving them the right to subscribe to 80,000 ordinary shares at
the price of 2.33 per share. These warrants were issued for a five-year period and will vest
ratably over four years from the date of issuance. During 2003, 20,000 warrants were exercised
and 30,000 warrants were cancelled. As of December 31, 2003, 30,000 warrants remain exercisable,
subject to the vesting provisions. On September 19, 2002, the Company issued, at a price of 0.01 per warrant, 40,000 warrants to a
Director of the Company giving him the right to subscribe to 40,000 ordinary shares at the price
of 1.36 per share. These warrants are issued for a five-year period and will vest ratably over
four years from the date of issuance. During 2003, the 40,000 warrants were cancelled. On November 7, 2003, the Company issued, at a price of 0.01 per warrant, 200,000 warrants to
certain Directors of the Company giving them the right to subscribe to 200,000 ordinary shares
at the price of  9,88 ($11.29) per share. Out of these 200,000 warrants, 120,000 are issued for
a five-year period and will vest ratably over four years from the date of issuance, whereas the
remaining 80,000 warrants will vest with the next General Shareholders meeting on June, 22 2004.
At December 31, 2003, the 200,000 warrants remain exercisable, subject to the vesting
provisions. The Company accounted for these warrants granted to non-employee directors for their
services as directors under APB 25. Under APB 25, when the exercise price of the Companys
warrants is less than the market price of the underlying shares at the date of grant, the
Company records deferred compensation expense, which is being amortized on a straight-line basis
over the vesting period. The deferred compensation related to these warrants amounted to
$2,729,000 at the date of grant. In 2003, the Company recorded compensation expense related to
these 200,000 warrants of $346,000. The summary of warrants activity is as follows: Weighted AverageWarrants
    
    
    Exercise Price inOutstanding
    
    
    U.S. dollars3Balance at January 1, 2001
    
    
    3,846,500
    
    
    $
    3.81Warrants granted
    
    
    70,000
    
    
    $
    5.17Warrants cancelled
    
    
    90,000
    
    
    $
    4.95Balance at December 31, 2001
    
    
    3,826,500
    
    
    $
    3.81Warrants granted
    
    
    120,000
    
    
    $
    1.94Balance at December 31, 2002
    
    
    3,946,500
    
    
    $
    3.75Warrants granted
    
    
    200,000
    
    
    $
    11.29Warrants exercised
    
    
    2,866,500
    
    
    $
    3.16Warrants cancelled
    
    
    85,000
    
    
    $
    2.28Balance at December 31, 2003
    
    
    1,195,000
    
    
    $
    6.55
 
 3 

 Historical exchange rate F-20




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##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS Exercise prices for warrants outstanding as of December 31, 2003 were as follows: Warrants Outstanding
    
    Warrants ExercisableWeighted
    
    Weighted
    
    
    
    WeightedRange of
    
    
    
    
    
    average
    
    average
    
    
    
    averageexercise prices
    
    Number of
    
    
    remaining
    
    exercise price
    
    Number of
    
    exercise pricein euros
    
    shares
    
    
    contractual life
    
    in euros
    
    shares
    
    in euros0 to 2.33
    
    
    30 000
    
    
    3.47
    
    2.33
    
    0.00
    
    2.33 to 5.96
    
    
    965 000
    
    
    1.27
    
    5.95
    
    0.00
    
    5.96 to 9.88
    
    
    200 000
    
    
    4.86
    
    9.88
    
    0.00
    
    1195 000
    
    
    1.93
    
    6.52
    
    0.00
    
    
 14.5. Stock options The Company has issued stock options under plans approved by shareholders in 1990, 1993,
1996, 2000, 2001 and 2003. Generally, each option vests four years from the date of grant.
In accordance with APB 25, the difference between the exercise price and the fair value of
the underlying share on the grant date has been recorded as deferred compensation expense
and is being amortized on a straight-line basis over the vesting period. The amounts
expensed under these plans in 2001, 2002 and 2003 were $23,000, $18,000 and $9,000,
respectively. The activity under the option plans were as follows: Shares
    
    
    
    
    
    WeightedAvailable for
    
    
    Options
    
    
    Average ExerciseGrant
    
    
    Outstanding
    
    
    
    Price4Balance at January 1, 2001Options
    
    
    685,000
    
    
    
    1,295,000
    
    
    $
    5.23Authorized
    
    
    750,000Granted
    
    
    (960,000
    )
    
    
    960,000
    
    
    $
    1.64Cancelled or expired
    
    
    45,000
    
    
    
    (245,000
    )
    
    $
    4.53Balance at December 31, 2001
    
    
    520,000
    
    
    
    2,010,000
    
    
    $
    3.63Options authorized
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    (695,000
    )
    
    
    695,000
    
    
    $
    2.73Cancelled or expired
    
    
    290,000
    
    
    
    (390,000
    )
    
    $
    3.64Balance at December 31, 2002
    
    
    115,000
    
    
    
    2,315,000
    
    
    $
    3.36Options authorized
    
    
    1,900,000Granted
    
    
    (1,350,000
    )
    
    
    1,350,000
    
    
    $
    16.66Exercised
    
    
    
    
    
    
    (327,500
    )
    
    $
    5.33Cancelled or expired
    
    
    107,500
    
    
    
    (117,500
    )
    
    $
    4.09Balance at December 31, 2003
    
    
    772,500
    
    
    
    3,220,000
    
    
    $
    8.65
 Stock options outstanding at December 31, 2003, which expire from 2007 to 2013, had
exercise prices ranging from 1.09 to  20.81. The weighted average remaining contractual
life of all options is 8 years. At December 31, 2003, there were 3,220,000 outstanding
options at a weighted average exercise price of 7.68, of which 1,301,250 were exercisable at a weighted average price
of  3.79. 
 4  

Historical exchange rate F-21




---



##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS Exercise prices for options outstanding as of December 31, 2003 were as follows: Stock Options Outstanding
    
    
    Stock Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    averageRange of
    
    
    
    
    
    remaining
    
    
    exercise
    
    
    
    
    
    
    exerciseexercise prices in
    
    Number of
    
    
    contractual
    
    
    price in
    
    
    Number of
    
    
    price ineuros

    shares
    
    
    life
    
    
    euros
    
    
    shares
    
    
    euros0 to 1.36
    
    
    640,000
    
    
    
    7.9
    
    
    
    1.13
    
    
    
    285,000
    
    
    
    1.112.33 to 2.77
    
    
    520,000
    
    
    
    8.1
    
    
    
    2.43
    
    
    
    460,000
    
    
    
    2.394.11 to 4.86
    
    
    890,000
    
    
    
    8.1
    
    
    
    4.47
    
    
    
    246,250
    
    
    
    4.776.40
    
    
    260,000
    
    
    
    6.9
    
    
    
    6.4
    
    
    
    195,000
    
    
    
    6.407.58 to 9.88
    
    
    155,000
    
    
    
    8.4
    
    
    
    8.99
    
    
    
    115,000
    
    
    
    9.4820.81
    
    
    755,000
    
    
    
    9.9
    
    
    
    20.81
    
    
    
    
    
    
    
    3,220,000
    
    
    
    8.4
    
    
    
    7.68
    
    
    
    1,301,250
    
    
    
    3.79
 In March 2002, 400,000 options were granted to certain executives, the vesting of
which could accelerate upon the achievement of certain targets in 2002. If these targets are not
attained, the options would continue to vest over four years in accordance with the terms of the
2001 plan agreement. No deferred compensation expense has been recognized under APB 25 as the
exercise price equals the stock price at the date of grant. The targets were achieved during
2002. In March 2003, 400,000 options were granted to certain executives, the vesting of which
would accelerate upon the achievement of certain targets in 2003. If these targets were not
attained, the options would continue to vest over four years in accordance with the terms
of the 2003 plan agreement. No deferred compensation expense has been recognized under APB
25 as the exercise price equals the stock price at the date of grant. The achievement of
the targets was recognized during 2003. The effects of applying the fair value method provided under SFAS No. 123 are shown in Note 1.12
and are not necessarily indicative of future amounts. In January 1997, the French parliament adopted a law that requires French companies to pay
social contributions, which generally represent 45% of the taxable salary, on the
difference between the exercise price of a stock option and the fair market value of the
underlying shares on the exercise date if the beneficiary sells the stock before a
five-year period following the grant of the option. The new law is consistent with personal
income tax law that requires individuals to pay income tax on the difference between the
option exercise price and the fair value of the shares at the grant date if the shares are
sold within five years of the option grant. The law applies to all options exercised after
January 1, 1997. The Company has not recorded a liability for social charges which may be assessed for
options granted in 2001, 2002, and 2003 as the liability, which is dependent on future
trading values of the Companys shares and the timing of employees decisions to exercise
options and sell the related shares, cannot be estimated. The Company also does not
consider that the liability is probable due to the income tax. The Company has instituted a
new rule that options may not be exercised if social charges could be
made against the Company. As a result, we do not expect any liability for
such social charges. F-22




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##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS 15. INCOME TAXES Income (loss) before income taxes comprises the following: Year ended December 31,(in thousands of dollars)
    
    2001
    
    
    2002
    
    
    2003France
    
    $
    (2,860
    )
    
    $
    2,452
    
    
    $
    (4,427
    )
 A reconciliation of income tax benefit computed at the French statutory rate (35.4% in
2001, 34.4% in 2002 and 34.4% in 2003) to the income tax benefit is as follows: Year ended December 31,(in thousands of dollars)
    
    2001
    
    
    2002
    
    
    2003Income tax benefit (provision) computed at the French statutory rate
    
    
    1,010
    
    
    
    (843
    )
    
    
    1,524Operating losses not utilized
    
    
    (1,010
    )
    
    
    843
    
    
    
    (1,524
    )Research credits
    
    
    
    
    
    
    567
    
    
    
    527Minimum tax payable
    
    
    (14
    )
    
    
    (14
    )
    
    
    (24
    )Total
    
    
    (14
    )
    
    
    553
    
    
    
    503
 The Company was not eligible for research and development tax credit in 2001 due to the
limited increase in research and development expenses in 2001 as compared to 1998, 1999 and
2000, respectively. Income tax benefits amounted to $553,000 in 2002 and $503,000 in 2003 and
was principally related to the research and development tax credit recorded in France. Income tax expense amounted to $14,000 in 2001 and represented the minimum income tax payable in
France. In 2002, the minimum income tax payable in France was equal to $14,173. Minimum income
tax payable in France amounted to $24,500 in 2003. Significant components of the Companys deferred taxes consist of the following: December 31,(In thousands of U.S. dollars)
    
    2002
    
    
    2003Deferred tax assets:Net operating loss carry-forwards
    
    
    10,450
    
    
    
    7,739Other deferred tax assets
    
    
    1,502
    
    
    
    8,624Deferred tax liabilities
    
    
    35
    
    
    
    Net deferred tax assets
    
    
    11,917
    
    
    
    16,363Valuation allowance
    
    
    (11,917
    )
    
    
    (16,363
    )Deferred taxes, net
    
    
    
    
    
    
    
 The Company has provided valuation allowances covering 100% of net deferred tax assets due
to the Companys history of losses. As of December 31, 2003, the Company had $22,498,000 in French net operating losses
carry-forwards. Due to a change in French tax law in 2003, we have been informed that the above
carry-forwards no longer have an expiration date. The reduction in available net operating
losses carry-forwards in 2003 is attributable to the use of $9,051 and $5,042 of net operating losses
carry-forwards respectively related to 1998 and 1999. The French government provides tax credits to companies for annual increased spending for
innovative research and development. Income tax benefits correspond to these French research tax
credits, which are credited against income taxes payable in each of the four years after being
incurred or, if not so utilized, are recoverable in cash. As of December 31, 2003, Flamel had
total research tax credits receivable of $1,348,000. If these credits are not applied against
future income F-23




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##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS taxes, they will be received as cash payments in the fourth year after the credit
is earned in accordance with the following timetable: (In thousands of U.S. dollars)
    
    December 31,2006
    
    
    7582007
    
    
    5901,348
 16. EMPLOYEE RETIREMENT PLANS In accordance with French law, post-retirement and post-employment benefits for most of the
Companys employees are sponsored by the relevant government agencies in France. The Companys
liability with respect to these plans is mostly limited to specific payroll deductions. There is
no further liability in connection with these plans. French law also requires payment of a lump sum retirement indemnity to all employees based upon
years of service and compensation at retirement. Benefits do not vest prior to retirement.
There is no formal plan and no funding of the obligation is required. The provision has
been calculated taking into account the estimated payment at retirement (discounted to the
current date), turnover and salary increases. As of December 31, 2002 and 2003, the
liability for retirement indemnities amounted to $414,000 and $457,000, respectively. In the United States, the Company sponsors a retirement plan. The company made contributions of
approximately $11,000 in 2001, $35,000 in 2002 and $23,000 in 2003. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 2002 and 2003, the carrying values of financial instruments such as cash and
cash equivalents, trade receivables and payables, other receivables and accrued liabilities and
the current portion of long-term debt approximated their market values, based on the short-term
maturities of these instruments. At December 31, 2002 and 2003, the fair value of long-term debt with carrying value of
$1,391,000 and $1,675,000, was estimated to be $1,086,000 and $1,179,000, respectively.Fair
value was determined based on expected future cash flows, discounted at market interest rates. 18. COMMITMENTS AND CONTINGENCIES 18.1. Capital leases The Company currently has commitments regarding capital leases as described in Note 12. 18.2. Operating leases The Company leases its facilities and certain equipment under operating leases, which
expire through 2006. Future minimum lease payments under operating leases due for the
fiscal years ending December 31 are as follows: (In thousands of U.S. dollars)
    
    December 31,2004
    
    
    3662005
    
    
    2012006
    
    
    98
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##### 



FLAMEL TECHNOLOGIES S.A. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS Rental expense for the years ended December 31, 2001, 2002 and 2003 was approximately
$451,000, $418,000, and $587,000, respectively. 18.3. Litigation The Company is involved in a number of claims and lawsuits considered normal in its business,
including employee litigation. While it is not possible to predict the outcome of legal actions
brought against the Company, the Company believes that the liability resulting from the pending
claims and suits would not have a material adverse effect on the results of its operations,
cash flows, or financial position as of December 31, 2003, and for the year then ended. 19. INDUSTRY AND GEOGRAPHIC INFORMATION The Company operates in one segment, the development and commercialization of
controlled-release therapeutic products based on its proprietary polymer based technology. Operations outside of France consist principally of the operations of the U.S. subsidiary, which
had no sales to third parties in 2001, 2002 or 2003. Revenues generated from customers outside of France (export sales) amounted to $7,733,000,
$6,358,000 and $18,926,000 in 2001, 2002 and 2003, respectively. The following is a summary of long-lived assets by geographic location: As of December 30,2002
    
    
    2003(in thousands)Long-lived assets:North America
    
    $
    35
    
    
    $
    39France
    
    
    4,330
    
    
    
    6,478Total long-lived assets
    
    $
    4,365
    
    
    $
    6,517
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SIGNATURES The Registrant hereby certifies that it meets all of the requirements for filing on Form
20-F/A and that it has duly caused and authorized the undersigned to sign this report on its
behalf. FLAMEL TECHNOLOGIES S.A.
(Registrant)By:
    
    /s/ Gerard SoulaGérard SoulaPresident and Chief Executive Officer
 Date: June 15, 2005