##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 Commission file number: 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
 
    Ordinary Shares, nominal value 0.122 Euros per share, represented by American Depositary Shares (as evidenced by
American Depositary Receipts), each representing one Ordinary Share
     o þ
  o þ
  þ o
  o þ o
  o þ
  o þ




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##### 



PagePART I
    
    
    
    
    1Item 1.
    
    Identity of Directors, Senior Management and Advisers
    
    
    1Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    1Item 3.
    
    Key Information
    
    
    1Item 4.
    
    Information on the Company
    
    
    10Item 5.
    
    Operating and Financial Review and Prospects
    
    
    27Item 6.
    
    Directors, Senior Management and Employees
    
    
    35Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    43Item 8.
    
    Financial Information
    
    
    44Item 9.
    
    The Offer and Listing
    
    
    44Item 10.
    
    Additional Information
    
    
    45Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    52Item 12.
    
    Description of Securities Other Than Equity Securities
    
    
    52PART II
    
    
    
    
    53Item 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    53Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    53Item 15.
    
    Controls and Procedures
    
    
    53Item 16.
    
    [Reserved]
    
    
    53Item 16A
    
    Audit Committee Financial Expert
    
    
    53Item 16B
    
    Code of Ethics
    
    
    53Item 16C
    
    Principal Accountant Fees and Services
    
    
    53Item 16D
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    54Item 16E
    
    Purchase of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    54PART III
    
    
    
    
    55Item 17.
    
    Financial Statements
    
    
    55Item 18.
    
    Financial Statements
    
    
    55Item 19.
    
    Exhibits
    
    
    55
  ® ® ® TM ®
  i




---



##### 



SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
  
    
    our product candidates, if approved for marketing, may not produce significant
revenues and we rely on our partners to determine the regulatory and marketing
strategies;
    
    our product candidates, in commercial use, may have unintended side effects,
adverse reactions or incidents of misuse;
    
    we may enter into a collaboration with a third party to market or fund a
proprietary product candidate and the terms of such a collaboration may not meet
our expectations;
    
    our delivery technologies or product development efforts may not produce safe,
effective or commercially viable products;
    
    our collaborators could elect to terminate or delay programs at any time and
disputes with collaborators or failure to negotiate acceptable new collaborative
arrangements for our technologies could occur;
    
    we may be unable to manufacture or, if our products are successful, scale-up the
manufacturing of our products economically or on a commercial scale;
    
    unexpected events could interrupt manufacturing operations at our facilities,
which could be the sole source of supply for these products;
    
    after the completion of clinical trials of products incorporating our
technologies and the submission to the FDA of a New Drug Application, or NDA, for
marketing approval and to other health authorities as a marketing authorization
application, the FDA or other health authorities could refuse to accept such
filings or could request additional pre-clinical or clinical studies be conducted,
each of which could result in significant delays, or such authorities could refuse
to approve the product at all;
    
    our product candidates could be ineffective or unsafe during pre-clinical
studies and clinical trials and we and our collaborators may not be permitted by
regulatory authorities to undertake new or additional clinical trials for product
candidates incorporating our technologies, or clinical trials could be delayed;
    
    we may experience significant delays in clinical trials on our products;
    
    we may not realize any revenue from milestone or royalty payments under our
license agreements with our partners, including GlaxoSmithKline;
    
    even if our product candidates appear promising at an early stage of
development, product candidates could fail to receive necessary regulatory
approvals, be difficult to manufacture on a large scale, be uneconomical, fail to
achieve market acceptance, be precluded from commercialization by proprietary
rights of third parties or experience substantial competition in the marketplace;
 ii




---



##### 




    
    technological changes in the biotechnology or pharmaceutical industries could
render our product candidates obsolete or noncompetitive;
    
    we may face difficulties or set-backs in obtaining and enforcing our patents or
defending claims of patent infringement by others; and
    
    we may need to raise substantial additional funding to continue research and
development programs and clinical trials and could incur difficulties or setbacks
in raising such funds.
  iii




---



##### 



PART I
 ITEM 1. Identity of Directors, Senior Management and Advisers
  ITEM 2. Offer Statistics and Expected Timetable
  ITEM 3. Key Information
 Selected Financial Data
  Statement of Operations Data:*
    
    2001
    
    2002
    
    2003
    
    2004
    
    2005Revenues
    
    $
    13,087
    
    
    $
    18,406
    
    
    $
    25,167
    
    
    $
    55,410
    
    
    $
    23,598Cost and Expenses
    
    
    (16,242
    )
    
    
    (18,629
    )
    
    
    (29,866
    )
    
    
    (46,575
    )
    
    
    (64,367
    )Income (Loss) from Operations
    
    
    (3,155
    )
    
    
    (223
    )
    
    
    (4,699
    )
    
    
    8,835
    
    
    
    (40,769
    )Interest and foreign exchange gain (loss), net
    
    
    295
    
    
    
    149
    
    
    
    (856
    )
    
    
    363
    
    
    
    4,103Other income
    
    
    
    
    
    
    2,525
    
    
    
    1,128
    
    
    
    100
    
    
    
    5,003Income (loss) before income tax
    
    
    (2,860
    )
    
    
    2,452
    
    
    
    (4,427
    )
    
    
    9,298
    
    
    
    (31,663
    )Income tax benefit (expense)
    
    
    (14
    )
    
    
    553
    
    
    
    503
    
    
    
    3,201
    
    
    
    4,286Net income (loss)
    
    $
    (2,874
    )
    
    $
    3,005
    
    
    $
    (3,924
    )
    
    $
    12,499
    
    
    $
    (27,377
    )Basic earnings (loss) per ordinary share.
    
    $
    (0.18
    )
    
    $
    0.19
    
    
    $
    (0.22
    )
    
    $
    0.58
    
    
    $
    (1.19
    )Diluted earnings (loss) per ordinary share
    
    $
    (0.18
    )
    
    $
    0.18
    
    
    $
    (0.22
    )
    
    $
    0.53
    
    
    $
    (1.19
    )Basic weighted average number of shares
outstanding (in thousands).
    
    
    16,198
    
    
    
    16,198
    
    
    
    17,762
    
    
    
    21,514
    
    
    
    22,999Diluted weighted average number of shares
outstanding (in thousands)
    
    
    16,198
    
    
    
    16,711
    
    
    
    17,762
    
    
    
    23,559
    
    
    
    22,999Dividends per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 *
    
    (in thousands of U.S. dollars, except share and per share data) Balance Sheet Data:*
    
    2001
    
    2002
    
    2003
    
    2004
    
    2005Cash, Cash
equivalents &
Marketable securities
    
    $
    5,309
    
    
    $
    14,527
    
    
    $
    109,617
    
    
    $
    105,374
    
    
    $
    83,774Working capital**
    
    
    7,338
    
    
    
    12,202
    
    
    
    102,867
    
    
    
    97,446
    
    
    
    67,092Total assets
    
    
    18,144
    
    
    
    23,076
    
    
    
    127,252
    
    
    
    145,608
    
    
    
    124,351Long term liabilities
(excluding deferred
revenues)
    
    
    1,299
    
    
    
    2,329
    
    
    
    3,123
    
    
    
    4,665
    
    
    
    12,801Shareholders equity
    
    
    7,509
    
    
    
    12,286
    
    
    
    92,061
    
    
    
    116,757
    
    
    
    86,654
 
 *
    
    (in thousands of U.S. dollars)**
    
    (current assets  current liabilities) 1




---



##### 



Exchange Rates
   Year Ended December 31,Euro to U.S. Dollar:
    
    High
    
    Low
    
    Average Rate12005
    
    
    1.3507
    
    
    
    1.1667
    
    
    
    1.244782004
    
    
    1.367
    
    
    
    1.176
    
    
    
    1.2482003
    
    
    1.246
    
    
    
    1.036
    
    
    
    1.1322002
    
    
    1.0485
    
    
    
    0.8594
    
    
    
    0.94952001
    
    
    0.9548
    
    
    
    0.8388
    
    
    
    0.8958
 Previous Six Months,Euro to U.S. Dollar:
    
    High
    
    Low
    
    Average Rate1April, 2006
    
    
    1.2537
    
    
    
    1.2063
    
    
    
    1.2271March, 2006
    
    
    1.2185
    
    
    
    1.1913
    
    
    
    1.2020February, 2006
    
    
    1.2092
    
    
    
    1.1852
    
    
    
    1.1938January, 2006
    
    
    1.2294
    
    
    
    1.1826
    
    
    
    1.2103December, 2005
    
    
    1.2020
    
    
    
    1.1697
    
    
    
    1.1856November, 2005
    
    
    1.2041
    
    
    
    1.1667
    
    
    
    1.1786
  Risk Factors
  We depend on a few customers for the majority of our revenues, and the loss of any one of these
customers could reduce our revenues significantly.
  
 1
    
    Annual totals represent the average of the
noon buying rates for Euros of each business day during the relevant period.
Monthly totals represent the average of the noon buying rates for Euros for
each business day during the relevant month. 2




---



##### 



Our revenues depend on pharmaceutical and biotechnology companies successfully developing products
that incorporate our drug delivery technologies.
   
    
    our collaborative agreements may not result in any new commercial products;
    
    the existing commercial products developed under our collaborative agreements
may not be successful;
    
    our pharmaceutical and biotechnology company partners may not successfully
market any commercial products;
    
    we may not be able to meet the milestones established in our current or future
collaborative agreements;
    
    we may not be able to successfully develop new drug delivery technologies that
would be attractive to potential pharmaceutical or biotechnology company partners;
and
    
    our collaborative partners may terminate their relationships with us.
 Although products that incorporate our drug delivery technologies may appear promising at their
early stages of development and in clinical trials, none of these potential products may reach the
commercial market for a number of reasons.
   
    
    they may be found to be ineffective or cause harmful side effects, or they may
fail during pre-clinical testing or clinical trials;
    
    we may not find pharmaceutical or biotechnology companies to adopt the
technologies or, if partnered, the business strategy of our partner may change;
    
    our pharmaceutical and biotechnology company partners may find that certain
products cannot be manufactured on a commercial scale and, therefore, may not be
economical to produce; or
 3




---



##### 




    
    products that use our technologies also could fail to achieve market acceptance
or be precluded from commercialization by proprietary rights of third parties.
 We depend on key personnel to execute our business plan. If we cannot attract and retain key
personnel, we may not be able to successfully implement our business plan.
  Products that incorporate our drug delivery technologies are subject to regulatory approval. If
our pharmaceutical and biotechnology company partners do not obtain such approvals, or if such
approvals are delayed, our revenues may be adversely affected.
      4




---



##### 



We may face product liability claims related to participation in clinical trials or the use or
misuse of our products or products that incorporate our technologies.
  Our commercial products are subject to continuing regulation and we may be subject to adverse
consequences if we fail to comply with applicable regulations.
  
    
    adverse drug experience and other reporting regulations;
    
    product promotion;
    
    product manufacturing, including good manufacturing practice requirements;
    
    record keeping requirements;
    
    drug sampling and distribution requirements;
    
    electronic record and signature requirements; and
    
    product manufacturing and labeling changes or modifications.
  
    
    issue warning letters;
    
    impose fines;
    
    seize products or order recalls;
    
    issue injunctions to stop future sales of products;
    
    refuse to permit products to be imported into, or exported out of, the United States;
    
    suspend or limit our production;
    
    withdraw previously approved marketing applications; and
    
    initiate criminal prosecutions.
 5




---



##### 



If our competitors develop and market drug delivery technologies or related products that are more
effective than ours, or obtain regulatory approval and market such technology or products before we
do, our commercial opportunity will be reduced or eliminated.
 ® ®
   If we cannot keep pace with the rapid technological change in our industry, we may lose business.
  Our products and technologies may not gain market acceptance.
   
    
    the effectiveness of our marketing strategy;
    
    demonstration of the clinical efficacy and safety of the product or technology;
    
    no evidence of undesirable side effects which delay or extend trials;
    
    no regulatory delays or other regulatory actions;
    
    its cost-effectiveness;
    
    its potential advantage over alternative treatment methods; and
 6




---



##### 




    
    the marketing and distribution support it receives.
  If we cannot adequately protect our technology and proprietary information, we may be unable to
sustain a competitive advantage.
    Third parties may claim that our technologies, or the products in which they are used, infringe on
their rights and we may incur significant costs resolving these claims.
   If we or our collaborative partners are required to obtain licenses from third parties, our
revenues and royalties on any commercialized products could be reduced.
  7




---



##### 



If we use biological and hazardous materials in a manner that causes injury, we may be liable for
significant damages.
  Healthcare reform and restrictions on reimbursements may limit our financial returns.
  Because we have a limited operating history, investors in our shares may have difficulty evaluating
our prospects.
 ® ®
 If we are not profitable in the future, the value of our shares may fall.
  
    
    the demand for our technologies and products;
    
    the level of product and price competition;
    
    our ability to develop additional commercial applications for our products;
    
    our ability to control our costs;
    
    our ability to broaden our customer base;
    
    the effectiveness of our marketing strategy; and
    
    general economic conditions.
 8




---



##### 



We may require additional financing, which may not be available on favorable terms or at all, and
which may result in dilution of your equity interest.
  
    
    the development and acquisition of new products and technologies;
    
    the progress of our research and product development programs;
    
    results of our collaborative efforts with current and potential pharmaceutical
and biotechnology company partners; and
    
    the timing of, and amounts received from, future product sales, product
development fees and licensing revenue and royalties.
 Our share price has been volatile and may continue to be volatile.
 ,
 
    
    fluctuations in our operating results;
    
    announcements of technological collaborations, innovations or new products by us
or our competitors;
    
    governmental regulations;
    
    developments in patent or other proprietary rights owned by us or others;
    
    public concern as to the safety of drugs developed by us or others;
    
    the results of pre-clinical testing and clinical studies or trials by us or our competitors;
    
    litigation;
    
    decisions by our pharmaceutical and biotechnology company partners relating to
the products incorporating our technologies;
    
    actions by the FDA in connection with submissions related to the products
incorporating our technologies;
    
    the perception by the market of biotechnology and high technology companies
generally; and
    
    general market conditions.
 9




---



##### 



Our operating results may fluctuate, which may adversely affect our share price.
  
    
    demand by consumers for the products we produce;
    
    new product introductions;
    
    pharmaceutical and biotechnology company ordering patterns;
    
    the number of new collaborative agreements into which we enter;
    
    the number and timing of product development milestones that we achieve under
collaborative agreements;
    
    the level of our development activity conducted for, and at the direction of,
pharmaceutical and biotechnology companies under collaborative agreements; and
    
    the level of our spending on new drug delivery technology development and
technology acquisition, and internal product development.
  ITEM 4. Information on the Company
 General Overview
 ® ® ® ® ®
 ® ® ®
 ® ® ®
 ®
 10




---



##### 



® ® ®
 ®
 ® ® ® ®
   The Need for Novel Delivery Systems
  Business Strategy
  
    
    maximize the potential of our existing drug delivery systems;
    
    develop or acquire additional drug delivery technologies;
    
    identify additional compounds for unmet medical needs;
    
    develop new formulations of proprietary compounds that we receive from
additional collaborators; and
 11




---



##### 




    
    leverage capabilities of pharmaceutical partners for clinical development and
commercialization.
   Medusa ® : Delivery System for Therapeutic Proteins and Peptides
   
    
    can be metabolized by the human body into harmless substances;
    
    is compatible with the protein or peptide;
    
    keeps the structure of the protein intact;
    
    protects the therapeutic agent during transit and delivery; and
    
    has the required release properties once delivered.
 ® ® ®
 Basuli ® Long-acting Basal Insulin Formulation
 ®
 Insulin Market
  12




---



##### 



®
 The Development of Basulin®
 ® ®
  ® ®
 Other Products Based on the Medusa ® Technology
 ® ® ®
 Interferon
 ® ®
  13




---



##### 



Interleukin
 ® ®
 Micropump ® : Delivery System for the Oral Administration of Drugs
 ®
 ®
 ® ® ® ®
 ® ®
 ® ®
 14




---



##### 



Products Based on the Micropump® Technology
 ® ®
 1.
    
    Lansoprazole extended release
 ®
 The Market for Proton Pump Inhibitors
  ® ®
 2.
    
    Genvir  : Controlled-release Oral Acyclovir
 ®
 The Market for Anti-Herpes Drugs
 ®
 15




---



##### 



Controlled-Release Acyclovir for Acute Genital Herpes
  ®
   TM
 3.
    
    Asacard 162.5mg: Controlled-Release Cardiovascular Aspirin
 ®
 Other Products Based on Micropump® Technology
 ® ®
 Photochromic Materials
    16




---



##### 



Strategic Alliances
  GlaxoSmithKline
 ® ®
 TAP
 ®
 Bristol-Myers Squibb
 ®
 17




---



##### 



Biovail
 TM
 Servier
 ®
 Merck & Co.
  Corning: Photochromic Materials
    Manufacturing
   18




---



##### 



® ®
 ®
  ®
 Patents and Proprietary Technology
  â â â â â
   19




---



##### 



Government Regulation
  ®
  New Drug Development and Approval Process
 United States
   20




---



##### 



Chemical and Formulation Development
   Pre-Clinical Testing
  Investigational New Drug Application
 USA:
 21




---



##### 



European Union:
 Clinical Trials
  New Drug Application or Biological License Application
    Other Countries
  22




---



##### 



Regulation of Combination Drugs
    Marketing Approval and Reporting Requirements
   Post-Marketing Obligations
  23




---



##### 



Patent Restoration and Exclusivity
     24




---



##### 



Regulation of Medical Devices
 United States
 ®
 Other Countries
   Other Regulation
   Healthcare Reimbursement
  25




---



##### 



Competition
      
    
    demonstration of its clinical efficacy and safety;
    
    its cost-effectiveness;
    
    its potential advantage over alternative treatment methods; and
    
    the marketing and distribution support it receives.
 Description of Property
 ®
 26




---



##### 



® ® ®
 ITEM 5. Operating and Financial Review and Prospects
  Overview
 ® ® ® ® ® ® ® ® ® ®
 ® ®
 27




---



##### 



28




---



##### 



Critical Accounting Policies
 Revenue Recognition
       29




---



##### 



Results of Operations
  Operating Revenues
  2003
    
    2004
    
    2005LICENSE AND RESEARCH REVENUES
    
    
    21.0
    
    
    
    50.9
    
    
    
    20.8RESEARCH
    
    
    
    
    13.0
    
    
    
    20.8
    
    
    
    15.4Research
    
    Servier
    
    
    1.4
    
    
    
    0.2GSK undisclosed existingproduct
    
    
    4.4
    
    
    
    6.4
    
    
    
    8.6BMS
    
    
    3.8
    
    
    
    8.0Corning
    
    
    0.4TAP Lansoprazole
    
    
    
    
    
    
    4.9
    
    
    
    6.8Biovail Genvir
    
    
    
    
    
    
    0.6Undisclosed Partners
    
    
    3.0
    
    
    
    0.7LICENSES
    
    
    
    
    8.0
    
    
    
    30.1
    
    
    
    5.4Up Front Payment
    
    Servier
    
    
    1.3
    
    
    
    1.4GSK undisclosed existingproduct
    
    
    0.5
    
    
    
    0.8
    
    
    
    0.8GSK Augmentin
    
    
    1.4BMS
    
    
    1.3
    
    
    
    19.9TAP Lansoprazole
    
    
    
    
    
    
    0.1
    
    
    
    0.9Biovail Genvir
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2Undisclosed Partners
    
    
    0.1
    
    
    
    0.1Milestones
    
    Servier
    
    
    0.5GSK undisclosed existingproduct
    
    
    2.8
    
    
    
    2.0
    
    
    
    2.0BMS
    
    
    
    
    
    
    5.1TAP Lansoprazole
    
    
    
    
    
    
    0.5
    
    
    
    1.5TOTAL
    
    
    
    
    21.0
    
    
    
    50.9
    
    
    
    20.8Servier
    
    
    3.2
    
    
    
    1.6GSK undisclosed existingproduct
    
    
    7.7
    
    
    
    9.2
    
    
    
    11.4GSK Augmentin
    
    
    1.4Corning
    
    
    0.4BMS
    
    
    5.1
    
    
    
    33.0TAP Lansoprazole
    
    
    
    
    
    
    5.5
    
    
    
    9.2Biovail Genvir
    
    
    0.1
    
    
    
    0.8
    
    
    
    0.2Undisclosed Partners
    
    
    3.1
    
    
    
    0.8
 30




---



##### 



Operating Expenses
   31




---



##### 



®
   Non-Operating Items
 ®
    32




---



##### 



Net Income/Loss
  Liquidity and Capital Resources
        33




---



##### 



Payments Due Per PeriodLess than
    
    
    1 to 3
    
    
    3 to 5(in
thousands of US dollars)
    
    1 year
    
    
    years
    
    
    years
    
    
    More than 5 years
    
    
    TotalLong-Term Debt (see note 12)
    
    $
    449
    
    
    $
    1,173
    
    
    
    
    
    
    $
    1,160
    
    
    $
    2,782Capital Lease Obligation (see
note 13)
    
    
    409
    
    
    
    623
    
    
    
    27
    
    
    
    
    
    
    
    1,059Operating Leases (see note 19.2)
    
    
    776
    
    
    
    1,405
    
    
    
    731
    
    
    
    919
    
    
    
    3,831Total Contractual Cash Obligations
    
    $
    1,634
    
    
    $
    3,201
    
    
    $
    758
    
    
    $
    2,079
    
    
    $
    7,672
  34




---



##### 



ITEM 6. Directors, Senior Management and Employees
 Directors and Senior Management
  Year ofInitialName
    
    Position
    
    AppointmentElie Vannier (1) (2) (5)
    
    Non-Executive Chairman of the Board of Directors
    
    
    2005Stephen H. Willard
    
    Chief Executive Officer and Director
    
    
    2000Michel Finance
    
    Executive Vice President and Chief Financial Officer
    
    
    2005Rafael Jorda
    
    Executive Vice President and Chief Operating Officer
    
    
    1991Andrew Francis
    
    Senior Vice President Business Development
    
    
    2005Christian Kalita
    
    Directeur General Delegue Pharmacien Responsable
    
    
    2005(Chief Pharmacist)Remi Meyrueix
    
    Scientific Director
    
    
    1990Catherine Castan
    
    Galenic Department Director
    
    
    1992You Ping Chan
    
    Chemistry Department Director
    
    
    1992Sian Crouzet
    
    Financial Controller
    
    
    2005Roger Kravtzoff
    
    Pharmaceutical Development Director
    
    
    2002Charles Mosseri-Marlio
    
    Director of Strategic Planning and Investor Relations
    
    
    2004David Weber
    
    Supply Chain Director
    
    
    2003Cornélis Boonstra (2)
    
    Director
    
    
    2005Frederick Lemoine (2) (5)
    
    Director
    
    
    2005Randy H. Thurman (3)
    
    Director
    
    
    2005Lodewijk J.R. de Vink (1) (4)
    
    Director
    
    
    2006John L. Vogelstein(1) (5)
    
    Director
    
    
    2005
 
 (1)
    
    Member of the Compensation Committee(2)
    
    Member of the Audit Committee(3)
    
    Resigned on January 10th 2006(4)
    
    Nominated on January 10th in replacement of Randy H. Thurman(5)
    
    Member of the Nomination and Corporate Governance Committee     35




---



##### 



36




---



##### 



Board Practices
   statuts statuts
  37




---



##### 



Compensation of Directors and Officers
   Options to Purchase Securities from the Company
     38




---



##### 



39




---



##### 



Options Granted and Warrants Subscribed from January 1, 2005 to April 30, 2006
 Plan on
    
    Exercise
    
    ExerciseNumber of
    
    Which
    
    Price in
    
    Price in USDName
    
    Warrants
    
    Options
    
    Granted
    

Euros

    
    $
    
    ExpirationFinance
    
    
    
    
    
    
    200,000
    
    
    
    2005
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201520,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Jorda
    
    
    
    
    
    
    105,000
    
    
    
    2004
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201575,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Francis
    
    
    
    
    
    
    100,000
    
    
    
    2005
    
    
    
    11.42
    
    
    
    15.24
    
    
    March 201530,000
    
    
    
    2004
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201520,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015McWilliam
    
    
    
    
    
    
    100,000
    
    
    
    2004
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 20155,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Willard
    
    
    
    
    
    
    100,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Vannier
    
    
    
    
    
    
    75,000
    
    
    
    2005
    
    
    
    13.72
    
    
    
    16.68
    
    
    September 2008Boonstra
    
    
    60,000
    
    
    
    
    
    
    
    
    
    
    
    14.91
    
    
    
    17.88
    
    
    November 20083,083
    
    
    
    
    
    
    
    
    
    
    
    20.07
    
    
    
    23.99
    
    
    March 2009Lemoine
    
    
    50,750
    
    
    
    
    
    
    
    
    
    
    
    14.91
    
    
    
    17.88
    
    
    November 2008Volgestein
    
    
    60,000
    
    
    
    
    
    
    
    
    
    
    
    14.91
    
    
    
    17.88
    
    
    November 20083,083
    
    
    
    
    
    
    
    
    
    
    
    20.07
    
    
    
    23.99
    
    
    March 2009De Vink
    
    
    63,084
    
    
    
    
    
    
    
    
    
    
    
    20.07
    
    
    
    23.99
    
    
    March 2009Bourboulou
    
    
    
    
    
    
    50,000
    
    
    
    2005
    
    
    
    13.08
    
    
    
    17.49
    
    
    May 201520,000
    
    
    
    2003
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 2015Crouzet
    
    
    
    
    
    
    50,000
    
    
    
    2000
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 20155,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Green
    
    
    
    
    
    
    50,000
    
    
    
    2004
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 2015Kalita
    
    
    
    
    
    
    50,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Kravtzoff
    
    
    
    
    
    
    30,000
    
    
    
    2004
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201520,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Meyrueix
    
    
    
    
    
    
    30,000
    
    
    
    2004
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201520,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Autant
    
    
    
    
    
    
    20,000
    
    
    
    2004
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201510,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Castan
    
    
    
    
    
    
    20,000
    
    
    
    2004
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201520,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Cheong Chan
    
    
    
    
    
    
    20,000
    
    
    
    2004
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201520,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Commaret
    
    
    
    
    
    
    20,000
    
    
    
    2003
    
    
    
    11.42
    
    
    
    15.24
    
    
    March 20155,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Duracher
    
    
    
    
    
    
    20,000
    
    
    
    2003
    
    
    
    11.42
    
    
    
    15.24
    
    
    March 2015Gorria
    
    
    
    
    
    
    20,000
    
    
    
    2005
    
    
    
    20.07
    
    
    
    23.99
    
    
    April 2016Guimerberteau
    
    
    
    
    
    
    20,000
    
    
    
    2004
    
    
    
    11.42
    
    
    
    15.24
    
    
    March 201520,000
    
    
    
    2003
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 2015Hardre
    
    
    
    
    
    
    20,000
    
    
    
    2003
    
    
    
    11.42
    
    
    
    15.24
    
    
    March 2015Pouliquen
    
    
    
    
    
    
    20,000
    
    
    
    2003
    
    
    
    11.42
    
    
    
    15.24
    
    
    March 2015Soula R
    
    
    
    
    
    
    20,000
    
    
    
    2003
    
    
    
    11.42
    
    
    
    15.24
    
    
    March 2015Vialas
    
    
    
    
    
    
    20,000
    
    
    
    2004
    
    
    
    11.42
    
    
    
    15.24
    
    
    March 201520,000
    
    
    
    2005
    
    
    
    20.07
    
    
    
    23.99
    
    
    March 2016Ysac
    
    
    
    
    
    
    20,000
    
    
    
    2004
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 20155,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Bardet
    
    
    
    
    
    
    10,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Borel
    
    
    
    
    
    
    10,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Lemercier
    
    
    
    
    
    
    10,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 201510,000
    
    
    
    2005
    
    
    
    20.07
    
    
    
    23.99
    
    
    March 2016Marlio
    
    
    
    
    
    
    10,000
    
    
    
    2004
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 20155,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Nicolas
    
    
    
    
    
    
    10,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015Prevot
    
    
    
    
    
    
    10,000
    
    
    
    2005
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
 40




---



##### 



Employees
  Employees
 Venissieux (1)
    
    Pessac (2)
    
    USA (3)
    
    TotalYear End2003
    
    
    95
    
    
    
    76
    
    
    
    3
    
    
    
    1742004
    
    
    120
    
    
    
    101
    
    
    
    3
    
    
    
    2242005
    
    
    123
    
    
    
    131
    
    
    
    5
    
    
    
    259
 
 (1)
    
    Primarily engaged in research activities(2)
    
    Primarily engaged in technical and pharmaceutical development activities(3)
    
    Primarily engaged in administrative and marketing activities  Share Ownership
  41




---



##### 



OWNERSHIP OF SHARES AS OF APRIL 30, 2006
 % of Ordinary
    
    
    
    
    
    
    
    
    
    Exercise Price
    
    ExerciseShares
    
    Shares
    
    
    
    
    
    Number of
    
    in Euros
    
    Price in USD
    
    
    
    
    
    
    
    TotalName
    
    Owned
    
    Outstanding
    
    Warrants
    
    Options
    
    
    
    $
    
    Expiration
    
    Total
    
    %Willard
    
    
    25,001
    
    
    
    0.11
    %
    
    
    
    
    
    
    40,000
    
    
    
    7.58
    
    
    
    4.99
    
    
    September 201040,000
    
    
    
    6.4
    
    
    
    5.73
    
    
    December 201025,000
    
    
    
    6.4
    
    
    
    5.73
    
    
    December 201090,000
    
    
    
    1.09
    
    
    
    0.99
    
    
    September 2011195,000
    
    
    
    2.33
    
    
    
    2.04
    
    
    March 2012200,000
    
    
    
    4.32
    
    
    
    4.62
    
    
    March 2013100,000
    
    
    
    20.81
    
    
    
    25.27
    
    
    December 2013150,000
    
    
    
    14.81
    
    
    
    19.70
    
    
    December 2014100,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    965,001
    
    
    
    3.43
    %Vannier
    
    
    1
    
    
    
    0.00
    %
    
    
    
    
    
    
    75,000
    
    
    
    13.72
    
    
    
    16.68
    
    
    September 2008
    
    
    75,001
    
    
    
    0.27
    %Boonstra
    
    
    1
    
    
    
    0.00
    %
    
    
    60,000
    
    
    
    
    
    
    
    14.91
    
    
    
    17.88
    
    
    November 20083,083
    
    
    
    
    
    
    
    20.07
    
    
    
    23.99
    
    
    March 2009
    
    
    63,084
    
    
    
    0.22
    %Lemoine
    
    
    1
    
    
    
    0.00
    %
    
    
    50,750
    
    
    
    
    
    
    
    14.91
    
    
    
    17.88
    
    
    November 2008
    
    
    50,751
    
    
    
    0.18
    %Volgestein
    
    
    100,001
    
    
    
    0.42
    %
    
    
    60,000
    
    
    
    
    
    
    
    14.91
    
    
    
    17.88
    
    
    November 20083,083
    
    
    
    
    
    
    
    20.07
    
    
    
    23.99
    
    
    March 2009
    
    
    163,084
    
    
    
    0.58
    %De Vink
    
    
    1
    
    
    
    0.00
    %
    
    
    63,084
    
    
    
    
    
    
    
    20.07
    
    
    
    23.99
    
    
    March 2009
    
    
    63,085
    
    
    
    0.22
    %Finance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201520,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    220,000
    
    
    
    0.78
    %Jorda
    
    
    370
    
    
    
    0.00
    %
    
    
    
    
    
    
    80,000
    
    
    
    2.78
    
    
    
    2.49
    
    
    December 20115,000
    
    
    
    9.88
    
    
    
    11.66
    
    
    June 201360,000
    
    
    
    14.81
    
    
    
    19.70
    
    
    December 2014105,000
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201575,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    325,370
    
    
    
    1.16
    %Francis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    11.42
    
    
    
    15.24
    
    
    March 201530,000
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201520,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    150,000
    
    
    
    0.53
    %Hanras
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    9.88
    
    
    
    11.66
    
    
    June 201340,000
    
    
    
    20.81
    
    
    
    25.27
    
    
    December 2013
    
    
    45,000
    
    
    
    0.16
    %Kalita
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    50,000
    
    
    
    0.18
    %Meyrueix
    
    
    125
    
    
    
    0.00
    %
    
    
    
    
    
    
    40,000
    
    
    
    4.87
    
    
    
    4.65
    
    
    April 201040,000
    
    
    
    2.78
    
    
    
    2.49
    
    
    December 20115,000
    
    
    
    9.88
    
    
    
    11.66
    
    
    June 201340,000
    
    
    
    14.81
    
    
    
    19.70
    
    
    December 201430,000
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201520,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    175,125
    
    
    
    0.62
    %Kravtzoff
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    50,000
    
    
    
    1.36
    
    
    
    1.34
    
    
    June 20125,000
    
    
    
    9.88
    
    
    
    11.66
    
    
    June 201330,000
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201520,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    105,000
    
    
    
    0.37
    %Chan
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    40,000
    
    
    
    1.36
    
    
    
    1.34
    
    
    June 20125,000
    
    
    
    9.88
    
    
    
    11.66
    
    
    June 201320,000
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201520,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    85,000
    
    
    
    0.30
    %Bardet
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    5,000
    
    
    
    9.88
    
    
    
    11.66
    
    
    June 201310,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    15,000
    
    
    
    0.05
    %Castan
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    10,000
    
    
    
    1.09
    
    
    
    0.99
    
    
    September 20115,000
    
    
    
    9.88
    
    
    
    11.66
    
    
    June 201340,000
    
    
    
    20.81
    
    
    
    25.27
    
    
    December 201320,000
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 201520,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    95,000
    
    
    
    0.34
    %Mosseri-Marlio
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    50,000
    
    
    
    19.2
    
    
    
    23.61
    
    
    March 201410,000
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 20155,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    65,000
    
    
    
    0.23
    %Crouzet
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    50,000
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 20155,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    55,000
    
    
    
    0.20
    %Weber
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    50,000
    
    
    
    12.02
    
    
    
    14.81
    
    
    September 2014
    
    
    50,000
    
    
    
    0.18
    %Bourboulou
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    50,000
    
    
    
    13.08
    
    
    
    17.49
    
    
    May 201520,000
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 2015
    
    
    70,000
    
    
    
    0.25
    %McWilliam
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    100,000
    
    
    
    12.86
    
    
    
    15.83
    
    
    September 20155,000
    
    
    
    16.23
    
    
    
    19.35
    
    
    December 2015
    
    
    105,000
    
    
    
    0.37
    %
 42




---



##### 



ITEM 7. Major Shareholders and Related Party Transactions
 Major Shareholders
  Amount of Ordinary
    
    PercentageIdentity of Person or Group
    
    Shares Owned
    
    of ClassO.S.S. Capital Management LP
    
    
    3,633,447
    (1)
    
    
    15.26
    %Knoll Capital Management, LP
    
    
    2,012,684
    (2)
    
    
    8.45
    %Greenlight Capital Management
    
    
    1,547,045
    (3)
    
    
    6.50
    %BVF, Inc.
    
    
    1,448,087
    (4)
    
    
    6.08
    %Glenhill Advisors, LLC
    
    
    1,162,654
    (5)
    
    
    4.88
    %
 
 (1)
    
    Based solely on a review of a Schedule 13G/A filed on January 13,
2006. O.S.S. Capital Management LP, shares beneficial ownership over
the Ordinary Shares it owns with Schafer Brothers LLC and Oscar S.
Schafer and in respect of 5.0% of the Ordinary Shares with O.S.S
Advisors LLC. Percentages are calculated using the total number of
shares outstanding as of May 1, 2006.(2)
    
    Based solely on a review of a Schedule 13G/A filed on February 9, 2006
Knoll Capital Management, LP shares beneficial ownership over the
Ordinary Shares it owns with Fred Knoll. Percentages are calculated
using the total number of shares outstanding as of May 1, 2006.(3)
    
    Based solely on a review of a Schedule 13G/A filed on July 18, 2005.
Greenlight Capital, LLC shares beneficial ownership over the Ordinary
Shares it owns with David Einhorn. Percentages are calculated using
the total number of shares outstanding as of May 1, 2006.(4)
    
    Based solely on a review of a Schedule 13D/A filed on April 25, 2006.
BVF Inc. shares beneficial ownership over the Ordinary Shares it owns
with BVF Partners L.P. Percentages are calculated using the total
number of shares outstanding as of May 1, 2006.(5)
    
    Based solely on a review of a Schedule 13G/A filed on January 13,
2006. Glenhill Advisors, LLC shares beneficial ownership over the
Ordinary Shares it owns with Glenn Krevlin. Percentages are
calculated using the total number of shares outstanding as of May 1,
2006.   
    
    The share ownership of O.S.S. Capital Management LP, Schafer Brothers LLC and Oscar S.
Schafer decreased from approximately 5.09% as reported on June 30, 2003 to approximately
3.10% as reported on January 28, 2004, then increased to approximately 5.40% as reported on
July 22, 2004 and approximately 7.80% as reported on February 11, 2005, then increased
further to approximately 9.70% as reported on April 18, 2005; to approximately 11.9% as
reported on May 11, 2005; to approximately 12.3% as reported on May 12, 2005; it decreased
on a percentage basis to 11.7% as reported on June 23, 2005 (the actual number of shares
owned increased); it increased further to 13.0% as reported on September 9, 2006; and
further increased to 15.4% as reported on January 13, 2006.
 43




---



##### 




    
    The share ownership of Knoll Capital Management, LP and Fred Knoll increased from 6.8%
as reported on April 8, 2004 to 7.8% as reported on April 20, 2005 and further increased to
8.5% as reported on February 9, 2006.
    
    The share ownership of BVF Inc. and BVF Partners L.P. decreased from approximately 19.6%
as reported on February 13, 2003 to approximately 12.18% as reported on April 9, 2004 and
decreased further to approximately 5.66% as reported on September 26, 2004; it increased to
approximately 10.31% as reported on February 14, 2005 and increased further to 11.41% as of
April 21, 2005; it decreased to approximately 9.5% as reported on July 22, 2005, and
decreased to 8.1% as reported on January 13, 2006, and decreased further to 6.7% as
reported on April 25, 2006.
    
    The share ownership of Glenhill Advisors and Glen Krevlin declined from 5.01% as
reported on January 26, 2005 to 4.92% as reported on January 13, 2006.
 Related Party Transactions
  ITEM 8. Financial Information
 Financial Statements
  Legal Proceedings
  Dividend Policy
  ITEM 9. The Offer and Listing
   Price Per ADS (US$)Year
    
    High
    
    Low2001
    
    
    7.06
    
    
    
    0.942002
    
    
    4.85
    
    
    
    1.222003
    
    
    42.85
    
    
    
    3.742004
    
    
    31.73
    
    
    
    14.672005
    
    
    21.37
    
    
    
    12.25
 44




---



##### 



Price Per ADS (US$)Quarter Ended
    
    High
    
    Low1st Quarter, 2003
    
    
    7.15
    
    
    
    3.742ndQuarter, 2003
    
    
    13.95
    
    
    
    7.173rd Quarter, 2003
    
    
    42.85
    
    
    
    13.034th Quarter, 2003
    
    
    37.99
    
    
    
    23.231st Quarter, 2004
    
    
    31.73
    
    
    
    23.262ndQuarter, 2004
    
    
    30.78
    
    
    
    23.273rd Quarter, 2004
    
    
    25.51
    
    
    
    14.674th Quarter, 2004
    
    
    21.46
    
    
    
    14.861st Quarter, 2005
    
    
    19.65
    
    
    
    12.822nd Quarter, 2005
    
    
    12.25
    
    
    
    21.373rd Quarter, 2005
    
    
    20.45
    
    
    
    14.904th Quarter, 2005
    
    
    19.77
    
    
    
    17.221st Quarter, 2006
    
    
    24.40
    
    
    
    18.50
 Price Per ADS (US$)Month Ended
    
    High
    
    LowApril 30, 2006
    
    
    21.28
    
    
    
    18.64March 31, 2006
    
    
    23.99
    
    
    
    20.73February 28, 2006
    
    
    24.40
    
    
    
    20.73January 31, 2006
    
    
    23.98
    
    
    
    18.50December 31, 2005
    
    
    19.56
    
    
    
    17.73November 30, 2005
    
    
    19.77
    
    
    
    17.71
 ITEM 10. Additional Information
    Memorandum and Articles of Association
  45




---



##### 



Ownership of Shares by Non-European Union Persons
    Material Contracts
  Exchange Controls
  Taxation
 French Taxation
    Taxation on Sale or Disposal of Flamel Ordinary Shares
  
    
    the holder is not a French resident for French tax purposes; and
 46




---



##### 




    
    the holder has held not more than 25% of Flamels dividend rights, known as
droits aux benefices sociaux, at any time during the preceding five years, either
directly or indirectly.
    Taxation of Dividends
 Withholding Tax
 avoir fiscal
 avoir fiscal credit dimpôt
   avoir fiscal credit dimpôt
 crédit dimpôt avoir fiscal


Australia
    
    Germany
    
    Luxembourg
    
    Norway
    
    United KingdomAustria
    
    Ghana
    
    Malaysia
    
    Pakistan
    
    United StatesBelgium
    
    Iceland
    
    Mali
    
    Senegal
    
    UkraineBolivia
    
    India
    
    Malta
    
    Singapore
    
    VenezuelaBrazil
    
    Israel
    
    Mauritius
    
    South KoreaBurkina Faso
    
    Italy
    
    Mexico
    
    SpainCameroon
    
    Ivory
    
    Coast Namibia
    
    Sweden
    
    Mayotte


47



---



##### 



Canada
    
    Japan
    
    Netherlands
    
    Switzerland
    
    New CaledoniaFinland
    
    Latvia
    
    New Zealand
    
    Togo
    
    Saint-Pierre et MiquelonGabon
    
    Lithuania
    
    Niger
    
    Turkey
  Estate and Gift Tax
   Wealth Tax
 impôt de solidarité sur la fortune
  Taxation of U.S. Holders
   
    
    the U.S. Holder owns, directly or indirectly, less than 10% of Flamels share
capital;
 48




---



##### 




    
    the U.S. Holder is entitled to the benefits of the U.S.-France tax treaty under
the limitations on benefits article of that treaty;
    
    the U.S. Holder holds Flamel Shares as capital assets; and
    
    the U.S. Holders functional currency is the U.S. dollar.
    Taxation of Dividends
 Withholding Tax
   credit dimpôt
 
    
    the U.S. Holder is an individual or other non-corporate holder that is a resident of
the United States for purposes of the U.S.-France tax treaty;
    
    the U.S. Holder is a U.S. corporation, other than a regulated investment company;
 49




---



##### 




    
    the U.S. Holder is a U.S. corporation which is a regulated investment company,
provided that less than 20% of the U.S. Holders shares are beneficially owned by
persons who are neither citizens nor residents of the United States; or
    
    the U.S. Holder is a partnership or trust that is a resident of the United States
for purposes of the U.S.-France tax treaty, but only to the extent that the U.S.
Holders partners, beneficiaries or grantors would qualify as eligible under one of
the first two points in this list.
 crédit dimpôt avoir fiscal
    
    
    First, as a tax-free return of capital, which will cause a reduction in the adjusted
basis of a U.S. Holders Flamel Shares. This adjustment will increase the amount of
gain, or decrease the amount of loss, which a U.S. Holder will recognize if such U.S.
Holder later disposes of those Flamel Shares.
    
    Second, the balance of the dividend in excess of the adjusted basis will be taxed as
capital gain recognized on a sale or exchange.
 crédit
dimpôt avoir fiscal
 Taxation of Capital Gains
 50
         
    
    75% or more of its gross income is passive income; or
    
    its assets which produce passive income or which are held for the production of
passive income amount to at least 50%of the value of its total assets on average.
  French Estate and Gift Taxes
  
    
    the U.S. Holder is domiciled in France at the time of making the gift, or at the
time of the U.S. Holders death; or
    
    the U.S. Holder used the Flamel Shares in conducting a business through a permanent
establishment or fixed base in France, or the U.S. Holder held the Flamel Shares for
that use.
 French Wealth Tax
 participation substantielle)
 United States Information Reporting and Backup Withholding
 51
      Documents on Display
 www.sec.gov www.flamel.com
 ITEM 11. Quantitative and Qualitative Disclosures About Market Risk
  ITEM 12. Description of Securities Other Than Equity Securities
  52
      PART II
 ITEM 13. Defaults, Dividend Arrearages and Delinquencies
  ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
  ITEM 15. Controls and Procedures
   ITEM 16. [Reserved]
 ITEM 16A. Audit Committee Financial Expert
  ITEM 16B. Code of Ethics
  ITEM 16C. Principal Accountant Fees and Services
  Fee Category
    
    Fiscal 2005 Fees (Euros)
    
    Fiscal 2004 Fees (Euros)Audit
    
    
    198,250
    
    
    
    117,000Audit-Related Fees
    
    
    0
    
    
    
    0Tax Fees
    
    
    0
    
    
    
    0All Other Fees
    
    
    0
    
    
    
    0Total Fees
    
    
    198,250
    
    
    
    117,000
 All fees were billed in Euros. Using the average exchange rate of 1.24478 U.S dollars per Euro
for 2005, and 1.2433 U.S dollars per Euro for 2004, audit fees equaled $246,779 for Fiscal 2005 and
$145,466 for Fiscal 2004.
 Audit Fees.
 Audit-Related
Fees. C
 53
       Tax Fees.
 All Other Fees.
 Audit Committees Pre-Approval Policies and Procedures
  ITEM 16D. Exemptions from the Listing Standards for Audit Committees
  ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 .
 54




---



##### 



PART III
 ITEM 17. Financial Statements
  ITEM 18. Financial Statements
  Report of independent registered public accounting firm
    
    F-2Consolidated Balance Sheets as of December 31, 2004 and 2005
    
    F-3Consolidated Statement of Operations for the Years Ended December 31,
2003, 2004 and 2005
    
    F-4Consolidated Statements of Shareholders Equity for the Years Ended
December 31, 2003, 2004 and 2005
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2004 and 2005
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
  ITEM 19. Exhibits
 EXHIBIT INDEX
 ExhibitNumber
    
    Description1.1
    
    Revised Statutsor charter of the Company.2.1
    
    Deposit Agreement among Flamel, The Bank of New York, as
Depositary, and holders from time to time of American Depositary
Shares issued thereunder (including as an exhibit the form of American Depositary Receipt). (1)8.1
    
    List of Subsidiaries (Filed herewith)11.1
    
    Code of Ethics for CEO (Directeur General), Delegated Managing
Directors (Directeurs Generaux Delegues) and Senior Financial
Officers (2)12.1
    
    Certification of the Chief Executive pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith)12.2
    
    Certification of the Executive Vice President and Chief Financial
Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed herewith)13.1
    
    Certification of the Chief Executive pursuant to USC Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (Furnished herewith)13.2
    
    Certification of the Executive Vice President and Chief Financial
Officer pursuant to USC Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith)23
    
    Consent of Ernst & Young Audit (Filed herewith).
 
 (1)
    
    Incorporated by reference to Post-Effective Amendment No. 1 to the Companys registration
statement on Form F-6 filed July 26, 2001, as amended (No. 333-12790).(2)
    
    Incorporated by reference to the Companys annual report on Form 20-F filed on April 26, 2004.
The registrant undertakes to provide to each shareholder requesting the same a copy of each exhibit
referred to herein upon payment of a reasonable fee limited to the registrants reasonable expenses
in furnishing such exhibit. 55




---



##### 



FLAMEL TECHNOLOGIES S.A.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2004 and 2005
    
    F-3Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2004 and 2005
    
    F-4Consolidated Statements of Shareholders Equity for the
Years Ended December 31, 2003, 2004 and 2005
    
    F-5Consolidated Statements of Cash flows for the Years Ended
December 31, 2003, 2004 and 2005
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
 F-1




---



##### 



REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    ERNST & YOUNG AuditRepresented byJean-Luc DesplatMay 23, 2006, Lyon, France
 F-2




---



##### 



FLAMEL TECHNOLOGIES S.A.
 CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars except share data)
 December 31,Note
    
    2004
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    5
    
    $
    4,591
    
    
    $
    1,018Marketable securities
    
    6
    
    
    100,783
    
    
    
    82,756Accounts receivable (net of allowance of $565 and $489 at
December 31,
2004 and 2005 respectively)
    
    
    
    
    8,203
    
    
    
    2,583Inventory
    
    7
    
    
    1,597
    
    
    
    1,050Research and development tax credit receivable short term
    
    
    
    
    0
    
    
    
    708Prepaid expenses and other current assets
    
    
    
    
    5,598
    
    
    
    3,873Total current assets
    
    
    
    
    120,772
    
    
    
    91,988Property and equipment, net
    
    8
    
    
    18,162
    
    
    
    22,317Other assets:Research and development tax credit receivable long term
    
    
    
    
    6,533
    
    
    
    8,950Other long-term assets
    
    
    
    
    141
    
    
    
    1,096Total assets
    
    
    
    $
    145,608
    
    
    $
    124,351LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    12
    
    $
    218
    
    
    $
    449Current portion of capital lease obligations
    
    13
    
    
    334
    
    
    
    379Accounts payable
    
    
    
    
    9,660
    
    
    
    11,497Current portion of deferred revenue
    
    11
    
    
    2,528
    
    
    
    182Advances from customers
    
    
    
    
    368
    
    
    
    385Accrued expenses
    
    9
    
    
    4,329
    
    
    
    4,457Other current liabilities
    
    10
    
    
    5,889
    
    
    
    7,547Total current liabilities
    
    
    
    
    23,326
    
    
    
    24,896Long-term debt, less current portion
    
    12
    
    
    1,589
    
    
    
    2,333Capital lease obligations, less current portion
    
    13
    
    
    789
    
    
    
    630Deferred revenue, less current portion
    
    11
    
    
    860
    
    
    
    Other long-term liabilities
    
    10 - 17
    
    
    2,287
    
    
    
    9,838Total long-term liabilities
    
    
    
    
    5,525
    
    
    
    12,801Commitments and contingencies:
    
    
    
    
    
    
    
    
    Shareholders equity :
    
    14Ordinary shares: 21,751,590 issued and outstanding at December
31, 2004 and
23,706,590 at December 31, 2005 (nominal value 0.122 euro )
    
    
    
    
    3,135
    
    
    
    3,436Additional paid-in capital
    
    
    
    
    148,389
    
    
    
    161,120Accumulated deficit
    
    
    
    
    (47,806
    )
    
    
    (75,183
    )Deferred compensation
    
    
    
    
    (1,122
    )
    
    
    Accumulated other comprehensive income
    
    
    
    
    14,161
    
    
    
    (2,719
    )Total shareholders equity
    
    
    
    
    116,757
    
    
    
    86,654Total liabilities and shareholders equity
    
    
    
    $
    145,608
    
    
    $
    124,351
  F-3




---



##### 



FLAMEL TECHNOLOGIES S.A.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands of dollars except share data)
 Year ended December 31,Note
    
    2003
    
    
    2004
    
    
    2005Revenue:License and research revenue
    
    3
    
    $
    20,978
    
    
    $
    50,893
    
    
    $
    20,825Product sales and services
    
    2
    
    
    3,411
    
    
    
    3,755
    
    
    
    1,757Other revenues
    
    
    
    
    778
    
    
    
    762
    
    
    
    1,016Total revenue
    
    
    
    
    25,167
    
    
    
    55,410
    
    
    
    23,598Costs and expenses:Cost of products and services sold
    
    
    
    
    (3,676
    )
    
    
    (3,602
    )
    
    
    (2,525
    )Research and development
    
    
    
    
    (20,223
    )
    
    
    (35,359
    )
    
    
    (47,301
    )Selling, general and administrative
    
    
    
    
    (5,967
    )
    
    
    (7,614
    )
    
    
    (14,541
    )Total
    
    
    
    
    (29,866
    )
    
    
    (46,575
    )
    
    
    (64,367
    )Income (loss) from operations
    
    
    
    
    (4,699
    )
    
    
    8,835
    
    
    
    (40,769
    )Interest expense
    
    
    
    
    (29
    )
    
    
    (45
    )
    
    
    (68
    )Interest income
    
    
    
    
    192
    
    
    
    652
    
    
    
    3,671Foreign exchange gain (loss)
    
    
    
    
    (1,019
    )
    
    
    (244
    )
    
    
    500Other income
    
    4
    
    
    1,128
    
    
    
    100
    
    
    
    5,003Income (loss) before income taxes
    
    
    
    
    (4,427
    )
    
    
    9,298
    
    
    
    (31,663
    )Income tax benefit
    
    16
    
    
    503
    
    
    
    3,201
    
    
    
    4,286Net income (loss)
    
    
    
    $
    (3,924
    )
    
    $
    12,499
    
    
    $
    (27,377
    )Earnings (loss) per share
    
    14Basic earnings (loss) per ordinary share
    
    
    
    $
    (0.22
    )
    
    $
    0.58
    
    
    $
    (1.19
    )Diluted earnings (loss) per share
    
    
    
    $
    (0.22
    )
    
    $
    0.53
    
    
    $
    (1.19
    )Weighted average number of shares outstanding (in thousands) :Basic
    
    
    
    
    17,762
    
    
    
    21,514
    
    
    
    22,999Diluted
    
    
    
    
    17,762
    
    
    
    23,559
    
    
    
    22,999
  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, 2003
    
    
    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
    )
    
    
    
    
    
    
    Amort. deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    355
    
    
    
    
    
    
    
    355Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,924
    )
    
    
    
    
    
    
    
    
    
    
    (3,924
    )Unrealized gains on securities
available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    479
    
    
    
    479Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,378
    
    
    
    8,378Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,933Balance at December 31, 2003
    
    
    21,391,590
    
    
    $
    3,081
    
    
    
    $147,679
    
    
    $
    (60,305
    )
    
    $
    (2,388
    )
    
    
    $3,994
    
    
    
    $92,061Issuance of ordinary shares on exercise
of stock-options
    
    
    360,000
    
    
    
    54
    
    
    
    710
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    764Amort. deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,266
    
    
    
    
    
    
    
    1,266Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,499
    
    
    
    
    
    
    
    
    
    
    
    12,499Unrealized gains on securities
available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,408
    
    
    
    1,408Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,759
    
    
    
    8,759Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,666Balance at December 31, 2004
    
    
    21,751,590
    
    
    $
    3,135
    
    
    
    $148,389
    
    
    $
    (47,806
    )
    
    $
    (1,122
    )
    
    
    $14,161
    
    
    $
    116,757Issuance of ordinary shares on exercise
of warrants
    
    
    1,125,000
    
    
    
    180
    
    
    
    9,196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,376Issuance of ordinary shares on exercise
of stock -options
    
    
    830,000
    
    
    
    121
    
    
    
    4,148
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,269Compensation on warrants granted to
non employees
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207Amort. deferred compensation
    
    
    
    
    
    
    
    
    
    
    (820
    )
    
    
    
    
    
    
    1,122
    
    
    
    
    
    
    
    302Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,377
    )
    
    
    
    
    
    
    
    
    
    
    (27,377
    )Unrealized gains (loss) on
available-for
sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,887
    )
    
    
    (1,887
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,993
    )
    
    
    (14,993
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (44,257
    )Balance at December 31, 2005
    
    
    23,706,590
    
    
    $
    3,436
    
    
    
    $161,120
    
    
    $
    (75,183
    )
    
    
    $0
    
    
    
    $(2,719
    )
    
    
    $86,654
  F-5




---



##### 



CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars except share data)
 Year ended December 31,2003
    
    
    2004
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (3,924
    )
    
    $
    12,499
    
    
    $
    (27,377
    )Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
    
    
    Depreciation of property and equipment
    
    
    1,712
    
    
    
    2,530
    
    
    
    4,743Gain (loss) on disposal of property and equipment
    
    
    (380
    )
    
    
    4
    
    
    
    (93
    )Gains on sales of marketable securities
    
    
    (322
    )
    
    
    (642
    )
    
    
    (3,650
    )Grants recognized in other income
    
    
    (823
    )Stock compensation expense
    
    
    355
    
    
    
    1,389
    
    
    
    546Provision for losses on accounts receivable
    
    
    273
    
    
    
    216
    
    
    
    Increase (decrease) in cash from:Accounts receivable
    
    
    (4,032
    )
    
    
    532
    
    
    
    4,771Inventory
    
    
    (569
    )
    
    
    (419
    )
    
    
    351Prepaid expenses and other current assets
    
    
    (1,143
    )
    
    
    (3,443
    )
    
    
    1,029Research and development tax credit receivable
    
    
    (247
    )
    
    
    (4,636
    )
    
    
    (4,221
    )Accounts payable
    
    
    2,511
    
    
    
    4,490
    
    
    
    3,303Deferred revenue
    
    
    17,280
    
    
    
    (20,358
    )
    
    
    (2,905
    )Accrued expenses
    
    
    468
    
    
    
    2,068
    
    
    
    813Other current liabilities
    
    
    
    
    
    
    1,451
    
    
    
    3,411Other long-term assets and liabilities
    
    
    316
    
    
    
    169
    
    
    
    (110
    )Net cash provided by (used in) operating activities
    
    
    11,475
    
    
    
    (4,150
    )
    
    
    (19,389
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (2,841
    )
    
    
    (13,837
    )
    
    
    (11,326
    )Proceeds from disposal of property and equipment
    
    
    918
    
    
    
    543
    
    
    
    154Proceeds from sales of marketable securities
    
    
    24,367
    
    
    
    37,945
    
    
    
    431,055Purchase of marketable securities
    
    
    (105,293
    )
    
    
    (22,573
    )
    
    
    (424,383
    )Net cash provided by (used in) investing activities
    
    
    (82,849
    )
    
    
    2,078
    
    
    
    (4,500
    )Cash flows from financing activities:Funding from partner GSK
    
    
    
    
    
    
    6,353
    
    
    
    12,311Use of funds received from partners (GSK) or relating to
conditional grants
    
    
    (99
    )
    
    
    (2,475
    )
    
    
    (7,951
    )Proceeds from loans or conditional grants
    
    
    175
    
    
    
    833
    
    
    
    3,470Principal payments on capital lease obligations
    
    
    (230
    )
    
    
    (389
    )
    
    
    (397
    )Shares issuance costs
    
    
    (898
    )
    
    
    Cash proceeds from issuance of ordinary shares and warrants
    
    
    75,482
    
    
    
    764
    
    
    
    13,646Net cash provided by (used in) financing activities
    
    
    74,430
    
    
    
    5,086
    
    
    
    21,079Effect of exchange rate changes on cash and cash equivalents
    
    
    (2,133
    )
    
    
    378
    
    
    
    (763
    )Net increase (decrease) in cash and cash equivalents
    
    
    923
    
    
    
    3,392
    
    
    
    (3,573
    )Cash and cash equivalents, beginning of year
    
    
    276
    
    
    
    1,199
    
    
    
    4,591Cash and cash equivalents, end of year
    
    $
    1,199
    
    
    $
    4,591
    
    
    $
    1,018Supplemental disclosures of cash flow informationIncome tax paid
    
    
    24
    
    
    
    10
    
    
    
    23Interest paid
    
    
    29
    
    
    
    45
    
    
    
    68Non cash transactions:Capital lease obligations incurred
    
    
    341
    
    
    
    800
    
    
    
    339
  F-6




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 1.1. Nature of business
 société anonyme
 1.2. Principles of consolidation
    1.3. Translation of financial statements of foreign entities and foreign currency transactions
   1.4. Revenue recognition
 Revenue Recognition Revenue Arrangements with Multiple Deliverables
 F-7




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     1.5. Governmental Grants
  1.6. Research and development costs
   1.7. Concentration of credit risk
   F-8




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   1.8. Earnings per share
  1.9. Cash and cash equivalents
  1.10 Marketable securities
  1.11. Accounts Receivable
 .
 1.12. Inventories
  F-9




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1.13. Property and equipment
  Land and buildings
    
    20 yearsLaboratory
equipment
    
    4 - 5 yearsOffice and computer equipment
    
    3 yearsFurniture,
fixtures and fittings
    
    5-10 years
  1.14. Impairment of Long-Lived Assets
  1.15. Income taxes
  1.16. Employee stock options and warrants
 Accounting
for Stock Issued to Employees Accounting for Stock-Based Compensation,
 F-10




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Year Ended December 31(In thousands of U.S. dollars except share data)
    
    2003
    
    2004
    
    2005Net income (loss), as reported
    
    
    (3,924
    )
    
    
    12,499
    
    
    
    (27,377
    )Add: Stock-based employee compensation
expense included in reported net income (loss),
net of related tax effects
    
    
    355
    
    
    
    1,619
    
    
    
    335Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of related
tax effects
    
    
    (3,277
    )
    
    
    (7,254
    )
    
    
    (2,220
    )Pro forma net income (loss)
    
    
    (6,846
    )
    
    
    6,864
    
    
    
    (29,262
    )
  Year Ended December 312003
    
    2004
    
    2005Weighted-average expected life (years)
    
    
    4.90
    
    
    
    6.26
    
    
    
    6.06Expected volatility rates
    
    
    115.08
    %
    
    
    73.37
    %
    
    
    59.84
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Risk-free interest rate
    
    
    3.50
    %
    
    
    3.34
    %
    
    
    3.02
    %
 Year Ended December 31(In thousands of U.S. dollars except share data)
    
    2003
    
    2004
    
    2005Earnings per share:Basic, as reported
    
    
    (0.22
    )
    
    
    0.58
    
    
    
    (1.19
    )Basic, pro forma
    
    
    (0.39
    )
    
    
    0.31
    
    
    
    (1.27
    )Diluted, as reported
    
    
    (0.22
    )
    
    
    0.53
    
    
    
    (1.19
    )Diluted, pro forma
    
    
    (0.39
    )
    
    
    0.28
    
    
    
    (1.27
    )
 F-11




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Year Ended December 31(In U.S. dollars)
    
    2003
    
    
    2004
    
    
    2005Weighted avg.
    
    
    Weighted avg.
    
    
    Weighted avg.
    
    
    Weighted avg.
    
    
    Weighted avg.
    
    
    Weighted avg.Fair value1
    
    
    Exer. Price1
    
    
    Fair value1
    
    
    Exer. Price1
    
    
    Fair value1
    
    
    Exer. Price1Options or warrants whose price equaled
market price of the underlying shares on the
date of grant
    
    13.89
    
    

    16.78
    
    

    10.96
    
    

    12.83
    
    

    9.61
    
    

    16.82Options or warrants whose price was less
than the market price of the underlying shares
on the date of grant
    

    21.21
    
    

    11.29
    
    

    
    
    

    
    
    

    
    
    

    Options or warrants whose price was more
than the market price of the underlying shares
on the date of grant
    
    
    
    
    
    
    
    
    

    13.38
    
    

    20.43
 [1] Historical exchange rate
 1.17. Comprehensive Income
  1.18. Recent Accounting Pronouncements
   
    
    A modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123R for all
share-based payments granted after the effective date and (b) based on the
requirements of Statement 123 for all awards granted to employees prior to the
effective date of SFAS 123R that remain unvested on the effective date, or
    
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on
the amounts previously recognized under SFAS 123 for purposes of pro forma
disclosures either (a) all prior periods presented or (b) prior interim periods of
the year of adoption.
 F-12




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     2. SUBCONTRACTING AGREEMENT
 .
 F-13




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 3. LICENSE, RESEARCH AND CONSULTING AGREEMENTS
 TAP Pharmaceutical Products Inc.
 ® ®
   Bristol-Myers Squibb
 ®
    F-14




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SB Pharma Puerto Rico Inc. (GSK)
 ® ®
       F-15




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Biovail
   GSK Augmentin®
 ® ®
  Servier
 ®
 Corning
  F-16




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Others
  4. OTHER INCOME
   5. CASH AND CASH EQUIVALENTS
   December,31(In thousands of U.S. dollars)
    
    2004
    
    
    2005CCF HSBC deposit
    
    $
    3,668
    
    
    $
    185Credit Lyonnais deposit
    
    
    627
    
    
    
    596Other deposits
    
    
    296
    
    
    
    237Total cash and cash equivalents
    
    $
    4,591
    
    
    $
    1,018
 6. MARKETABLE SECURITIES
   F-17




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Fair value
    
    Value at cost
    
    Unrealized Gains (Losses)(in thousands of U.S dollars)
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004
    
    2005Credit Agricole securities
    
    
    48,490
    
    
    
    33,573
    
    
    
    47,491
    
    
    
    33,573
    
    
    
    999
    
    
    
    Credit Lyonnais securities
    
    
    1,085
    
    
    
    393
    
    
    
    1,082
    
    
    
    393
    
    
    
    3
    
    
    
    HSBC securities
    
    
    51,208
    
    
    
    48,790
    
    
    
    50,287
    
    
    
    48,789
    
    
    
    921
    
    
    
    1Total
    
    
    100,783
    
    
    
    82,756
    
    
    
    98,860
    
    
    
    82,755
    
    
    
    1,923
    
    
    
    1
  Proceeds from sales
    
    value at cost of securities sold
    
    Gross gains (Losses)(in thousands of U.S dollars)
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004
    
    2005Credit Agricole securities
    
    
    13,925
    
    
    
    173,063
    
    
    
    13,647
    
    
    
    171,388
    
    
    
    278
    
    
    
    1,675Credit Lyonnais securities
    
    
    3,181
    
    
    
    6,845
    
    
    
    3,131
    
    
    
    6,817
    
    
    
    50
    
    
    
    28HSBC securities
    
    
    20,839
    
    
    
    251,147
    
    
    
    20,525
    
    
    
    249,200
    
    
    
    314
    
    
    
    1,947Total
    
    
    37,945
    
    
    
    431,055
    
    
    
    37,303
    
    
    
    427,405
    
    
    
    642
    
    
    
    3,650
 7. INVENTORY
  December 31,(In thousands of U.S. dollars)
    
    2004
    
    2005Raw materials
    
    
    1,445
    
    
    
    1,083Finished goods
    
    
    361
    
    
    
    40Provision for inventory obsolescence
    
    
    (209
    )
    
    
    (73
    )Inventories, net
    
    
    1,597
    
    
    
    1,050
 F-18




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8 . PROPERTY AND EQUIPMENT
  December 31,(In thousands of U.S. dollars)
    
    2004
    
    2005Land and buildings
    
    
    121
    
    
    
    105Laboratory equipment
    
    
    15,906
    
    
    
    18,128Office and computer equipment
    
    
    1,875
    
    
    
    2,036Furniture,
fixtures and fittings
    
    
    5,667
    
    
    
    9,733Construction
in progress
    
    
    9,701
    
    
    
    8,742Total property and equipment
    
    
    33,270
    
    
    
    38,744Less accumulated depreciation and amortization
    
    
    (15,108
    )
    
    
    (16,427
    )Property and equipment, net
    
    
    18,162
    
    
    
    22,317
    9. ACCRUED EXPENSES
   December 31,(In thousands of U.S. dollars)
    
    2004
    
    2005Accrued compensation
    
    
    1,930
    
    
    
    2,119Accrued social charges
    
    
    2,263
    
    
    
    2,308Other
    
    
    136
    
    
    
    29Total accrued expenses
    
    
    4,329
    
    
    
    4,457
 F-19




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 10. OTHER CURRENT AND LONG TERM LIABILITIES
 10.1. Other current liabilities
  (In thousands of U.S. dollars)
    
    2004
    
    2005Advance received from partner GSK
    
    
    4,248
    
    
    
    1,854Funding from partner GSK short term
    
    
    
    
    
    
    1,042Provision for costs
    
    
    
    
    
    
    4,400Withholding tax
    
    
    1,547
    
    
    
    Service award provision short term
    
    
    
    
    
    
    172Other
    
    
    94
    
    
    
    79Total Other current liabilities
    
    
    5,889
    
    
    
    7,547
     F-20




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 10.2. Other long term liabilities
  (In thousands of U.S. dollars)
    
    2004
    
    2005Funding from partner GSK long term
    
    
    1,143
    
    
    
    5,905Conditional grants
    
    
    
    
    
    
    2,072Provision for retirement indemnity (see note 17)
    
    
    613
    
    
    
    664Service award provision long term
    
    
    
    
    
    
    807Other
    
    
    531
    
    
    
    390Total Other long term liabilities
    
    
    2,287
    
    
    
    9,838
  11. DEFERRED REVENUE
  12. LONG-TERM DEBT
  December 31,(In thousands of U.S. dollars)
    
    2004
    
    2005Anvar loans (a) :Asacard program
    
    
    934
    
    
    
    809Other programs
    
    
    270
    
    
    
    234French Ministry of Industry (b)
    
    
    603
    
    
    
    1,739Total
    
    
    1,807
    
    
    
    2,782Current portion
    
    
    218
    
    
    
    449Long-term portion
    
    
    1,589
    
    
    
    2,333
 
 (a)
    
    Anvar is an agency of the French government that provides financing to French companies
for research and development. At December 31, 2004 and 2005, the Company had outstanding
loans from Anvar of $1,204,000 and $1,043,000, 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 F-21




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    (In thousands of U.S. dollars)
    
    December 31,2006
    
    
    4492007
    
    
    3242008
    
    
    8492011
    
    
    1,1602,782
 13. CAPITAL LEASE OBLIGATIONS
 
 (In thousands of U.S. dollars)
    
    December 31,2006
    
    
    4092007
    
    
    4062008
    
    
    2172009
    
    
    27Total
    
    
    1,059Less amounts representing interest
    
    
    (50
    )Capital lease
    
    
    1,009Less current portion
    
    
    379Long -term portion
    
    
    630
 F-22




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  14. EARNINGS PER SHARE
  Year ended December 31,(In thousands, except per share amounts)
    
    2003
    
    
    2004
    
    
    2005Numerator:Net income (loss)
    
    
    $(3,924
    )
    
    
    $12,499
    
    
    
    $(27,377
    )Denominator:Weighted average shares outstanding used for basic earnings (loss) per
share
    
    
    17,762,050
    
    
    
    21,513,905
    
    
    
    22,998,504Effect of dilutive securities:Stock-options and warrants
    
    
    
    
    
    
    2,045,249Weighted average shares outstanding and dilutive securities used for
diluted earnings (loss) per share
    
    
    17,762,050
    
    
    
    23,559,154
    
    
    
    22,998,504Basic earnings (loss) per share
    
    
    $(0.22
    )
    
    
    $0.58
    
    
    
    $(1.19
    )Diluted earnings (loss) per share
    
    
    $(0.22
    )
    
    
    $0.53
    
    
    
    $(1.19
    )
  15. SHAREHOLDERS EQUITY
 15.1. Preemptive subscription rights
 pro rata
 15.2. Dividends
  F-23




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  15.3. Warrants
   
  
  
  
  
  
 F-24




---



##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
  
  WeightedAverage Exercise
    
    WeightedWarrants
    
    Price in U.S
    
    Average ExerciseOutstanding
    
    dollars [1]
    
    Price in EurosBalance at January 1, 2003
    
    
    3,946,500
    
    
    $
    3.75
    
    
    
    3.92Warrants granted
    
    
    200,000
    
    
    $
    11.29
    
    
    
    9.88Warrants exercised
    
    
    2,866,500
    
    
    $
    3.16
    
    
    
    3.29Warrants cancelled
    
    
    85,000
    
    
    $
    2.28
    
    
    
    2.39Balance at December 31, 2003
    
    
    1,195,000
    
    
    $
    6.55
    
    
    
    6.52Warrants granted
    
    
    80,000
    
    
    $
    26.27
    
    
    
    21.73Balance at December 31, 2004
    
    
    1,275,000
    
    
    $
    7.79
    
    
    
    7.47Warrants granted
    
    
    40,000
    
    
    $
    16.18
    
    
    
    12.34Warrants exercised
    
    
    1,125,000
    
    
    $
    6.34
    
    
    
    6.37Warrants cancelled
    
    
    150,000
    
    
    $
    18.68
    
    
    
    15.70Balance at December 31, 2005
    
    
    40,000
    
    
    $
    16.18
    
    
    
    12.34
  F-25




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##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Warrants Outstanding
    
    Warrants ExercisableWeighted
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    average
    
    
    
    
    
    averageExercise prices in
    
    Number of
    
    remaining
    
    exercise price
    
    Number of
    
    exercise priceeuros
    
    shares
    
    contractual life
    
    in euros
    
    shares
    
    in euros12.34
    
    
    40,000
    
    
    
    4.01
    
    
    
    12.34
    
    
    
    10,000
    
    
    
    12.34
 15.4. Stock options
   Weighted Average
    
    
    Weighted AverageShares Available
    
    
    Options Granted
    
    
    Exercise Price in
    
    
    Exercise Price infor Grant
    
    
    and Outstanding
    
    
    U.S dollars [1]
    
    
    EurosBalance at January 1, 2003
    
    
    115,000
    
    
    
    2,315,000
    
    
    
    $3.36
    
    
    
    3.56Options authorized
    
    
    1,900,000Granted
    
    
    (1,350,000
    )
    
    
    1,350,000
    
    
    
    $16.66
    
    
    
    13.93Exercised
    
    
    
    
    
    
    (327,500
    )
    
    
    $5.33
    
    
    
    5.61Cancelled or expired
    
    
    107,500
    
    
    
    (117,500
    )
    
    
    $4.09
    
    
    
    4.09Balance at December 31, 2003
    
    
    772,500
    
    
    
    3,220,000
    
    
    
    $8.65
    
    
    
    7.68Granted
    
    
    (926,500
    )
    
    
    926,500
    
    
    
    $20.75
    
    
    
    16.15Exercised
    
    
    
    
    
    
    (360,000
    )
    
    
    $1.55
    
    
    
    1.72Cancelled or expired
    
    
    203,000
    
    
    
    (203,000
    )
    
    
    $25.27
    
    
    
    20.81Balance at December 31, 2004
    
    
    49,000
    
    
    
    3,583,500
    
    
    
    $11.55
    
    
    
    9.72Options authorized
    
    
    1,500,000Granted
    
    
    (1,545,500
    )
    
    
    1,545,500
    
    
    
    $16.83
    
    
    
    13.64Exercised
    
    
    
    
    
    
    (830,000
    )
    
    
    $4.12
    
    
    
    4.26Cancelled or expired
    
    
    794,000
    
    
    
    (874,000
    )
    
    
    $19.60
    
    
    
    15.69Balance at December 31, 2005
    
    
    797,500
    
    
    
    3,425,000
    
    
    
    $13.69
    
    
    
    11.31
 [1] Historical exchange rate at date of grant
    
 F-26




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##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Stock Options Outstanding
    
    Stock Options ExercisableWeightedaverage
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    remaining
    
    average
    
    
    
    
    
    averageexercise prices
    
    Number of
    
    contractual
    
    exercise price
    
    Number of
    
    exercise pricein euros
    
    shares
    
    life
    
    in euros
    
    shares
    
    in euros0 to 1.36
    
    
    190,000
    
    
    
    6.09
    
    
    
    1.22
    
    
    
    167,500
    
    
    
    1.202.33 to 2.77
    
    
    315,000
    
    
    
    6.10
    
    
    
    2.50
    
    
    
    315,000
    
    
    
    2.504.11 to 4.86
    
    
    405,000
    
    
    
    6.71
    
    
    
    4.35
    
    
    
    358,750
    
    
    
    4.376.40 to 7.58
    
    
    150,000
    
    
    
    4.91
    
    
    
    6.71
    
    
    
    150,000
    
    
    
    6.719.88 to 12.02
    
    
    380,000
    
    
    
    8.74
    
    
    
    11.16
    
    
    
    85,000
    
    
    
    9.8812.86 to 16.23
    
    
    1,596,000
    
    
    
    9.63
    
    
    
    14.19
    
    
    
    72,500
    
    
    
    14.8119.2 to 20.81
    
    
    389,000
    
    
    
    8.02
    
    
    
    20.57
    
    
    
    137,500
    
    
    
    20.653,425,000
    
    
    
    8.28
    
    
    
    11.31
    
    
    
    1,286,250
    
    
    
    6.46
     F-27




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##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 15.5. Accumulated other comprehensive income
  December 31,(In thousands of U.S. dollars)
    
    2004
    
    2005Unrealized gains on available-for-sale securities
    
    
    1,887
    
    
    
    Foreign currency translation
    
    
    12,274
    
    
    
    (2,719
    )Total
    
    
    14,161
    
    
    
    (2,719
    )
 16. INCOME TAXES
  Year ended December 31,(in thousands of dollars)
    
    2003
    
    2004
    
    2005France
    
    
    ($4,427
    )
    
    $
    9,298
    
    
    
    ($31,663
    )
 A reconciliation of income tax benefit (provision) computed at the French statutory rate
(34.33% in 2003 and 33.83% in 2004 and 2005) to the income tax benefit is as follows:
 Year ended December 31,(in thousands of dollars)
    
    2003
    
    2004
    
    2005Income tax benefit (provision) computed at the French statutory rate
    
    
    1,524
    
    
    
    (3,146
    )
    
    
    10,712Operating losses (not utilized )
    
    
    (1,524
    )
    
    
    3,146
    
    
    
    (10,712
    )Withholding tax
    
    
    
    
    
    
    (1,425
    )
    
    
    89Research tax credits
    
    
    527
    
    
    
    4,636
    
    
    
    4,220Minimum tax payable
    
    
    (24
    )
    
    
    (10
    )
    
    
    (23
    )Total
    
    
    503
    
    
    
    3,201
    
    
    
    4,286
   F-28




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##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31,(In thousands of U.S. dollars)
    
    2004
    
    2005Deferred income tax assets:Net operating loss carry-forwards (not utilized)
    
    
    12,541
    
    
    
    19,210Other deferred income tax assets
    
    
    1,103
    
    
    
    1,276Valuation allowance
    
    
    (13,633
    )
    
    
    (20,486
    )Net deferred income tax assets
    
    
    11
    
    
    
    14Deferred income tax liabilities
    
    
    (11
    )
    
    
    (14
    )Deferred income taxes, net
    
    
    
    
    
    
    
    (In thousands of U.S. dollars)
    
    December 31,2006
    
    
    7082007
    
    
    5512008
    
    
    4,3992009
    
    
    4,0009,658
 17. EMPLOYEE RETIREMENT PLANS
  F-29




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##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    2003
    
    2004
    
    2005Average increase of salaries
    
    
    2
    %
    
    
    2
    %
    
    
    3
    %Discounted interest rate
    
    
    5
    %
    
    
    5
    %
    
    
    4
    %Turn over
    
    average of the
    
    average of the
    
    average of thelast 4 years
    
    last 4 years
    
    last 4 yearsAge of retirement
    
    65 years
    
    65 years
    
    65 years
  18. FAIR VALUE OF FINANCIAL INSTRUMENTS
  .
 19. COMMITMENTS AND CONTINGENCIES
 19.1. Capital leases
  19.2. Operating leases
 F-30




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##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (In thousands of U.S. dollars)
    
    December 31,2006
    
    
    7762007
    
    
    7522008
    
    
    6532009
    
    
    3872010
    
    
    344Thereafter
    
    
    919TOTAL
    
    
    3,831
  19.3. Litigation
  20. 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 2003, 2004 or 2005.
  (in thousands)
    
    As of December 31,2003
    
    
    2004
    
    
    2005RevenuesUSA
    
    $
    17,614
    
    
    $
    48,302
    
    
    $
    18,972France
    
    $
    6,824
    
    
    $
    6,095
    
    
    $
    2,773Other
    
    $
    729
    
    
    $
    1,013
    
    
    $
    1,853Total Revenues
    
    $
    25,167
    
    
    $
    55,410
    
    
    $
    23,598
 F-31




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##### 



FLAMEL TECHNOLOGIES S.A
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (in thousands)
    
    As of December 31,2004
    
    
    2005Long-lived assets:USA
    
    
    $52
    
    
    
    $39France
    
    
    $24,784
    
    
    
    $32,325Total long-lived assets
    
    
    $24,836
    
    
    
    $32,363
 F-32




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##### 



SIGNATURES
  FLAMEL TECHNOLOGIES S.A.(Registrant)By: /s/ Stephen H. WillardStephen H. WillardChief Executive Officer