TABLE OF CONTENTS

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Some of the statements in this Annual Report constitute forward-looking statements. These statements relate to future events or our future financial performance and involve assumptions, known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activities, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “predicts,” “potential,” or “continue” or the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

     The assumptions, risks and uncertainties involved in forward-looking statements include without limitation: economic, competitive and technological factors affecting markets, services, and prices; changes in spending on technology and technology upgrades; the extent and timing of growth in the telecommunications industry; continued demand for chip cards (which are also referred to as smart cards) and related solutions; the development of new markets for our wireless communications products, financial services and network systems products using chip card technology; the success of our restructuring efforts; chip card technology being adopted in wireless transmission standards and other technology standards; political, regulatory and commercial risks inherent in international operations, including the risk of currency exchange rate fluctuations; and general economic and business conditions in various regions of the world.

     Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievements. Factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this Annual Report include, but are not limited to, the risk factors set forth under “Item 3. Key Information — Risk Factors”, in “Item 5. Operating and Financial Review and Prospects” and factors found elsewhere in this Annual Report.

     You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward looking statements, whether as a result of new information, future events or otherwise, except to the extent that, as a result of fulfilling our disclosure obligations under applicable securities laws and regulations, we determine that such an update is necessary.

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SUMMARY

     The following summary should be read together with the more detailed information regarding Gemplus International S.A. and our audited consolidated financial statements and notes thereto appearing elsewhere in this Annual Report.

Our Business

     We are a leading provider of technology, products and services that enable wireless network operators to offer their customers secure voice and data communications and transactions through mobile phones, and that enable companies, financial institutions and public entities to provide customized services to their customers and employees through a range of systems, including financial card networks, loyalty programs, identification and Internet security systems.

     During 2003, we reported in two main business segments:

•		Telecommunications, which includes our wireless products and services, as well as prepaid telephone cards and other related products; and
•		Financial Services and Security, which includes systems and services based on chip card technology in areas such as financial services, identification, health care, corporate security, loyalty programs, transportation access, pay-television applications, and e-business security activities as well as magnetic stripe cards for banking applications.

As of January 1, 2004, we began reporting in three business segments: Telecommunications, Financial Services and Identity and Security.

     In our Telecommunications Segment, wireless products and services are used in the global system for mobile communications standard, also referred to as GSM, which is the dominant mobile phone transmission standard in Europe and the most widely used in the world. Our products are also used in third Generation (3G) wireless networks and in other transmission standards. Our wireless products consist primarily of subscriber identity modules (SIM) cards, which are small plastic modules with embedded microcontroller chips that are inserted in mobile telephones. These microcontroller chips are capable of storing and processing data like a miniature computer, transferring processed data to the handset and running software programs or “applets” that interact remotely with server-based applications.

     The wireless communication market is entering a new era during which mobile telephone users increasingly use wireless networks for data transmission services in addition to voice transmission services. Data transmission includes short message service (SMS) text messages. We believe that this shift in the wireless communication market will accelerate as wireless operators construct and develop networks that use new wireless transmission standards. These next generation networks will allow wireless operators to provide data transmission services including video, high speed Internet access and mobile commerce. Because of their security, portability and flexibility, SIM cards have been included in the specifications for new wireless transmission standards in many regions around the world.

     In our Financial Services and Security segment, chip card technology also offers a platform for a variety of service applications over other network systems. In the financial services market, for example, banks can issue credit and debit cards with embedded chips to reduce fraud and to provide their customers with premium value services, including e-purse applications (applications that store cash values that can be used to make purchases) and mobile banking services. In the identification systems and security networks markets, plastic cards with embedded chips can be used to provide more secure access restrictions to restricted facilities or computer networks and to increase the overall effectiveness of identification and security systems.

     In our Telecommunications and Financial Services and Security segments, we provide a broad range of services that allow our customers to implement and manage sophisticated systems that take advantage of our chip card technology. Our services include customization, technical support, consulting, system design and integration and operated services.

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     We also provide non-chip card products and services in other areas related to our Telecommunications and Financial Services and Security segments, such as chip card readers and other devices, magnetic stripe credit cards and authentication and non-repudiation software.

     Our revenues totaled €749.2 million in 2003, compared to €787.4 million in 2002. Sales of our wireless products and services in our Telecommunications segment represented approximately 58% of our revenues in 2003, compared to approximately 51% in 2002, while sales for 2003 of our chip card products and services in our Financial Services and Security segment represented approximately 28% of our revenues compared to approximately 31% in 2002. Based on the 2003 worldwide chip card vendor shipments ranking of Gartner Dataquest, an industry analyst, we were the leading provider of chip cards in 2003 with a global market share of approximately 30% in terms of units sold. In addition, based on information published in April 2004 by Eurosmart, a chip card industry association, we estimate that in 2003 our global market share was approximately 30% in terms of units sold.

     We are registered with the Registrar of Commerce in Luxembourg under RC No. B73145. Our registered office is located at 46A Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg and our telephone number is +352.26.00.52.26. Our World Wide Web site address is www.gemplus.com. The information on our Web site is not incorporated by reference into this Annual Report.

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PART I

Item 1. Identity of Directors, Senior Management and Advisors

     Not applicable.

Item 2. Offer Statistics and Expected Timetable

     Not applicable.

Item 3. Key Information

SELECTED CONSOLIDATED FINANCIAL DATA

     The selected consolidated financial data set forth below has been derived from, and is qualified in its entirety by reference to our audited consolidated financial statements and notes thereto, which have been prepared in accordance with International Financial Reporting Standards (IFRS) formulated by the International Accounting Standards Board (IASB) and with International Accounting Standards (IAS) formulated by its predecessor organization, the International Accounting Standards Committee (IASC). These standards differ in certain significant respects from generally accepted accounting principles in the United States, commonly referred to as U.S. GAAP. Note 31 to our audited consolidated financial statements describes the principal differences between IFRS and U.S. GAAP as they relate to us, and reconciles our net income and shareholders’ equity to U.S. GAAP.

     Selected consolidated financial data below are in accordance with IFRS except as otherwise stated.

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(1)

Dollar amounts have been translated for convenience at the Noon Buying Rate (as defined below in the section “Exchange Rate Information And The European Monetary System”) on May 24, 2004, of U.S. $1.00 = € 0.83.

(2)

Basic net income per share under IFRS and U.S. GAAP is calculated by dividing net income by the weighted average number of our ordinary shares outstanding during each period, in each case adjusted for a fifty-for-one share split that took place on June 21, 2000. The weighted average number of shares used in calculating the basic net income per share was 298,523,800, 313,120,400, 497,523,946, 636,992,392, 606,222,660 and 605,658,965 for the years ended December 31, 1999, 2000, 2001, 2002 and 2003. Diluted net income per share under IFRS and U.S. GAAP is calculated in the same manner as basic net income per share, except that the dilutive effect of the exercise of our outstanding share options and warrants is included in the determination of the weighted average number of shares outstanding for each period. The weighted average number of shares used in calculating the diluted net income per share was 307,274,750, 313,120,400, 539,256,206, 636,992,392, 606,222,660 and 605,658,965 for the years ended December 31, 1999, 2000, 2001, 2002 and 2003.

(3)

Adjusted EBITDA is defined as earnings before interest expense (net of interest income), provision for income taxes and depreciation and amortization expense and legal reorganization expense. We believe that Adjusted EBITDA is a useful indicator of operational strength and performance of our business. However, Adjusted EBITDA is not a measurement of operating performance calculated in accordance with either IFRS or U.S. GAAP, and therefore should not be considered a substitute for operating income or net income as a measure of profitability, or a substitute for cash flows from operating activities as a measure of liquidity, in each case determined in accordance with IFRS or U.S. GAAP. Because all companies do not calculate EBITDA identically, and because our adjustments relate to a reorganization that is unique to our company, the presentation of Adjusted EBITDA contained herein may not be comparable to similarly titled measures provided by other companies.

     The reconciliation of Adjusted EBITDA with operating income is as follows:

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(1)

Dollar amounts have been translated for convenience at the Noon Buying Rate on May 24, 2004, of U.S. $1.00 = €0.83.

     Exchange Rate Information And The European Monetary System

     Under the provisions of the Treaty on European Union, an economic and monetary union, known as EMU, was implemented on January 1, 1999, and a single European currency, known as the euro, was introduced. The following 12 member states participate in EMU and have adopted the euro as their national currency: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. In May 2004, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia joined the European Union, but are not currently members of the EMU. The legal rate of conversion between French francs and the euro was fixed on December 31, 1998, at €1.00 = FF 6.55957. For your convenience, this Annual Report contains translations of certain euro amounts into U.S. dollars. Unless otherwise indicated, U.S. dollar amounts have been translated from euros at the rate of U.S. $1.00 = €0.83, the Noon Buying Rate for the euro on May 24, 2004. The “Noon Buying Rate” is the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. This does not mean that we actually converted these amounts into U.S. dollars at that rate, and you should not assume that they could have been converted at that or any other rate.

     Fluctuations in the exchange rate between the euro and the U.S. dollar may affect the U.S. dollar price of our American Depositary Shares (ADSs) on the NASDAQ.

     Our reporting currency during 1999 was the French franc. We began reporting in euros on January 1, 2000. The following table shows the French franc/U.S. dollar and euro/U.S. dollar exchange rates based on the Noon Buying Rate expressed in French francs per U.S. dollar and euros per U.S. dollar for the periods indicated.

(1)

The average of the Noon Buying Rates on the last business day of each month (or portion thereof) during the relevant period.

(2)

The Federal Reserve Bank of New York stopped publishing the Noon Buying Rate for the French franc on January 15, 1999. The Noon Buying Rate for French francs for periods subsequent to January 15, 1999 was calculated by applying the fixed rate of legal conversion of FF 6.55957 per €1.00 to the Noon Buying Rate for euros.

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RISK FACTORS

Risks Related to Our Business

Slow growth in the wireless communications industry may continue to adversely affect our business.

     Our business is significantly affected by trends in the wireless communications industry because a substantial portion of our revenues is derived from sales of wireless products and services. In 2003, sales of wireless products and services accounted for approximately 58% of our revenues, as compared to 51% in 2002. While the wireless communications industry experienced tremendous growth through 2000, demand for wireless products and services fell abruptly in 2001 and continued to fall in 2002, particularly in Europe and the United States. Growth in demand, however, resumed in 2003 but remains volatile. Due to currency fluctuations and price pressures, however, our overall revenues declined 4.9% in 2003 compared to 2002, although overall revenues increased by 4.0% on a currency-adjusted basis (meaning after adjusting for currency fluctuations, discontinued operations and acquisitions). Due to the competitive market environment, suppliers to the wireless communications industry are under constant pressure to reduce selling prices, and while we endeavor to provide a broad product range to our customers and continually add new high-end products, a reduction in the average selling price may continue to affect our profitability. In addition, if wireless operators delay making the necessary investments for the introduction of new wireless systems and technologies, our business may be adversely affected due to reduced demand for our products.

The markets that we have targeted for a substantial part of our future growth are in the early stages of development, and may not develop rapidly or at all.

     Many of the markets that we target for our future growth are currently small or non-existent and need to develop for us to achieve our growth objectives. If some or all of these markets do not develop, or if they develop more slowly than we anticipate, then our business may be adversely affected. For example:

•		We are seeking to take advantage of the development of new markets for wireless communications products and services, including mobile commerce, mobile banking and mobile Internet services. These markets are only just starting to develop.
•		We are developing chip card products and services for the financial services market. Chip card technology has not yet been widely adopted by the financial services industry outside of France, Germany and the United Kingdom, largely due to the cost of building the necessary infrastructure, the need for more internationally compatible standards and the relatively limited capabilities of all but the newest chip cards.
•		We are investing in identification and security networks products and services, but so far we have not deployed these products and services on a widespread basis. Our businesses in these markets currently represent start up operations, and we do not know whether these businesses will be profitable.

In 2001 and 2002 we had significant changes in our senior management, and while we do not expect similar changes to occur in the near term, we cannot be assured such changes will not occur.

     We believe that having stable management is important to the success of our company. In 2001 and 2002 we had rapid and significant changes in our senior management, and although we do not expect similar changes to occur in the near term, we cannot be assured that such changes will not occur and adversely affect our business. Improvements in our performance and operations depend significantly on the success of the management team.

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Our restructuring and repositioning strategies, or our implementation of those strategies, may fail to provide lasting positive results.

     We implemented three separate restructuring plans starting in 2001. The first restructuring plan commenced in the second quarter of 2001, the second was initiated in February 2002, and the third began in December 2002. These plans were adopted to address the effects on our business of the global slowdown in the wireless communications industry. The slowdown led to a decline in sales of our wireless products and services in 2001 and 2002 and an increase in our operating losses in those years. While implementation of these plans resulted in reduced operating costs in 2003, as compared to 2002, if we are not able to maintain the reduction in our operating costs or increase our productivity because our restructuring plans do not continue to provide the results that we expect or they are not implemented adequately, we may experience higher losses and difficulties in growing our business.

Chip card technology may not be adopted in new wireless transmission standards or in the financial services industry, such that we may lose some of our existing customers or not be able to obtain future customers.

     Our ability to grow depends significantly on whether government and industry organizations adopt chip card technology as part of their new technology standards. If these entities do not adopt chip card technology, we might not be able to succeed in some of the new markets we are targeting, or we may lose some or all of our existing customers.

     In order for us to achieve our growth objectives, chip card technology must be adopted in a variety of areas, including in:

•		certain wireless communication devices that are currently not equipped to read chip cards;
•		bank credit and debit card systems, which in most countries still use magnetic stripe cards as their primary technology;
•		computer equipment, which must include chip card readers as standard equipment if the use of chip cards for Internet and other applications is to become common;
•		digital signature information technology security systems; and
•		identity card programs.

     The decisions of standard setting bodies that may decide whether to adopt chip card technology are likely to be based on factors such as:

•		the cost of adopting chip card technology relative to alternatives;
•		the degree of security provided by chip card technology relative to alternatives;
•		the development of competing technologies to provide security and premium value services;
•		the relative ease of implementing chip card technology; and
•		whether chip card technology becomes generally accepted by businesses and consumers.

     Most of our products are subject to competition from other technologies. These technologies include magnetic stripe payment cards, non-chip based authentication, certain wireless standards that do not incorporate a SIM card into the platform, and non-portable security devices onto PC motherboards. We believe the chip card has certain advantages, although there may be viable alternatives to our products.

We may need to further develop our position as a provider of software and services to earn higher margins from our technology.

     The development of sophisticated operating systems and applications can represent both a potentially high-margin business and a key driver of more advanced, higher-margin chip card sales. Although we have had some early success positioning ourselves as a provider of services and systems, we cannot be assured that we will be successful in developing a profitable business line, or that we will be able to capture a significant share of the market for the sophisticated services and systems that we believe are likely to produce more attractive margins in the future.

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We may fail to manage optimally our inventories of microcontroller chips or suffer disruptions in our supply chain.

     Our technology is based principally on microcontroller chips. Because the wireless communications industry has been volatile in the past few years, experiencing rapid growth in 2000, a sudden downturn in 2001, a continued slowdown in 2002, and signs of growth in 2003, we have had periods of difficulty managing our inventory levels of microcontroller chips. Failure to manage our inventory can cause us to lose business to competitors, and have lower margin on existing sales, as the price for the chips may increase. Managing our inventory levels is made more difficult by the fact that the lead-times for the procurement of semiconductors is significant compared to the volatility of demand from our customers. Although in 2003 we managed our inventory at more acceptable levels, managing our inventory supply in the future, particularly if the industry undergoes significant and rapid change, will remain a challenge to our procurement strategy.

     In addition, if the wireless communications industry experiences a sudden upturn, with significant levels of growth in the near future, we will need to secure adequate supplies of microcontroller chips to expand our production. If we are not able to secure these supplies, or experience supply problems with the newest generation of microcontroller chips that generate our highest margins, we may record lower revenues and profits and lose market share to competitors that have secured adequate chip supplies. There are some signals in the marketplace that there may be supply limitations in the future that could negatively impact our ability to procure microcontroller chips.

     Until 1999, STMicroelectronics and Infineon were the only two major silicon suppliers for the chip card industry, covering roughly 90% of market needs. In 2000, we invested in a multisourcing program to enlarge our supplier base.

     In 2003, we purchased approximately 90% of our microcontroller chips from three suppliers. While there are several chip suppliers in the market, the failure by one or more of our main suppliers to continue to meet our needs could have a material adverse affect on our business. Major suppliers in this industry include Atmel, Infineon, ST Microelectronics, Philips and Samsung.

If we are unable to keep up with rapid changes in chip card technology, our existing products and services may no longer be competitive or could become obsolete.

     The market for our products and services is marked by rapid technological change because of frequent new product introductions and chip card technology enhancements, uncertain product life cycles, changes in client demands and evolving industry standards. New products and services based on new or improved technologies or new industry standards can render existing products and services obsolete and unmarketable. To succeed, we need to enhance our current products and service offerings and develop new products and services on a timely basis to keep pace with developments related to chip card technology and to satisfy the increasingly sophisticated requirements of our customers. Any delays in developing and releasing enhanced or new products and services or in keeping pace with continuous technological change may cause us to lose our existing customer base or prevent us from expanding it, which could adversely effect our business.

     The process of developing our products and services is extremely complex and requires significant continuing development efforts and investments. Our investments in research and development have been considerable, and while they have declined in recent years, they may need to increase. These expenses may adversely affect our operating results and financial condition.

Our quarterly financial results fluctuate and are difficult to predict, and if our future results are below the expectations of investors, the price of our shares or ADSs may decline.

     Our operating results have varied from quarter to quarter, and we anticipate that this pattern will continue. This variability makes it difficult to use a particular quarter’s results of operations as an indicator of possible trends.

     Although these quarterly variations are a historical part of our business, they could affect the market price of our shares or ADSs. In particular, if our results of operations in any quarter are below the expectations of investors, the trading price of our shares or ADSs may decrease significantly.

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     In addition to general economic factors and factors that affect companies generally, a number of factors specific to us are likely to cause quarterly variations, including:

•		the mix of products and services that we are able to sell, including in particular, whether we are able to increase the sales of our higher margin product and services, such as those we sell in the wireless communications market;
•		the geographical mix of our sales, including the relative extent of our growth in countries where our products and services are sold at the most attractive price margins;
•		costs related to possible acquisitions of technology or businesses, including costs related to the integration of acquired businesses into our operations; and
•		the level of success we achieve in maintaining and enhancing existing relationships and developing new relationships with strategic partners, including operating systems developers, systems integrators and other implementation partners.

     In prior years, we experienced seasonal fluctuations in our operating results but cannot be sure such fluctuations will continue in the same or another pattern in the future.

The period between our initial contact with a potential customer and the sale of our products or services to that customer tends to be long and may be subject to delays which may have an impact on our revenues.

     The period between our initial contact with a potential customer and the purchase of our products and services is often long and subject to delays associated with the budgeting, approval and competitive evaluation processes that frequently accompany significant capital expenditures. A lengthy sales cycle may have an impact on the timing of our revenues, which may cause our quarterly operating results to fall below investor expectations. A customer’s decision to purchase our products and services is often discretionary, involves a significant commitment of resources, and is influenced by customer budgetary cycles. To successfully sell our products and services, we generally must educate our potential customers regarding the uses and benefits of our products and services, which can require the expenditure of significant time and resources, however, there can be no assurance that this significant expenditure of time and resources will result in actual sales of our products and services.

If our products contain defects or if we make errors in providing services, we could lose customers and revenues and become subject to costly claims.

     Complex chip card products such as ours can contain errors and defects, particularly when first introduced or when new versions or enhancements are released. Similarly, our services involve sophisticated decisions that result in our customers making significant investments and changes to their business organizations. Serious defects or errors in our products or services could result in lost revenues or a delay in market acceptance, would be detrimental to our reputation and could cause us to lose existing customers or prevent us from securing new ones, which would harm our business, operating results and financial condition.

     Defects or other performance problems in our products and services could also result in financial or other losses to our customers, in which case our customers could seek compensation for losses from us. If these kinds of legal claims were to be made, they could be expensive, time consuming and costly to defend against and could harm our reputation, which in turn could result in a loss of our customers and a decrease in our revenues. Although our sales and services agreements typically contain provisions designed to limit our exposure to such claims, existing or future laws or unfavorable judicial decisions could potentially limit the effectiveness of these provisions.

If our strategic relationships terminate or do not develop, we may lose important sales and marketing opportunities.

     We have established strategic relationships, including joint ventures with telecommunications carriers, operating systems and security software developers, financial institutions and several government agencies and organizations.

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These relationships expose our products and services to potential customers to whom we may not otherwise have access. In addition, these relationships provide us with insights into new technology and with access to third-party service providers that our customers can use for implementation assistance. These entities are not always obligated to continue their relations with us, and could terminate them and either work instead with our competitors, or terminate their programs that use our products and technology. If our strategic relationships or joint ventures are terminated, we might lose important sales and marketing opportunities.

Challenges to our intellectual property rights could cause us to incur costly litigation, and if we are not successful, could result in our losing valuable assets or market share.

     Our success depends, in part, upon our proprietary technology and other intellectual property rights. If we are not able to defend successfully our industrial or intellectual property rights, we might lose rights to use technology that we need to develop our business, which may cause us to lose market share, or we might be required to pay significant license fees for the use of such technology or might be unable to use such technology at all. To date, we have relied primarily on a combination of patent, trade secret and copyright laws, as well as nondisclosure and other contractual restrictions on copying, reverse engineering and distribution, to protect our proprietary technology. We regularly prepare patent applications for technology related to our chip cards. There can be no assurance that these applications, laws and contractual restrictions will be successful.

     Litigation to enforce our intellectual property rights or protect our trade secrets could result in substantial costs and may not be successful, which could result in costly judgments, license fees or injunctions. Any loss of or inability to protect intellectual property in our technology could seriously harm our business, operating results and financial condition. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the European Union or the United States. Our means of protecting our intellectual property rights in the European Union, the United States or any other country in which we operate, may not be adequate to fully protect our intellectual property rights. Similarly, if third parties claim that we infringe their intellectual property rights, we might be required to incur significant costs and devote substantial resources to the defense of such claims, and if we are unsuccessful, we could suffer costly judgments and injunctions that could materially adversely affect our business, operating results or financial condition.

We might be forced to change our product and service offerings or to pay higher costs if the third-party technology that we use in our products changes or if the price of such technology increases.

     Many of our products integrate third-party technologies that we license or otherwise obtain the right to use, including:

•		Third party operating systems;
•		security and cryptographic technology for card operating systems, which prevents unauthorized parties from tampering with our cards; and
•		public key infrastructure technology that is used for Internet transactions and identification in corporate security networks.

     Technology providers frequently change their products and cease supporting prior versions of their products. Should such cessation of support occur, we cannot be assured that we will be able to effectively adapt our products and services to accommodate such changes. If not, we may have to change the features of our products and services or to discontinue some or all of them. Some changes in technology may be accompanied by significant price increases that cannot be passed on to our customers, which could increase our costs and materially affect our business, financial condition or results of operation.

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We have multinational operations that are subject to risks inherent in international operations, including currency exchange rate fluctuations.

     We conduct our business in all regions of the world, including in many countries outside the United States and the European Union. As a result, we are subject to political, regulatory and commercial risks inherent in international operations, including the risk of currency exchange rate fluctuations, particularly in relation to the U.S. dollar, the British pound, the Chinese yuan and the Singapore dollar.

     Our operations are subject to the risks associated with international operations, which include:

•		A slowdown or a recession in global, regional or national economic growth;
•		tariffs and trade barriers;
•		exchange controls;
•		fluctuations in national currencies;
•		social and political risks;
•		national and regional labor disputes;
•		required compliance with a variety of foreign laws, regulations and standards; and
•		the difficulty of enforcing legal claims and agreements through certain legal systems.

     Furthermore, our regional businesses are subject to cyclical fluctuations in the industries and economies in which they operate. Any of the risks above could adversely affect our results of operations.

     In 2003, we earned 10% of our revenues in China, and we expect to continue to earn a material portion of our revenues in China. Conducting business and manufacturing activities in China is subject to special risks that may not arise in other countries, including:

•		the possible failure to adopt, or the adoption of inconsistent or ineffectual, market-oriented economic reforms by the government;
•		uncertainties regarding the interpretation and enforcement of laws and regulations; and
•		the devaluation of the local currency or the imposition of restrictions on currency conversion or expatriation of profits.

Future acquisitions may adversely affect our business.

     Our strategy to achieve growth may lead us to make significant acquisitions of businesses that we believe to be complementary to our own. Future acquisitions may require us to use significant financial resources, to make potentially dilutive issuances of our equity securities, to incur debt and to incur amortization expenses related to goodwill and other intangible assets. Acquisitions involve numerous other risks, including difficulties in integrating the operations, technologies and products acquired and the employees of the acquired businesses, the diversion of management’s attention from other business concerns, the risk of entering geographic markets in which we have little or no prior experience, and the potential loss of key employees of acquired businesses.

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Risks Related to Our Industry

Our markets are highly competitive and competition could harm our ability to sell products and services and could reduce our margins and market share.

     The market for chip card products and services is rapidly changing and intensely competitive. We expect competition to increase as the industry grows and as some chip card technology matures. Recently, intense competition has led to increased pricing pressures on our products which in turn resulted in lower price margins on those products. We may not be able to compete successfully against current or future competitors or may not be able to make a profit at the prices we would need to sell products at to be competitive. The competitive pressures facing us may harm our business, operating results and financial condition.

     Our current principal competitors include chip card product and service providers such as Axalto (formerly part of Schlumberger), Giesecke & Devrient, Oberthur Card Systems, Incard and Orga Kartensysteme. There have been new entrants into the industry with low-cost operating models, especially in China, with aggressive pricing policies that could threaten our market share and our profitability. As the market for chip card products and services in the wireless, financial services and Internet security industries grows, and as these markets converge, we may experience additional competition from companies that are currently our suppliers, customers and strategic partners, including:

•		operating system developers, such as Microsoft and IBM;
•		electronic security product and service providers, such as Baltimore Technologies, Entrust, RSA and Verisign;
•		wireless device manufacturers, such as Nokia, Motorola, Samsung and Sony-Ericsson;
•		systems integrators, such as IBM, Siemens and EDS;
•		microcontroller chip manufacturers, such as STMicroelectronics, Infineon, Philips, Atmel, Renesas, Samsung and Sony; and
•		wireless infrastructure software providers, such as Smart Trust.

     Some of our competitors and potential competitors may have larger technical staffs, larger customer bases, more established distribution channels, greater brand recognition and greater financial, marketing and other resources than we do. Our competitors may be able to develop products and services that are superior to our products and services, which achieve greater customer acceptance or which have significantly improved functionality as compared to our existing and future chip card products and services. In addition, our competitors may be able to negotiate strategic relationships on more favorable terms than we have been or are able to negotiate. Many of our competitors may also have well-established relationships with our existing and prospective customers. Increased competition may result in reduced margins, loss of sales or decreased market shares, which in turn could harm our business, operating results and financial condition.

The Internet and other communications networks may not expand as a commerce and business medium.

     Our growth may suffer if the use of the Internet for commercial transactions does not grow, or if wireless devices do not become a widely used method of accessing the Internet for commercial transactions.

     The acceptance and use of the Internet and wireless communications networks for Internet commerce, mobile banking and mobile commerce could be limited by a number of factors, including:

•		inadequate development of the necessary network infrastructure;
•		inconsistent quality of service;
•		excessive cost of high-speed service;
•		concerns about transaction security and fraud or theft of stored data and information communicated over the Internet and wireless communications networks;
•		increased government regulation and the taxation of transactions conducted over the Internet and wireless communications networks; and

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•

delays in development or adoption of new standards or protocols to handle increased levels of activity on the Internet and wireless communication networks.

     In addition, companies and government agencies that have already invested substantial resources in other methods of conducting business may be reluctant to adopt new Internet-based or wireless-based methods.

Future regulations may be enacted that either directly restrict our business or indirectly affect our business by limiting the growth of Internet and mobile commerce.

     Our products and services are sold in numerous countries around the world, each of which imposes regulations affecting our operations, including product controls, trade restrictions, tariffs and charges, and labor and other social controls. Many countries impose regulatory restrictions or bans on the use or transfer of cryptography, which is an essential part of our chip card products and services. Regulation of the Internet in general, and of e-commerce, and mobile commerce in particular, is largely unsettled.

     As Internet and mobile commerce evolve, we expect that various governmental entities will enact or revise laws, rules and regulations covering issues such as user privacy, consumer fraud, pricing, content and quality of products and services and the use of cryptography. Such laws, rules or regulations may increase the costs or administrative burdens of doing business using the Internet and wireless communications networks and may cause companies to seek alternative means of transacting business in those countries. The limitations on the use and transfer of cryptography and the enactment of laws increasing the cost or burdens of using the Internet or wireless communications would limit the market for our products and services which could have an adverse on our business, financial condition and operations.

New developments may render our chip card encryption technology inadequate or ineffective.

     Chip cards use cryptographic technology to secure transactions and exchange confidential information. Most types of chip cards are equipped with secret keys that are required to encrypt and decode messages through the application of algorithms. The security afforded by this technology depends on the integrity of a user’s secret key and the complexity of the algorithms used to encrypt and decode information. Any significant advance in techniques for attacking cryptographic systems, including the successful decoding of cryptographic messages or the misappropriation of private keys, could result in a decline in the security of our technology and affect the market’s acceptance of, or demand for, our products which could have an adverse effect on our business, financial condition and results of operation.

The role of chip cards may be relegated to that of simple identity tokens with limited additional added value.

     The primary role of chip cards has historically been to ensure authentication, and they are widely used as identity tokens. Chip cards can also provide additional value with on-board applications running in a stand-alone or in a client-server mode. This value is created if:

•		Chip cards are technically enabled to play an effective role in applications; and
•		applications relying on chip cards are actually developed and used.

     If an insufficient number of applications rely on the chip cards, chip cards risk having their role reduced to that of simple identity tokens, providing limited additional value. In these circumstances, the value of chip cards would not grow, which could materially adversely affect our business operating results and financial condition.

Risks Related To Trading of Our Shares and ADSs

Technology-related stock prices are especially volatile, and this volatility may depress our stock price, and the trading in our shares and ADSs often experiences low volumes.

     Because we operate in the highly volatile technology sector, the market price of our shares and ADSs is likely to continue to be highly volatile. In addition, there is often low market volume in our shares and ADSs.

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     If we are unable to meet the continued listing standards of the exchanges or quotation systems on which our securities trade, or if remaining as a publicly listed company is not economically feasible, we may delist and investors may not be able to resell their shares or ADSs easily.

Because several of our shareholders own a large percentage of our voting stock, other shareholders’ effective voting power may be limited.

     As of June 2, 2004, our executive officers, directors and their affiliates beneficially owned or controlled approximately 0.2% of our shares (excluding shares held by Texas Pacific Group and its affiliates and members of the Quandt family) and had options to acquire approximately an additional 3.1% of our shares. As of June 2, 2004, Texas Pacific Group and members of the Quandt family owned or controlled approximately 26.2% and 19.0% of our shares, respectively, or approximately 23.2% and 16.8% on a fully diluted basis, respectively. If some or all of such persons act together, they have the ability to control matters submitted to our shareholders for approval, including the election and removal of directors and the approval of any merger, consolidation or sale of all or substantially all of our assets. This potential concentration of control can affect the value of our traded securities or limit the effective voting power of small shareholders.

If we are deemed a passive foreign investment company, certain unfavorable U.S. tax rules may apply.

     Recent increases in our market capitalization have reduced the risk that comparatively minor changes in our assets or share price could result in our becoming a “passive foreign investment company” or “PFIC” for U.S. tax purposes for reasons outside our control. If there is a decline in our market capitalization in the future, this risk could become more significant. Certain unfavorable U.S. tax rules apply to shareholders in companies that are PFICs for even a single year. See “Item 10. Additional Information — Taxation — United States Federal Income Tax Considerations — Passive Foreign Investment Company Considerations.”

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Item 4. Information on the Company

HISTORY AND DEVELOPMENT OF THE COMPANY

     We started our operations in 1988 as a major supplier of prepaid phonecards in France and elsewhere. Because of our strength in the prepaid phonecard market during the 1990s, we developed strong ties with the telecommunications industry and, as a result, we helped pioneer the development of chip card technology for wireless communications.

     Prior to 1999, our business was conducted through a French limited partnership known as Gemplus SCA. In December 1999, we merged Gemplus Associates, the general partner of Gemplus SCA, into Gemplus SCA and transformed the surviving entity into a French corporation, Gemplus S.A. In February 2000, we reorganized our corporate structure, creating a new holding company, Gemplus International S.A., a Luxembourg corporation. The shareholders of Gemplus S.A. contributed to Gemplus International S.A. substantially all of the shares of Gemplus S.A. in exchange for shares of our capital stock. As a result of these transactions, as of December 31, 2003, our company held 99% of the outstanding shares of Gemplus S.A.

     Texas Pacific Group became a shareholder of our company at the time of its equity contribution in February 2000. In December 2000, we completed an initial public offering of our capital stock, in the form of ordinary shares and ADSs.

     Our company is organized under the laws of the Grand Duchy of Luxembourg. Our Company’s registered office is located at 46A Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, telephone +352.26.00.52.26.

Capital Expenditures and Divestitures

     The following table sets forth our capital expenditures, before retirements and disposals, for each year in the three-year period ended December 31, 2003.

     In 2003, we continued to execute a restructuring and rationalization program that we commenced in 2002. This program includes the rationalization of our office facilities on a worldwide basis. The capital expenditures relating to manufacturing in 2003 were made in almost all of our plants, and especially in our Singapore and La Ciotat, France, micro-controller module assembly plants. In 2002, capital expenditures were made primarily in Europe, and included principally €17.7 million related to a constructing a research and development and office building located in La Ciotat, France, which was mainly financed through a sale-leaseback transaction.

     We plan to internally fund these expenditures and have budgeted capital expenditures of approximately €23 million for the year ending December 31, 2004, including €16 million related to equipment for our manufacturing activities.

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

     See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources” for a description of our sources of financing for our budgeted capital expenditures.

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BUSINESS OVERVIEW

Overview

     We are a leading provider of technology, products and services that enable wireless network operators to offer their customers secure voice and data communications and transactions through mobile phones, and that enable companies, financial institutions and public entities to provide customized services to their customers and employees through a range of systems, including financial card networks, loyalty and bonus point programs and identification and Internet security systems.

     In 2003, we reported our results in two main business segments:

•		Telecommunications, which includes our wireless products such as subscriber identification modules (SIMs), related software and services, and prepaid phonecards for fixed telephony operators; and
•		Financial Services and Security, which focuses on applications for the financial services sector and corporate and national identity card programs to facilitate identification and secure transactions within a variety of systems.

     As of January 1, 2004, the Company began reporting in three business segments: Telecommunications, Financial Services and Identity and Security. See “Item 5. Operating and Financial Review and Prospects — Recent Developments” for a description of business segment reporting.

     Within our Telecommunications business segment, our wireless products and services are based on subscriber identification modules (SIM), which are small plastic modules with embedded microcontroller chips, and related systems. SIMs are used in the global system for mobile communications (GSM) wireless standard, which is dominant in Europe and the most widely used system in the world, in terms of both the number of subscribers and number of countries. SIM cards are also increasingly used in other wireless communications systems standards, such as in CDMAOne, WCDMA and CDMA2000.

     Within our Financial Services and Security segments, our chip card products and services are used by government and financial, retail, and other businesses to provide a wide array of services, and to manage customer relationships. In the financial services market, for example, banks can issue credit and debit cards with embedded chips to reduce fraud and to provide their cardholders with premium services and retail applications (i.e., applications that store cash values that can be used to make purchases) which applications can be transacted in person or on-line. In the identification systems and security networks markets, our products and services are used to provide both secure access to restricted facilities and computer networks and to increase the effectiveness of other identification and security systems.

     In both our Telecommunications and Financial Services and Security businesses we provide a broad range of software and services that allow our customers to implement and manage sophisticated systems. Our software includes card management systems that allow our customers to manage card issuance, update data, download applications and obtain user information. Our services include customization, technical support, consulting, system design and integration and system operation. Many chip sales are combined and priced or sold together with sales of these services and software, and therefore we do not separately report these sales.

     We also provide non-chip card products and services in other areas that are related to our chip card businesses, such as magnetic stripe payment cards for banks and card-based transportation access products that operate in conjunction with authentication and non-repudiation software. In addition, we provide chip card readers and other devices including reader chipsets for use by third party manufacturers.

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Our Strategy

     We are pursuing our objectives of expanding and enabling the market for safe electronic services involving our products, including a broad set of services delivered through wireless or fixed wire networks, while increasing the use of high-volume, portable, secure and personalizable devices.

     Our strategy for attaining these objectives is to be a leading provider of applications and services that employ or that operate using chip cards. We hope to grow our core businesses, while continuing to restore our profitability. Simultaneously, we hope to establish stronger positions in promising new markets for the use of chip cards and related software such as in identity, corporate security and wireless local area network systems (WLANs).

Achieving and maintaining profitable growth by following through on our restructuring and efficiency initiatives, and gaining momentum through innovation and continued cost control:

•		We are continuing to adapt our cost structure and increase our competitiveness in an environment where price is an overriding factor.
•		We have been reorganizing our business structures to better align to market structures. We have been enhancing our customer-facing front-end and supply chain related back-end processes to more effectively and efficiently serve our markets.
•		We are working on increasing our market share in higher margin products in the wireless communications sector by innovating, working closely with key customers, enhancing our product mix, improving our supply chain and business processes, and using differentiating account strategies.

Differentiating on value

		Our strategy includes focusing on a number of growing markets in addition to our traditional businesses, including:
•		Software and services in wireless communications, including SIM administration, content delivery, mobile-payment, and over the air (OTA) platform markets. We believe that our position as a leading supplier of OTA platforms should enable us to further strengthen our relationship with our customers and facilitate the advancement of the value that SIM cards can add to wireless networks.
•		Identity card programs. National identity programs represent a large and growing opportunity for us. We are continuing our development efforts in this area with the objective of tapping into this significant market potential. In addition, we are seeking to form alliances with strategic partners to enhance our prospects for success in this area.
•		Corporate security (controlling access to buildings and computer networks). With our experience in relevant security technologies, we hope to become a leader in this field.
•		WLANs (wireless local area network). The functionality of this technology is enhanced by using chip cards as a key to access control similar to the use of SIM cards in wireless communications. We believe that our research and development capabilities should help us attain a leading position in the development of this technology. The deployment of WLAN, however, is facing concerns regarding security, roaming and billing. We believe that devices like SIM cards offer an excellent point of access control for WLAN operators to enable secured authentication while using the roaming and billing capabilities of the existing telecom networks.

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Getting closer to our customers

     We are continuing to strengthen our regional structures in order to improve our customer responsiveness worldwide. We believe that improved regional sales and sales support functions will enhance our customer relationships by combining the ability to design and deliver complex high-end solutions with support from local offices and direct supply chain management on commodities.

Excelling in execution is a key goal

     We are continuing to re-engineer our organizational structures and processes in an effort to further improve accountability and monitor and reach our employee, customer and shareholder satisfaction targets.

Technology Overview

Chip Card Technology

     Our products and services are part of a class of technology that involves small modules or cards with embedded electronic chips known as chip cards or smart cards. Chip card technology has evolved significantly since chip cards were first introduced in the 1970s. Since our inception in 1988, we have played, and continue to play, an important role in the evolution of chip cards and related applications.

     There are two major categories of chip cards:

•		Memory cards, which contain chips that provide only secure storage of data, that can be modified at a special terminal. Memory cards are used for single applications that do not require sophisticated data processing functions, such as prepaid phonecards and loyalty cards.
•		Microcontroller cards, which contain chips that are capable of storing and processing data like a miniature computer, transfer processed data to a network and run software programs or “applets” that interact remotely with server-based applications. The most sophisticated new chip cards, such as subscriber identification modules (SIMs) used in wireless communications, are all microcontroller cards.

     Chip card technology is developing rapidly as the capability of microcontroller chips to conduct sophisticated operations is expanding. Some of the most important recent technological developments in chip card technology include:

•		The development of operating systems for microcontroller chips that allow card issuers to load multiple applets onto a single card. This allows our customers to offer their users several functions on the same card. For example, a single multi-application card can be used to access facilities or computer networks, to make payments as a debit or credit card, to store bonus points that can be used to make purchases and to authenticate Internet transactions.
•		The development of open standards for chip card operating systems. These operating systems contain an embedded virtual machine or interpreter which interacts with the operating system and a documented application programming interface (API) to execute applets. The API allows software programmers to design new applets in a standardized format, without reference to the technical specifications of the interpreter, improving ease of use and programming time. In addition, microcontroller chips based on open operating systems are interoperable with more systems. This means that software programmers can create new applications based on a standard language or protocol, which can be used to provide services through the chip cards of different manufacturers. The most widely used open platforms today are based on Java Card technology, a software API specification for chip cards based on technology from Sun Microsystems that has been adopted by the chip card industry.

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•		The development of sophisticated card management software for chip cards, which helps card issuers take advantage of new chip card capabilities by enabling the issuers to manage the cards remotely, and to update, download and install new information or applets as they become available, without replacing the cards. These new software capabilities have also created a demand for system design, integration and management services that allow card technology companies to develop closer ties with their customers.
•		Significant advances in the memory structure and capacity of microcontroller chips with the development of flash memory technology. Chips based on this technology can be able to store substantially more information, conduct more sophisticated operations and load a higher number of applets. In addition to greater memory capacity, the flash memory chips can give card manufacturers increased flexibility to modify the chip’s operating system.
•		The development of chip cards designed to work with the most advanced security technologies, such as public key infrastructure (PKI) systems and secure downloadable applets. Cards with PKI capability can be offered to customers requiring a higher level of security, such as individuals or companies that conduct transactions or business over the Internet, and banks that are implementing mobile payment systems.
•		The increased use of contactless chip cards which include an antenna that allows the card to communicate using radio waves. Contactless cards provide the benefits of easy access since insertion into a card reader is not required. This technology is becoming increasingly attractive for identity programs and payment systems.

     We believe that chip card products and related services include features that are attractive to customers in the sophisticated wireless, financial, Internet and corporate security markets. The features we believe are most significant include:

•		Security. Chip cards are capable of storing complex algorithms that can be used to identify a user or to encrypt information, such as a digital certificate. Because a user needs both a card and an activation mechanism, such as a personal identification number (PIN), to use a card, security is not entirely compromised by either the loss of a card or the communication of a PIN. As a result, using chip cards to authenticate mobile and electronic commerce transactions, significantly reduces the incidence of fraud. In addition, microcontroller chip cards can be equipped with sophisticated cryptographic algorithms and functions that prevent unauthorized parties from tampering with the contents of the card.
•		Portability. Chip cards can be easily transferred from one device to another. As a result, for example, a mobile phone subscriber can purchase and immediately use a new mobile phone without changing his or her service subscription, a feature that mobile phone network operators find attractive as it reduces customer churn. Similarly, a chip card used to authenticate the user of a company’s computer network can be inserted into any computer equipped with a reader, and include certain user profile information so the user is less dependent on a particular computer.
•		Flexibility. The newest chip cards can carry and run multiple applets that can be updated remotely without the need to replace the card. This increases the flexibility of banks and other companies to use chip cards as customer management tools by changing applications in response to changes in product offerings or customer preferences. This also allows them to offer multiple services, such as wireless, banking, payment and loyalty applications, on a single platform.

     Despite these advantages, chip card technology has not yet been widely deployed in some areas, particularly in financial services markets. This is primarily because the replacement of existing terminals with devices capable of reading chip cards, and the development of related network infrastructure, is costly and time consuming. See “Item 3. Key Information—Risk Factors—Risks Related to Our Business.”

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Use of Our Chip Card Technology in Wireless Communications

     Currently, one of the largest uses for chip card technology is in wireless communications, due to the security and flexibility provided by chip cards. There are various wireless network standards:

•		Wireless 2G standards are the second major type of technology used for wireless communication. 2G standards mainly support voice transmission, but also support some data transmission capability. The global system for mobile (GSM) communications is the most widely used 2G standard, both in terms of number of subscribers and number of countries. The GSM standard requires the use of subscriber identification module (SIM) technology.
•		Wireless 2.5G standards support higher data transmission capability than GSM and other 2G standards. Wireless 2.5G standards incorporate identification module technology similar to that used in 2G SIM cards. The technology is included in a removable card or in the telephone handset. In the transition from 2G to 2.5G, some operators located outside of Europe are migrating to the European GSM-originated standard.
•		Wireless 3G standards, particularly WCDMA and CDMA2000, which supports higher data transmission capability than 2.5G, are in the process of being deployed. As with 2.5G, the wireless 3G standards incorporate identification module technology similar to that used in SIM cards, either as a removable card or in the telephone handset.

     The following table generally summarizes the principal 2G, 2.5G and 3G transmission standards, indicating the principal geographical regions where they are used and whether they incorporate removable identification module technology. Some countries use more than one standard, and are listed in more than one place in the table.

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Market Overview

     The market for chip card technology, products and services is growing, both in terms of size and sophistication. According to Eurosmart, 1,898 million chip cards – including microcontroller cards and memory cards – were sold worldwide in 2003, and using data provided by Eurosmart we estimate that we are the world’s largest chip card provider, with 30% of the global market in terms of volume in 2003.

Wireless Market

     The wireless communications market, particularly the wireless market using GSM standards, recorded strong growth prior to 2001, primarily as a result of a significant increase in the use of mobile phones around the world for voice transmission. Since then, growth in the wireless communications market has slowed significantly as, among other things, the market and the technology for wireless voice transmission services have matured. Demand, however, returned in 2003 due to consumer equipment replacement, driven significantly by color-screen handsets, and growth in emerging markets. According to Eurosmart, approximately 670 million SIM cards were sold in 2003, as compared to 430 million in 2002.

     In established markets, wireless communication operators are seeking to enhance their offerings with new premium value services based on the increasing use of wireless data transmission services. For example, short message service (SMS) allows text messaging through mobile phones. In anticipation of the growing demand for wireless data services, including the provision of pictures, streaming audio and video, and high-speed Internet access through mobile phones, operators have made significant investments in 3G licenses (government provided licenses to use frequency bands for 3G data communication), and are beginning to develop the infrastructures necessary to deliver 3G services. To date, we have been involved in the launch of every commercial 3G network worldwide. We believe that the growth of the wireless data market is important for the growth of the chip card market, and that demand for new wireless data services could increase demand for more sophisticated chip cards. Because identification module technology allows wireless operators to facilitate and control the access between wireless subscribers and content providers, we believe that our chip card products, software and services can be a core technology for our wireless customers to address this new market.

Financial Services and Security Market

     According to Eurosmart, approximately 205 million chip cards were sold in the financial services industry in 2003. According to Frost & Sullivan, we estimate that we are one of the top three providers of chip cards in the banking and retail sectors with approximately 22% of the market in terms of units sold. We believe use of chip card products and services will grow due to enhanced security requirements and increased fraud rates among conventional cards.

Our Products and Services

     The following table sets forth our revenues for the year ended December 31, 2003:

     See “Item 5. Operating and Financial Review and Prospects” for a discussion of our total revenues, broken down by category of activity and geographic market, for each of the last three financial years.

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Delivering a complete solution

     We provide our customers with a portfolio of products, software and services that enable the delivery of complete solutions:

•		Products. We provide a complete range of chip card products, from low-end to high-end, with proprietary and “open” operating systems, offering various amounts of available memory, some with features and embedded applications dedicated to specific markets. Our chip card reader products and software development tools are a direct complement to our chip cards.
•		Software. We provide software that help us manage the client-server architecture and enable interactions between the applets stored on chip cards and the card issuer’s computing system. We also provide card management systems that enable the tracking of issued cards and the management of information stored on the chip card.
•		Technical Support. We provide our customers with a full range of maintenance and technical support including help desk services for their card solutions. Our regional Gemplus service centers are responsible for our help desk services in their region, with several sub-regional or local technical support staffs as needed.
•		Consulting, System Design, Customization and Integration. Our consulting services focus on key topics and issues in the development and implementation of chip card systems, including marketing and commercial analysis and recommendations, feasibility studies and development of possible implementation scenarios. We also provide our customers with training in chip card technology and software applications.

•		Our system design services provide our customers with flexibility in the overall design of chip card systems, including security parameters and detailed component design.
•		Our customization services include the development of customized software applets for particular card issuers.
•		We provide system integration services to deliver complete systems using a project management approach. This approach involves coordinating with contractors to obtain and integrate the required system components, including customized software applications and providing operational system support during acceptance testing, pilot programs and the roll-out of the final, customized card system.

•		Personalization. Our personalization services consist of the process of loading personal data or premium value applications onto the memory or microcontroller chips embedded in cards. We also emboss and print customized card bodies for our customers, and customize the associated packaging and card carriers used to deliver cards to end-users. Our card printing capabilities include technically advanced, high quality techniques. We often prepare and distribute products directly to end-users on behalf of our customers.
•		Outsourced Operations. We provide a variety of services associated with the administration of that card management system, including card profile update campaigns, network management, server management and data encryption and archiving. We also provide other operational services for our customers’ chip card system managers, such as mapping and profiling, certificate authority and management services to work with trusted third party systems and certification authorities.

Telecommunications Products and Services

     Our telecommunications products and services consist primarily of SIM-based products, software and services for wireless communications operators, and chip-based prepaid phonecards for public pay telephone operators.

     Wireless Products, Software and Services

     SIM cards were introduced to provide standardized and secure subscriber identification and authentication. Evolution of technology and subscriber demands has helped turn the SIM card into a wireless data service enabler within an open client-server architecture.

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     SIM cards are well adapted for applications that need to be highly personalized, secure and portable. SIM-enabled systems can be used to enhance customer relationships, to enable content delivery and to secure mobile transactions. We design many of our products around interoperable SIM platforms that connect to networks and remote applications and over the air (OTA) platform technology. These telecommunications products include:

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

     Phonecards

     Based on information published by Eurosmart in their 2003 report, we believe we are one of the world’s leading manufacturers of prepaid phonecards and associated phonecard security products with a 40% share of the worldwide phonecard market in 2003. As of June 2, 2004, we had produced over 3 billion phonecards since our inception in 1988. Our main customers include more than 20 major telecommunications operators, including CANTV, China Telecom, France Telecom, and Telmex. Our multi-application solutions help telecommunications operators take advantage of the convergence of telephony with banking, loyalty and transportation applications. These products generate increased revenues by helping to enable innovative marketing opportunities. For example, CANTV, the Venezuelan national telecommunications carrier, currently uses a line of our prepaid phonecards that allow public telephony customers to use them to pay for consumer products, such as soft drinks and snacks, at designated points of sale.

     Scratch Cards

     We provide a range of scratch cards under the name GemScratch, which contain a scratch-off panel revealing unique numbers to be used by the end-user of the card in order to place a prepaid telephone call. We sell our GemScratch cards primarily to our wireless customers who provide prepaid services. Our GSM Prepaid Kit includes a SIM card and a scratch card in a single package, allowing wireless operators to offer their subscribers an integrated communications package. Our scratch-off products are also used by fixed-line telecommunications operators to provide calling card services to their customers.

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     Wireless LAN (WLAN)

     As part of our business development group, we created a group dedicated to the WLAN market (also referred to as Wi-Fi market). The main product offering of our Wi-Fi group is GEMobileIT, a package comprised of software, a chip card combining a SIM and enterprise security functions, and a chip card reader. The package is designed to authenticate a WLAN user to the network operator and to provide secure access to the user’s corporate network and data. Once installed on a PC, GEMobileIT manages the operator/end-user authentication over the WLAN, and then automatically runs the enterprise Virtual Private Network (VPN) authentication. It provides a secure connection over public hotspots by linking into the GSM infrastructure, thereby benefiting from the roaming, billing and authentication infrastructure already deployed by mobile operators. GEMobileIT stores corporate credentials and authenticates end-users to their VPN within the same chip card. The GEMobileIT software facilitates access to the chip card from different locations (USB reader or GPRS/WLAN PC card) and provides user convenience through single PIN management for both WLAN and VPN authentication.

Financial Services

     Secure chip card technology offers a platform for a variety of financial and banking service applications, such as credit/debit cards (payment cards), e-purse cards (cards that store cash values that can be used to make purchases), multi-application services and mobile banking services. Payment cards and e-purse cards are smartcards that contain an embedded microcontroller chip that processes transaction information received at the point of sale and carries information that allows a card reader to accept or reject a transaction up to a specified amount without on-line authorization. The smart card reduces fraud associated with existing magnetic stripe card-based systems by helping to prevent, among other things, the use of stolen cards to make unauthorized purchases because the cardholder enters a PIN code with the reader at the point of sale rather than simply signing a printed card receipt. Furthermore, microcontroller chips for this market contain sophisticated cryptographic algorithms and functions that help prevent unauthorized parties from tampering with their contents, in contrast with the more limited security safeguards of magnetic stripe cards.

     According to Eurosmart, approximately 205 million chip cards were sold in the financial services industry in 2003, and based on information from Frost & Sullivan, we believe that we are one of the largest providers of chip cards in the banking and retail sectors with 22% of the market in terms of units sold.

     Several large payment card associations, including Visa International and MasterCard International, as well as American Express, have introduced chip cards in some of the payment cards in their systems. Banking and credit card associations in countries around the world, such as Australia, Austria, Brazil, China, Denmark, Taiwan, Korea, Malaysia, Finland, Spain and Switzerland, have recently announced plans to adopt chip cards to replace some of their magnetic stripe cards. The adoption of chip card technology in these countries represents a new phase in the financial services industry, which has been slow to broadly adopt this technology, in large part due to the cost of associated infrastructure. We believe that several new developments have the potential to accelerate the adoption of chip card technology in the financial services industry, including:

•		Interoperability. One obstacle to the widespread adoption of microcontroller chip technology is that many card specifications were adopted by each country on an individual basis, preventing the interoperability of payment cards issued in different countries. To address this problem, in 1996, the major payment card associations, Europay International, MasterCard International and Visa International (together known as EMV), adopted standard specifications for payment cards, which enable interoperability between different payment systems. We believe that migration to the EMV standard is now a well-established expectation that could contribute to a structural change in the financial services market.
•		New Services. The capabilities of microcontroller chip technology permit banks to offer their customers services that were not available when banks initially studied the technology. New services include online authentication, instant rewards and more advanced loyalty and coupon programs, mobile banking, mobile commerce and other services made available with the development of multi-application cards.

     Single Application Cards

     We design and develop chip card products and services that enable financial card issuers to offer a wide range of single-application services to their customers. Our financial services products are designed to meet the requirements and specifications of the most important industry standards, such as the EMV specifications for payment cards. In addition, our chip card products have been individually certified by the major financial and banking organizations and bodies, such as Visa International, Europay International, MasterCard International, Cartes Bancaires (France), Banksys (Belgium) and APACS (United Kingdom). Our main product offering includes:

•		GemVision, a range of payment cards developed for banks that are members of Visa International;
•		GemShare, a range of payment cards developed for members of Europay International and MasterCard International; and

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•

GemValue, a range of payment cards developed in compliance with both Visa and MasterCard specifications.

     We also have developed and market a full range of chip cards for e-purse systems, which are cards that store cash values that can be used to make payments. Our e-purse products have been individually certified by the major e-purse system operators, such as CEPS, Zentral Kredit Auschuss (Germany), Proton World International, Visa International and Mondex. Our main product offerings include Geldkarte, an e-purse card developed for German e-purse systems, and Mondex E-Purse, an e-purse application developed for the Multos multi-application card that is mainly used in the United Kingdom, Latin America, South Korea, Australia and the Philippines.

     Multi-Application Cards

     One of our main multi-application cards for financial services is based on MPCOS, a multi-application standard, commonly used in Asia. This card contains credit/debit and e-purse applications, loyalty programs and transportation ticketing functionality. This card is also available in a contact/contactless mode under the designation GemCombi that allows interaction with the card using radio frequencies. We have also developed a line of multi-application Java-based cards that provide our customers with the flexibility to quickly develop and bring to market new services. Our line of Java-based financial cards, GemXpresso, is also targeted to retail banking and e-commerce payment applications.

     Loyalty and Retail

     We have developed chip card products for a wide variety of loyalty and retail programs, including bonus point and reward programs, such as our microcontroller chip card-based system for Boots, a United Kingdom retailer, Shell U.K., and Esso Netherlands. Our loyalty applications can also be combined with other applications, such as payment cards and e-purse applications, by using our multi-application chip cards. We believe that chip cards should facilitate the next generation of loyalty programs because they enable retailers to set up card-based programs to offer customers a combination of in-store and Internet-based benefits, such as instant rewards, online coupons and privileged access to websites and points systems.

     Bank and Retail Conventional Cards

     In addition to chip cards, we provide our customers with magnetic stripe (“conventional”) cards that do not contain embedded microchips, mostly for our banking customers. Our conventional card operations were launched in 1995 in order to strengthen our position both in the financial services market and in several geographic markets in which conventional cards were the principal product in the local card industry, such as the United States.

     We offer a wide range of magnetic stripe and encoding options to meet the demands of our different customers. We delivered over 250 million magnetic stripe cards to our customers in the banking sector in 2003. We also provide certified card personalization and production and disaster recovery services to MasterCard, Visa and American Express card issuers in various regions around the world.

     Other Businesses

     We also serve customers where our cards are used for identification together with a payment application such as:

	•		transportation access, which includes contactless chip systems that are used for highway tolls and access to public transportation and other transportation facilities;
	•		pay television chip cards, which are used to allow pay television subscribers access to programs and services over cable and satellite television systems; and
	•		loyalty and identification programs that do not use chip cards.

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Identity and Security

     The chip card is a security device which serves as a component in enabling identity management systems for governments and corporations. According to the International Data Corporation, the success of the Internet commerce depends on the development of secure identification, encryption and transaction systems. Chip card technology allows users to access corporate and external networks, identify themselves, send encrypted messages and digitally “sign” transactions and documents.

     The most recent generation of chip cards has been designed to work with the most sophisticated security technologies, such as public key infrastructure (PKI) systems, which are used to control access to computer networks and to secure e-business transactions. Chip cards can store digital certificates that identify users of computer networks and parties to e-business transactions, as well as keys or mathematical algorithms that facilitate secure information exchange between trading partners over the Internet and authenticate transactions. Microcontroller chip technology also permits certificate authorities to revoke certificates and change authorization levels remotely, without issuing new cards.

     We are continuing to work actively with our corporate customers to design security software and services based on microcontroller chip technology to control access to corporate computer networks and to permit the secure exchange of information. In November 2003, we introduced SafesITe, a subsystem that integrates with enterprise legacy applications to combine logical and physical access control with employee identity badges. The SafesITe components are chip cards (either Java Card, PKI, contact, or contactless with a diverse memory capacity range), readers (either contact or contactless for both logical and physical access control), software (including public key and password authentication, digital signing, password management, and e-purse), and card management (utilizing integrated solutions from a variety of vendors) as well as related consulting, project management, custom design and implementation services.

     Because of the special customer demands and opportunities presented by this market, beginning in 2004, we manage this activity as a distinct operating segment. We have identified three areas of demands in this market:

     Enterprise Security

     In this area, we offer cards, readers, software and services, such as personalization or consulting. Associated infrastructure can be based on contact or contactless technology as our cards and readers include digital signature capabilities for electronic business transactions. Our software functions with chip card-based password management and chip card-based user-authentication. In this market, we typically offer solutions and project management to a customer, and not only card products.

     Government to Business

     Using chip card technology, electronic information for government services can be securely accessed and exchanged. The chip card can help build a secure network, facilitating authentication, authorization and non-repudiation. Our customers in this market typically order complete solutions, which are composed of secure chip cards with digital signatures enabled, the associated readers in our PC link range for logical access control (ie, readers that connect to computer serial ports, and other ports such as those complying with universal serial bus or Personal Computer Memory Card International Association specifications), and software in our GemSafe line (GemSafe Libraries for user authentication, GemSafe Logon for password management, and GemSafe eSigner for card enabled digital signature).

     We provide server software that manages verification, time stamping and logging of all operations performed with digital signatures, as well as client software. These products enable trusted parties such as post offices, government agencies or major financial institutions to provide the security levels necessary to support secure, non-repudiable delivery of on-line documents and the completion of transactions.

     Government to Citizens

     In the government to citizens market, programs include identification (including passports and driver’s licenses), healthcare services, citizens’ rights projects, freedom and privacy, and fraud prevention. For these markets, we offer a subsystem called ResIDent, designed specifically for national ID and e-government applications.

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     Typical applications include:

•		Chip card-based vehicle registration and drivers license systems for government agencies, allowing authorities to track vehicle ownership and driving records, and to verify fines and offenses.
•		Chip card systems for accurate identification of travelers at borders and other ports of entry into a country, enabling authorities to facilitate the entry of foreign travelers or workers while helping to ensure compliance with national immigration regulations. With our Automated Border Clearance system, an electronic visa is stored on a microcontroller chip embedded in an immigration card, which interacts with a secure automated access control reader at a country’s ports of entry using contactless technology. For example, in Singapore, the Ministry of Home Affairs uses our Automated Border Clearance system to facilitate entry to cross-border workers from Malaysia.
•		Chip card-based national identification programs involving the issuance of chip cards by national governments to their residents. In 2003, we were awarded a contract to provide chip cards as part of the national identity program in the United Arab Emirates. In the Sultanate of Oman, we are currently delivering a national identification program, including consultancy, project management and integration services, as well as software and chip cards.

Health Care

     We provide systems integration services that allow health care and insurance providers to use our chip cards for on-site access to, and management of, medical and insurance information. Currently, we sell our health care products primarily in Europe. Our health card systems enable an automated and secure insurance claim system that allows the electronic transfer of claims from the point of care to insurance providers, generating significant administrative cost savings and reduced paperwork for health care providers and insurers. Starting in 2004, we include our activities in the health care market within our Identity and Security business segment.

Chip Card Readers and Other Devices

     We provide chip card readers and reader chipset devices that enable the chip card to interact with computing systems. Our products include both contact (requiring the insertion of the chip card into the reader device) and contactless readers (which readers communicate with the contactless chip card via an embedded antenna on the card). In addition to off-the-shelf chip card readers, we also manufacture and develop reader chipsets which are included in third party devices. In 2003, Gemplus introduced a standalone device, called MySIMCopier, which enables end users to securely copy their phone book, SMS files and other data from one SIM card to another. MySIMCopier is now used by over 40 wireless operators.

GemVentures

     To promote the use of chip card technology and applications across a broad range of markets, we created GemVentures, a wholly-owned venture capital company. GemVentures has invested in start up and developing companies that create and market innovative technologies, applications and services in our core markets, such as wireless communications and computer security infrastructure and service providers. GemVentures leverages our expertise in the chip card industry to provide portfolio companies with strategic advice and support in the development of new chip card technologies, applications and services.

Customers

     We have a broad base of customers, including many of the largest wireless operators in each of the markets in which we operate, as well as major banking and financial institutions around the world. Some of our principal customers in each of our major business lines include:

•

Telecommunications – China Mobile, China Telecom, China Unicom, Cingular, France Telecom, H3G, MTS, Nextel, NTT DoCoMo, Orange, STC, Telemar, Telmex, T-Mobile, Telefonica, Turkcell and Vodafone;

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•		Financial Services – BNP Paribas, Banco Nacional de Mexico, Banques Populaires, DSV, EPC, Halifax, ICBC, Lloyds TSB, MBNA Europe, Malayan Bank Berhad, Raiffeisendrückerei, Société Générale;
•		Loyalty and Retail – Banpol SA, Canal Plus, Compuworks, Hewlett-Packard Thailand, Royal Dutch/Shell Group, Sao Paulo Transports, Total France; and
•		Identity and Security – Argentina, France, Germany, HSBC Group, Royal Oman Police, Sertracen SA, and Singapore.

     In 2003, no single customer accounted for more than 10% of our revenues. Our largest customer represented 6% of our total revenues, our five largest customers together represented 19.6% of our total revenues, our ten largest customers together represented approximately 30.7% and our fifteen largest customers together represented approximately 38% of our total revenues.

Suppliers

     We rely on a number of different suppliers of materials and components to manufacture our products. The two basic components of our products are electronic silicon chips and plastic cards with other materials used in the manufacturing process, such as lamination film and inks.

     We have restructured our silicon chip-purchasing strategy in the effort to implement more balanced sourcing with four major suppliers that we anticipate should be able to meet our requirements in terms of cost and volumes. Major suppliers in this industry include Atmel, Infineon, ST Microelectronics, Philips and Samsung. Our main plastic supplier is Bayer AG, which produces several types of resins for injection-molding in Europe, Asia and the United States. We also have supply arrangements for specific types of plastic with BASF, Dupont, Klockner, Lucasi and several other plastic suppliers. We have diverse supply arrangements for our other materials, including ink and lamination film, for each of which we have at least two supply sources.

     In 2003, we made improvements to our purchasing strategies (including further multi-sourcing for certain products and better forecasting systems). There are some signs that there may be supply limitations for microcontroller chips in the future that could negatively affect our ability to procure such chips at favorable prices. There are also indications of possibly higher future prices for some metals and petroleum-based plastics used in the manufacture of some of our products. We believe, however, that our improved purchasing strategies will help mitigate the affects of price increases or supply restrictions if they arise. Nevertheless, in the event of higher sales volumes, our gross margins may be negatively affected by higher chip prices.

Competition

     The chip card market is highly competitive. We face competition in all of our markets from chip card and chip manufacturers, software developers, and security providers. Moreover, our customers and companies with whom we currently have strategic relationships may become competitors in the future.

     Chip card manufacturers are currently our main source of competition in all of our markets. According to Gartner Dataquest, our overall share of the global chip card market was approximately 30% in terms of chip card units sold on a worldwide basis in 2003, followed by Axalto (formerly part of Schlumberger) with 22%, Giesecke & Devrient with 16%, Oberthur Card Systems with 7%, Incard with 4% and Orga Kartensysteme with 3%. The relative strengths and market shares of each of our competitors, however, vary in each of the chip card markets, depending on their core competencies and their strategic alliances and partnerships.

     Certain of our customers, suppliers and companies, with whom we currently have strategic relationships, may become competitors in the future. In 2003, Proton World International, a chip card system software company, and Incard SpA a chip card manufacturer, were acquired by ST Microelectronics, a semiconductor manufacturer. This vertical integration may threaten the competitive position of companies like ours that do not own semiconductor manufacturing facilities, and therefore are potentially subject to supply constraints. There are also new entrants into the smart card manufacturing market, particularly in China where Chinese chip card manufacturers such as Zhuhai Eastcom Peace Smart Card Co., Datang Microelectronics Technology Co. and WatchData System Co., have entered into the industry with low-cost operating models and aggressive pricing policies that are reducing market share and profit margins in that region.

See “Item 3. Key Information — Risk Factors — Risks Related to Our Business.”

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Telecommunications Markets

     Wireless Products and Services

     The market for wireless infrastructure products and services is characterized by intense competition and rapidly changing technology. Our main competitors in this market include Axalto, Giesecke & Devrient, Oberthur Card Systems and Orga Kartensysteme.

     Success in this market is determined by the ability to consistently provide products and software at attractive prices that enable our customers to provide premium value services to their customers. We believe that our research and development activities position us as an innovator in SIM technology, and our global manufacturing capacity provides us with production volumes that enable us to offer competitive prices. In addition, our experience in over-the-air (OTA) server software helps expand potential SIM technologies by creating a unique link between wireless operators and their customers and provides us with a more strategic role within the wireless network. Because wireless infrastructure providers work closely with wireless operators to design and implement customized SIM-based systems, the development of strong customer relationships and the joint creation of product development plans are also important elements in competing in this market.

     Because of the enhanced capabilities of microcontroller chip technology, we may face new competition from operating system and software application developers. The development of open operating systems and platforms are expected to lead to the creation of a new market for application development tools, in which software development providers create and market premium value applications, either as generic packages or customized software for specific customers. The enhanced capabilities of chip cards are expected to create the potential for a variety of products and services that may attract a number of new competitors into software, services and infrastructure markets, including:

•		operating system developers, such as Microsoft and IBM;
•		electronic security product and service providers, such as Baltimore Technologies, Entrust, RSA and Verisign;
•		wireless device manufacturers, such as Nokia, Motorola, Samsung and Sony-Ericsson;
•		systems integrators, such as IBM, Siemens and EDS;
•		silicon chip manufacturers, such as STMicroelectronics, Infineon, Philips, Renesas, Samsung, Sony and Atmel; and
•		wireless infrastructure software providers, such as Smart Trust.

     Phonecards

     Public telephony is a mature market, and is highly competitive. Our presence in this market since its origins in the late 1980s has allowed us to become a leading provider of phonecards on a worldwide basis. According to Eurosmart, approximately 800 million phonecards were sold worldwide in 2003. Our main competitor in this market is Axalto, followed by other chip card manufacturers such as Giesecke & Devrient and Oberthur Card Systems. The ability to deliver large volumes of phonecards at competitive prices, as well as the capability of meeting changing customer demands, such as increased volume requirements, in a short time frame are key competitive factors in this market.

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Financial Services and Security Markets

     Financial Services

     The financial services market is currently fragmented and subject to intense competition. Many of the companies that provide chip card products and services to banks also manufacture conventional bank cards with magnetic stripes. Our competitors in this market include Giesecke & Devrient, Oberthur Card Systems and Axalto. The financial chip card market is currently focused in Europe, where competitors such as Oberthur Card Systems have a strong presence in the banking industry.

     Identity and Security

     The market for identification and security products is currently in its development stage. There are a number of contracts for government identification and security chip card-based systems that are currently being offered through public tender procedures. We and our competitors compete in these tenders in association with major system integrators to provide the chip card products used in these systems.

Marketing

     We use a direct sales force to market and sell our products and services. In addition, we use some local distributors and agents in certain markets.

     Strategic relationships and sales through other channels are an important part of our overall marketing strategy. Through our Gemplus Partners Program we facilitate new product development, collaborative marketing initiatives and joint sales efforts with a select group of value-added resellers, systems integrators, consultants and developers.

Intellectual Property

     We take appropriate measures under the intellectual property laws of applicable jurisdictions in an effort to protect our rights to our chip card technology. Performance in the chip card industry can depend, among other factors, on patent protection. Our policy is to regularly identify patentable inventions developed within our company, and to systematically seek to acquire patent rights upon such technologies. Many of our current patents expire between 2008 and 2021. We mainly develop and patent technology in the fields of card body manufacturing, chip operating software, card readers, chip design and cryptographic processes. We seek to obtain a reasonably broad territorial protection for our patented technologies. We usually file initial patent applications in the country of invention, according to the location of the applicable engineers, and subsequently extend such protection to the European Union, the United States, Canada and Japan, as well as China and other foreign countries depending on the relevant circumstances. We also hold certain co-ownership rights in patents developed through joint venture companies established with our business partners. Proprietary rights in technologies developed through such joint ventures usually vest in the jointly owned companies.

     We have entered into non-exclusive licenses from third parties for technologies relevant to our business, such as from Sun Microsystems with respect to Java Card technology, from IBM with respect to IBM mask data for certain chip cards operating systems, and from Bull CP8 with respect to Bull mask data for banking chip cards. See “Item 3. Key Information — Risk Factors.” We include third party technology in our products, and our business would be harmed if we were not able to continue using this third party technology.

     Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our property is difficult, and while we are sometimes able to determine and reduce the extent to which misappropriation of our intellectual property rights occurs, such infringement can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the European Union and the United States. Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology, duplicate our products or design around patents issued to us or our other intellectual property rights.

     Due to the importance of proprietary technology in the chip card industry, our business involves a substantial risk of overlap with third party patents and subsequent litigation with competitors or patent-holders. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or cause us to enter into royalty bearing licensing agreements.

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Regulation

Encryption Technology Controls

     Our security products and services rely on the ability of our chip cards to perform cryptographic functions, such as the encryption and decryption of information sent by chip card users over the Internet. The domestic use and transfer, and the export of systems and equipment with encryption capabilities, including hardware, software, modules and cards, have been subject to national regulation in many countries and international controls. As a result, the domestic use and transfer and the export of cryptographic products are subject in many countries to strict controls and governmental scrutiny, often requiring the user or transferor to obtain special licenses.

     In an effort to reduce delays arising from the above restrictions in the development and delivery of our chip card-based security technology, we have created a centralized organization within our company to coordinate all of our operations that involve the transfer of our cryptographic-enabled products and services and ensure compliance with all relevant laws and regulations.

Environmental Matters

     Our manufacturing and personalization operations may be subject to extensive, evolving and increasingly stringent environmental and occupational health and safety laws and regulations in a number of jurisdictions, including regulations governing the management, use and release or discharge of hazardous and toxic materials into the environment.

     As part of our sustainable development initiatives and to avoid incurring liability under applicable environmental, health and safety laws and regulations, we have adopted global environment, health and safety guidelines for the layout, construction and operation of our facilities. These guidelines have been defined to comply with current laws and regulations and are completed or modified by our local environment, health and safety officers to ensure compliance with all applicable local laws and regulations. If there are no local environmental, health and safety laws or regulations, or if our guidelines contain environmental, health and safety rules that are stricter than local laws or regulations, our guidelines will be generally applied in those localities.

Geographic Organization

     We are a global company, with headquarters located in Luxembourg. We have operations and facilities located throughout Europe, North America, South America and Asia. We have organized our global operations into three world regions:

•		EMEA, which consists of Europe, the Middle East and Africa;
•		the Americas, which consists of North, Central and South America and the Caribbean; and
•		Asia, which consists of sub regions: SEA (composed of South East Asia), JAKOR (composed of Japan and Korea), and Greater China (composed of China, Hong Kong and Taiwan).

     Our manufacturing and research and development activities are organized on a global basis, while our sales and marketing activities are organized on a regional basis. As of December 31, 2003, we operated 50 sales offices in 35 countries, 16 personalization centers and 11 manufacturing centers in 14 countries worldwide and research and development centers in 4 countries.

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Organizational Structure

     Our company is the sole parent company of its group with approximately 70 direct and indirect subsidiaries located throughout the world. In May 2004, we completed an internal reorganization intended to better align our legal structures to our business operations. This involved the transfer of 26 subsidiaries from Gemplus S.A. to Gemplus International S.A. and had no material impact on our audited consolidated financial statements.

     The following table sets forth our significant direct and indirect subsidiaries as of June 2, 2004:

---

(1)

The remaining shares are mainly held by our employees pursuant to the exercise of stock options, who may contribute to our company the shares of Gemplus S.A. received upon exercise of these options in exchange for shares of our company. For accounting purposes, these shares are already assumed to be a component of the company’s shareholder’s equity.

Property, Plants and Equipment

     Our manufacturing operations are organized on a global basis with a view toward achieving timely and cost-efficient production and delivery of our products in each of our regions. Our expertise in chip card manufacturing includes:

•		Chip Design. We work with our main suppliers to design chips that meet our customer’s requirements, including chip geometry, circuit and architecture design.
•		Micro-electronics. We receive memory and microcontroller chips from our suppliers in wafer form. In clean rooms, rooms that have a high level of dust filtration, we assemble our chip modules, each of which consists of a chip and a printed circuit board, using microelectronic technologies.
•		Embedding. The printed card body is prepared for the assembled chip module, which is then embedded onto the card body using various techniques.

     Our chip cards are subject to in-process visual inspections designed to ensure that each card meets the customer’s physical specifications. We perform a series of electric tests on our modules prior to embedding them onto the card body. These tests are designed to ensure the electrical functionality of our chip cards. We also perform a final visual inspection of our chip cards to ensure quality control and compliance with our chip card specifications.

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     We constantly seek to enhance the efficiency of our global manufacturing operations in order to increase production capacity, to reduce production and delivery time and to lower operational costs, through upgrades in our chip card manufacturing technology, by outsourcing non-critical manufacturing processes and by constructing new manufacturing capacity in lower-cost regions. To further these and related goals, commencing in the second quarter of 2001, we implemented three successive restructuring plans. These restructurings included the closure of a factory in Seebach, Germany in 2003, and a reallocation of our production requirements among our manufacturing and other facilities around the world. In May 2004, we announced the closure of our factory in Herne, Germany. See “Item 6. Directors, Senior Management and Employees — Employees.”

     Our main chip card manufacturing centers are currently located in France, Germany, Poland, China, Singapore, Mexico and the United States. All of these centers have microcontroller and memory card manufacturing capabilities. Our main plastic card manufacturing centers are located in China, Germany, Singapore, the United Kingdom and the United States.

     Our material tangible fixed assets, including leased properties, include the following facilities:

* Facilities owned by the company. ** Facilities partially owned and partially leased. All others are leased.

¹ The property and equipment used in our activities in Tianjin, China, is divided between a legal entity that we wholly own, and another legal entity in which we hold 51% of the equity. We have commenced an improvement program regarding one of the buildings we lease in Tianjin, China, to allow for our increased utilization of that property.

² The property and equipment used in our activities in Zhuhai, China, is held by a legal entity in which we have a 65% equity interest.

     As of June 1, 2004, our approximate annual practical capacity in millions of units for the manufacture of the following products is:

     In addition to the tangible fixed assets that we use in our manufacturing activities, we lease office space in various countries throughout the world, including a significant building in La Ciotat, France, that we use for activities including research and development and product sales and marketing. See Note 13 to our Consolidated Financial Statements.

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Item 5. Operating and Financial Review and Prospects

OPERATING RESULTS

     The financial information included in the discussion below for the three years prior to December 31, 2003, is derived from the audited consolidated financial statements included in this Annual Report. You should read the following discussion together with the audited consolidated financial statements and related notes. Our audited consolidated financial statements have been prepared in accordance with IFRS, which differ from U.S. GAAP. Note 31 to our audited consolidated financial statements describes the principal differences between IFRS and U.S. GAAP as they relate to our company, and reconciles our net income and shareholders’ equity to U.S. GAAP.

Overview

     In the year ended December 31, 2003, we saw sequential improvement in our quarterly net sales in each quarter. The results of such improvement, however, were affected by competition and pricing pressures. 2003 annual net sales remained relatively stable, declining slightly as compared to 2002. In the year ended December 31, 2003, we decreased our net loss. In the second half of 2003, we narrowed our operating loss to €18.6 million, after €16.5 million in restructuring charges, compared to an operating loss of €115.9 million in the first half of the year, after €45.4 million in restructuring charges. We believe this indicates the positive effects of our restructuring programs combined with increased demand for our products, especially in the wireless communication market where we shipped 184 million wireless cards in 2003, an increase of 35.3% compared to 2002. Our operating loss in each quarter of 2003 was also lower than the operating loss we experienced in each corresponding quarter of 2002.

     Our net sales declined 5% to €749.2 million in 2003, from €787.4 million in 2002. However, net sales were up 4%, on a currency adjusted basis. In 2003, our results were negatively affected by the strengthening of the euro, our reporting currency, in relation to the decline in value of other currencies in which we sell our products, in particular against the U.S. dollar and currencies pegged to the U.S. dollar. As a global business, operating in numerous currencies, changes in exchange rates of the euro may result in an increase or decrease in our consolidated net sales as reported in our audited consolidated financial statements. We provide this information to help investors follow the year-to-year changes in our operations. We calculate the impact of currency variances by translating the figures from the current year as reported in their local currencies using the exchange rate for the previous year.

     In addition to the affects of currency fluctuations, our results were also negatively affected by price competition. These pressures included additional competition from recent entrants into the chip card market, especially those manufacturers located in China. This additional competition, combined with a relative lack of differentiation among chip card suppliers for certain low-end chip card products, has forced us to compete primarily on price in some markets.

     We recorded an operating loss of €134.5 million in 2003, compared to an operating loss of €231.8 million in 2002. Our operating loss was reduced by the increase in the gross profit in our Telecommunications segment as compared to 2002, combined with lower costs arising from a reduction in employee headcount, which was part of our restructuring programs. Both operational and non-recurring factors affected our operating loss in 2003. The principal non-recurring factor was the €62.0 million in restructuring expenses recorded in 2003, compared to €90.0 million in restructuring expenses in 2002. The operational factors were primarily related to pricing pressure in our Telecommunications segment, weak sales in our Financial Services and Security segment and unfavorable currency fluctuations.

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     Despite a decline in selling prices and adverse currency fluctuations in certain markets, our gross margin increased by 2.3 percentage points, mainly driven by a favorable business mix (i.e., weighted towards more wireless products, higher-end products and regions with more favorable pricing), the benefit of the restructuring programs and our cost cutting initiatives. In 2003, our research and development, selling and marketing and general and administrative expenses declined 16% as compared with 2002, driven by the positive effects of our restructuring programs and cost cutting measures.

     Our financial position remained strong in 2003. The net decrease in cash and cash equivalents during 2003 amounted to €33.1 million, which included the use of €55.9 million to finance our restructuring programs, compared to €33.4 million in 2002. Our capital expenditures decreased to €15.2 million in 2003, approximately half of the 2002 level, as a result of our decision to limit expenditures on facility expansions. Cash and cash equivalents were €390.7 million at December 31, 2003, as compared to €417.2 million at December 31, 2002.

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Factors Affecting Revenues

     Most of our historical revenues were earned from sales of our chip card products, which are typically invoiced to customers on the basis of the number of cards supplied. We generally record revenues from our product sales when we transfer title and risk of loss of those products to the customer. We recognize revenues in our systems design and integration services as the services are completed.

     Our sales of wireless products in our Telecommunications segment continue to represent a large percentage of our sales. Our prices for our most sophisticated wireless identification modules are higher than our prices for our earlier generation wireless identification modules. When we introduce a new chip card, it can initially have the effect of decreasing our average prices, because our prices decline for our earlier generation cards before sales volumes migrate to the new card.

     For our Financial Services and Security segment, which includes systems and services based on chip card technology in areas such as financial services, identification, health care, corporate security, loyalty programs, transportation access, pay-television applications, e-business security activities as well as magnetic stripe cards for banking applications, our revenues can vary over the life of our contracts with our customers to design, develop and implement chip card-based products and systems.

     For system deliveries, we typically record a larger share of our revenues early in the life of a contract, when we receive progress and completion revenues for the implementation of a system, and card sale revenues to supply the initial needs of a customer. As a contract matures, our revenues consist, to a greater extent, of sales of cards as new cardholders join the system and replace cards that have expired or were lost.

Factors Affecting Operating Income

     Our operating income is affected by a number of factors. The most significant factor in recent years has been our product mix, as our wireless products and services have generated margins that were higher than many of our other products and services, particularly our magnetic stripe bank cards. Historically, as our sales of wireless products and services have grown, our gross margin and operating margin have also grown. Starting in 2001, however, the overall market decline led us to reduce our prices on wireless communications products, which reduced our gross margin. New competition, especially in China, has also led to reduced prices. While margins are still higher in our Telecommunications segment than in other segments, the difference has decreased.

     Our cost of sales consists principally of the cost of our microcontroller chips, the plastic that is used in our cards, tools and equipment used to manufacture and personalize our chip cards, and personnel related to manufacturing, supply, logistics and management of production. Our margins are significantly impacted by the extent to which we are able to match our inventory and production capacity with demand for our products. Our operating income is also affected by our selling and marketing, research and development and administrative expenses, all of which are typically a function of planning that is based on projected business demand.

     When we initiate a major card program or open a new manufacturing facility, we typically incur costs in connection with the establishment of the program or the facility, including the cost of manufacturing tools and equipment and personnel who are trained to implement the program or hired to operate the new facility. Depending on when the start up phase occurs in relation to our accounting periods, we may incur significant start up costs in a period before we earn substantial revenues. When this happens, our operating income is negatively affected in the period that the start up phase occurs. In contrast, once the program begins to generate revenues or the new manufacturing facility begins to run, our operating income typically increases.

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Impact of Currency Fluctuations

     We report our audited consolidated financial statements in euros. Because we earn a significant portion of revenues and incur expenditures in countries where the euro is not the local currency, exchange rate movements between the euro and other currencies can significantly impact our results of operations. Fluctuations in exchange rates may also affect the reported value of our assets and the components of shareholders’ equity. The other currencies include the U.S. dollar, the Chinese yuan, the Singapore dollar and the British pound. In 2003, we earned 11% of our revenues in the United States, 10% in China, 10% in the United Kingdom, and 13% in Asia outside China. A substantial portion of our sales in the rest of Asia, other than China, is denominated in Singapore dollars and in U.S. dollars. We seek to minimize our currency exposure by engaging in hedging transactions where we deem it appropriate. We cannot predict, however, all changes in currency, inflation or other factors, which could affect our international businesses and, therefore, our results may continue to be negatively affected by currency fluctuations.

     The following table sets forth information relating to the average exchange rates between the euro and the British pound, the Chinese yuan, the U.S. dollar and the Singapore dollar since January 1, 2001, calculated based on daily indicative fixing publicly supplied by the European Central Bank (“ECB”) and indicative quotations supplied on Internet sites of bank counterparties for currencies on which the ECB does not establish fixing.

Seasonality

     In prior years, we have experienced limited seasonal fluctuations, where a greater percentage of our net sales are recorded in the fourth quarter. In 2001 and 2002, this seasonality was offset by global market fluctuations and an uneven economic recovery. In 2003, we experienced a limited recurrence of this seasonality. The possible seasonality that we experience in the future may continue to be affected by factors such as global economic conditions.

Reporting segments

     As of January 1, 2002, we changed the reporting of our business segments. All of the activities formerly reported as part of our Network Systems segment have been transferred to our Financial Services and Security segment, except the access control systems activities of our former subsidiary SkiData and the electronic smart labels solutions activities of our former Tag subsidiary, which have been reported separately under “Disposed Operations”, as they were sold during the third quarter of 2001. Consequently, the Financial Services and Security segment includes systems and services based on chip card technology in areas such as financial services, identification, health care, corporate security, loyalty programs, transportation access, e-business security, and pay-television applications, as well as magnetic stripe cards for banking applications. Our activities in this segment also include the sales of chip card readers to our customers and chip card interfacing technologies to device manufacturers. There is no change with respect to the Telecommunications segment, which includes our wireless solutions, as well as prepaid telephone cards and other products. This change in the Financial Services and Security segment reporting is

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consistent with the changes in our financial reporting structure incorporated in our management reporting. For a discussion of recent developments, see “Item 5. Operating and Financial Review and Prospects — Results of Operations-Recent Developments”.

Recent Developments

     In addition to the restructuring programs that were put into place in April 2001 and February 2002, we announced a third restructuring and rationalization program in December 2002. This new program was implemented in response to further market deterioration and price erosion beyond what was anticipated. As of December 31, 2003, this program had resulted in a reduction of 777 employees worldwide and the rationalization of production sites and office facilities on a worldwide basis. These restructuring and cost cutting initiatives have been implemented with the objective of achieving annualized savings of approximately €100 million by the end of 2004. We believe that we will be able to achieve the costs savings objectives associated with this restructuring program. However, our ability to reach these objectives will depend on a number of factors, including the actual expenses that we incur as the program is fully implemented and the impact of market conditions.

     As of January 1, 2004, we elected again to change the reporting of our business segments to better reflect the changing nature of our industry. The Financial Services and Security segment was divided into two separate units; Financial Services and Identity and Security. The Financial Services segment includes systems and services based on chip card technology in financial services as well as magnetic stripe cards for banking applications while the Identity and Security segment includes chip card technology in areas such as identification, health care, corporate security, loyalty programs, transportation access, e-business security, and pay-television applications. Our activities in the Identity and Security segment also include the sales of chip card readers to our customers and chip card reader components to device manufacturers. There is no change with respect to the Telecommunications segment, which includes our wireless solutions, as well as prepaid telephone cards and other products. This change in business segment reporting is consistent with the changes in our financial reporting structure incorporated in our management reporting.

Year ended December 31, 2003, compared to year ended December 31, 2002

Net Sales

     Net sales for the year ended December 31, 2003 amounted to €749.2 million, a 5% decrease compared with net sales of €787.4 million for the year ended December 31, 2002. After adjusting for currency fluctuations, however, net sales increased by 4%.

     The following table shows the breakdown of our net sales in 2003 and 2002 by reporting segment (our reporting segments are described in Note 29 to our Consolidated Financial Statements):

     Net sales in our Telecommunications segment remained relatively stable, decreasing slightly to €542.5 million in 2003 from €544.5 million in 2002. On a currency adjusted basis, Telecommunications net sales increased by 9% in 2003 as compared to 2002. Our increase in net sales in 2003, on a currency adjusted basis, was influenced by more rapid adoption of wireless communication systems that require SIM cards in the United States, strong growth in South America and continued demand in Europe. Shipments of high-end microcontroller cards (i.e., with greater computing power and memory) increased as compared to 2002. Telecommunications segment revenue was primarily

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driven by a 9% increase in sales of products used in the wireless communication market, amounting to €436.7 million in 2003 compared to €400.6 million in 2002. This increase was primarily attributable to stronger demand for wireless products as our shipments of SIM cards rose 35% from 137 million units in 2002 to 184 million units in 2003.

     The favorable shift to higher-end wireless products in 2003 and the stronger demand for wireless products overall, including software and services, were sufficient to overcome the continuous price competition in this segment. Other card sales in our Telecommunications segment decreased significantly in 2003 compared to 2002, mainly driven by lower demand for cards used in the public telephony market and stronger price pressure. Sales of phone cards decreased 27 %. The Telecommunications segment represented 72% of our revenues in 2003, as compared to 69% in 2002.

     Growth in our Telecommunications segment is driven by very large wireless carriers increasing their use of advanced SIM cards to enhance end-user relationships and operator investments in network infrastructure that accelerate the SIM card renewal process. Higher revenues in this segment are also driven by the migration of wireless networks towards technologies that require SIM cards, particularly in the Americas and in China. Demand for SIM cards continues to shift towards higher-end products as wireless carriers launch networks based on more advanced technologies, including next generation 2.5G and 3G systems. These systems also facilitate a growing number of applications that require higher-end SIM cards, better device management and improved mobile data services.

     Net sales in our Financial Services and Security segment declined 15% to €206.7 million in 2003, from €242.9 million in 2002. On a currency adjusted basis, net sales decreased by 8%. The decline in our Financial Services and Security segment was primarily due to the Geldkarte (i.e., the German payment card) market shifting to a lower volume replacement cycle, decreased demand in the Pay-TV market, and lower demand for microcontroller payment cards in the United States due primarily to the completion of certain chip card programs. Despite the lower demand for the Geldkarte microcontroller payment card (i.e., chip card), shipments were up 10%, driven by the ramp-up of EMV migration in the United Kingdom (EMV is a jointly defined set of specifications adopted by Europay, MasterCard and Visa, to migrate their bank cards from conventional magnetic stripe cards to chip cards) which started in the third quarter of 2003. The Financial Services and Security segment represented 28% of our revenues in 2003, as compared to 31% in 2002.

     We organize our operations into three geographic regions: EMEA (Europe, Middle East and Africa), Asia and the Americas.

     The following table breaks down our net sales among our three regions:

     Primarily due to a mixed performance between our two segments, net sales were relatively stable in the EMEA region, which represented 54% of our revenues in 2003, as compared to 53% in 2002. The Telecommunications segment improved in 2003, as wireless carriers resumed investments in new infrastructure (in which our products often have a prominent role), in an effort to increase their average revenue per user. Telecommunications revenue was strong in 2003 with the leading wireless carriers in Europe. We believe this resulted from our new sales organization and its emphasis on key accounts. In the Financial Services and Security segment in EMEA, there were some improvements in 2003 due to the EMV payment card migration, mainly driven by the United Kingdom market. Total revenues in EMEA fell, however, due to decreased demand for the Geldkarte and the weakness in the Pay-TV market.

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     Net sales in Asia declined by 14% in 2003 although they were up by 1% on a currency adjusted basis. The decrease reflects a deterioration of pricing conditions (both currency and selling prices) in the wireless communication market despite higher volumes shipped.

     Net sales in the Americas declined 1%, although on a currency-adjusted basis revenue in the Americas was up by 18%. In 2003, we experienced a significant increase in our Telecommunications sales in the United States, which was our most dynamic region for wireless products fueled by the rapid adoption of communication systems that require SIM cards. Among other factors, we believe wireless carriers in the United States are adopting SIM card-based systems because these systems represent a less expensive path toward the implementation of more advanced communication standards, such as 3G networks, that will allow carriers to provide enhanced services to their customers. We provide products to all of the major wireless carriers in the United States that utilize smart card technology (Cingular Wireless, AT&T Wireless, Nextel Communications, and T-Mobile). There are also signs of a similar trend towards adoption of smart card-based technologies in Latin America.

Gross profit

     Gross profit increased 4% in 2003 to €207.3 million, from €199.7 million in 2002. Our gross margin increased in 2003 to 27.7%, from 25.4% in 2002. Despite adverse currency fluctuations and the effect of price pressures, gross margin increased by 2.3 percentage points, mainly driven by an improved business mix (i.e., weighted towards more wireless products, higher-end products and more favorable regional mix), and the benefit of our restructuring and cost cutting initiatives.

     The following table breaks down our gross profit and gross margin by segment:

     The gross margin of our Telecommunications segment increased to 30.7% in 2003, from 28.4% in 2002. This increase resulted primarily from higher volumes of SIM cards shipped, lower purchase prices in the first half of 2003 for wireless microcontroller chips used in the making of our products, favorable business mix (both in terms of geographic area and products) and the benefits of our restructuring and cost cutting measures. The increase was partially offset by the continuous price pressure in this segment and unfavorable currency fluctuations in 2003.

     The gross margin in our Financial Services and Security segment increased to 19.6% in 2003, from 18.6% in 2002. This increase was primarily due to higher volumes shipped of microcontroller payment cards and our restructuring and cost cutting measures. The increase was partially offset by unfavorable currency fluctuations in 2003.

Operating income (loss)

     We recorded an operating loss of €134.5 million in 2003, compared to an operating loss of €231.8 million in 2002. The 2003 operating loss was lower due to increased volumes of products shipped, improved gross margins in both of our reporting segments and lower restructuring expenses. Our restructuring expenses in 2003 amounted to €62.0 million compared to €90.0 million in 2002. Moreover, the 16% decrease of our operating expenses (excluding restructuring expenses), to €246.7 million in 2003 from €294.4 million in 2002, contributed to the reduction of our operating loss. This reduction in our operating expenses reflected the effects of our restructuring, combined with other cost saving programs.

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     Our research and development expenses decreased by 25% to €69.2 million in 2003, compared to €92.2 million in 2002, while general and administrative expenses decreased by 14% to €77.3 million in 2003, from €89.9 million in 2002. Our selling and marketing expenses also benefited from our restructuring and cost cutting measures, falling by 11% to €100.2 million in 2003, from €112.2 million in 2002.

     We have made progress implementing our restructuring program announced in December 2002. Under this plan, we reduced our headcount by 777 during all of 2003, most of which occurred in the second half of the year. Annualized savings from our restructuring and cost cutting initiatives are, as of June 2, 2004, estimated to be approximately €100 million by the end of 2004. The restructuring charge of €62.0 million recorded in 2003 included an amount of €61.7 million relating to this restructuring program. We anticipate that approximately €15.0 million in additional expenses in 2004 will be required to complete this restructuring program.

     Goodwill amortization and impairment amounted to €33.1 million in 2003, as compared to €47.1 million in 2002. In 2003, we recorded a goodwill write-down of €19.9 million based on impairment testing. This write-down relates to the goodwill generated following the acquisition of Celocom Limited in November 2000, and is due to the revision of the business plan of the acquired activities of that company (see Note 8 to our Consolidated Financial Statements). In 2002, goodwill amortization and impairment included a write-down of €22.1 million following impairment testing. This write-down concerned the goodwill generated following the acquisition of SLP S.A. (“SLP”) in October 2000 and was due to significantly declining sales of SLP software. In early 2003, we decided to cease SLP operations. The winding down is in process and is expected to be completed in 2004. The cessation of SLP operations will have no negative effect on our Consolidated Financial Statements in 2004.

Financial income and expense, net

     We recorded net financial income of €8.2 million in 2003, compared to €51.1 million net financial expense in 2002.

     Net financial income and expense was affected by the following specific factors:

•		Provision for a loan to the former Chairman of the Board: in 2000, one of our indirect subsidiaries granted a loan to Dr. Lassus, our former Chairman of the Board. In 2002, we recorded in financial expense a €67.6 million non-cash charge to cover the risk of possible non-reimbursement of the loan. In 2003, no additional financial expense was recorded related to this risk. The Company has not forgiven the loan (see Note 9 to our Consolidated Financial Statements).
•		Interest receivable on loans to senior management: net financial expense incurred in 2002 included €1.7 million of interest income on the loan granted in 2000 by one of our indirect subsidiaries to Dr. Lassus. In 2003, no interest was accrued on this loan, given that we made a provision for the loan described above.
•		Financial income related to an advance made to a trade supplier: net financial income in 2003 included €0.6 million of interest arising from the amendment of an advance facility made to a trade supplier that previously did not bear interest, as compared to €1.9 million of interest income in 2002 arising from the reversal of accrued interest expenses (such advance previously bearing no interest) (see Note 6 to our Consolidated Financial Statements).

     Excluding these specific items, the net financial income reported in 2003 amounted to €7.6 million, as compared to a net financial income of €12.9 million in 2002, primarily reflecting the decrease in our cash balances and the decrease in the market interest rate.

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Other income and expense, net

     We recorded a net other expense of €20.1 million in 2003, compared to a net other expense of €28.9 million in 2002. Net other expense in 2003 was primarily attributable to foreign exchange losses (€8.7 million; mainly loss in time value of the option contracts used as part of our foreign currency hedging program), losses on equity investments (€7.6 million), losses on non-marketable investments (€2.5 million) and losses in minority interests (€2.2 million). Net other expense in 2002 was primarily attributable to foreign exchange losses (€15.1 million), losses on equity investments (€3.1 million), losses on non-marketable investments (€6.4 million) and minority interests expense (€4.3 million).

Income taxes

     We recorded an income tax expense of €14.7 million in 2003, reflecting non-recognition of additional deferred tax assets on most of the losses incurred, and an increase of the valuation allowances for deferred tax assets recognized in previous years by €7.5 million. In 2002, we recorded an income tax expense of €9.1 million, which included a provision for tax risks of €5.9 million relating to a tax audit in France. See “Item 8. Financial Information — Legal Proceedings”.

Net loss

     We recorded a net loss of €161.1 million in 2003, or €0.27 per share, as compared to a net loss of €320.9 million in 2002, or €0.53 per share. Our net loss recorded in 2003, primarily reflected €62.0 million in restructuring expenses that we incurred in that year. In 2003, we were not affected by any further write-down on the loan granted to Dr. Lassus in 2000. Our smaller net loss recorded in 2003 also reflected a reduction of €47.6 million in our operating expenses (excluding restructuring expenses and goodwill amortization and impairment), comprised of €23.0 million of savings in research and development expenses, €12.0 million of savings in selling and marketing expenses, and €12.6 million of savings in general and administrative expenses. In 2002, our net loss primarily reflected the €90.0 million in restructuring expenses we incurred in that year, the €67.6 million non-cash write-down of the loan granted in 2000 to Dr. Lassus and declines in our gross margins. Our loss in 2002 was, however, offset by reductions in our operating expenses as a result of our restructuring programs.

Year ended December 31, 2002, compared to year ended December 31, 2001

Net Sales

     Net sales for the year ended December 31, 2002, amounted to €787.4 million, a 23% decrease compared with net sales of €1,023.0 million for the year ended December 31, 2001. After adjusting for currency fluctuations and discontinued operations, net sales decreased by 17%.

     The following table shows the breakdown of our net sales in 2002 and 2001 by market segment:

(*) including SkiData and Tag activities, the divestitures of which occurred during the third quarter of 2001.

     Net sales in our Telecommunications segment declined 20%, from €681.9 million in 2001 to €544.5 million in 2002. After adjusting for currency fluctuations, net sales in this segment decreased by 17%. This decrease was primarily due to a 19% decline in sales of wireless products, from €491.7 million in 2001 to €400.6 million in 2002, resulting mainly from continuous price competition in this activity. While there was a shift to higher-end wireless products in 2002 and stronger demand for wireless products, including software and services, they were not sufficient to overcome the pricing pressure. Other cards sales decreased significantly in 2002 compared to 2001, mainly driven by lower demand for phonecard products and stronger price pressure. Excluding SkiData and Tag activities, the Telecommunications segment represented 69% of our revenues in 2002, as compared to 70% in 2001.

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

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     The following table breaks down our net sales among our three regions in 2002 and 2001:

(*) including SkiData and Tag activities, the divestitures of which occurred during the third quarter of 2001.

     The decline in net sales in the EMEA region, which represented 53% of our revenues in 2002, was primarily due to the poor performance of the wireless segment, which was partly offset by an increase in sales in the banking sector. In Asia, lower sales reflected a deterioration of pricing conditions in the wireless segment. In the Americas, we experienced a significant decrease in our chip card sales to United States banks and retailers.

Gross profit

     Gross profit decreased by 35% in 2002, from €307.5 million in 2001 to €199.7 million in 2002 (the decrease was 31%, excluding disposed operations). Our gross margin decreased from 30.1% in 2001 to 25.4% in 2002. This decrease was mainly due to pricing pressure in the Telecommunications segment. In addition, in 2001, our gross profit was impacted by a €10.6 million one-time favorable adjustment resulting from the partial reversal of a provision for a patent claim that was settled in 2001. However, the decline in our gross profit was partially offset by a better regional and product mix and the depletion of expensive microcontroller chip inventories purchased during prior periods, as well as higher sales volumes and productivity gains.

     The following table breaks down our gross profit and gross margin by segment.

(*) including SkiData and Tag activities, the divestitures of which occurred during the third quarter of 2001.

     The gross margin of our Telecommunications segment decreased from 33.6% in 2001 to 28.4% in 2002. This decrease resulted primarily from the strong price pressure in the wireless market. This decrease was partially offset by lower purchase prices for wireless microcontroller chips, and higher sales volumes in the wireless market, including in related software and services which generate higher margins. In addition, in 2001, our gross margin was favorably impacted by the one-time royalty expense adjustment described above.

     The decrease in our Financial Services and Security segment gross margin, from 21.1% in 2001 to 18.6% in 2002, resulted primarily from lower sales volumes, lower prices and an unfavorable product mix and customer mix for smart card products. The lower purchase prices for microcontroller chips partially offset this decrease.

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Operating income (loss)

     We recorded an operating loss of €231.8 million in 2002 compared to an operating loss of €180.8 million in 2001. The 2002 operating loss resulted from declining sales, declining gross margins in both our segments and higher restructuring expenses. Restructuring expenses in 2002 amounted to €90.0 million compared to €28.5 million in 2001. This increase was partly offset by a significant decrease in our operating expenses which were €294.4 million in 2002 compared to €388.8 million in 2001 (excluding goodwill amortization and impairment in 2002 and 2001 and two one-time items incurred in 2001: management severance expenses amounting to €25.7 million, and litigation expenses amounting to €18.1 million). The operating expenses decrease reflected the effect of the restructuring plans announced in 2001 and in 2002, combined with other cost saving programs.

     For the year as a whole, research and development expenses decreased by 18%, from €112.9 million in 2001 to €92.2 million in 2002, while general and administrative expenses decreased by 19%, from €110.7 million in 2001 to €89.9 million in 2002. Selling and marketing expenses decreased 32% from €165.3 million in 2001 to €112.2 million in 2002.

     Goodwill amortization and impairment amounted to €47.1 million in 2002, as compared to €27.2 million in 2001. In 2002, goodwill amortization and impairment included a goodwill write-down of €22.1 million following impairment testing. This write-down concerned the goodwill generated following the acquisition of SLP in October 2000, and was due to significantly declining sales of SLP software. (See Note 8 to our Consolidated Financial Statements). Goodwill amortization and impairment recorded in 2001 included a one-time €1.1 million charge resulting from a write-off of goodwill previously recorded from the acquisition of a 21% equity interest in Softcard due to Softcard’s decision to cease its operations.

Restructuring expenses

     The deteriorating economic conditions and the continuation of the turmoil in the telecommunications industry led us to announce a second restructuring plan in February 2002 and a third plan in December 2002. As in 2001, we responded to the rapidly changing environment by commencing the implementation of a program in February 2002, to control our costs and restructure our activities. The February 2002 program involved a reduction of our workforce and the rationalization of office operations on a worldwide basis. In 2002 we recorded a restructuring charge of €90.0 million, of which €80.8 million was related to our February 2002 restructuring plan. The goal of the program was to achieve €100 million in annualized cost savings, an objective that we continue to maintain.

     Despite progress on cost saving efforts initiated in 2001 and 2002, we implemented a third restructuring program in response to further market deterioration and price erosion beyond what we had previously anticipated. This program was announced in December 2002, and was to impact most parts of the company. This program was expected to deliver annual savings in the range of €100 million, the full benefit of which was expected to be seen in the second half of 2004. The restructuring charge of €90.0 million recorded in 2002, included an amount of €7.7 million relating to this plan.

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Net financial income and expense

     We recorded net financial expense of €51.1 million in 2002, compared to €20.7 million net income in 2001. Net financial expense and income were impacted by the following specific factors:

•		Provision for a loan to the former Chairman of the board. In 2000, one of our indirect subsidiaries granted a loan to Dr. Lassus, our former Chairman of the board. Pursuant to an agreement dated December 19, 2001, as of January 10, 2002, Dr. Lassus ceased his office as Chairman of our board of directors and resigned from all other positions that he held with our company and any of our company’s affiliates, except for his position as a non-executive director of our company. As of January 10, 2002, Mr. Lassus was no longer an employee of our company or any of our company affiliates. Effective June 30, 2002, we recorded in financial expense a €67.6 million non-cash charge to cover the risk of possible non-reimbursement of the loan. Our company has not forgiven the loan and is seeking repayment by Dr. Lassus through legal proceedings (See Note 9 to our Consolidated Financial Statements).
•		Interest receivable on loans to senior management. Net financial expense incurred in 2001 included €4.9 million of interest income on the loans granted in 2000 by one of our indirect subsidiaries to Mr. Antonio Perez, our former Chief Executive Officer, and to Dr. Lassus. During 2001, Mr. Perez partially reimbursed the loans that were granted to him and the unreimbursed portion of the loans was charged to our Consolidated Statement of Income. Net interest accrued in 2002 on the loan granted to Dr. Lassus was €1.7 million corresponding to interest accrued in the first half of 2002.
•		Amortized cost of an advance made to a trade supplier. Net interest income incurred in 2001 included a €2.0 million interest expense following the measurement at amortized cost of an advance made to a trade supplier, as compared to €1.9 million of interest income following such measurement in 2002 (See Note 6 to our Consolidated Financial Statements).

     Excluding these specific items, net financial income reported in 2002 amounted to €12.9 million, as compared to net financial income of €17.8 million in 2001, reflecting primarily the decrease in our cash balances and the decrease in the market interest rate.

Other income and expense, net

     We recorded net other expense of €28.9 million in 2002 compared to a net other income of €45.7 million in 2001. In 2001, net other income primarily included a one-time €68.3 million gain generated from the divestiture of our SkiData and Tag activities, which was only partially offset by foreign exchange losses and minority interests. Net other expense in 2002 was primarily attributable to foreign exchange losses (€15.1 million), losses on investments (€6.4 million) and minority interests (€4.3 million).

Income taxes

     We recorded an income tax expense of €9.1 million in 2002. This tax expense reflected the fact that we did not recognize additional deferred income taxes on the losses incurred in France in 2002, and that a provision for tax risks amounting to €5.9 million was recorded following a tax audit in France. In 2001, we recorded an income tax credit of €14.2 million, reflecting an effective tax rate of 16.3%. In 2001, our effective tax rate was impacted by the management severance expenses, which created losses in certain countries with low effective tax rates and by the one-time €68.3 million gain from the SkiData and Tag divestitures.

Net loss

     We recorded a net loss of €320.9 million in 2002, or €0.53 per share, as compared to a net loss of €100.2 million in 2001, or €0.16 per share. Net loss recorded in 2002 primarily reflected the €90.0 million restructuring charge, the €67.6 million non-cash write-down of a loan granted in 2000 to Dr. Lassus and the decline in our gross margin, which were, however, offset by the reduction of our operating expenses as a result of our restructuring program. Net loss recorded in 2001 primarily reflected the decrease of our operating income, the €28.5 million restructuring expense and the €18.1 million one-time charge for the Humetrix lawsuit (See Note 25 to our Consolidated Financial Statements), which were partially offset by the impact of the €68.3 million one-time gains from our SkiData and Tag divestitures.

LIQUIDITY AND CAPITAL RESOURCES

     Our financial position remained strong in 2003. Cash and cash equivalents were €390.7 million at December 31, 2003, as compared to a €417.2 million at December 31, 2002. During 2003, net cash decreased mainly due to outlays to fund our restructuring program, while we used limited amounts of cash to fund our purchases of property, plant and equipment and investments.

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     Operating activities used €10.1 million of cash during 2003, as compared to €62.7 million during 2002. Accounts payable increased by €32.5 million as compared to December 31, 2002, primarily due to our higher requirements for materials to satisfy our higher sales volumes, particularly in the latter part of 2003. Accounts receivable increased by €12.3 million as compared to December 31, 2002, reflecting the higher revenue levels in the latter part of 2003. Inventory levels as at December 31, 2003, increased by €9.2 million as compared to December 31, 2002, but only represent 82 days of supply compared to 111 days of supply at the end of December 2002. The year 2003 cash flow was also affected by €55.9 million paid in connection with our restructuring programs as compared to €33.4 million in 2002.

     Net cash used in investing activities during the year 2003 was €16.7 million compared to €47.1 million in 2002, primarily due to lower capital expenditures which were €15.2 million in 2003, compared to €31.9 million in 2002.

     Financing activities used €6.3 million of cash in 2003, compared to €3.8 million generated by such activities in 2002. This change resulted primarily from capital lease financing received in 2002 under the sale-leaseback transaction regarding our new facilities in La Ciotat, France.

     We believe that our existing cash resources and our anticipated cash flow from operations are sufficient to provide for our foreseeable liquidity needs within the next two years. At December 31, 2003, cash and cash equivalents amounted to €390.7 million.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

     The annual Consolidated Financial Statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) formulated by the International Accounting Standards Board (IASB) and with International Accounting Standards (IAS) formulated by its predecessor organization the International Accounting Standards Committee (IASC).

     We consider our critical accounting policies to be those that: (1) involve significant judgments and uncertainties; (2) require estimates that are more difficult for management to determine; and (3) have the potential to result in materially different outcomes under varying assumptions and conditions. On an ongoing basis, the Company evaluates its estimates which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The Company believes that the following represent critical accounting policies of the Company that require significant management judgments and estimates. For a summary of the Company’s significant accounting policies, including the critical accounting policies discussed below, please see Note 2 to our Consolidated Financial Statements.

Revenue Recognition

     Revenues from product sales are recorded upon transfer of title and risk of loss, provided that no significant obligations of the Company remain and collection of the resulting receivable is probable. The Company records deferred revenue for cards that are invoiced to customers but not shipped because they require customization by the Company. Procedures exist which are regularly reviewed to ensure that the policies are consistently applied throughout our subsidiaries worldwide.

Goodwill and impairment of goodwill

     At each balance sheet date, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, goodwill is reviewed for impairment based on expectations of future cash flows, which by definition are uncertain. Future cash flows are computed based on the associated revenue estimates for the following five years, and include a terminal value assumption. Whenever possible, the Company forecast and long range planning data is used in these computations. Future cash flows are discounted using the cost of capital of the Company at the time of the acquisition to which the goodwill is related. In evaluating goodwill and impairment of goodwill, we consider significant underperformance relative to expected historical or projected future operating results, significant change in the manner we use the acquired assets or the strategy for our overall business, and significant negative industry or economic trends. Management believes that the estimates of future cash flows and fair market value are reasonable; however, changes in estimates resulting in lower future cash flows and fair market value due to unforeseen changes in business assumptions (for example, a substantial decline in consumer demand) could negatively affect the valuations of goodwill. Under the current assumptions, we believe that no further material impairment of goodwill is required.

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Inventory

     Our industry is highly competitive and influenced by rapid technological change, frequent new product development, changes in demand and product pricing and rapid product obsolescence. We regularly review inventory quantities on hand for excess inventory, obsolescence and declines in market value below cost and record an allowance against the inventory balance for such declines. These reviews are primarily based on management’s estimated forecast of future product demand and production requirements. Possible changes in these estimates could result in revisions to the valuation of our inventory. Inventories are carried at the lower of cost or market, with cost being determined principally on the weighted-average cost basis. Cost elements included in inventories are raw materials, labor and manufacturing overhead, excluding the impact of low activity, if any. A significant component of the cost of production relates to the acquisition of microprocessor chips. Our provision for microcontroller chips inventory is determined based on the anticipated net realizable value of finished products, which includes cost of production, raw materials, labor and manufacturing overheads.

Research and Development

     Our results of operations depend on the continued successful development and marketing of new and innovative products and services. The development of new products and services requires significant capital investments by our businesses and the successful marketing of these products depends on their acceptance by customers and business associates. Further, the Company’s businesses are characterized by rapid technological changes and corresponding shifts in customer demand, resulting in unpredictable product transitions, shortened life cycles and increasing emphasis on being the first to market new products and services.

     There can be no assurance that we will successfully develop and introduce new products and services, that these products and services will be accepted by customers, or that our businesses will recoup or realize a return on our capital investments. We capitalize certain development costs when it is probable that a development project will be a success and once technological feasibility is established. Otherwise such costs are recognized as an expense when incurred. These costs are capitalized through the time the product under development is produced and its future profitability is demonstrated by net present value computations using a discount rate based on the Company's cost of capital plus a risk factor. These costs are then amortized on a systematic basis over the product’s expected useful lives, which due to the constant development of new technologies, does not exceed three years. During the development stage, management must exercise its judgment in determining technological feasibility and future profitability of these projects, as well as their expected useful lives. Should a product fail to substantiate its estimated feasibility or life cycle, we may be required to write off excess development costs in future periods.

     In addition, from time to time, we may experience difficulties or delays in the development, production or marketing of new products and services. Consequently, we continually evaluate the recoverability of capitalized costs and make write-downs when necessary.

Restructuring

     We are engaged, and may continue to engage, in restructuring activities. This requires our management to utilize significant estimates related to realizable values of assets made redundant or obsolete and expenses for severance and other employee separation costs, lease cancellations and other exit costs. A provision for restructuring is recognized only when a detailed, formal plan for restructuring exists and the main features of the plan have been announced.

Income taxes

     As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that these deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not more likely than not or unknown, we must establish a valuation allowance. The valuation allowance is based on our estimates of taxable income by jurisdiction and assumptions regarding the period over which our deferred tax assets will be recovered. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets.

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Changes in accounting rules could affect our reported results

     The International Accounting Standards Board is in the process of a critical examination of current International Financial Reporting Standards with a view to increasing international harmonization of accounting rules. This process of amendment and convergence of worldwide accounting rules could result in significant amendments to the existing rules within the next two years in such areas as the timing of recognition of sales and other revenues arising from collaborative agreements with marketing and sales partners, accounting for share-based compensation, goodwill and intangibles, employee benefit plans, marketable securities and derivative financial instruments and classification of balance sheet positions as debt or equity. It is not possible to predict the impact on our reported results of any such rule changes which may be made in the future, or whether such rule changes would be retrospective, potentially requiring us to restate past reported results.

Market Risk

     In the conduct of our business, we are exposed to a number of market risks, including currency exchange risks, interest rate risks and credit risks. To hedge our market risk exposures, we use several types of derivative instruments. We discuss our exposure to market risks and our hedging activities in “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”.

U.S. GAAP Reconciliation

     We prepare our audited consolidated financial statements in accordance with IFRS, which differs in several respects from U.S. GAAP. As a result, our net income and shareholders’ equity are different under U.S. GAAP and under IFRS.

     The following table sets forth our consolidated net income under IFRS and under U.S. GAAP for the periods indicated.

     One of the principal differences affecting the determination of our net income under U.S. GAAP compared with IFRS resulted in 2000 and 2001 from the granting of share options to our executive officers and employees. In accordance with IFRS, the issuance of share options does not have any impact on net income at the time of grant or of exercise of the options. Under IFRS, upon exercise of the options, the price paid for the underlying shares is allocated to share capital and paid-in-capital. Under U.S. GAAP the difference between the exercise price and the fair market value of our shares at the time the options are granted generates compensation expense. In addition, in connection with the issuance of stock options to our former Chief Executive Officer and our former Chairman of the board in the second half of 2000, we made several loans to these individuals for the exercise of these options, as described under “Item 7. Major Shareholders and Related Party Transactions — Related Party Transactions.” Because these loans may be prepaid prior to maturity, the amount of interest to be paid on the loans was uncertain and, as a result, the ultimate option price was also uncertain. Under U.S. GAAP, the issuance of stock options with an unknown exercise price must be accounted for as a variable plan, which requires us to measure compensation in each period based on the difference between the exercise price and the fair market value of the shares. Consequently, the accounting for share options in accordance with U.S. GAAP resulted in a net compensation expense of €6.4 million for the year ended December 31, 2003, a net compensation expense of €2.9 million for the year ended December 31, 2002 and a net compensation benefit of €69.3 million for the year ended December 31, 2001.

     Another significant difference affecting the determination of our net income under U.S. GAAP compared with IFRS results from goodwill amortization. As a result of the adoption of SFAS 142 as of January 1, 2002, our company no longer amortizes goodwill under U.S. GAAP.

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     One of the principal differences affecting the determination of our shareholders’ equity under U.S. GAAP are the impact of several loans made to our former Chief Executive Officer and our former Chairman of the board for the exercise of the stock options granted in the second half of 2000, which, in aggregate, amounted to €4.9 million, €71.9 million and €143.7 million and are recorded as a decrease in shareholders’ equity under U.S. GAAP as at December 31, 2003, 2002 and 2001, respectively.

     The following table sets forth our shareholders’ equity under IFRS and U.S. GAAP as of the dates indicated.

     For a discussion of the differences between IFRS and U.S. GAAP as they relate to our consolidated net income and shareholders’ equity, see Note 31 to our Consolidated Financial Statements.

RESEARCH AND DEVELOPMENT

     We maintain a longstanding commitment to investing in a broad range of research and development initiatives to strengthen our leadership in the development of chip card technology and software, such as our research initiatives in open operating systems, cryptographic processes and application development and remote management tools. The focus of our research and development is to develop new software and integrated systems based on our microcontroller chip technology and to reduce the time required to bring new products and applications to market.

     We carry out our research and development activities on chip card operating systems through a centralized group responsible for the business lines of all three reporting segments (Telecommunications, Financial Services and Identity and Security). In addition, there are separate teams for all other research and development initiatives undertaken by each reporting segment.

     Our research and development activities are organized on a global basis, with our main research and development centers located in France, Singapore, Germany and China. We believe we have one of the largest research and development teams in the chip card industry both in terms of gross research and development expenditures and number of employees. As of December 31, 2003, we had 562 engineers working in our research and development centers around the world (plus an additional 50 engineers working in our manufacturing group), compared to 711 engineers as of December 31, 2002 and 760 engineers as of December 31, 2001.

     In 2003, our gross research and development expenditures were €63.9 million, or approximately 8.5% of our net sales, compared to gross research and development expenditures of €95.3 million, or approximately 12.1% of our net sales in 2002, and of €124.6 million, or approximately 12.2% of our net sales in 2001. A portion of these expenditures was financed through grants and research tax credits available under certain government programs, which amounted to €2.7 million in 2003, €5.6 million in 2002 and €9.6 million in 2001.

     We also maintain certain licenses to third parties technologies. See “Item 4. Information on the Company — Business Overview — Intellectual Property.”

TREND INFORMATION

Trends in the Markets for our Telecommunications Segment

     After sharp downturns starting in 2001 and continuing into early 2002, growth in the markets for our wireless products (primarily SIM cards) started to re-emerge towards the end of 2002. This corresponded with new demand for more advanced wireless telecommunications services, including for wireless data transmission, and growth linked to further adoption of wireless communication systems using SIM cards, including in developing economies where wireless telecommunications services continued to become more financially accessible.

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     The portion of increased demand that most positively affected our performance was demand for higher priced wireless products (primarily SIM cards with greater capabilities). In 2003, the favorable shift to these higher-end wireless products and the stronger overall demand for wireless products were sufficient to overcome the continuous selling price pressure in this segment.

     We believe that our Telecommunications segment should benefit if the wireless sector continues to gain momentum through 2004. Growth in our Telecommunications segment may, however, be somewhat lessened by continued declines in the demand for public telephony phonecards and by competition.

     Wireless carriers are increasingly recognizing the flexible and strategic role of SIM cards for offering improved and new value-added services to their customers. This should increase the demand for higher priced SIM cards with greater memory and processing power. We believe this, in turn, should result in a further improved business mix towards higher priced products and help offset pressures to lower prices on our more mature products. This improved product mix should also be aided by further growth in the United States and Latin America, where carriers are adopting SIM card-based systems and by the growth related to the progressive implementation of 3G networks.

Trends in the Markets for our Financial Services Segment

     Progress in the markets for our financial services products was also negatively affected by the downturns of 2001 and 2002. A significant hindrance to growth in the past has been the absence of widely accepted technology standards for improved interoperability of products. With the adoption of the EMV standard for chip card-based payment systems, however, we believe there should be positive momentum in the adoption of chip cards in 2004 and 2005, for example, in the United Kingdom, South America and Asia.

Trends in the Markets for our Identity and Security Segment

     As government and corporate demand increases toward more secure systems for authenticating persons and controlling access to networks and facilities, there should be opportunities to promote the adoption of chip card-based security systems. We believe our Identity and Security segment also stands to benefit from broader acceptance of technology standards that would allow larger organizations to implement chip card security and identity systems with more confidence in system interoperability and forward compatibility.

     We believe our abilities to produce large volumes of chip cards and deliver associated infrastructure and integration services should position us to capture market share as spending increases in this sector.

Trends in Our Development

     In 2004, we realigned our business units into three segments: Telecommunications, Financial Services and Identity and Security. This realignment separates our former Financial Services and Security segment into two business units. While our Identity and Security segment is starting from a small base, we believe its potential growth merits its treatment as a separate business unit. We believe this realignment will enable us to better serve our customers over time through more focused sales and marketing efforts in all our business units.

     The restructuring programs that we implemented in 2003 are starting to deliver our strategic objectives and Gemplus now has lower fixed costs. We intend to continue to keep focusing on managing costs, and are further implementing processes to control our expenses.

Outlook

     For 2004, we anticipate continued improvement in our operating income for the year as a whole, although this will be offset to a limited extent by the completion of the restructuring program that we began in December 2002. This anticipated improvement, however, assumes an average exchange rate of approximately US$1.20 per euro. The effects of currency fluctuations have played a significant factor in our results in the recent past and may continue to do so; however, we have attempted to mitigate our losses through our hedging programs. See Note 24 to our Consolidated Financial Statements.

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     For additional information regarding trends, uncertainties, demands or commitments, please see Item 5 “Operating and Financial Review and Prospects — Results of Operations — Recent Developments” and the Special Note regarding Forward Looking Statements on page 4 of this Annual Report.

OFF-BALANCE SHEET ARRANGEMENTS

     There are no off-balance sheet transactions that have, or are reasonable likely to have, a current or future effect on the Company’s financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to our shareholders.

(thousands of euros)

As at December 31, 2003, the amount of guarantees delivered by the Company reached €17,335 thousand and represents mainly performance bonds and bid bonds, made as part of normal operations where the Company’s customers demand such guarantees to secure the Company’s performance under contracts or tenders for business which become payable based upon non-performance of the Company. See Note 25 to our Consolidated Financial Statements.

CONTRACTUAL OBLIGATIONS

Schedule of payments

(1)

including €54,500 thousand, as at December 31, 2003, related to microcontroller chips purchase commitments.

     As at December 31, 2003, 2002 and 2001, no obligations or commitments other than those disclosed in the note above would have a significant impact on the Company’s Consolidated Financial Statements. See Note 25 to our Consolidated Financial Statements.

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Item 6. Directors, Senior Management and Employees

BOARD OF DIRECTORS

     Under Luxembourg law, our board of directors is vested with broad powers to manage our company. All powers not expressly reserved by law or by the articles of incorporation to the shareholders fall within the powers of the board of directors.

     Our board of directors currently has twelve members. Members of the board are appointed by the shareholders to serve terms not to exceed three years and may be re-appointed for consecutive terms. They may resign at any time, and their functions as members of the board may be terminated at any time by a simple majority of the votes of the shareholders voting at a general meeting. Under Luxembourg law, a director may be an individual or a corporation.

     Our board of directors met seven times during 2003, with an attendance rate in 2003 (physically or by telephone) of approximately 93%. Prior to April 29, 2003, the board members were elected by cumulative voting. At the annual general shareholders meeting held April 29, 2003, our shareholders voted to eliminate cumulative voting and to accordingly amend our articles of incorporation.

     As of January 1, 2003, our board of directors consisted of Mr. Dominique Vignon (Chairman), Mr. David Bonderman (Vice Chairman), Mr. Alex Mandl, Mr. Randy Christofferson, Mr. Thierry Dassault, Mr. Johannes Fritz, Mr. Abel Halpern, Dr. Peter Kraljic, Mr. Daniel Le Gal, Mr. Kheng Nam Lee, Mr. Ronald W. Mackintosh, and Mr. William S. Price III.

     Mr. Kheng Nam Lee resigned from our board of directors, with effect as of September 26, 2003. Mr. Abel Halpern resigned from our board of directors as of October 28, 2003. On October 28, 2003, Mr. Werner Koepf and Mr. Geoffrey Fink were elected to our board of directors. On April 27, 2004, Mr. Ron Mackintosh and Mr. Thierry Dassault ceased being members of our board of directors, and our shareholders elected Mr. Michel Akkermans and Mr. Kurt Hellström to our board of directors. As of May 31, 2004, Mr. Randy Christofferson ceased to be a member of our board of directors. Effective June 1, 2004, Mr. John Ormerod became a member of our board of directors.

     Our board of directors conducts its activities in accordance with governance principles set forth in applicable regulations, exchange rules, the company’s articles of incorporation, the company’s Corporate Governance Guidelines adopted in February 2004, committee charters and other adopted practices.

     As of June 2, 2004, the following individuals comprised our board of directors:

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¹ Mr. Price is a shareholder of the general partner of Texas Pacific Group, one of our major shareholders, and, as a result, it is not certain whether Mr. Price may be considered an “independent director” in accordance with Rule 4350 of the Nasdaq Marketplace Rules. See “Item 7. Major Shareholders and Related Party Transactions-Major Shareholders.” Our board of directors determined that the appointment of Mr. Price to the Audit Committee in November 2000 was in the best interests of our company and our shareholders. Mr. Price has extensive experience in finance and management and has served as a director of a significant number of public and privately-held companies in the United States and abroad. See “Item 6. Directors, Senior Management and Employees — Director and Executive Officer Biographies” for a description of Mr. Price’s professional and academic background.

Compensation Committee

     In 2003, the Compensation Committee consisted of Mr. Dominique Vignon (Chairman), Mr. Thierry Dassault , Mr. David Bonderman and Mr. Kheng Nam Lee. In June 2004, Mr. Werner Koepf replaced Mr. Thierry Dassault on our Compensation Committee. This committee met three times during 2003, with an attendance rate in 2003 (physically or by telephone) of 100%. The activities of the committee are governed by a specific committee charter. Among other things, this committee reviews our Chief Executive Officer compensation and makes recommendations on the compensation of all our executive officers and directors. The Compensation Committee follows guidelines that generally call for the bonus portion of senior executive compensation to vary between 50% and 100% of the applicable salary, depending on the executive’s position. Generally, one-half of this bonus depends on the performance of the company, and the other half depends on achievement of individual objectives related to the executive’s performance. The committee also evaluates and recommends candidates for new board members and for the selection of our Chairman and Chief Executive Officer.

     In 2003, the Stock Administration Committee, acting as a subcommittee to the Compensation Committee, consisted of Mr. Alex Mandl, Mr. Philippe Duranton, Mr. Yves Guillaumot and Mr. Stephen Juge. As of June 1, 2004, Mr. Frans Spaargaren replaced Mr. Yves Guillaumot as a member of the Stock Administration Committee. The activity of this committee is governed by a specific committee charter. The Stock Administration Committee’s role is to advise the board concerning stock option issuances and related matters. In 2003, the Stock Administration Committee analyzed our future stock options needs, the stock option plans and the stock option reserve. Stock options are generally granted to executives and certain other personnel when they are hired, and potential additional grants are subject to annual review based on individual and collective company achievement criteria.

Strategy Committee

     In 2003, the Strategy Committee consisted of Mr. Dominique Vignon (Chairman), Dr. Peter Kraljic, Mr. Daniel Le Gal, Mr. Alex Mandl and Mr. William S. Price III. The Strategy Committee met one time on October 27, 2003, with all members in attendance. The Strategy Committee’s role is to advise the Board concerning the Company’s strategies, major plans of action and significant acquisitions or divestitures.

SENIOR MANAGEMENT

     Our board of directors has, with the authorization of our shareholders, delegated the day-to-day management of our company, including the power to act on behalf of our company and sub-delegate powers, to the Chief Executive Officer, except for matters that exceed €50 million that must be authorized by the Board of Directors. This delegation is subject to certain powers reserved by law to the board of directors or our shareholders.

     In September 2002, Mr. Alex Mandl became our Chief Executive Officer, replacing Mr. Ronald Mackintosh. In November 2002, Mr. Mandl appointed Mr. Jacques Villières as Executive Vice President Operations, and confirmed Mr. Stephen Juge as Executive Vice President General Counsel, Mr. Didier Lachaud as Executive Vice President Human Resources, Mr. Gilles Michel as Executive Vice President Financial and Security Services Business Unit, Mr. Philippe Vallée as Executive Vice President Telecommunications Business Unit and Mr. Yves Guillaumot as interim Chief Financial Officer.

     In February 2003, Mr. Mandl announced a reorganization, appointing Mr. Jacques Seneca as Executive Vice President Business Development Group, Mr. Philippe Combes as Executive Vice President Operations (replacing Mr. Jacques Villières), and Mr. Guillaumot as Executive Vice President and Chief Financial Officer. Mr. Tony Engberg resigned as Executive Vice President, Research and Development as of March 15, 2003, and his responsibilities were transferred to the company’s Business Development Group. On May 24, 2003, Mr. Philippe Duranton was appointed as Executive Vice President Human Resources, replacing Mr. Didier Lachaud. On December 19, 2003, Mr. Gilles Michel resigned from his position as Executive Vice President Financial Services and Security, and his responsibilities were transferred to Mr. Philippe Combes and Mr. Jacques Seneca. On January 20, 2004, Mr. Jacques Seneca was appointed as the head of the newly formed Identity and Security business unit, and Mr. Philippe Combes was appointed as the head of the Financial Services business unit.

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     On June 1, 2004, Mr. Frans Spaargaren was appointed as our Chief Financial Officer, replacing Mr. Yves Guillaumot. The following table sets forth the name, age and current position of each of our executive officers as of, June 2, 2004:

DIRECTOR AND EXECUTIVE OFFICER BIOGRAPHIES

     Dominique Vignon has served as Chairman of the board of directors since June 21, 2002. Mr. Vignon served as Chairman of the board of directors and Chief Executive Officer of the Framatome Group from 1996 to 2001, where he also developed that group’s connector business (FCI). From the end of 2000 to the end of 2001, he served as President of Framatome ANP and led the merger of the Framatome and Siemens corresponding activities. From 1995 to 1996, he was President of Framatome’s nuclear business. From 1993 to 1995, he was Chairman of Jeumont Industrie. From 1990 to 1993, Mr. Vignon was General Manager of Nuclear Power International (NPI), the joint venture of Framatome and Siemens. From 1975 to 1990, he worked at Electricité de France, where he was in charge of major new generation projects in France and abroad. Mr. Vignon is a graduate of France’s Ecole Polytechnique, and of the leading French Engineering School, the Ecole Nationale des Ponts et Chaussées (civil engineering). He also holds a master in Economics. Mr. Vignon serves on the board of Completel Europe N.V.

     Alex Mandl has served as Chief Executive Officer since September 2002, and as director since October 29, 2002. From April 2001 through August 2002, Mr. Mandl was a principal in ASM Investments focusing on technology investments. Previously, Mr. Mandl served as Chairman and CEO of Teligent, a company he started in 1996, offering the business markets an alternative to the local Bell Companies for telecommunication/internet services. From 1991 to 1996, Mr. Mandl was with AT&T where he served as President and Chief Operating Officer with responsibility for long distance, wireless, local communications and Internet services. Prior to his President/COO position, he was AT&T’s Chief Financial Officer. Between 1987 and 1991, Mr. Mandl was Chairman and CEO of Sea-Land Services, Inc., the world’s leading provider of ocean transport services. In 1980, he joined Seaboard Coastline Industries, a diversified transportation company, as Senior Vice President and Chief Financial Officer. Mr. Mandl began his career in 1969, when he joined Boise Cascade Corp. as a merger and acquisition analyst, and he held various financial positions during the next eleven years. Mr. Mandl holds an M.B.A. from the University of California at Berkeley and a B.A. in economics from Willamette University in Salem, Oregon. Mr. Mandl serves on the boards of Dell Computer Corporation, the Walter A. Haas School of Business at the University of California at Berkeley, Willamette University and the American Enterprise Institute for Public Policy Research.

     David Bonderman has served as Vice-Chairman of the board of directors since December 2001. He is a principal, general partner and one of the founders of Texas Pacific Group (“TPG”). Prior to forming TPG in 1993, Mr. Bonderman was Chief Operating Officer of the Robert M. Bass Group, Inc. (now doing business as Keystone, Inc.) (“RMBG”) in Fort Worth, Texas. Prior to joining RMBG in 1983, Mr. Bonderman was a partner in the law firm of Arnold & Porter in Washington, DC where he specialized in corporate, securities, bankruptcy, and antitrust

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litigation. From 1969 to 1970, Mr. Bonderman was a Fellow in Foreign and Comparative Law in conjunction with Harvard University and from 1968 to 1969, he was Special Assistant to the U.S. Attorney General in the Civil Rights Division. From 1967 to 1968, Mr. Bonderman was Assistant Professor at Tulane University School of Law in New Orleans. Mr. Bonderman graduated magna cum laude from Harvard Law School in 1966. He was a member of the Harvard Law Review and a Sheldon Fellow. He is a 1963 graduate of the University of Washington in Seattle. Mr. Bonderman serves on the boards of ProQuest Company, Ducati Motor Holding, S.p.A., Co-Star Group, Inc., and Ryanair Holdings, plc. He also serves on the boards of The Wilderness Society, the Grand Canyon Trust, the World Wildlife Fund and the American Himalayan Foundation. In addition, he serves on the board of directors of the University of Washington Foundation as well as the Harvard Law School Dean’s Advisory Board.

     Michel Akkermans has served as one of our directors since April 27, 2004. Mr. Akkermans is a successful entrepreneur specializing in information technology for the banking industry. Mr. Akkermans holds a Master of Science in Electronic Engineering and Computer Sciences and a degree in economics & finance from the University of Leuven in Belgium. He is currently Chairman and Chief Executive of Clear2Pay, a software solutions company that helps financial institutions to provide branded electronic payment services. Mr. Akkermans was previously Chairman and CEO of FICS and Former Executive Chairman of NASDAQ-listed S1 Corporation, the market leader in internet banking. In addition to Clear2Pay, he also serves on the boards of The Capital Markets Company, Data4, Approach, Proficient, and is a member of the Advisory Board of GIMV.

     Randy L. Christofferson has served as a director from November 2000 to May 31, 2004. Mr. Christofferson has been the Managing Director of MIOGA Ventures since 2000. From August 1999 to September 2000, Mr. Christofferson served as Chief Executive Officer of Walker Digital. From 1995 to 1999, Mr. Christofferson served as President of First USA Bank. From 1990 to 1995, Mr. Christofferson held several senior management positions at the American Express Company, including President of Amex Relationship Services, Senior Vice President of Worldwide Quality and Reengineering and Senior Vice President of Corporate Strategy and Advanced Technology. Prior to 1990, Mr. Christofferson was a partner of Bain & Company. Mr. Christofferson received his Master of Business Administration from Harvard University and graduated with highest honors from Michigan State University, where he earned a B.S. in Chemical Engineering. Mr. Christofferson serves on the boards of directors of IntelliRisk Management Corporation, FineStationery.com, DeNovo, Inc. and the Delaware Art Museum.

     Philippe Combes was appointed Executive Vice President, Operations on February 12, 2003, and as head of the Financial Services Business Unit with effect as of January 20, 2004. Prior to joining Gemplus, Mr. Combes had been running his own Executive Coaching consultancy. From 1998 to 2002, he was CEO of Philips Displays, based in Holland, the worldwide leader in consumer displays. From 1988 to 1998, Mr. Combes served in general management positions for Thomson Multimedia in Hong Kong, China, Poland and France, including VP Operations for Displays. In 1975 he joined Schlumberger Industries where he held various operational responsibilities in France, Brazil and Indonesia. Mr. Combes has a B.A. from ENSAM (Ecole Nationale Supérieure d’Arts et Métiers) with a masters in robotics and electronics.

     Thierry Dassault served as a director from April 2002 to April 27, 2004. He currently serves as the Chairman of Dassault Multimedia, a venture capital company that holds investments in companies such as ATARI (Infogrames), Hi-Média, EMME Interactive and Welcome Real Time in which Mr. Dassault also serves as Director. Prior to that, from 1985 to 1993, he was Producer Partner at Claude Delon Productions Company. From 1982 to 1984, he was General Manager in an alarm systems company, and from 1979 to 1981, he was director of the Equipements Civils pour l’Electronique Serge Dassault company in Brazil. Mr. Dassault has served on the supervisory board of Gemplus S.A. from 1998 to May 2004 and as Vice-Chairman from March 2001 to May 2004. He serves on the boards of various companies, including Chapitre.com, Dassault Multimedia and Groupe Industriel Marcel Dassault. He also serves on the supervisory board of Société du Journal des Finances.

     Philippe Duranton has served as our Executive Vice President, Human Resources since May 2003. Prior to joining Gemplus, Mr. Duranton served as Human Resources EVP at Canal+ and Co-Managing Director, General Affairs, for the Television and Film Division of Vivendi Universal from 1998 to 2002. Prior to joining Canal+, Mr. Duranton spent nine years (1989 to 1998) at Thales where he held numerous Human Resource management positions across the company’s divisions. Mr. Duranton began his career in education and held various positions from

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1985 to 1988 in both the public and private sectors. Mr. Duranton holds a variety of academic distinctions including a D.E.S.S. diploma in Human Resource Management from the Institute of Administration for Business, Bordeaux, France, and a masters degree in History.

     Geoffrey D. Fink has served as a director since October 2003. Mr. Fink is a London-based Principal in Texas Pacific Group’s operating group, which he joined in December 2000. From May 1998 to December 2000, Mr. Fink was a Vice President and subsequently Senior Vice President with Security Capital Group. Between August 1999 and December 2000, Mr. Fink was also Chief Operating Officer, head of the Management Committee, and board member of Access Space. In 1993 and from 1995 to 1998, Mr. Fink was a Consultant and then Engagement Manager with McKinsey & Company in London and he was one of the founders of McKinsey’s asset management practice. Prior to joining McKinsey, Mr. Fink worked in the M&A departments of both Goldman Sachs in London and PaineWebber in New York. Mr. Fink received a Bachelor of Arts degree summa cum laude from Yale University, a Juris Doctor degree magna cum laude from Harvard University and a masters degree focused on international business from the Fletcher School of Law and Diplomacy.

     Johannes Fritz has served as a director since December 2002. He has been the head of the Quandt family office since June 2000. From 1991 to June 2000, he was a managing director responsible for all financial affairs of the Quandt family office and running its day-to-day-business. In 1989 he joined the Quandt family office. Prior to that, he spent five years at KPMG covering financial institutions and industrial companies. From 1982 to 1983, he worked with Bertelsmann AG in the area of human resources. Mr. Fritz studied at Mannheim University where he was awarded a Master and Doctor degree in Business Administration. As a research associate he followed a postgraduate education at the business school of the New York University. Mr. Fritz earned a degree as a tax advisor and a certified public accountant (CPA). He serves on the advisory board of Drees & Sommer AG, as a member of the regional council of Deutsche Bank and on the advisory board of ING BHF-Bank.

     Yves Guillaumot served as our Executive Vice President Chief Financial Officer from November 2002 to June 1, 2004, and as Vice President, Interim Chief Financial Officer from March 2002 to November 2002. Mr. Guillaumot joined our company in July 1998 as Corporate Controller. He was promoted to Vice President in March 2001. Prior to joining Gemplus, from 1987 to 1998, Mr. Guillaumot held various financial management positions with Digital Equipment, including as director of Finance for Southern Europe, Middle East and Africa from 1997 to 1998 and Controller of the PC division from 1996 to 1997. Prior to 1996, Mr. Guillaumot held positions with Arthur Andersen and Arthur Young. Mr. Guillaumot graduated from the Ecole de Hautes Etudes Commerciales du Nord in France.

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

     Kurt Hellström has served as a director since April 27, 2004. Mr. Hellström is the former President and Chief Executive Officer of Ericsson, the major telecommunications group, where he spent almost 20 years in a number of senior roles. Earlier in his career, he held commercial positions with Jugner Instrument and Standard Radio & Telephone. Mr. Hellström holds a Masters of Science in Electrotechnology. He serves on the Board of Atlas Copco, Bharti Televentures in India and Kineto Wireless, USA.

     Werner Karl Koepf has served as a director since October 2003. Mr. Koepf currently holds various senior management positions at Marconi Corporation plc London UK, in particular he serves as director and member of the audit, nominations, remunerations and operations review committee. Mr. Koepf serves as well as Chairman of the supervisory board and the nominations committee of Marconi Communications GmbH, and as Chairman of the supervisory board of Marconi Communications Holding GmbH. From 1993 to 2002, Mr. Koepf was successively Vice President and General Manager of the General Business Group of Compaq Computer Europe Middle East and

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Africa (EMEA) and Chief Executive Officer and Chairman for Compaq Computer, EMEA. From 1989 to 1993, Mr. Koepf was Chairman and Chief Executive Officer for European Silicon Structures S.A. in Luxemburg. Previously, Mr. Koepf held various management positions at Texas Instruments Inc., including as Vice President and General Manager of several divisions of the group. Mr. Koepf received a Master of Business Administration from Munich University and a Bachelor of Electrical Engineering degree with honors from the Technical College in St. Poelten in Austria. Mr. Koepf is an advisor for Techno Venture Management GmbH, a venture capital company in Munich and Boston (Massachusetts). Mr. Koepf is Chairman of the board of directors of PXP Software AG in Austria and, since April 2004, he has been Director of ALDATA Software Oyj in Helsinki.

     Stephen Juge has served as our Executive Vice President, General Counsel since November 2000. Prior to joining Gemplus, Mr. Juge served from January to October 2000, as Senior Vice President and General Counsel of Walt Disney Europe. From April 1996 to January 2000, Mr. Juge served as Senior Vice President and European Legal Counsel of The Walt Disney Company (Europe) S.A. From November 1987 to March 1996, Mr. Juge served as Vice President and General Counsel of Disneyland Paris Resort (Euro Disney S.C.A.). Prior to joining Disneyland Paris, Mr. Juge was an associate at the international law firm of Coudert Frères in Paris between 1981 and 1987. Mr. Juge attended Louisiana State University, received a Juris Doctor degree from the Tulane University School of Law and studied comparative law at the University of Oxford on a Marshall Foundation Fellowship.

     Peter Kraljic has served as a director since April 2002. He currently serves as a senior director with McKinsey Advisory Council, New York. Dr. Kraljic joined McKinsey in 1970 and has worked extensively on strategic, organizational, operational and restructuring programs for industrial companies in Germany, Austria, France as well as in Central and Eastern Europe. From 1993 to 1998, he was responsible for McKinsey’s activities in France as “Directeur Général”. Prior to joining McKinsey, Dr. Kraljic worked as researcher in La Continentale Nucleaire, Luxembourg, as well as for the Welding Institute Ljubljana, Slovenia. Dr. Kraljic holds a degree in metallurgy from the University of Ljubljana, a Doctorate from the Technical University Hanover and a Masters in Business Administration from INSEAD, Fontainebleau, France. Dr. Kraljic serves on the supervisory board of the Wolfsburg AG association, LEK d.d. and of the IEDC Bled Management School.

     Didier Lachaud served as our Executive Vice President, Human Resources from September 1997 until May 2003. Prior to joining Gemplus, Mr. Lachaud served as Corporate Human Resources Manager at Fives-Lille from September 1995 to August 1997. Prior to August 1997, Mr. Lachaud held several senior management positions at Air Liquide from September 1990, and served as Personnel Manager at Schlumberger from 1985. Mr. Lachaud holds a Degree from the Institut d’Etudes Politiques de Paris.

     Daniel Le Gal has served as a director since April 2002. He currently serves as a partner and Managing Director of Finadvance. One of our co-founders in 1988, Mr. Le Gal served as our Chief Executive Officer from 1997 to 1999, prior to which he held several management positions in Sales, Marketing and Strategic Planning for our company. Prior to founding our company, from 1982 to 1987, Mr. Le Gal served as Marketing Manager in the Telecommunication Unit of Thomson Semiconductors. From 1975 to 1982, he held various positions at France Telecom. Daniel Le Gal holds an Engineering Degree from Supelec, in Paris, France. Mr. Le Gal serves on the boards of directors of Tornado, T.O.D, Qualicontrol and S.E.A.

     Kheng Nam Lee served as a director from October 2000 to September 26, 2003. Mr. Lee is the President of Vertex Group and of Vickers Capital. Prior to serving as President of the Vertex Group, Mr. Lee managed several venture capital funds of the Vertex Group since 1988. Prior to joining the Vertex Group, Mr. Lee served as head of strategic and venture capital investments at the Singapore Technologies Group. He holds a Bachelor of Science degree in Mechanical Engineering (with First Class honors) from Queen’s University, Canada, and a Master of Science in Operations Research and Systems Analysis (with distinction) from the U.S. Naval Postgraduate School. Mr. Lee serves on the boards of directors of Creative Technology Ltd., GRIC Communications Inc., Activcard SA, and Innomedia Pte. Ltd.

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     Ronald W. Mackintosh served as a director from April 2001 to April 27, 2004. He also served as interim Chief Executive Officer from December 19, 2001 (when he resigned as a director) until August 31, 2002 and was re-elected director at the annual general meeting of shareholders held on April 17, 2002. Mr. Mackintosh was the Chief Executive Officer of Differentis from July 2000 through December 2001, when he resigned from that position in order to take the interim role at Gemplus. Since completing his interim role for Gemplus, he has returned to Differentis as Chairman. Mr. Mackintosh served as Chief Executive Officer of Computer Sciences Corporation, European Business since October 1992. From June 1990 to September 1992, Mr. Mackintosh served as Chief Executive, CSC UK. From November 1987 to June 1990, Mr. Mackintosh served as Chief Executive Officer at Index Group Europe. Prior to October 1987, Mr. Mackintosh was a Partner at Nolan Norton & Co. Europe. Mr. Mackintosh serves on the board of directors of Differentis. Mr. Mackintosh graduated from Arbroath High School, Scotland.

     Dr. Gilles Michel served as Executive Vice President Financial and Security Services May 2001 until December 2003. Prior to May 2001, Dr. Michel served as Executive Vice President, Financial Services from November 2000, and as Senior Vice President, Strategy, Mergers and Acquisitions from February 2000. Prior to joining Gemplus, Dr. Michel served as Vice President, Regional Business Segment (North and South America) at Schlumberger from September 1999 to January 2000. Prior to September 1999, Dr. Michel held various senior management positions at Schlumberger, including Vice President, Marketing and Vice President, Engineering and Manufacturing. Dr. Michel holds a Degree in Physics from the Ecole Supérieure de Physique et de Chimie, Paris, France, and a Ph.D. in Computer Science from the University of Paris VI.

     John Ormerod, has served as our director since June 1, 2004. Mr. Ormerod was a Senior Partner in the UK practice of Deloitte, the international accounting firm. Educated at Oxford, Mr. Ormerod was previously Regional Managing Partner, UK & Ireland, of Andersen, where he also spent six years as Head of European Technology, Media & Telecommunications. Mr. Ormerod is a Chartered Accountant. He serves on the board and audit committee of The Roundhouse Trust. Mr. Ormerod is presently the Chairman of Walbrook Group Limited.

     William S. Price, III has served as a director since February 2000. Mr. Price was a founding partner of the Texas Pacific Group in 1992. Prior to forming the Texas Pacific Group, Mr. Price was Vice President of Strategic Planning and Business Development for General Electric Capital Corporation. From 1985 to 1991, Mr. Price was employed by the management consulting firm of Bain & Company, attaining partnership status and acting as co-head of the Financial Services Practice. Prior to 1985, Mr. Price was employed as an associate specializing in corporate securities transactions with the law firm of Gibson, Dunn & Crutcher LLP. Mr. Price is a member of the California Bar and graduated with honors in 1981 from the Boalt Hall School of Law at the University of California, Berkeley. He is a 1978 Phi Beta Kappa graduate of Stanford University. Mr. Price serves on the boards of directors of Del Monte Foods, Denbury Resources, Inc, Belden & Blake Corp. Bally, DoveBid, Findexa and Kraton Holdings.

     Jacques Seneca has served as our Executive Vice President, Business Development Unit since January 2003, and as head of the ID & Security Business Unit with effect as of January 20, 2004. Prior to that date, he served as General Manager of our GemVentures Services Unit from September 1, 2001, and continues in that role. Mr. Seneca joined Gemplus in 1989 as Project Manager. He has held several management positions as Products Department Manager, General Manager for Sales and Manufacturing Operations in Germany, General Manager for the Telecom Business Division, and as Executive Vice President for Gemplus Marketing & Technology. Mr. Seneca has been a member of the Gemplus Executive Committee since 1990. Prior to joining our company, he worked with ST-Microelectronics where he held various positions in the fields of manufacturing, marketing and business development. Mr. Seneca holds a Bachelors degree from ENSAM (Ecole Nationale Supérieure d’Arts et Métiers) and a Business Administration degree from IAE of Aix-en-Provence in France.

     Frans Spaargaren has served as our Chief Financial Officer and Executive Vice President of Gemplus since June 2004. Before joining Gemplus he was Executive Vice President of Philips International, with responsibility for Philips’ joint venture operations with LG Electronics. From May 1998 till November 2001 he was Chief Financial Officer and Executive Vice President of Philips Components. Prior to that he held various positions in general and financial management at Varta Batteries, latest as a Member of the Divisional Board of Varta Portable Batteries. Mr. Spaargaren has a Bachelor’s Degree in Economics and Accounting from Utrecht University, a Post-graduate Diploma in Financial Management, and a Master’s Degree in Business Administration from Henley Management College, United Kingdom.

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     Philippe Vallée has served as our Executive Vice President, Telecom Business Unit since February 2002. He was Vice-President Marketing of the Telecom Business Unit from May 2001 to February 2002. He was previously based in Singapore as Executive Vice-President of Gemplus Technologies Asia, and headed the marketing and development activities and professional services operations of Gemplus Asia Pacific. Mr. Vallée has 12 years of experience in the smart card industry and has served in various marketing, product management and sales capacities in our company. Prior to joining our company, Mr. Vallée served as product manager on the first generation of GSM mobile phones for Matra Communications (now Lagardère Group) in France. Mr. Vallée has a Bachelor’s degree in Electronics and Telecommunications Engineering and a Masters of Science in Marketing Management from ESSEC.

COMPENSATION OF DIRECTORS AND PRINCIPAL EXECUTIVE OFFICERS

     Aggregate compensation paid by our company with respect to our directors and executive officers as a group for the fiscal year ended December 31, 2003 was approximately €7,393,093. In addition, a total of 3,650,000 options were granted to our directors and executive officers as a group during 2003.

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     The following table presents the compensation paid for the fiscal year ended December 31, 2003 to our mandataires sociaux (as defined under French law), which legal term includes our Chief Executive Officer and certain directors of our company¹:

¹ Directors not listed did not receive any compensation from our company for the year 2003.

     At the annual meeting of the shareholders held on April 29, 2003, our shareholders approved the compensation to be paid to our directors in 2003 in an aggregate amount of up to €1,000 thousand and 100,000 options that were granted on April 29, 2003, 20,000 of which expired as of December 31, 2003. On April 29, 2003, our board of directors decided to allocate compensation to individual directors amounting to €40 thousand per year per director as compensation in connection with services performed as a member of our board and an additional annual payment of €10 thousand to the chairman of each board committee for services in that capacity and €1 thousand per committee meeting attendance for each committee member. Mr. Thierry Dassault waived his compensation in 2003. Our current Chairman of the board, Mr. Dominique Vignon, receives annual compensation of €300 thousand (net of social charges) plus ordinary benefits.

     During 2003, our company issued to directors 10,000 options per Board member (except the Chairman and the Chief Executive Officer), with the fair market value at the date of the grant (€0.96) and a one year vesting. No new stock options were granted to Mr. Vignon or Mr. Mandl in 2003.

     On April 27, 2004, our board of directors decided to allocate compensation to individual directors of €50 thousand per year per director as compensation in connection with services performed as a member of our board, plus €20 thousand for the Audit Committee Chairman, €10 thousand for elected committee Chairmen, plus €1 thousand per committee meeting attendance for each committee member. Mr. Thierry Dassault waived his compensation in 2004.

     None of the non-employee directors have any agreement with our company that provides for benefits upon termination of service (Mr. Vignon is an employee of our company).

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STOCK OPTIONS

In General

     On July 27, 2000, we adopted a stock option plan that provides for the grant of stock options to any employee who is employed by our company or its affiliates. The term of the options granted under the plan is determined by the notice of grant, but will not exceed ten years from the date of the grant of the option. Pursuant to an authorization of the shareholders during an extraordinary general meeting held on April 29, 2003, options may be granted under the current plan until May 31, 2006.

     The maximum number of shares of common stock that may be issued under the current stock option plan is 50,000,000. As of March 31, 2004, 36,141,477 stock options were outstanding.

     Our employees are also currently beneficiaries under the stock option plans previously adopted for Gemplus S.A., our main operating subsidiary in France. Our employees may contribute to our company the stock options or the shares of Gemplus S.A. received upon exercise of these options in exchange for options or shares, as applicable, of our company. As of March 31, 2004, 391,125 options for subscription of shares of Gemplus S.A. were outstanding under the old plans. If such Gemplus S.A. stock options outstanding as of March 31, 2004 were exercised or exchanged for options of our company and if all the shares resulting from the exercise of these options were contributed to our company, the beneficiaries would be the holders of 19,556,250 of our shares. In addition, certain employees of Gemplus S.A. have elected to receive stock options of our company in exchange for their Gemplus S.A. stock options. As of March 31, 2004, 2,596,750 options resulting from the conversion of Gemplus S.A. stock options were outstanding. Consequently, as at March 31, 2004, a total of 22,153,000 stock options were outstanding in relation to the Gemplus S.A. stock options plans.

     The terms and conditions of Gemplus S.A.’s stock option plans are substantially consistent with those of our stock option plan as described below, except for the method of determination of the option exercise price and the vesting period. The exercise price was determined at the time of issuance of the options based on the fair market value of the securities as determined by the board of directors of Gemplus S.A. One-third of the options vest each year over a three-year term for beneficiaries in France under the Gemplus S.A. stock option plan issued to employees in France in 1999 and 2000, while 25% of the options vest each year over a four-year term for beneficiaries outside of France. No more options may be granted under the Gemplus S.A. stock option plans.

Plan Administration

     Our company’s stock option plans are administered by the Stock Administration Committee that reports plan activities to the Compensation Committee of our board of directors on a quarterly basis. Under the option plan and other guidelines, the Stock Administration Committee has limited authority to determine, in its discretion:

•		the persons to whom options are granted (except any grant of options to directors and senior executive officers, which is under the authority of the Compensation Committee);
•		the number of shares of common stock underlying each option;
•		the vesting schedule and conditions under which the options may be exercised, including any lockup periods; and
•		any other matters necessary or desirable for the administration of the option plan.

Vesting Period

     Unless otherwise decided by the Stock Administration Committee, the vesting period for options granted under the company’s stock option plans will be four years, with 25% of the granted options vesting in each year, exercisable upon each anniversary of the date of grant, subject to specific provisions pursuant to local regulations as applicable.

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Option Exercise Price

     Our company’s stock option plans require that the exercise price for issued options be 100% of the fair market value of the underlying shares of common stock on the date of grant as determined by the Compensation Committee or the Stock Administration Committee subject to specific provisions pursuant to local regulations as applicable. The exercise price may not be less than 100% of the value of the underlying shares on the relevant stock exchange on the date of grant, subject to applicable law.

     On April 17, 2002, our board of directors approved a plan whereby our employees were offered the opportunity to waive and cancel 0%, 50% or 100% of the stock options previously granted between July 2000 and December 31, 2001 and to receive newly issued options. This plan was launched on May 23, 2002. On June 5, 2002, 17,106,162 options were cancelled according to the instructions of the option holders. The new options vest over a period of 3.5 years subject to the following schedule: 25% vested after 6 months from the date of grant, 25% vest after 1.5 years from the date of grant, 25% vest after 2.5 years from the date of grant, 25% vest after 3.5 years from the date of grant (subject to certain specific provisions pursuant to local regulations). Out of the 16,784,084 stock options granted on December 10, 2002 and July 22, 2003 in the UK, 13,737,258 stock options were outstanding on March 31, 2004.

General Plan Provisions

     Share Counting. If any outstanding option expires, terminates or is canceled for any reason, the shares of common stock subject to the unexercised portion of such option will become available for future grants under the option plan.

Effect of Termination of Employment. If an option holder’s employment is terminated:
•		for any reason other than the option holder’s death, he or she may exercise options which were exercisable at the time of the option holder’s termination within twelve months after such termination, and all other options will expire at such time;
•		on account of the death of the option holder, his or her designated beneficiary may exercise all options granted to the beneficiary within six months following the option holder’s death.

     Adjustments upon Changes in Capitalization. Our company’s stock option plans provide for an adjustment in the number of shares of common stock available to be issued under the plans, the number of shares subject to options and the exercise prices of options upon changes in the capitalization of our company.

     Adjustments upon Change of Control. Our company’s stock option plans provide for certain rights relating to vesting of outstanding employee options upon the occurrence of a change of control and similar events.

     No Assignment or Transfer. During an option holder’s lifetime, each option granted to an option holder is exercisable only by him or her and is not transferable.

     Amendment. The Stock Administration Committee may at any time amend the stock option plans to adjust to or comply with applicable local legal, tax and accounting requirements. However, any modification or adaptation that would impair the rights of an option holder requires the prior consent of that option holder.

Senior Management Stock Options

     On November 10, 2000, our shareholders authorized our board of directors to increase our share capital and issue up to 60,000,000 shares to directors and executive officers of our company (including any of its subsidiaries or affiliates) in the form of stock options or, except in the case of directors, in the form of free shares, in each case on terms and conditions determined by our board of directors in its sole discretion. Our board of directors may issue these stock options and free shares from time to time over a five-year period from the date of publication of the shareholder resolution and in accordance with Luxembourg law. As of March 31, 2004, 20,120,000 such stock options were outstanding. The stock options issued pursuant to this shareholder resolution are not subject to the terms and conditions of our stock option plans, but are subject to the terms of a separate plan for this reserve of stock options.

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     On April 17, 2002, our board of directors approved a plan whereby members of our senior management were offered the opportunity to waive and cancel 0%, 50% or 100% of the stock options previously granted between July, 2000 and December 31, 2001 and receive newly issued options. This plan was launched on May 23, 2002. On June 5, 2002, 250,000 options were cancelled according to the instructions of the holders. On December 10, 2002, 250,000 new options were granted. The new options vest over a period of 3.5 years subject to the following schedule: 25% vested after 6 months from the date of grant, 25% vest after 1.5 years from the date of grant, 25% vest after 2.5 years from the date of grant, and 25% vest after 3.5 years from the date of grant (subject to certain specific provisions pursuant to local regulations). 187,500 of the stock options granted on December 10, 2002, were outstanding on June 2, 2004.

     On August 14, 2003, our executive officers were granted 3,550,000 stock options at an exercise price of €1.23 and €0.83. None of them exercised any options during 2003.

     The following table sets forth certain information with respect to: (i) stock options granted to the ten employees of the company (excluding the officers identified above) who received the largest number of stock options granted in 2003; and (ii) the exercise of these options by them:

SHARE OWNERSHIP OF DIRECTORS AND OFFICERS

     As of June 2, 2004, Mr. Alex Mandl owned 503,130 of our common shares, and had options to purchase 12,000,000 of our common shares. See, Item 19 “Exhibits”.

     As of June 2, 2004, Mr. David Bonderman was a Managing Director of Texas Pacific Group, Mr. William Price was a Managing Director of Texas Pacific Group, and Mr. Geoffrey Fink was a Principal of Texas Pacific Group. As of June 2, 2004, affiliates of the Texas Pacific Group held 159,305,600 of our shares, representing 26.2% of the shares outstanding. Messrs. Bonderman, Fink and Price have disclaimed beneficial ownership of any of these shares.

     As of June 2, 2004, Mr. Johannes Fritz was the head of the Quandt family office. As of June 2, 2004, the members of the Quandt family and its affiliates owned 115,508,200 of our shares, representing 19.0% of the shares outstanding. Mr. Fritz has disclaimed beneficial ownership of any of these shares.

     None of our other officers or directors was the beneficial owner of more than 1% of our capital stock. See also “Item 7. Major Shareholders and Related Party Transactions-Major Shareholders.”

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EMPLOYEES

     The following table sets forth the number of employees and a breakdown of employees by main category of activity and geographic location as of the end of each year in the three-year period ended December 31, 2001 through 2003:

     In 2003, the workers’ committee of Gemplus S.A. requested that the Marseille Commercial Court nominate an expert to analyze certain decisions allegedly taken by the management or the supervisory board of Gemplus S.A., to prohibit Gemplus S.A. from taking or implementing certain of these alleged decisions and to appoint a court-designated representative to monitor the requested prohibition. We believe these allegations have no merit. See “Item 8. Financial Information — Legal Proceedings” for additional details.

     On December 9, 2002, we announced a restructuring program. This restructuring program affected all areas within the company (manufacturing, selling, marketing, research and development and general and administrative functions). The overall reduction of the workforce (including temporary employees and independent) totaled 1100 employees. The majority of employees terminated were located in France, Germany, the United States, Singapore and Mexico. In France and Germany, we are required to engage in consultations with employee representatives before implementing workforce reductions. In connection with this plan, on December 18, 2002, Gemplus S.A. initiated the process of consultation with its workers’ committee and union representatives regarding a plan for the reduction of approximately 483 positions in France. This consultation process was completed in May 2003.

     During May 2003, some of the employees of Gemplus S.A. in France (mainly manufacturing workers) engaged in a strike for approximately one week. We believe our relations with these employees have stabilized and improved since that time. On May 15, 2003, Gemplus S.A. entered into an agreement with certain labor unions representing some members of its workforce in France that amended and replaced a previous agreement dated April 15, 2003, and that provides for a period of three years for minimum production volumes in the manufacturing facilities of Gemplus S.A. located in Gémenos and La Ciotat, France, on condition of such facilities meeting certain productivity criteria. The agreement also provides for maintaining certain marketing, research and development, new product introduction and related administrative functions in the Gémenos and La Ciotat areas. Effective February 1, 2004, this agreement was amended primarily to provide greater flexibility regarding the methods of maintaining production volumes while continuing to further the objective of maintaining employment levels in manufacturing at the Gémenos and La Ciotat sites.

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