UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

OR

OR

Commission file number: 0-31052

Gemplus International S.A.

(Exact name of registrant as specified in its charter)

Not Applicable

Grand Duchy of Luxembourg

46a Avenue J.F. Kennedy

Securities registered or to be registered pursuant to Section 12(b) of the Act: None

Securities registered or to be registered pursuant to Section 12(g) of the Act:

     Ordinary Shares, without par value

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

     607,582,003                    Ordinary Shares, without par value

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

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

TABLE OF CONTENTS

1

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 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,” “should,” “will,” “intend,” “seek,” “predicts,” “potential,” or “continue” or similar expressions or the negative of such terms. 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 our products and services; the development of new markets for our products and services; 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 assumptions on which our forward-looking statements are based are reasonable in light of available information, any of those assumptions could prove to be inaccurate, and 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”, “Item 5. Operating and Financial Review and Prospects” and other 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.

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). These standards differ in certain significant respects from generally accepted accounting principles in the United States, commonly referred to as U.S. GAAP. Note 39 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 is in accordance with IFRS except as otherwise stated. Information indicated as restated for 2003 and previous years has been prepared following the adoption of International Accounting Standard 1 (Revised 2003) (see Note 2.23 to our Consolidated Financial Statements).

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

     Exchange Rate Information and The European Monetary System

     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 = € 0.81, the Noon Buying Rate for the euro on May 31, 2005. 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.

     The following table shows the euro/U.S. dollar exchange rates based on the Noon Buying Rate expressed in euros per U.S. dollar for the periods indicated.

RISK FACTORS

Risks Related to Our Business

Slow growth or downturns in the wireless communications industry may 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 2004, sales of wireless products and services accounted for approximately 74% of our revenues, as compared to 72% in 2003. The wireless communications industry experienced positive growth in 2004 as demand for wireless products and services increased. There can be no assurance that this growth will continue, or that the wireless communications industry will not experience dramatic downturns similar to those that occurred in the years 2001 and 2002.

     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:

Our success depends upon recruiting and retaining key personnel.

     Our products, services and technologies are complex, and our future growth and success depend to a significant extent on the skills of capable engineers, operators, managers and other key personnel. Maintaining our know-how, and the continued re-training of currently competent personnel, are also necessary to maintain an appropriate level of innovation and technological advancement. The ability to recruit, retain and develop quality personnel is a critical success factor for us.

     We believe that having stable management is important to our success. In 2001 and 2002 we had 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.

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

     We implemented three separate restructuring plans in 2001 and 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 2004, as compared to 2003, 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 are not implemented adequately, we may experience losses and difficulties in growing our business.

Chip card technology may not be adopted in new standards for the markets that we target, such that we may lose some of our existing customers or not be able to obtain new customers.

     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 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:

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

     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 network architecture, and non-portable security devices built into 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 successes 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.

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. The wireless communications industry has been volatile in recent years, experiencing rapid growth in 2000, a downturn in 2001 and 2002, signs of growth in 2003 and improved growth in 2004. We have had periods of difficulty managing our inventory levels of microcontroller chips. Failures to manage our inventory can cause us to lose business to competitors, and have lower margins on existing sales. 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 2004 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 may be supply limitations in the future that could negatively affect 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. Since 2000, we have invested in a multi-sourcing program to enlarge our supplier base.

     In 2004, 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 continually 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 affect our business.

     The process of developing our products and services is highly 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.

     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:

     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 a negative affect 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 a negative effect 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 can involve decisions that result in our customers making significant investments and changes to their business organizations or processes. 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, third party software developers, financial institutions and several government agencies and organizations.

     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 business relations with us. These business relations could be terminated, and they may either work instead with our competitors or become new competitors of ours. 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 in 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:

     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.

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:

     To the extent that we incur costs in one currency and make our sales in another, our profit margins may be affected by changes in the exchange rates between the currencies. A substantial part of our expenses is in euros, while a significant amount of our sales is in U.S. dollars and other currencies. The U.S. dollar, and currencies whose exchange rates are tied to the U.S. dollar, have experienced a decline in the recent past. Although our general policy is to hedge against much of our currency fluctuation risks, given the volatility of currency exchange rates and the costs of hedging against them, there is no assurance that we will be able to manage effectively these risks.

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

     In 2004, we earned 6% 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:

We operate in many jurisdictions with highly complex and variable tax regimes, and changes in tax rules and the outcome of tax assessments and audits could cause a material effect on our financial results.

     We operate in many jurisdictions with highly complex and variable tax regimes. Changes in tax rules and the outcome of tax assessments and audits could have a material effect on our financial results. The tax rates that we are subject to are variable. Our effective tax rate in any jurisdiction may depend on changes in our level of operating profit or in the applicable rate of taxation there, as well as on changes in estimated tax provisions due to new events. We currently enjoy tax benefits in certain jurisdictions. These benefits may not be available in the future due to changes in the relevant tax rules, which could cause our effective tax rate to increase in the future.

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. Our strategy also depends in part on our ability to identify suitable acquisition targets, finance their acquisitions and obtain required regulatory and other approvals. 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 impairments 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.

We face risks relating to certain partnerships, joint ventures and subsidiaries that we do not control.

     Some of our activities are, and will in the future be, conducted through entities that we do not entirely control or in which we have minority interest, such as in certain joint ventures. Under the governing documents or agreements for these entities, certain key matters such as the approval of business plans require the agreement of our partners and, in some cases, decisions regarding these matters may be made without our approval. There is also a risk of disagreement or deadlock among the stakeholders of jointly controlled entities and that decisions contrary to our interests will be made. These factors could affect our ability to pursue our stated strategies with respect to those entities or have a material adverse effect on our results or financial condition.

Our operating results can vary significantly due to impairment of goodwill and other intangible assets arising from acquisitions, as well as to impairment of assets due to changes in the business environment.

As of December 31, 2004, the value reported on our Consolidated Balance Sheet for goodwill was € 28.2 million, net of amortization (December 31, 2003: € 37.7 million, December 31, 2002: € 73.2 million). Because the market for our products is characterized by rapidly changing technologies, and because of significant changes in our industry, our future cash flows may not support the value of goodwill and other intangibles in our balance sheet. We are required to regularly test goodwill and to assess the carrying values of intangible and tangible assets when impairment indicators exist. As a result of such tests, we could be required to book an impairment in our statement of income if the carrying value in our balance sheet is in excess of the fair value. The amount of any potential impairment is not necessarily predictable since it depends on our estimates of projected market trends, results of operations and cash flows. Any potential impairment, if required, could have a material adverse effect on our results of operations.

Changes in International Financial Reporting Standards could affect our reported results.

     We have been preparing our consolidated financial statements and reporting our results in accordance with International Financial Reporting Standards (“IFRS”) since 2000. Some changes in IFRS may have a significant impact on our reported operating results.

     The International Accounting Standards Board regularly revises 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. It is not possible to predict the effect on our reported results of any such changes which may be made in the future, or whether such rule changes would be retrospective, potentially requiring us to restate past reported results.

Risks Related to Our Industry

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

     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. Intense competition has led to increased pricing pressures on our products which, in turn, has 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 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, Giesecke & Devrient, Oberthur Card Systems, Orga Kartensysteme and Incard. There have also been new entrants into the industry with low-cost operating models, especially in China, with aggressive pricing policies that are threatening 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:

     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.

Communications networks may not expand as a commerce and business medium.

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

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

     In addition, companies and government agencies that have already invested substantial resources in other methods of conducting business may be reluctant to adopt new 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 effect 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:

     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.

     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 considered economically justified, 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 April 26, 2005, to our company’s knowledge, our executive officers, directors and their affiliates beneficially owned or controlled approximately 0.26% 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 3.41% of our shares on a fully diluted basis. As of April 26, 2005, Texas Pacific Group, members of the Quandt family, and Groupe Industriel Marcel Dassault owned or controlled approximately 26.17%, 18.97% and 5.25%of our shares, respectively, or approximately 23.34%, 16.92% and 4.69% 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”.

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. 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 S.C.A. In December 1999, we merged Gemplus Associates, the general partner of Gemplus S.C.A, 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, 2004, our company held 99.49% 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. In 2004, we completed the planned reorganization of our corporate structure by transferring most of the subsidiaries of Gemplus S.A. to Gemplus International S.A. In April 2005, we purchased Setec OY, a company headquartered in Finland that, among other things, supplies conventional and electronic travel passports to various governments and products involving secure printing.

     Our company is organized under the laws of the Grand Duchy of Luxembourg and is registered with the Commerce and Companies Registry under No. B73145. Our registered office is located at 46a Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, telephone +352.26.005.226. Our website address is www.gemplus.com. The information on our web site is not incorporated by reference into this Annual Report.

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, 2004.

     In 2004 and 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 2004 were made in almost all of our plants, and were focused on increasing our capacity to make SIM cards for our wireless activities. In 2002

we made a capital expenditure of € 17.7 million related to 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 our capital expenditures, and have budgeted capital expenditures of approximately € 25 million, for the year ending December 31, 2005. Of that amount, we anticipate incurring approximately: € 17.4 million mainly for new equipment for product assembly, plastic lamination and printing, micro-module embeding and personalization for SIM cards; € 3.0 million for improvements in our management information systems, including in a personal computer replacement program; € 2.9 million on our facilities; and € 1.7 million mainly relating to IT hardware for research and development.

     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.

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 2004, we reported our results in three main business segments:

     We started reporting in three business segments on January 1, 2004. See “Item 5. Operating and Financial Review and Prospects — Recent Developments” for a description of business segment reporting, and Note 32.1 to our Consolidated Financial Statements.

     Within our Telecommunications business segment, our wireless products and services are based on subscriber identification modules (SIMs), 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 segments, our chip card products and services are used by 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 (e.g., applications that store cash values that can be used to make purchases) which applications can be transacted in person or on-line.

     Within our Identity and Security segment, our products and services are used by private and public entities to provide secure access to restricted facilities and computer networks through the use of chip cards, software and related products and services. We also deliver chip card-based identity solutions to national and local governments to enhance identification processes among their residents by using chip cards for a range of identity applications, including in the areas of border control, drivers’ licenses, vehicle registration and health care. In addition, we offer contactless electronic passport technology for biometric authentication at national border controls.

     In all our businesses we provide a 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 card sales are combined and priced or sold together with sales of these services and software for customers within the applicable reporting segment, and therefore we do not separately report these sales. See Note 32.1 to our Consolidated Financial Statements.

     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.

Our Strategy

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

     Our strategy for attaining these objectives is to be a leading provider of chip cards and related products, and of applications and services that operate using chip cards and other devices with embedded microcontrollers. We hope to grow our core businesses, while continuing to enhance our profitability. Simultaneously, we seek to establish stronger positions in promising new markets for the use of chip cards and related software such as in identity and corporate security markets.

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

Differentiating on value

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 using our products and services with support from local offices and direct supply chain management on commodities.

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:

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

     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 that we believe are most significant include:

     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”.

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:

     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.

Market Overview

     The market for chip card technology, products and services is growing, both in terms of size and sophistication. According to Eurosmart, 2,290 million chip cards – including microcontroller cards and memory cards – were sold worldwide in 2004, compared with 1,898 million in 2003. Using data provided by Eurosmart we estimate that we are the world’s largest chip card provider, with 28.6% of the global market in terms of volume in 2004, compared to 30% in 2003.

Wireless Market

     The wireless communications market, particularly over networks 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. The market suffered a slowdown in 2001 and 2002. Demand began to return in 2003 due to consumer equipment replacement, driven significantly by the availability of handsets with color displays, and growth in emerging markets. There was further market growth in 2004. According to Eurosmart, approximately 1,075 million SIM cards were sold in 2004, as compared to 670 million in 2003.

     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 continuing 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 helps 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 Market

     According to Eurosmart, approximately 280 million chip cards were sold in the financial services industry in 2004, compared to 205 million 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 20% of the market in terms of units sold, compared to 22% in 2003. We believe use of chip card products and services will grow due to enhanced security requirements and increased fraud rates among conventional cards.

Identity and Security Market

     The Identity and Security market, while still relatively small, has experienced solid growth over the past few years. The convergence of physical and logical access control continues to drive the enterprise security market, and is expected to reach over one billion euros in 2007 according to Datamonitor. In the enterprise security market, Fortune 500 companies and federal agencies are implementing chip cards as a means to govern employee access to physical and logical resources. The Government ID market is escalating rapidly with many ongoing nationwide identity programs expected to be rolled out over the next few years. We are involved in several of these ID programs, including national projects in the Middle-East in Oman and the United Arab Emirates, and India’s vehicle registration card program with a market potential of over 100 million cards to be issued nationwide over the next five years. The demand for contactless chip cards in the Identity and Security market is also expanding quickly, mainly through mass-transit and physical access applications, and also through the introduction of electronic passports. We also sell chip card readers in the Identity and Security market, and we remained the world’s leading supplier of chip card readers in 2004, with a 21% market share according to Frost & Sullivan.

Our Products and Services

     The following table sets forth our revenues for the year ended December 31, 2004.

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.

Delivering a complete solution

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

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.

     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:

     Phonecards

     Based on information published by Eurosmart in its 2004 report, we believe we are one of the world’s leading manufacturers of prepaid phonecards and associated phonecard security products with a 47% share of the worldwide phonecard market in 2004, compared to 40% in 2003. As of June 2, 2005, we have produced over 3.5 billion phonecards since our inception in 1988. Our main customers include more than 20 major telecommunications operators, including 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.

     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.

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. Chip-based payment cards and e-purse cards 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 chip 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.

     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, Japan, 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 continuing developments have the potential to accelerate the adoption of chip card technology in the financial services industry, including:

     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:

     We have also 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 in this market 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 252 million magnetic stripe cards to our customers in the banking sector in 2004, according to the 2004 Nilson Report. 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:

Identity and Security Services

     The chip card is a security device that serves as a component in enabling identity management systems for governments and corporations. Chip card technology allows users to access corporate and external networks, digitally “sign” transactions and documents and identify themselves electronically. Due to customer demand and opportunities presented in the Identity and Security market, our organization for this market is divided into two section that are driven by applications and usage:

     Enterprise Security

     In this area, 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 systems and applications to combine logical access (i.e., access to computing devices or systems) 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.

     Government ID

     In the Government ID market, programs include identification (including passports and drivers’ 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. Through ResIDent we offer the necessary components of a full chip card-based ID system, including printed security features, chip card modules, operating systems and applets design, chip card readers, client/server software, card management and issuance systems, personalization services, consulting, integration, training and maintenance services. We also deliver electronic passport technology through our “GemBorder” solution for contactless biometric authentication at border controls.

     Typical Government ID applications include:

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.

     In 2004, no single customer accounted for more than 10% of our revenues. Our largest customer represented 5% of our total revenues, and our five largest customers together represented 17% of our total revenues. Our ten largest customers together represented approximately 25%, and our fifteen largest customers together represented approximately 31% 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 silicon micro-controller and memory chips and plastic cards and other materials used in the manufacturing process, such as lamination film and inks.

     We have structured 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, Renesas 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 2004, we made additional 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, in particular, 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 27.1% in terms of chip card units sold on a worldwide basis in 2004, followed by Axalto (formerly part of Schlumberger) with 20.4%, Giesecke & Devrient with 13.8%, Oberthur Card Systems with 6.2%, Orga Kartensysteme with 3.7% and Incard with 3.1%. 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 chip card manufacturing market, particularly in China, where Chinese chip card manufacturers such as Eastcom Peace Smart Card Co., Datang Microelectronics Technology Co., WatchData System Co. and Wuhan Tianyu 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”.

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 the potential of SIM-based 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:

     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 670 million phonecards were sold worldwide in 2004, compared to 800 million 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.

Financial Services Markets

     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 Markets

     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 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 system 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. We have also entered into a comprehensive patent cross-license with Axalto and its subsidiary CP8 Technologies. See “Item 3. Key Information — Risk Factors” and “Item 9. — Material Contracts”. 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 might not be adequate and our competitors may independently develop similar technology, duplicate our products or design around our patents.

     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.

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 to 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:

     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, 2004, we operated 50 sales and marketing offices, 17 personalization centers and 11 manufacturing centers and research and development centers in 4 countries.

Organizational Structure

     Our company is the sole parent company of its group with approximately 60 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 27 subsidiaries from Gemplus S.A. to Gemplus International S.A. and had no material affect on our Consolidated Financial Statements.

     The following table sets forth our significant direct and indirect subsidiaries as of June 2, 2005.

Property, Plant 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:

     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.

     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, in Herne, Germany in February 2005 and a reallocation of our production requirements among our manufacturing and other facilities around the world. 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:

¹ The property and equipment used in our activities in Tianjin, China, are divided between a legal entity that we wholly own, and another legal entity in which we hold 51% of the equity.

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

³ The property and equipment used in our activities in Sao Paulo, Brazil, are held by a legal entity in which we have a 50% equity interest.

     As of June 1, 2005, 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 18 to our Consolidated Financial Statements.

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, 2004, is derived from the Consolidated Financial Statements included in this Annual Report. You should read the following discussion together with the Consolidated Financial Statements and related notes. Our Consolidated Financial Statements have been prepared in accordance with IFRS, which differ from U.S. GAAP. Note 39 to our 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. Information indicated as restated for 2003 and previous years has been prepared following the adoption of International Accounting Standard 1 (Revised 2003) (see Note 2.23 to our Consolidated Financial Statements) and to reflect changes in our reporting segments as described below (see Note 32 to our Consolidated Financial Statements).

Overview

     In 2004, we made significant progress in net sales and profitability. We were able to reinforce our competitive position by responding to strong demand in our core markets. At the same time, we strengthened our position in certain emerging geographic markets for Telecommunications and Financial Services, and we improve our situation in the growing markets that are targeted by our Identity and Security segment. We also maintained robust, industry-leading research and development activities to prepare us for future opportunities.

     We observed strong customer demand throughout the year across all regions in our core markets. This was particularly true in the markets for wireless products, which continued to benefit from rapid migration to SIM technology in the United States and in Japan. We also benefited from subscriber growth in rapidly developing economies, as well as continued shifts towards higher-end cards in developed economies. EMV (Europay MasterCard Visa) migration, which involves the replacement of conventional magnetic stripe payment cards with microcontroller cards as a result of banking industry-wide agreements, remained a key driver of the market for chip-based payment cards. Larger volumes of chip cards were issued in the United Kingdom as a result of EMV migration, and EMV card issuances began in other European and in Asian countries. In 2004, we also observed increased interest in initiatives for Identity and Security card programs in the emerging corporate security and government markets.

     Our net sales increased in 2004 by 15% to € 865.0 million in 2004 from € 749.2 million in 2003, driven primarily by higher demand throughout the year for wireless communication products and EMV payment cards. On a currency adjusted basis, our net sales increased by 20%. Despite a decline in average selling prices and adverse currency fluctuations in certain markets, our gross margin improved by 3.6 percentage points in 2004, mainly driven by a favorable wireless mix (i.e., weighted towards higher-end products) and higher unit shipments allowing greater manufacturing productivity.

     Our operating expenses were substantially lower during the year, due to lower restructuring and general and administrative expenses and less goodwill amortization. These expenses in 2004 were reduced by € 96.9 million (or 28%) as compared to 2003.

     As a result, in 2004 we improved our operating result from a loss of € 133.8 million in 2003 to an income of € 26.3 million (even after taking into account € 16.1 million in restructuring and goodwill amortization expenses incurred in 2004). We also returned to a net profit of € 6.3 million in 2004, compared to a loss of € 159.0 million in 2003.

     Cash and cash equivalents were € 388.4 million at December 31, 2004, compared to € 390.7 million at December 31, 2003, despite cash outlays of € 82.2 million. These cash outlays included € 34.9 million relating to a tax assessment in France, € 25.3 million related to the implementation of restructuring plans and a € 22.0 million payment into an escrow account relating to a pending lawsuit. See Item 8 “Financial Information, Legal Proceedings”.

Factors Affecting Revenues

     Most of our 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. The prices for our most sophisticated wireless subscriber identification module (SIM) cards are higher than our prices for our earlier generation SIM cards. When we introduce a new chip card, it can initially have the effect of decreasing our average prices as prices decline for our earlier generation cards before sales volumes migrate to the new card.

     For our Financial Services segment, which also includes systems and services based on chip card technology in areas such as financial services loyalty programs, transportation access, pay-television applications, as well as magnetic stripe cards for banking applications, our revenues can vary over the life of our contracts with our customers. The revenues for design, development and implementation of chip card-based products are usually earned earlier in the term of the agreements, while revenues for card issuances and replacements may begin later and be earned over a longer period of time.

     Revenues in our Identity and Security segment include those from both software and hardware product sales. Similar to the sales in our Financial Services segment, the revenues from the customers of our Identity and Security segment for design, development and implementation of chip card-based products is usually earned earlier in the term of the agreements. Additional revenues are then generated over the life of the contracts as chip cards are supplied, along with revenue for technology support and maintenance. For system deliveries, we also 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.

     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 affected 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.

Effect of Exchange Rates

     We report our Consolidated Financial Statements in euros. Because we earn a significant portion of our revenues and incur expenses in countries where the euro is not the local currency, exchange rate movements between the euro and other currencies can significantly affect our results of operations. These other currencies are primarily the US dollar, the British pound, the Chinese yuan and the Singapore dollar. In 2004, we earned 12% of our revenues in the United States, 12% in the United Kingdom, 6% in China and 16% in Asia outside China. A substantial portion of our sales in Asia outside China is denominated in Singapore dollars and in US dollars. In 2004, our results of operations continued to suffer from the decline in the value of the US dollar and currencies pegged to the US dollar, against the value of the euro. The table below sets forth information relating to the average exchange rates between the euro and the main billing currencies used to record our revenues. We seek to mitigate our exposure to currency fluctuations by engaging in hedging transactions where we deem appropriate. We have hedged certain foreign currency positions for 2005. We cannot predict, however, all changes in currency, inflation or other factors, that could affect our international business.

     We provide information on a currency adjusted basis to help in the comparison of changes in our results of operations over time. We calculate the effect of currency variances for making currency adjustments by converting the figures from the current year in local currencies using the applicable exchange rates of the previous year.

     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, 2002, calculated based on daily indicative fixing publicly supplied by the European Central Bank (“ECB”) and indicative quotations supplied by recognized data providers 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. A significant factor causing this seasonality has been the replacement of mobile telephone handsets towards the year-end holiday season. In 2001 and 2002, this seasonality was offset by global market fluctuations and an uneven economic recovery. In 2003 and 2004, we experienced a limited recurrence of this seasonality. We earned 28% and 31% of our net sales in the fourth quarter of 2004 and 2003, respectively.

Reporting segments

     We started reporting in three business segments for the year 2004. All identity and security activities in the previous Financial and Security Services segment have been transferred to a new segment, entitled Identity and Security. See Note 32 to our Consolidated Financial Statements.

     The Financial Services segment includes systems and services based on chip card technology in areas such as financial services, loyalty programs, transportation access, e-business security, and pay-television applications, as well as magnetic stripe cards for banking applications. The Identity and Security segment includes systems and services based on chip card technology in areas such as national ID, healthcare, drivers’ licenses, car registration, passport and visa, e-government secured services, physical and logical access control as well as chip card readers and interfacing technologies. Our activities in both these segments 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 consistent with our management’s financial reporting structure. For a discussion of recent developments, see “Item 5. Operating and Financial Review and Prospects — Results of Operations-Recent Developments”.

Recent Developments

     In 2001 and 2002 we announced a series of restructuring programs. As of December 31, 2004, the last of these programs had resulted in a reduction of 877 employees worldwide and the rationalization of production sites and office facilities on a worldwide basis and an additional 66 employees are expected to leave the company during the first half of 2005.

Year ended December 31, 2004, compared to year ended December 31, 2003

Net sales

     The following table shows the breakdown of our net sales in 2004 and 2003 by reporting segment (our reporting segments are further described in Note 32 to our Consolidated Financial Statements).

     On a currency adjusted basis, the net sales of our Telecommunications segment experienced strong growth of 24% in 2004 compared to 2003. The growth of revenue in our Telecommunications segment was primarily driven by a 28% increase in sales of our wireless products, to € 558.5 million in 2004 from € 436.7 million in 2003. On a currency adjusted basis, this increase in the sales of our wireless products was 34%.

     In 2004, SIM card shipments rose 39% from 2003, to 255 million units, driven by growth in the Americas, emerging markets in South East Asia and demand in Europe. The shift towards more high-end SIM cards, including those with higher storage capacity and those for use in 3G networks helped to partially offset the continued price pressure we have been experiencing in certain markets, as well as unfavorable currency fluctuations. Our net sales of other cards continued to drop in 2004, as they did in 2003, mainly due to lower selling prices offered by certain competitors and reduced volumes supplied in Asia and in the EMEA region. The Telecommunications segment represented 74% of our revenues in 2004, as compared to 72% in 2003.

     In 2004, our Telecommunications segment net sales also benefited from our deliveries of more complete solutions to certain customers, including our “Over-The-Air” software platforms that allow operators to remotely manage SIM cards and provide additional services, resulting in enhanced sources of revenue from our chip card customers. This strategy also helped us to maintain a leading position within advanced 3G markets.

     After adjusting for currency fluctuations, the net sales of our Financial Services segment increased by 12% in 2004 compared to 2003. Financial Services segment revenue was mainly driven by EMV migration. This included a significant rollout of EMV cards in the United Kingdom, and increasing deliveries of EMV cards in France, Turkey, Mexico, South America and Malaysia. The volume of shipments of microcontroller payment cards increased 33%, reaching 51 million units in 2004, with an increase in net sales of such products by 29% in 2004 compared to 2003. The Financial Services segment represented 21% of our revenues in 2004, compared to 23% in 2003.

     The net sales of our Identity and Security segment increased by 11% in 2004 compared to 2003 on a currency adjusted basis. The growth of net sales in our Identity and Security segment was mainly driven by the sale of enterprise security solutions, particularly in the United States and the United Kingdom. Our continuing strategy of marketing subsystems based on software components, value-added services and high-end chip cards led to a significant improvement in the product mix of this segment (i.e., weighted more towards products with higher margins). Our Identity and Security segment represented 5% of our revenues in 2004, unchanged from 2003.

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

     The following table breaks down the net sales among our three regions.

     The increase in revenue in the Americas and Asia regions was mainly driven by increased sales of wireless products in our Telecommunications segment. Our Americas and Asia regions represented 26% and 23% of our total revenue in 2004, respectively, compared to 23% and 23% in 2003. The revenue in our EMEA region represented 51% of our revenue in 2004, compared to 54% in 2003. The increase in sales in our EMEA region in 2004 was mainly driven by increased sales in our Financial Services segment and, to a lesser extent, the sales of wireless products in our Telecommunications segment.

     In 2004, we experienced a significant increase in our Telecommunications sales in the United States, which was our most dynamic region in 2004 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 have been adopting SIM card-based systems because these systems represent a less expensive path towards the implementation of more advanced communication standards, such as 3G networks, that will allow carriers to provide enhanced services to their customers. There are also continued signs of a similar trend towards adoption of chip card-based technologies in Latin America.

Gross profit

     We experienced a substantial improvement in our gross profit, with a 30% increase, to € 270.5 million in 2004 from € 207.3 million in 2003. Our gross margin increased to 31.3% in 2004 from 27.7% in 2003. This increase in gross margin of 3.6 percentage points was mainly driven by an improved business mix (i.e., weighted towards more wireless products and high-end products), strong volume growth and lower chip purchasing prices. These improvements more than offset the continuing price competition and adverse currency fluctuations that we experienced in 2004. Our gross profit also benefited from savings resulting from our restructuring and other improvements in our cost structure.

The following table shows the breakdown of our gross profit and gross margin in 2004 and 2003 by reporting segment.

     The gross margin of our Telecommunications segment increased to 34.4% in 2004 from 30.7% in 2003. This increase resulted primarily from higher volumes of SIM cards shipped, lower purchase prices for wireless microcontroller chips and a more favorable product mix (i.e., weighted towards high-end wireless products). The gross margin in this segment also benefited from restructuring and other improvements in our cost structure. These improvements more than offset the continuing price competition and adverse currency fluctuations that we experienced in 2004.

     The gross margin of our Financial Services segment increased to 20.7% in 2004 from 19.0% in 2003. This was mainly driven by higher volumes shipped of microcontroller chip cards for payment applications. This included a large rollout of EMV cards in the United Kingdom, and EMV ramp-up in France, Turkey, Mexico, South America and Malaysia.

     The gross margin of our Identity and Security segment increased to 29.4% in 2004 from 22.2% in 2003. The growth of gross margin in our Identity and Security segment was mainly driven by the results of our strategy of marketing subsystems based on software components, value-added services and high-end chip cards.

Operating expenses

     In 2004, our operating expenses totaled € 244.2 million, a decrease of 28% from 2003. These expenses represented 28% of our net sales, compared to 46% in 2003. This decrease was mainly driven by lower restructuring and general and administrative expenses, and the absence of previously experienced adverse effects from goodwill impairment. The decrease also reflects benefits achieved from earlier restructuring and other cost reduction measures.

     Our general and administrative expenses decreased by 17% to € 63.9 million in 2004, compared to € 77.3 million in 2003. Our research and development expenses decreased by 10% to € 62.6 million in 2004, compared to € 69.2 million in 2003. Our selling and marketing expenses increased by 1% to € 101.5 million in 2004, compared to € 100.2 million in 2003, due to our higher sales.

     In 2004, we recorded a total pre-tax restructuring charge of € 20.2 million in our annual Consolidated Statement of Income, mainly related to our third restructuring program. This 2004 expense was partially offset by a release of unused provisions amounting to € 11.8 million, mainly related to our second restructuring plan. As a result, the total pre-tax net restructuring charge recorded in 2004 amounted to € 8.4 million, compared to the total pre-tax net restructuring charge recorded in 2003 of € 62.0 million.

     Goodwill amortization and impairment amounted to € 7.7 million 2004, compared to € 33.1 million in 2003. In 2003, we incurred a goodwill impairment charge of € 19.9 million, resulting from the revision of the business plan of the activities of Celocom Limited which we acquired in November 2000.

     The operating expenses for our Telecommunications segment decreased by 24% to € 149.0 million in 2004, compared to € 196.1 million in 2003. This decrease was mainly driven by the reduction of restructuring costs in 2004 and lower depreciation of our capitalized research and development projects.

     The operating expenses for our Financial Services segment decreased by 28% to € 63.9 million in 2004, compared to € 88.5 million in 2003. This decrease was mainly driven by the reduction of restructuring expenses in 2004 and lower general and administrative expenses in 2004 compared to 2003, mainly due to the provision for a pending lawsuit that we recorded in 2003. See Item 8. “Financial Information — Legal Proceedings”.

     The operating expenses for our Identity and Security segment decreased by 45% to € 31.3 million in 2004, compared to € 56.4 million in 2003. In 2003, we incurred a goodwill impairment charge of € 19.9 million, relating to the activities of Celocom Limited. This decrease was also driven by the reduction of restructuring costs in 2004 compared to 2003.

Operating income (loss)

     In 2004, we recorded operating income of € 26.3 million, compared to an operating loss of € 133.8 million in 2003. The increase in our operating income of € 160.1 million was mainly driven by increased volumes of chip cards shipped, improved gross margin in all of our segments, and decreases in our operating expenses mainly driven by lower restructuring and general and administrative expenses, and lower charges for goodwill amortization and impairment. Our operating income in 2004 also reflects the overall benefits achieved by earlier restructuring and other cost reduction measures.

     The operating income for our Telecommunications segment improved by € 101.1 million to an operating profit of € 71.8 million in 2004, compared to an operating loss of € 29.3 million in 2003. This increase was mainly due to significantly higher sales, resulting in a higher gross profit, and the decrease in our operating expenses.

     The operating loss for our Financial Services segment decreased by € 30.3 million to an operating loss of € 26.3 million in 2004, compared to an operating loss of € 56.6 million in 2003. This decrease is the result of higher sales, resulting in a higher gross profit, and the benefits from the earlier implementation of restructuring programs and other cost reduction measures.

     The operating loss for our Identity and Security segment decreased by € 28.7 million to € 19.2 million, compared to € 47.9 million in 2003. The decrease was mainly due to higher sales, reduced costs and lower charges for goodwill amortization and impairment in 2004.

Financial income (expense), net

     Our financial income (expense), net, decreased to € 5.7 million in 2004 from € 8.2 million in 2003. Interest income on short-term bank deposits decreased to € 7.4 million in 2004 from € 8.4 million in 2003 due to lower average effective interest rates. Currency exposure on intercompany financing and related hedges generated a € 1.4 million gain in 2003, and no effect on the Consolidated Statement of Income in 2004.

Share of profit (loss) of associates

     In 2004, share of loss of associates was € 6.0 million compared to € 7.6 million in 2003. This loss included goodwill amortization of € 3.5 million, compared to € 3.3 million in 2003, and impairment losses of € 0.7 million, compared to € 2.7 million in 2003.

Other non-operating income (loss), net

     In 2004, we recorded a net non-operating loss of € 6.8 million compared to € 11.1 million in 2003. This loss included foreign exchange loss amounting to € 5.9 million in 2004, compared to € 8.6 million loss in 2003, and net losses in available-for-sale financial assets amounting to € 0.9 million in 2004, compared to € 2.5 million in 2003.

Income tax benefit (expense)

     We recorded an income tax expense of € 13.0 million in 2004, which reflected a charge of € 3.0 million relating to the discounting of a receivable resulting from carry back of tax losses in France, a net charge from a provision for tax risk of € 1.6 million and a partial write-down of deferred tax assets. In 2003, we recorded an income tax expense of € 14.7 million, which included € 7.5 million of write-down of deferred tax assets recognized in previous years.

Net income

     We reported a net income of € 6.3 million in 2004, compared to a net loss of € 159.0 million in 2003, corresponding to a net income per share attributable to equity holders of € 0.01 in 2004, and a net loss per share of € 0.27 in 2003.

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 further described in Note 32 to our Consolidated Financial Statements).

     The net sales of our Telecommunications segment remained relatively stable, decreasing slightly to € 542.5 million in 2003, compared to € 544.5 million in 2002. On a currency adjusted basis, the net sales of our Telecommunications segment increased by 9% in 2003 compared to 2002. Our increase in net sales in 2003, on a currency adjusted basis, was influenced by a more rapid adoption of wireless communication systems that require SIM cards in the United States, a strong growth in South America and a 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 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 pressure 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 by 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.

     The net sales of our Financial Services segment declined by 14% to € 168.2 million in 2003, from € 195.0 million in 2002. After adjusting for currency fluctuations, the net sales of our Financial Services segment decreased by 8%. The decline in our Financial Services segment was primarily due to the Geldkarte (i.e., the German payment card) market shifting to a lower volume replacement cycle, the decreased demand in the Pay-TV market, and the lower demand for microcontroller payment cards (i.e., chip cards) in the United States primarily due to the completion of certain chip card programs. Despite the lower demand for Geldkarte microcontroller payment cards, shipments were up 10%, driven by the ramp-up of EMV migration in the United Kingdom, which started in the third quarter of 2003. The Financial Services segment represented 23% of our revenues in 2003, as compared to 25% in 2002.

     Net sales of our Identity and Security segment declined by 20% to € 38.5 million in 2003, from € 47.9 million in 2002. After adjusting for currency fluctuations, the net sales of our Identity and Security segment decreased by 13%. The Identity and Security segment represented 5% of our revenues in 2003, as compared to 3% 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 the net sales among our three regions.

     Primarily due to a mixed performance of our three segments during these periods, 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 a 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 our Financial Services 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 due to decreased demand for the Geldkarte and the weakness in the Pay-TV market.

     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 by 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 in 2003 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 have been adopting SIM card-based systems because these systems represent a less expensive path towards the implementation of more advanced communication standards, such as 3G networks, that will allow carriers to provide enhanced services to their customers. There are also signs of a similar trend towards adoption of chip card-based technologies in Latin America.

Gross profit

     Gross profit increased by 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. This 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 segment increased to 19.0% in 2003, from 17.8% in 2002. This increase was primarily due to higher volumes shipped of microcontroller payment cards and our restructuring and cost cutting measures. This increase was partially offset by unfavorable currency fluctuations in 2003.

     The gross margin of our Identity and Security segment improved to 22.2% in 2003, compared to 21.9% in 2002.

Operating expenses

     In 2003, our operating expenses totaled € 341.0 million, a 21% decrease compared to 2002. These expenses represented 46% of our net sales, compared to 55% in 2002. This reduction in our operating expenses reflected the effects of our restructuring, combined with other cost saving programs.

     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.

     In 2003 we made progress under our restructuring program announced in December 2002. Under this plan, we reduced our headcount by 777 during the entire year 2003, most of which occurred in the second half of the year. The restructuring charge of € 62.0 million that we recorded in 2003 included an amount of € 61.7 million related to 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 11 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. in October 2000, and was due to significantly declining sales of SLP software. In early 2003, we decided to cease our SLP operations. The wind-down of these operations was substantially completed in 2004.

     The following table breaks down our operating expenses by segment.

     The operating expenses of our Telecommunications segment decreased by 28% to € 196.1 million in 2003, compared to € 273.8 million in 2002. This decrease was mainly driven by the reduction of restructuring costs and no impact of goodwill impairment in 2003.

     The operating expenses of our Financial Services segment decreased by 20% to € 88.5 million in 2003, compared to € 110.9 million in 2002. This decrease was mainly driven by the reduction of restructuring costs.

     The operating expenses of our Identity and Security segment increased by 21% to € 56.4 million in 2003, compared to € 46.7 million in 2002. This increase was mainly driven by the 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.

Operating income (loss)

     We recorded an operating loss of € 133.8 million in 2003, compared to an operating loss of € 231.7 million in 2002. The 2003 operating loss was lower due to increased volumes of products shipped, improved gross margins in our reporting segments and lower restructuring expenses. Our restructuring expenses in 2003 amounted to € 62.0 million compared to € 90.0 million in 2002. The decrease of our operating loss in 2003 also reflects the overall benefits achieved by earlier restructuring and other cost reduction measures.

     The following table breaks down our operating income (loss) by segment.

     The operating loss for our Telecommunications segment decreased by € 90.0 million to an operating loss of € 29.3 million in 2003, compared to an operating loss of € 119.3 million in 2002. This improvement was mainly attributable to our higher gross margin, and the decrease in our operating expenses.

     The operating loss for our Financial Services segment decreased by € 19.6 million to an operating loss of € 56.6 million in 2003, compared to an operating loss of € 76.2 million in 2002. This improvement was mainly attributable to the earlier implementation of our restructuring programs and other cost reduction measures.

     The operating loss for our Identity and Security segment increased by € 11.7 million to an operating loss of € 47.9 million in 2003, compared to an operating loss of € 36.2 million in 2002. This increase was primarily the result of a goodwill write-down of € 19.9 million arising from impairment testing.

Financial income (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:

     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.

Other non-operating income and expense, net

     We recorded a net other non-operating expense of € 11.1 million in 2003, compared to a net other non-operating expense of € 21.6 million in 2002. Net other non-operating expense in 2003 was 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) and losses on available-for-sale financial assets (€ 2.5 million). Net other non-operating expense in 2002 was attributable to foreign exchange losses (€ 15.1 million) and losses on available-for-sale financial assets (€ 6.4 million).

Income tax benefit (expense)

     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 € 159.0 million in 2003, or € 0.27 per share, as compared to a net loss of € 316.6 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 Mr. 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 Mr. 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.

Liquidity and Capital Resources

     Our financial position remained strong during the year 2004. Cash and cash equivalents were € 388.4 million at December 31, 2004, as compared to € 390.7 million at December 31, 2003, despite significant cash outlays of € 82.2 million. These cash outlays included € 34.9 million related to the tax assessment in France, € 25.3 million related to restructuring plans and € 22.0 million payment on an escrow account relating to a pending lawsuit. See “Item 8. Financial Information – Legal Proceedings”.

     Operating activities generated € 27.0 million of cash during 2004, compared to € 10.1 million used in 2003. Accounts payable and related current assets as of December 31, 2004, increased by € 20.8 million as compared to December 31, 2003. Accounts receivable and related current liabilities as of December 31, 2004, increased by € 3.0 million as compared to December 31, 2003. Inventory levels as of December 31, 2004, increased by € 19.5 million as compared to December 31, 2003. The year 2004 was also affected by € 25.3 million paid in connection with our restructuring programs as compared to € 57.0 million in 2003.

     Net cash used in investing activities during the year 2004 was € 26.1 million as compared to € 16.7 million used in 2003 primarily due to higher capital expenditures, which were € 22.9 million in 2004 as compared to € 15.2 million in 2003.

     Financing activities used € 3.4 million of cash during 2004, as compared to € 6.3 million cash used in 2003.

     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, 2004, cash and cash equivalents amounted to € 388.4 million.

     We also use certain financial instruments in our foreign currency hedges. For a description of our foreign currency hedges, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk” and Note 8 to our Consolidated Financial Statements.

Critical Accounting Estimates and Policies

     Our annual Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS).

     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, we evaluate our estimates which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. We believe that the following represents our critical accounting policies that require significant management judgments and estimates. For a summary of our significant accounting policies, including the critical accounting policies discussed below, see Note 2 of the Consolidated Financial Statements.

Revenue recognition

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

Impairment of goodwill and other long-lived assets

     Goodwill is reviewed for impairment based on expectations of future cash flows, which by definition are uncertain, at each balance sheet date, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Future cash flows are computed based on the revenue estimates for the next five years, and include a terminal value assumption. Whenever possible, forecast and long range planning data approved by management are used in those computations. Future cash flows are discounted using our cost of capital at the time of the acquisition to which the goodwill is related. 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. We believe that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in business assumptions such as a drastic decline in consumer demand could negatively affect the valuations of goodwill.

     Other assets that are subject to amortization or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).

     Under our current assumptions we believe that no further material impairment of goodwill and other long-lived assets is required.

Inventory

     Our industry is highly competitive and influenced by rapid technological change, frequent new product development, changes in demand, product pricing pressure 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 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 microprocessor 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 success of these products depends on their acceptance by customers and business associates. Further, our 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 first to market new products and services.

     There can be no assurance that we will successfully 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 their 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 future profitability is demonstrated. These costs are then amortized on a systematic basis over their expected useful lives, which due to the constant development of new technologies does not exceed three years. During the development stage, management must exercise 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 have gone through three restructuring programs during the last three years. Provisions for restructuring were recognized only when a detailed formal plan for restructuring did exist and the main features of the plan were announced. The remaining restructuring provisions are principally for ongoing rents for closed sites and payment obligations for employee terminations. The latter is mainly linked to the close of a plant in Germany.

     The balances of our restructuring provisions are reviewed at each reporting period and adjustments are recorded when deemed necessary.

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 potential deferred tax assets and liabilities. 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 do not recognize those deferred tax assets. The recognition of deferred tax assets 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, deferred tax assets and liabilities.

Hedge accounting

     We account for derivative financial instruments in accordance with IAS 39. This requires that derivatives are initially recognized at fair value on the date the derivative contract is entered into and subsequently measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated and qualifies as a hedging instrument and the amount and timing of the item being hedged. We make significant estimates when calculating the fair value of our derivative instruments and when identifying the amount and timing of the items being hedged.

     Fair value of the forward exchange contracts at inception is zero. Fair value during the life and at expiration of the forward exchange contracts is calculated according to parameters obtained from official information providers or fixings by central banks, and using the following variables: (i) spot foreign exchange rate at the date the valuation is performed; (ii) risk-fee interest rates; (iii) time to expiration; and (iv) notional amount of the contract. Fair value is then obtained by discounting, for the remaining maturity, the difference between the contract rate and the market forward rate multiplied by the nominal amount.

     Fair value of the option contracts at inception equals the option premiums. Option contracts are marked-to-market during their life and at expiration using standard option pricing method (such as Black & Scholes option pricing model), based on market parameters obtained from official information providers or fixings by central banks, and using the following variables: (i) spot foreign exchange rate; (ii) option strike price; (iii) volatility; (iv) risk-free interest rate; (v) expiration date of the option.

     Large shifts in the market conditions above could lead to significant changes in the fair value of our financial instruments which could result in material movements in the Consolidated Financial Statements.

Changes in accounting rules could affect our reported results

     The International Accounting Standards Board regularly revises 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. It is not possible to predict the affect 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 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 has resulted from the granting of share options to our executive officers and employees. In accordance with IFRS, the issuance of share options has not had any affect 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. Consequently, the accounting for share options in accordance with U.S. GAAP resulted in a net compensation expense of € 7.0 million for the year ended December, 31, 2004, € 6.4 million for the year ended December 31, 2003, and € 2.9 million for the year ended December 31, 2002.

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

     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 39 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 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, 2004, we had 608 engineers working in our research and development centers around the world (plus an additional 34 engineers working in our manufacturing group), compared to 612 engineers as of December 31, 2003 and 711 engineers as of December 31, 2002.

     In 2004, our gross research and development expenditures were € 68.2 million, or approximately 7.9% of our net sales, compared to gross research and development expenditures of € 63.9 million, or approximately 8.5% of our net sales in 2003, and of € 95.3 million, or approximately 12.1% of our net sales in 2002. A portion of these expenditures was financed through grants and research tax credits available under certain government programs, which amounted to € 4.3 million in 2004, € 2.7 million in 2003, and € 5.6 million in 2002.

     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 a market downturn starting in 2001 and continuing into early 2002, growth in the markets for our wireless products (primarily SIM cards) started to re-emerge in 2003 and was strong in 2004. This corresponded with new demand for more advanced wireless telecommunications services, including wireless data transmission, and growth linked to further adoption of wireless communication systems using SIM cards. In addition, wireless telecommunications services continued to become more financially accessible in developing economies, along with continued improvement in the wireless communications infrastructure in those areas.

     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 2004, 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 2005. Growth in our Telecommunications segment may, however, be somewhat lessened by continued declines in the demand for public telephony phonecards and by price pressures due to increased 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. The adoption of the EMV standard for chip card-based payment systems should be a positive impact in the adoption of chip cards in 2005.

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. Our strategy is focused on selling subsystems based on software components, value-added services and high-end cards. 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 separated 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 recent years are starting to deliver lower fixed costs. We intend to continue to keep focusing on managing costs, and are further implementing processes to better control our expenses.

     The anticipated improvement in our profitability, 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 8 to our Consolidated Financial Statements.

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 our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to our shareholders.

     As of December 31, 2004, the amount of guarantees, mainly representing performance bonds and bid bonds, amounted to € 10.3 million. These guarantees are primarily made in the ordinary course of business where our customers demand guarantees to secure our performance under contracts or tenders for business which become payable based upon non-performance by us.

     As of December 31, 2004, guarantees related to operations included an amount of € 2.6 million relating to a potential liability in respect of the restricted cash in China (see Notes 9 and 37 to our Consolidated Financial Statements). These guarantees also included an amount of € 887 thousand (DKK 6.6 million) relating to a stand-by letter of credit issued by us in favor of Realtime A/S (see Note 37 to our Consolidated Financial Statements and “Item 7. Related Party Transactions”). See Note 35 to our Consolidated Financial Statements.

CONTRACTUAL OBLIGATIONS