UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report ___

Gemplus International S.A.

(Exact name of registrant as specified in its charter)

Not Applicable
(Translation of registrant’s name into English)

Grand Duchy of Luxembourg
(Jurisdiction of incorporation or organization)

46a Avenue J.F. Kennedy
L-1855 Luxembourg
Grand Duchy of Luxembourg
(Address of principal executive offices)

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:

     630,369,279           Ordinary Shares, without par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

þ     Yes		o     No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o     Yes		þ     No

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

þ     Yes		o     No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large Accelerated Filer þ            Accelerated Filer o           Non-accelerated Filer o

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

o     Item 17		þ     Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o     Yes		þ     No

 

 

TABLE OF CONTENTS

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

 

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 set forth in 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) as adopted by the European Union (EU), as applicable to the Company. There are no differences between IFRS as adopted by the EU and IFRS as adopted 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 US GAAP. Note 40 to our audited Consolidated Financial Statements describes the principal differences between IFRS and US GAAP as they relate to us, and reconciles our net income and shareholders’ equity to US GAAP.

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

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

		Year ended as at December 31,
		2005								2004				2003				2002				2001
		€				US$(1)				€				€				€				€
		(in millions, except per share amounts or as otherwise stated)
Operating income (loss) under US GAAP (3)			66				85				29				(119	)			(257	)			(117	)
- Net income (loss) under US GAAP (3)			89				114				11				(182	)			(280	)			(49	)
- Net income (loss) per share under US GAAP (2)
- Basic (3)			0.14				0.18				0.02				(0.30	)			(0.46	)			(0.08	)
- Diluted (3)			0.14				0.18				0.02				(0.30	)			(0.46	)			(0.08	)
OTHER DATA:
Adjusted EBITDA (4)			108				138				83				(39	)			(98	)			(60	)
Net cash from (used for) operating activities			121				155				27				(10	)			(63	)			(23	)
Net cash (used for) investing activities			(84	)			(108	)			(26	)			(17	)			(47	)			(65	)
Net cash from (used for) financing activities			(8	)			(10	)			(3	)			(6	)			4				(35	)
BALANCE SHEET DATA:
Cash and cash equivalents			418				536				388				391				417				491
Trade accounts receivable, net			183				235				149				155				145				189
Inventory, net			108				138				116				99				97				140
Derivative financial instruments			4				5				33				16				10				(5	)
Other current receivables			82				105				66				67				83				104
Total assets			1,182				1,515				1,025				1,053				1,218				1,531
Minority interest			13				16				11				12				15				17
Equity attributable to equity holders			825				1,058				711				695				860				1,168
Total assets under US GAAP			1,198				1,536				1,039				1,061				1,234				1,441
Shareholders’ equity under US GAAP (3)			836				1,072				729				700				879				1,078

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

		2005								2004				2003				2002				2001
		€				US$ (1)				€				€				€				€
		(in millions)
Operating income (loss)			67				86				26				(134	)			(232	)			(181	)
Depreciation, amortization and impairment			41				52				57				95				134				121
Adjusted EBITDA			108				138				83				(39	)			(98	)			(60	)

     Exchange Rate Information and The European Monetary System

     For your convenience, this Annual Report contains translations of certain euro amounts into US dollars. Unless otherwise indicated, US dollar amounts have been translated from euros at the rate of US $1.00 = € 0.78, the Noon Buying Rate for the euro on May 31, 2006. 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 US 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 US dollar may affect the US dollar price of our American Depositary Shares (ADSs) on the NASDAQ National Market.

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

		Euros
		Period-				Average
		end Rate				Rate				High				Low
2001			1.12				1.12				1.19				1.05
2002			0.95				1.06				1.16				0.95
2003			0.79				0.88				0.97				0.79
2004			0.74				0.80				0.85				0.73
2005			0.84				0.80				0.86				0.74
2005
December			0.84				0.84				0.85				0.83
2006
January			0.82				0.82				0.83				0.81
February			0.84				0.84				0.84				0.83
March			0.82				0.83				0.84				0.82
April			0.79				0.81				0.83				0.79
May			0.78				0.78				0.79				0.78

RISK FACTORS

Risks Related to Our Business

Slow growth or downturns in the wireless communications industry may adversely affect our business.

     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 2005, sales of wireless products and services accounted for approximately 70% of our revenues, as compared to 74% in 2004. The wireless communications industry experienced positive growth in 2005 as demand for wireless products and services continued to increase. There can be no assurance, however, 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:

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

Our success depends upon recruiting and retaining key personnel.

     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 skilled and stable management is important to our success. We will undergo certain management changes as part of our integration with Gemalto (see “Item 10. Additional Information — Material Contracts”). We cannot be certain that such changes will not adversely affect 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:

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

•

identity card programs.

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

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

     Most of our products are subject to competition from other technologies. These technologies include magnetic stripe payment cards, non-chip based authentication, certain wireless standards that do not incorporate a SIM card into the 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 develop further 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 and 2005. 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 2005 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.

     In 2005, we purchased the significant majority 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.

We must manage our chip card production capacities optimally in order to be profitable.

     Because our activities are based on orders varying in size and requiring different delivery schedules, we need to accurately anticipate demand from our customers for our products and effectively allocate our production capacity to such demand in order to meet delivery requirements, best recapture our fixed costs and maximize our operating margins. In particular, we must make judgments about when and how to allocate production capacity so as to maximize the likelihood that we will produce chip cards with the highest margins and operate our facilities and equipment at a high rate of utilization. Any failure to forecast accurately demand,

allocate our capacity optimally or run our operations efficiently may adversely affect our revenue and profitability. In addition, we must accurately forecast demand for products in order to source chips. If we do not accurately forecast our need for chips, we may be left with high chip inventories that we may not be able to use or may need to use to produce products that could have been produced with less powerful and costly chips, which may lead us to record lower profits on these products.

     Also, we may become responsible for indirect damages resulting from our breach of contract including, without limitation, penalties for failures to meet delivery schedules. If this were to occur, among other things, we would likely need to defend against claims, which could be time consuming and expensive, and we may be found liable for breach of contract.

     If our products or production facilities fail to satisfy the standards and criteria of various industry organizations and bodies, particularly in the financial market, we may not be eligible to compete for supply contracts to members of such organizations and bodies, which include some of our important customers.

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

     The market for our products and services is marked by rapid technological change because of frequent new product introductions and chip card technology enhancements, uncertain product life cycles, changes in client demands and evolving industry standards. New products and services based on new or improved technologies or new industry standards can render existing products and services obsolete and unmarketable. To succeed, we need to enhance continually 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.

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

     Many of the industry organizations and other bodies to which our customers belong have issued their own sets of standards and criteria relating to chip card manufacturers’ facilities and products, which we must satisfy in order to be eligible to supply products and services to these customers. We make significant investments in order to meet these standards and criteria, which vary depending on the organization or body, including investments required to satisfy changes adopted from time to time by these organizations and bodies in their respective standards and criteria. Further investments may be costly, and if we are unable to continue to meet these standards and criteria, we may become ineligible to provide products and services that have constituted in the past an important part of our revenue and profitability.

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:

•

the mix of products and services that we are able to sell, including in particular, whether we are able to increase the sales of our higher margin product and services, such as those we sell in the wireless communications market;

	•		the geographical mix of our sales, including the relative extent of our growth in countries where our products and services are sold at the most attractive prices;
	•		costs related to possible acquisitions of technology or businesses, including costs related to the integration of acquired businesses into our operations; and
	•		the level of success we achieve in maintaining and enhancing existing relationships and developing new relationships with strategic partners, including third party software developers, systems integrators and other implementation partners.

     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 sell our products and services successfully, 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 may 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 may 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 be forced to pay higher costs if the third-party technology that we use in our products changes or if the price of such technology increases.

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

	•		software relating to chip card operating systems;
	•		security and cryptographic technology for chip card operating systems, which help prevent unauthorized parties from accessing with or tampering with information; and
	•		public key infrastructure technology that is used for Internet transactions and identification in corporate security networks.

     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:

	•		a slowdown or a recession in global, regional or national economic growth;
	•		tariffs and trade barriers;
	•		exchange controls;
	•		fluctuations in national currencies;
	•		social and political risks;
	•		national and regional labor disputes;

	•		required compliance with a variety of foreign laws, regulations and standards; and
	•		the difficulty of enforcing legal claims and agreements through certain legal systems.

     Our Identity and Security business is, in part, dependent upon government contracts. Those contracts and related opportunities can be subject to changes in legislation and government policy and initiatives. Such changes can be difficult to predict with any significant level of reliability.

     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 certain declines and limited recoveries 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 2005, we earned 5% of our revenues in China, and we expect to continue to earn a material portion of our revenues in China. Conducting business and manufacturing activities in China is subject to special risks that may not arise in other countries, including:

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

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 a 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.

The integration of us and Gemalto may be difficult and expensive and may not result in the benefits that we currently expect.

     We have executed an agreement to combine our business with Axalto Holding N.V., to be renamed “Gemalto”. The combination involves the integration of two large and complex businesses that currently operate independently. The achievement of expected synergies from the combination will require the integration of various aspects of the business of Gemalto and our business.

     Gemalto’s and our goal in integrating our operations is to increase the revenues and earnings of the combined businesses through cost savings, including potential rationalization, planning and operational benefits and, as a combined group, to increase our ability to satisfy the demands of our customers. In so doing, we may encounter substantial difficulties in integrating our operations and fail to achieve the increased revenues, earnings, cost savings and operational benefits that are expected to result from the combination, and we could incur substantial costs as a result of, among other things:

	•		loss of key employees;
	•		inconsistencies in standards, controls, procedures and policies, business cultures and compensation structures between us and Gemalto and the need to implement, integrate and harmonize various business-specific operating procedures and systems, as well as the financial, accounting, information and other systems of us and Gemalto; and
	•		diversion of management’s attention from its other responsibilities as a result of the need to deal with integration issues.

     The diversion of management attention and any difficulties encountered from integrating the respective businesses of us and Gemalto could increase our costs or reduce our revenues, earnings and operating results. For these reasons, we and Gemalto may fail to complete successfully the necessary integration or realize any of the benefits and synergies that we hope for. If they are achieved, actual cost savings and operational benefits may be lower than we and Gemalto currently expect and may take a longer time to achieve than we and Gemplus currently expect.

Regulatory authorities have imposed, and may impose additional conditions on our combination that could reduce the expected benefits of the combination and may affect the price of our securities.

     In order to secure the approval of our combination with Axalto Holding N.V., we agreed with the European Commission to make certain undertakings in respect of our operations. These undertakings involve a commitment to broadly license certain intellectual property to competitors under fair and reasonable terms for ten years, and to provide certain access to information relating to our “over-the-air” wireless network gateway software for eight years. While we do not believe that compliance with these undertakings will have a material adverse effect on our operations, the financial impact on us, and any impact on the price of our securities, is difficult to predict with certainty.

     In addition, antitrust enforcement agencies outside of the European Union frequently review transactions such as the combination. At any time before or after the consummation of the transaction, an antitrust enforcement agency in a jurisdiction may take action under the applicable law of the jurisdiction as it deems necessary or desirable in the public interest, including seeking to enjoin our combination transaction or otherwise seeking to impose conditions on the operation of our businesses. Private parties may also bring legal action under the antitrust laws under some circumstances. Although we believe that the risk is not significant, antitrust, other regulatory agencies or private parties in a jurisdiction where we or Gemalto do not have unconditional clearance could take action under applicable law that is adverse to us.

Change of control provisions in our agreements may be triggered upon a combination with Gemalto and may lead to adverse consequences for us, including the loss of significant contractual rights and benefits, the termination of joint venture and/or licensing agreements or the need to renegotiate financing agreements.

     We may be a party to joint ventures, licenses and other agreements and instruments that contain change of control provisions that may be triggered upon the completion of the proposed combination with Gemalto. Agreements with change of control provisions typically provide for, or permit the termination of, the agreement upon the occurrence of a change of control of one of the parties or, in the case of debt instruments, require repayment of all outstanding indebtedness. These provisions, if any, may be waived with the consent of the other party and we will consider whether we will seek these waivers. In the absence of these waivers, the operation of

the change of control provisions, if any, could result in the loss of significant contractual rights and benefits, the termination of joint venture agreements and licensing agreements or require the renegotiation of financing agreements.

     In addition, employment agreements with members of our senior management and other of our employees may contain change of control clauses providing for compensation to be paid in the event the employment of these employees is terminated, either by us or by those employees, following the consummation of the proposed combination. These payments, if triggered, could be substantial and could adversely affect our results of operations in the period they become payable.

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, 2005, the net value reported on our Consolidated Balance Sheet for goodwill was € 90.8 million (December 31, 2004: € 28.2 million, December 31, 2003: € 37.7 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 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 Giesecke & Devrient, Oberthur Card Systems, Sagem Orga and ST Incard. In 2005, this industry also saw moves towards concentration. Sagem purchased German chip card manufacturer Orga Kartensysteme in 2005. Also in 2005, M-Systems, a flash memory maker, took over Spanish smart card maker, Microelectronica Espanola. In 2005, we entered into a Combination Agreement with Axalto Holding N.V. (“Axalto”) pursuant to which our Company and Axalto would be combined. See “Item 4. Information on the Company—History and Development of the Company”.

     There have also been new entrants into the industry with low-cost operating models, especially in China, with aggressive pricing policies that threaten our market share and our profitability, and which are gaining ground in emerging markets. As the market for chip card products and services in the wireless, financial services and Internet security industries grows, and as these markets converge, we may experience additional competition from companies that are currently our suppliers, customers and strategic partners, including:

•

operating system developers, such as Microsoft and IBM;

	•		electronic security product and service providers, such as RSA, Vasco and Verisign;
	•		wireless device manufacturers, such as Nokia, Motorola, Samsung and Sony-Ericsson;
	•		systems integrators, such as IBM, Siemens and EDS;
	•		microcontroller chip manufacturers, such as STMicroelectronics, Infineon, Philips, Atmel, Renesas, Samsung and Sony; and
	•		wireless infrastructure software providers, such as SmartTrust.

     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, 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:

	•		inadequate development of the necessary network infrastructure;
	•		inconsistent quality of service;
	•		excessive cost of high-speed service;
	•		concerns about transaction security and fraud or theft of stored data and information communicated over wireless communications networks;
	•		increased government regulation and the taxation of transactions conducted over wireless communications networks; and
	•		delays in development or adoption of new standards or protocols to handle increased levels of activity on wireless communication networks.

     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, indirect taxes 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:

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

     If an insufficient number of applications rely on 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 25, 2006, Texas Pacific Group, members of the Quandt family, and Groupe Industriel Marcel Dassault owned or controlled approximately 25%, 18% and 4% of our shares, respectively, or approximately 23%, 16% and 4% on a fully diluted basis, respectively. As of June 2, 2006, affiliates of Texas Pacific Group and the Quandt family had transferred all of their shares in our Company to Axalto, now named Gemalto. If some or all of our significant shareholders act together, they may 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. In addition, pursuant to our combination agreement with Axalto Holding N.V., to be renamed “Gemalto”, a significant percentage of our shares will be held by that company (see “Item 10. Additional Information — Material Contracts”).

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”.

Fluctuations in the exchange rate between the U.S. dollar and the euro may reduce the U.S. dollar market value of our American depositary shares as well as the U.S. dollar value of any dividends we pay.

     We will pay any cash dividends on our shares or American depositary shares in euros, and the American depositary share depositary will convert such euro amounts into dollars to pay any dividends on our American depositary shares. Exchange rate movements will affect the dollar value of these dividends as well as any other dollar distributions paid to you if you hold our American depositary shares. Exchange rate movements will also affect the market value of our American depositary shares.

If you hold our American depositary shares rather than our shares, you might not be able to exercise all the rights provided in our bylaws (statutes) to holders of our shares.

     The American depositary share depositary may use discretion to take action or exercise rights on behalf of each American depositary share holder in certain circumstances, including potentially in the exercise of rights that holders of American depositary shares may have to subscribe for or acquire new shares of ours. In addition, holders of our American depositary shares might only be able to exercise their voting rights by instructing the American depositary share depositary to vote on their behalf, and, therefore, the process for exercising voting rights may take longer for holders of our American depositary shares than for holders of our shares. For this reason, a deadline may be set by the American depositary share depositary by which it must receive voting instructions from all holders of our American depositary shares. The American depositary share depositary might not exercise voting rights with regard to any American depositary shares for which it does not receive voting instructions by the deadline.

As a foreign private issuer, we are permitted to file less information with the Securities and Exchange Commission than a U.S. domestic issuer would, which may limit the information available to holders of our securities.

     As a foreign private issuer, we are exempt from rules under the Exchange Act that impose certain disclosure and procedural requirements for the solicitation of proxies for shareholder meetings. In addition, our officers, directors and significant shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, we are not required to file periodic reports with the Securities and Exchange Commission as frequently or as promptly as are U.S. companies whose securities are registered under the Exchange Act. Therefore, there may be less publicly available information about us than is regularly published by or about other public companies in the United States.

The market for our shares may be less liquid following completion of the proposed combination with Gemalto, and the market value of our shares may be lower.

     We have executed an agreement to combine our business with Gemalto. That transaction will include the exchange of our shares or American depositary shares for shares of Gemalto pursuant to an offer that is expected to reduce the number of holders of our shares or American depositary shares as well as the number of our shares or American depositary shares that might otherwise trade publicly and, depending upon the number of our shares or American depositary shares so exchanged, will likely adversely affect the market value of our shares or American depositary shares.

Following consummation of the proposed combination with Gemalto, Gemalto will be a holder of a significant majority of our outstanding shares and may take actions or make decisions not in the best interest of our remaining minority shareholders.

     Subsequent to the consummation of the combination with Gemalto, Gemalto will hold a significant percentage of our outstanding shares and/or American depositary shares. Depending on the success of the exchange offer that Gemalto is expected to make as part of the proposed combination, the remaining holders of our securities other than Gemalto will constitute a small minority of outstanding shares. The interests of Gemalto may be different from the interests of any of our remaining shareholders. In effecting the combination and otherwise in the direction of the business of Gemalto, Gemalto may take actions or make decisions that may not be in the best interest of our other remaining minority shareholders.

Pursuant to a new Luxembourg law, Gemalto may conduct a “squeeze-out” merger or use some other means at some date following the combination to obligate the remaining holders of our securities to sell their securities to Gemalto for consideration of some combination of cash and/or Gemalto shares.

     A new Luxembourg law, adopted pursuant to an EU directive on takeover bids, could make possible a squeeze-out of the holders of our shares that are not held by Gemalto. In addition, regulatory agencies in other jurisdictions, such as the Autorité des marchés financiers in France, have amended their rules to take into account the stock exchange rule modifications that will result from the adoption of the EU takeover directive. As a result of these changes, if Gemalto were to hold the required percentage of capital and voting rights either directly or indirectly, Gemalto may conduct a minority buyout offer (offre publique de retrait) or similar procedure followed by a squeeze-out (retrait obligatoire) of the holders of our shares not held by Gemalto. This may also give rise to a delisting of our shares from exchanges on which our securities are quoted.

     We may decide to cease the listing of our shares on the Eurolist exchange of the Euronext Paris or the quotation of our ADSs on the Nasdaq National Market, and we may decide to cease the registration of our shares under the 1934 Exchange Act or terminate the depositary agreement relating to our ADSs, which could negatively affect the value of our shares or ADSs.

     The liquidity of our shares or ADSs, the information made publicly available in respect of the company and other factors benefiting the value of our shares and ADSs may be greater due to their respective listings on the Eurolist exchange of the Euronext Paris and on the Nasdaq National Marketplace, and the registration of our ADSs under the 1934 Exchange Act. We may decide, subject to applicable agreements and regulations, to cease such listings and registration due to a number of factors, including management’s assessment of the costs and benefits of such listings and registration and as a result of our business combination to form “Gemalto”.

     We may also decide to terminate our depositary agreement relating to our ADSs. If we terminate our depositary agreement, holders of our ADSs would have the right to receive our shares corresponding to the number of shares underlying their ADSs, and subject to the payment of certain fees to the depositary.

     If we take any actions to cease the securities exchange listings, registration or the depositary agreement in respect of our shares and ADSs, the value of our shares or ADS may be negatively affected.

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, 2005, we held more than 99.5% of the outstanding shares of Gemplus S.A.

     Texas Pacific Group became one of our shareholders 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 government agencies and products involving secure printing.

     On December 6, 2005, we entered into a Combination Agreement (the “Combination Agreement”) with Axalto Holding N.V. (“Axalto”), certain entities of the Texas Pacific Group (the “TPG Entities”) and certain Quandt family entities and members (the “Quandt Entities” and together with the TPG Entities, the “Significant Shareholders”), pursuant to which our Company and Axalto would be combined (the “Combination”) and Axalto would be renamed Gemalto N.V. (“Gemalto”). The TPG Entities and the Quandt Entities also each respectively entered into a Contribution in Kind Agreement (together, the “Contribution Agreements”) with Axalto under which each of them agreed, subject to various conditions, to contribute shares to Gemalto, constituting an aggregate of 43.6% of the outstanding ordinary shares (“Ordinary Shares”) of the Company (the “Contribution Shares”), in exchange for shares of Gemalto (the “Contribution”). In accordance with the Combination Agreement and the Contribution Agreements, on June 2, 2006, the Contribution of the Contribution Shares by the Significant Shareholders was made in exchange for shares of Gemalto issued through an increase in the share capital of Gemalto reserved to the Significant Shareholders, at a ratio of 2 Gemalto shares for every 25 Ordinary Shares (the “Exchange Ratio”). Concurrent with the Contribution, the Company commenced a distribution pro rata to all of its shareholders, including the TPG Entities and the Quandt Entities, of € 0.26 per Gemplus share from its available share premium/reserves (the “Distribution”) under the terms of the Combination Agreement.

     On June 2, 2006, in accordance with the terms of the Combination Agreement, Gemalto made the requisite filing with the French Autorité des marchés financiers (the “AMF”) to commence a global offer (the “Offer”) for the remaining ordinary shares it does not hold, at the Exchange Ratio.

     We are organized under the laws of the Grand Duchy of Luxembourg and are 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, 2005.

		Year ended December 31,
		2005				2004				2003
		(millions of euros)
Property, plant & equipment:
Research and development equipment			1.0				1.0				1.2
Manufacturing			17.1				13.3				9.4
Buildings			2.6				5.8				3.1
Other			4.4				2.8				1.5
Total property, plant & equipment			25.1				22.9				15.2
Intangible assets			2.7				1.8				4.7
Total capital expenditures			27.8				24.7				19.9

     In 2005, our capital expenditures related primarily to manufacturing and were mainly to increase our SIM card production capabilities for our Telecommunication segment to satisfy increasing demand. In 2004 and 2003, we continued to execute a restructuring and rationalization program that we commenced in 2002. This program included 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 € 34.0 million, for the year ending December 31, 2006. Of that amount, we anticipate incurring approximately: € 16.0 million mainly for new manufacturing equipment; € 11.8 million for improvements in our management information systems, of which almost € 8.0 million are intangible assets related to software and IT development; and € 4.8 million on our facilities.

     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 2005, we reported our results in three main business segments:

•

Telecommunications, which includes our wireless products such as subscriber identification modules (SIMs), related software and services, and prepaid phonecards for fixed telephony operators;

	•		Financial Services, which focuses on applications for the financial services sector to facilitate secure transactions within a variety of systems; and
	•		Identity and Security, which includes systems and services based on chip card technology in areas such as national ID, healthcare, drivers’ licenses, car registration, passport and visa, e-government secured services, physical and logical access control as well as chip card readers and interfacing technologies.

     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 33.1 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 33.1 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 secure platforms and related products, and of applications and services that operate such secure platforms, including 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 segments for the use of secure platforms and related software such as in the identity and corporate security markets.

Achieving and maintaining profitable growth by continuing to follow through on our restructuring and efficiency initiatives, and through innovation and continued cost control

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

Differentiating on value

     Our strategy includes focusing on a number of growing segments in addition to our traditional businesses, including:

	•		Software and services in wireless communications, including SIM administration, content delivery, mobile-payment, and over the air (OTA) platforms. We believe that our position as a leading supplier of OTA platforms should enable us to further strengthen our relationship with our customers and facilitate the advancement of the value that SIM cards can add to wireless networks.
	•		Identity card programs. National identity programs for electronic Identity Cards and e-Passport represent a large and growing opportunity for us. We are continuing our development efforts in this area with the objective of tapping into this significant market potential. In addition, we are seeking to form alliances with strategic partners to enhance our prospects for success in this area.
	•		Corporate security (controlling access to buildings and computer networks). With our experience in relevant security technologies, we hope to become a leader in this field, while being able to provide complete subsystems for strong authentication and other security functions.

Getting closer to our customers

     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:

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

     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:

	•		The development of operating systems for microcontroller chips that allow card issuers to load multiple applets onto a single card. This allows our customers to offer their users several functions on the same card. For example, a single multi-application card can be used to access facilities or computer networks, to make payments as a debit or credit card, to store bonus points that can be used to make purchases and to authenticate Internet transactions.
	•		The development of open standards for chip card operating systems. These operating systems contain an embedded virtual machine or interpreter which interacts with the operating system and a documented application programming interface (API) to execute applets. The API allows software programmers to design new applets in a standardized format, without reference to the technical specifications of the interpreter, improving ease of use and programming time. In addition, microcontroller chips based on open operating systems are interoperable with more systems. This means that software programmers can create new applications based on a standard language or protocol, which can be used to provide services through the chip cards of different manufacturers. The most widely used open platforms today are based on Java Card technology, a software API specification for chip cards based on technology from Sun Microsystems.
	•		The development of sophisticated card management software for chip cards to help card issuers take advantage of new chip card capabilities by enabling the issuers to manage the cards remotely, and to update, download and install new information or applets as they become available, without replacing the cards. These new software capabilities have also created a demand for system design, integration and management services that allow chip card technology companies to develop closer ties with their customers.
	•		Significant advances in the memory structure and capacity of microcontroller chips, including the development of flash memory technology. Chips based on this technology are able to store substantially more information, conduct more sophisticated operations and load a higher number of applets. In addition to greater memory capacity, flash memory chips can give card manufacturers increased flexibility to modify the chip’s operating system.
	•		The development of chip cards designed to work with the most advanced security technologies, such as public key infrastructure (PKI) systems and secure downloadable applets. Cards with PKI capability offer a higher level of security for customers, including individuals or companies that conduct transactions or business over the Internet, and banks that implement mobile payment systems.
	•		Innovative form factors for embedding of microprocessor technologies in new devices such as USB dongles, e-tokens, key fobs, flash memory cards, e-passports and other complete high security IT devices.
	•		The increased use of contactless chip cards which include an antenna that allows the card to communicate using radio waves. Contactless cards provide the benefits of easy access since insertion into a card reader is not required. This technology is becoming increasingly attractive for identity programs and payment systems.
	•		The inclusion of “flash” memory in chip cards that allow for the delivery and storage of large multi-media files.

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

	•		Security. Chip cards are capable of storing complex algorithms that can be used to identify a user or to encrypt information, such as a digital certificate. Because a user needs both a card and an activation mechanism, such as a personal identification number (PIN), to use a card, security is not entirely compromised by just the loss of a card or the communication of a PIN. As a result, using chip cards to authenticate mobile and electronic commerce transactions, can significantly reduce the incidence of fraud. In addition, microcontroller chip cards can be equipped with sophisticated cryptographic algorithms and functions that prevent unauthorized parties from tampering with the contents of the card.
	•		Portability. Chip cards can be easily transferred from one device to another. As a result, for example, a mobile phone subscriber can purchase and immediately use a new mobile phone without changing his or her service subscription, a feature that mobile phone network operators find attractive as it reduces customer turnover. Similarly, a chip card used to authenticate

the user of a company’s computer network can be inserted into any computer equipped with a reader, and include certain user profile and other information so the user is less dependent on a particular computer.

•

Flexibility. The newest chip cards can carry and run multiple applets that can be updated remotely without the need to replace the card. This increases the flexibility of banks and other companies that use chip cards as customer management tools by changing applications in response to changes in product offerings or customer preferences. This also allows them to offer multiple services, such as wireless, banking, payment and loyalty applications, on a single platform.

     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:

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

     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.

				Use of Removable Card
Transmission Standard		Principal Regions		Identification Modules
2G
GSM		Europe, Asia (including China), several regions in the United States		Yes
CDMA		United States, China		No
TDMA		United States		No
2.5G
GPRS (based on GSM)		Europe, most of Asia		Yes
CDMAOne		United States, China, South Korea		Yes in China and South Korea
IDEN		United States, Korea		Yes
3G
WCDMA		Europe, Asia (including Japan), United States		Yes
CDMA2000		United States, Asia		Operator-specific

Industry Overview

     The industry for chip card technology, products and services is growing, both in terms of size and sophistication. According to Eurosmart, 2,626 million chip cards — including microcontroller cards and memory cards — were sold worldwide in 2005, compared to 2,290 million in 2004. Using data provided by Eurosmart, we estimate that we are the world’s largest chip card provider, with 25.6% of the global industry in terms of volume in 2005, compared to 28.6% in 2004.

Wireless Segment

     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 2005 and 2004. According to Eurosmart, approximately 1,390 million SIM cards were sold in 2005, compared to 1,050 million in 2004.

     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 Segment

     According to Eurosmart, approximately 336 million chip cards were sold in the financial services industry in 2005, compared to 280 million in 2004. 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 21.5% of the market in terms of units sold in 2005, compared to 20% in 2004. 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 Segment

     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 segment, and is expected to reach over three billion dollars 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 2005, with a 34.6% market share according to Frost & Sullivan.

Our Products and Services

     The following table sets forth our revenues for the year ended December 31, 2005.

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

										Revenues - Year ended December 31,
		2005								2004								2003
		(in millions of				(as a % of total				(in millions of				(as a % of total				(in millions of				(as a % of total
		euros)				revenues)				euros)				revenues)				euros)				revenues)
EMEA			491.0				52%				443.1				51%				407.7				54%
Asia			172.7				19%				194.3				23%				171.9				23%
Americas			275.2				29%				227.6				26%				169.6				23%
Total			938.9				100%				865.0				100%				749.2				100%

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:

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

Telecommunications Products and Services

     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:

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

     Phonecards

     Based on information published by Eurosmart in its 2005 report, we believe we are one of the world’s leading manufacturers of prepaid phonecards and associated phonecard security products with a 40% share of the worldwide phonecard market in 2005, compared to 47% in 2004. As of May 2006, we have produced over 3.7 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:

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

     Single Application Cards

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

	•		GemVision, a range of payment cards developed for banks that are members of Visa International;
	•		GemShare, a range of payment cards developed for members of Europay International and MasterCard International; and
	•		GemValue, a range of payment cards developed in compliance with both Visa and MasterCard specifications.

     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 typically do not contain embedded microchips. We launched these operations in 1995 in order to strengthen our position both in the financial services market and in several geographic areas, 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 286 million magnetic stripe cards to our customers in the banking sector in 2004, according to the 2005 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:

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

Identity and Security Services

     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 sections 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:

	•		Chip card-based vehicle registration and drivers’ license systems for government agencies, allowing authorities to track vehicle ownership and driving records, and to verify fines and offenses.
	•		Chip card systems for accurate identification of travelers at borders and other ports of entry into a country, enabling authorities to facilitate the entry of foreign travelers or workers while helping to ensure compliance with national immigration regulations.
	•		Chip card-based national identification programs involving the issuance of chip cards by national governments to their residents. For example, in the Sultanate of Oman and United Arab Emirates, we are currently delivering a national identification program, including consultancy, project management and integration services, as well as software and chip cards.
	•		Conventional government-issued passports and visas, and microcontroller-embedded passports, with sophisticated printed security features. Our business in this area has been expanded by our acquisition of Setec Oy in 2005.

GemVentures

     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 2005, no single customer accounted for more than 10% of our revenues. Our largest customer represented 7% of our total revenues, and our five largest customers together represented 25% of our total revenues. Our ten largest customers together represented approximately 34%, and our fifteen largest customers together represented approximately 41% 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 microcontroller 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 an 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 2005, 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 prices for some metals and petroleum-based plastics used in the manufacture of some of our products in the future. We believe, however, that our improved purchasing strategies will help mitigate the effects of price increases or supply restrictions if they arise. Nevertheless, in the event of higher sales volumes, our gross margins may be negatively effected, 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 segments. According to Gartner Dataquest, our overall share of the global chip card industry was approximately 23.9% in terms of chip card units sold on a worldwide basis in 2005, followed by Axalto with approximately 20.4%, Giesecke & Devrient with approximately 13.2%, Oberthur Card Systems with approximately 7.1%, Sagem Orga with approximately 6.8% and EastcomPeace with 3.5%. The relative strengths and market shares of each of our competitors, however, vary in each of the chip card segments, 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. There are also signs of increasing concentration in the industry. Sagem purchased Orga, the German chip card company, in 2005. M-Systems, a flash memory maker, took over Spanish smart card maker, Microelectronica Espanola in 2005. In 2005, we entered into a Combination Agreement with Axalto. See “Item 4. Information on the Company–History and Development of the Company”. There are also new entrants to the industry, such as the Chinese chip card manufacturers EastcomPeace Smart Card Co., Datang Microelectronics Technology Co. and WatchData System Co. Some of these new entrants have low-cost operating models and aggressive pricing policies that are reducing our market share and profit margins in certain emerging markets.

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

Telecommunications Segment

     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 have included Axalto, Giesecke & Devrient, Oberthur Card Systems and Sagem Orga. In December 2005, we entered into a Combination Agreement with Axalto, and on June 2, 2006, in accordance with the Combination Agreement, the first steps to the Combination were completed. See “Item 4. Information on the Company–History and Development of the Company”.

     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:

	•		operating system developers, such as Microsoft and IBM;
	•		electronic security product and service providers, such as RSA, Vasco and Verisign;
	•		wireless device manufacturers, such as Nokia, Motorola, Samsung and Sony-Ericsson;
	•		systems integrators, such as IBM, Siemens and EDS;

	•		silicon chip manufacturers, such as STMicroelectronics, Infineon, Philips, Renesas, Samsung, Sony and Atmel; and
	•		wireless infrastructure software providers, such as SmartTrust and Sicap.

     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 580 million phonecards were sold worldwide in 2005, compared to 670 million in 2004. Our main competitor in this market has been 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 Segment

     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 have included 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 Segment

     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 that we develop, 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 and 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 10. Additional Information — 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 to coordinate all of our operations that involve the transfer of our cryptographic-enabled products and services and to 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 Luxemburg. We have operations and facilities located throughout Europe, North America, South America and Asia. We have organized our global operations into three world regions:

	•		EMEA, which consists of Europe, the Middle East and Africa;
	•		the Americas, which consists of North, Central and South America and the Caribbean; and
	•		Asia, which consists of South East Asia, Japan, Korea, and Greater China.

     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, 2005, we operated approximately 50 sales and marketing offices, 17 personalization centers and 11 manufacturing centers and research and development centers in 4 countries.

Organizational Structure

     We are the sole parent company of our 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 effect on our Consolidated Financial Statements.

     The following table sets forth our significant direct and indirect subsidiaries as of June 2, 2006.

Name of company		Percentage Owned
Gemplus Finance S.A., Swiss Branch, a Swiss branch of a Luxemburg corporation			100	%
Gemplus S.A., a French corporation			99.8	%(1)
Gemplus Limited, a British corporation			100	%
Gemplus Corp., a Delaware (U.S.) corporation			100	%
Gemplus Industrial S.A. de C.V., a Mexican corporation			100	%
Gemplus Microelectronics Asia Pte Limited, a Singapore corporation			100	%
Gemplus Technologies Asia Pte Ltd, a Singapore corporation			100	%
Setec Oy, a Finnish corporation			100	%
Gemplus GmbH, a German corporation			100	%
Gemplus Japan Co. Ltd, a Japanese corporation			100	%

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:

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

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

     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. This restructuring included the closure of a factory in Seebach, Germany in 2003, and in Herne, Germany in 2005, and also 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:

Location		Primary Activities		Gross Floor Area (m2)
Cuernavaca, Mexico		embedding, personalization			6,664	*
Gemenos, France		embedding, personalization			25,502
Havant, United Kingdom		plastic cards, personalization, embedding			6,332
Madrid, Spain		personalization			1,340
La Ciotat, France		microcontroller module production and
		assembly			5,871
Montgomeryville,		plastic cards, embedding, personalization
Pennsylvania, United States					8,535
Singapore		microcontroller module assembly, embedding, personalization,			20,984	*
		contactless cards, Plastic cards
Tczew, Poland		embedding, personalization			8,393	*
Tianjin, China1		embedding, personalization, microcontroller module assembly			12,730	**
Zhuhai, China2		plastic cards, personalization, embedding, contactless cards			2,722	*
Bangkok, Thailand		personalization			66
Johannesburg, South Africa		personalization			330
Sao Paulo/Brazil3		personalization			403
Filderstadt, Germany		embedding, personalization			9,424

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, 2006, our approximate annual practical capacity in millions of units for the manufacture of the following products is:

Activity		Capacity
Chip card modules			888
Chip card embedding			832
Conventional polyvinyl chloride (PVC) plastic cards (including magnetic stripe)			572

     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, which we use for activities including research and development and product sales and marketing. See Note 19 to our Consolidated Financial Statements.

Item 4A. Unresolved Staff Comments

     Not applicable.

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, 2005 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 US GAAP. Note 40 to our Consolidated Financial Statements describes the principal differences between IFRS and US GAAP as they relate to us, and reconciles our net income and shareholders’ equity to US GAAP.

Overview

     2005 was another year of substantial achievements for us. We strengthened our position, notably in higher-end wireless products and in the financial services segment. We also strongly improved our financial performance, for both gross and operating margin. At the same time, we undertook two important strategic moves. We acquired the Setec group, a leading company in electronic passports and security printing technologies. This acquisition strengthened in particular our position in the government identity sector. In addition, in December 2005, we entered into a Combination Agreement with Axalto, a leading competitor, and on June 2, 2006, the first steps to the Combination were completed. See “Item 4. Information on the Company—History and Development of the Company”.

     Our 2005 financial results reflect a very strong year of continuous improvement. Our revenue grew by 8.5% to € 938.9 million in 2005, compared to € 865.0 million in 2004. In addition, our gross margin improved by 1.7 percentages points to reach 33% in 2005, mainly driven by a favorable business mix in our Telecommunications and Identity and Security segments. We also achieved strong improvement in operating income, which delivered an above 7% operating margin. Our net income attributable to equity holders substantially improved to € 89.9 million in 2005, compared to € 4.7 million in 2004.

     The year 2005 confirmed our momentum in the sale of wireless products, despite ongoing price pressure. We increased our shipments of microprocessor cards by 34% in 2005, largely driven by increased sales in the Americas and Europe. The increase in our shipments of wireless products was also assisted by sales growth in developing countries, other than China. The demand for 3G wireless products continues to increase, and we maintained our leading position in this high-end segment. In our Telecommunications segment, we also recorded a rapid decrease in the net sales of our payphone cards sub-segment in 2005. We also launched the first multimedia SIM cards at the 3GSM Congress in February 2005, with the first commercial roll-out made by Orange in November 2005.

     In 2005, we consolidated and improved our position in microprocessor payment cards. The Financial Services segment in 2005 was driven by further deployment in EMV (Europay MasterCard Visa), the new standard for payment cards. We played a key role in EMV deployment in 2005, with the first EMV cards delivered in Japan, China and Italy. In 2005, we also participated in the first deployment of contactless payment cards in the United States and Australia.

     With the acquisition of Setec, and an increasing number of e-government initiatives, we achieved almost triple digit growth in our Identity and Security segment including electronic passports, identity cards, healthcare and car registration programs. For example, we are a supplier in a major identity project in the United Arab Emirates. We also delivered the first e-passports in Norway and Sweden.

     Our operating income increased by 154% to € 66.8 million in 2005, compared to € 26.3 million in 2004, driven by the combination of improvements in our performance. This growth was reflected in our operating margin, which reached 7.1% of net sales in 2005, compared to 3.0% of net sales in 2004.

     We recorded net income attributable to equity holders of € 89.9 million in 2005, compared to € 4.7 million in 2004, mainly driven by the improvement in our operating income and the benefit from the recognition of deferred tax assets in the amount of € 26.9 million.

     We generated net cash flow € 29.2 million in 2005, even after an outlay of € 63.4 million as part of the acquisition of Setec, compared to € 2.5 million of cash used in 2004. The improvement in our net cash flow benefited from the release of € 22.5 million from an escrow account in relation to the successful outcome of a legal action.

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 average 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 fluctuations between the euro and other currencies can significantly affect our results of operations. These currencies are primarily the US dollar, the British pound, the Chinese yuan and the Japanese yen. In 2005, we earned 14% of our revenues in the United States, 12% in the United Kingdom, 5% in China and 5% in

Japan.

     We seek to mitigate our exposure to currency fluctuations by matching currency of costs and revenue (“natural hedging”) and engaging in hedging transactions as we deem appropriate. We have hedged certain foreign currency positions for 2006. 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 impact of currency variances 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 US dollar and the Singapore dollar since January 1, 2003, 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.

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

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 2003 and 2004, we experienced a limited recurrence of this seasonality. In 2005, we earned 28% of our net sales in the fourth quarter, the same level as the last quarter of 2004.

Reporting segments

     We started reporting in three business segments in 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 33 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 2005, we largely completed the integration of the operations of Setec Oy into our business following our acquisition of that company in June 2005. This acquisition added new capabilities to our activities, especially in the area of manufacturing electronic and conventional passports.

Year ended December 31, 2005, compared to year ended December 31, 2004

Net sales

     The following table shows the breakdown of our net sales in 2005 and 2004 by reporting segment (our reporting segments are further described in Note 33 to our Consolidated Financial Statements).

		(in millions of euros)
Years ended December 31		2005				2004				% change				% change, adjusted (1)
Telecommunications			654.5				641.8				2	%			1	%
Financial Services			202.9				182.2				11	%			5	%
Identity and Security			81.5				41.0				99	%			47	%
Total			938.9				865.0				9	%			4	%

     The net sales of our Telecommunications segment improved slightly by 2% in 2005, compared to 2004. The growth of revenue in our Telecommunications segment was primarily driven by an 8% increase, 6% on a currency adjusted basis, in sales of our wireless products, to € 600.4 million in 2005 from € 558.5 million in 2004. Our SIM card shipments rose by 34% to 342 million units in 2005, driven by strong growth in the Americas and Europe. Our marketing of the value that higher-end SIM cards can provide, helped promote a shift towards sales of these products, including products for use in 3G networks and advanced applications. As a result, our sales of these higher-end cards increased to 10% of our total shipments in 2005, from 6.6% of our total shipments in 2004. This shift helped to partially offset the continued price pressure we have been experiencing, which resulted in a 21% decline in our average selling price per unit for wireless products in 2005. Our net sales of other cards in our Telecommunications segment reduced significantly in 2005, mainly caused by the continuous volume decrease in our prepaid phone cards subsegment in Latin America. Our Telecommunications segment represented 70% of our revenues in 2005, compared to 74% in 2004.

     The net sales of our Financial Services segment increased by 11% in 2005, compared to 2004. The revenue of our Financial Services segment reflects strong growth in microprocessor payment cards, as well as incremental revenue from the acquisition of Setec. The net sales increase in this segment was driven by continued EMV migration, with substantial new programs in certain European countries and continued expansion of existing programs in Europe and Latin America. Sales of these products in the United Kingdom and Continental Europe continued to grow, although at a slower pace than in emerging countries. Shipments of microprocessor cards for payment applications increased by 36% in 2005 compared to 2004, reaching 70 million units, with an increase in revenue from these products of 25% in 2005 compared to 2004. In addition, we made our first shipments of EMV cards in China in the fourth quarter of 2005. Our Financial Services segment represented 22% of our revenues in 2005, compared to 21% in 2004.

     Our acquisition of Setec made a significant contribution (50%) to revenue growth in our Identity and Security segment. The organic growth of net sales in our Identity and Security segment (47%) was driven by a substantial increase in government identity card projects, particularly in the United States, Asia and the Middle East and in corporate security programs mainly in the United States. Our Identity and Security segment represented 8% of our revenues in 2005, including Setec, compared to 5% in 2004.

     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.

		(in millions of euros)
Years ended December 31		2005				2004				% change				% change, adjusted (1)
EMEA			491.0				443.1				11	%			2	%
Asia			172.7				194.3				(11	%)			(13	%)
Americas			275.2				227.6				21	%			21	%
Total			938.9				865.0				9	%			4	%

     The increase in revenue in the Americas was mainly driven by increased sales of wireless products in our Telecommunications segment. The revenue growth in EMEA was mainly due to the acquisition of Setec and the growth in sales of wireless products. Our Americas and EMEA regions represented 29% and 52% of our total revenue in 2005, compared to 26% and 51% in 2004, respectively. The revenue in our Asia region represented 19% of our revenue in 2005, compared to 23% in 2004. The revenue in our Asia region decreased by 11%, mainly due to decreased sales in our Telecommunications segment and, to a lesser extent, in our Financial Services segment in that region.

Gross profit

     We experienced further improvement in our gross profit in 2005, with a 15% increase, to € 309.9 million, compared to € 270.5 million in 2004. Our gross margin increased from 31.3% in 2004 to 33.0% in 2005. This increase in gross margin of 1.7 percentage points was mainly driven by an improved business mix (i.e., weighted towards higher-end products), substantial volume growth and lower chip purchasing prices. These improvements more than offset the strong price competition that we experienced in 2005. Our gross profit also benefited from other improvements in our cost structure.

     The following table shows the breakdown of our gross profit and gross margin in 2005 and 2004 by reporting segment:

		2005								2004								% change
Years ended December 31		(in millions of euros)				(% of sales)				(in millions of euros)				(% of sales)				in gross profit
Telecommunications			241.4				36.9	%			220.8				34.4	%			9	%
Financial Services			41.9				20.6	%			37.7				20.7	%			11	%
Identity and Security			26.6				32.5	%			12.0				29.4	%			120	%
Total			309.9				33.0	%			270.5				31.3	%			15	%

     The gross margin of our Telecommunications segment increased from 34.4% in 2004 to 36.9% in 2005. This increase resulted primarily from an improved business mix (i.e., weighted towards higher volumes in wireless products), higher volumes of SIM cards shipped, and lower purchase prices for wireless chips. These improvements more than offset the continuing price competition and a chip quality problem that we experienced in 2005.

     The gross margin of our Financial Services segment remained stable at 20.6% in 2005, compared to 20.7% in 2004. The gross margin in this segment benefited from higher volumes shipped in chip cards for payment applications, driven by further expansion in EMV programs in EMEA and Latin America. These improvements, however, were offset by a less favorable sales mix.

     The gross margin of our Identity and Security segment increased to 32.5% in 2005, compared to 29.4% in 2004. The growth of gross margin in our Identity and Security segment was mainly driven by a favorable business mix, with significant growth on higher-end cards for government identity programs. As part of the acquisition of Setec, certain contractual customer relationships were recognized at fair value on the date of acquisition. Such assets are amortized on the basis of the revenue actually earned. Most of the revenue earned by Setec in 2005 resulted from contracts that existed on the acquisition date. As a result, the amortization of these assets substantially offset the gross margin earned by Setec in 2005.

Operating expenses

     Our operating expenses totaled € 243.2 million in 2005, compared to € 244.2 million in 2004. The decrease in operating expenses occurred despite the overall growth in volumes shipped, the Setec acquisition, share-based compensation expense and the costs of Sarbanes-Oxley Act compliance. Our operating expenses in 2005 benefited from a reversal of restructuring provisions in the amount of € 3.2 million, compared to a net restructuring expense of € 8.4 million in 2004. In addition, we had no goodwill amortization or impairment in 2005, compared to € 7.7 million in goodwill amortization in 2004. Accordingly, operating expenses represented 25.9% of sales in 2005, compared to 28.2% in 2004.

     Our research and development expenses remained stable at € 63.2 million in 2005, compared to at € 63.9 million in 2004, and represented 6.6% of our net sales in 2005, compared to 7.2% in 2004. Our selling and marketing expenses increased by 14% to € 116.1 million in 2005, compared to € 101.5 million in 2004, mainly due to the overall growth of our business and the consolidation of Setec. Selling and marketing expenses as a percentage of net sales increased to 12.4% in 2005, compared to 11.7% in 2004.

     Our general and administrative expenses increased by 6% to € 68.0 million in 2005, from € 63.9 million in 2004. These expenses represented 7.2% of our net sales in 2005, compared to 7.4% in 2004. Our general and administrative expenses benefited from the reversal of a € 5.2 million provision for a legal action established in 2003. The increase of our general and administrative expenses was mainly driven by share-based compensation expenses following the adoption of IFRS 2 “Share Based Payments”, the cost of the Sarbanes-Oxley Act compliance and the consolidation of Setec.

     In 2005, we recorded a release of unused restructuring provisions amounting to € 3.2 million, mainly related to our third restructuring plan, compared to a total pre-tax net restructuring charge of € 8.4 million in 2004.

     In accordance with the provisions of IFRS 3 “Business Combinations”, IAS 36 “Impairment of Assets” and IAS 38 “Intangible Assets” adopted as of January 1, 2005, we discontinued amortization of goodwill. In 2005 we tested our goodwill for impairment, which resulted in no impairment charge. Goodwill amortization and impairment amounted to € 7.7 million in 2004.

     The following table breaks down our operating expenses in 2005 and 2004 by reporting segment:

		2005								2004								% change in
Years ended December 31		in millions of euros)				(% of sales)				(in millions of euros)				(% of sales)				operating expenses
Telecommunications			158.7				24.2	%			149.0				23.2	%			6	%
Financial Services			43.2				21.3	%			63.9				35.1	%			(32	%)
Identity and Security			41.3				50.7	%			31.3				76.3	%			32	%
Total			243.2				25.9	%			244.2				28.2	%			0	%

     The operating expenses of our Telecommunications segment increased by 6% to € 158.7 million in 2005, compared to € 149.0 million in 2004. This increase was mainly driven by additional selling and marketing expenses in 2005, compared to 2004, and the consolidation of Setec.

     The operating expenses of our Financial Services segment were reduced by 32% to € 43.2 million in 2005, compared to € 63.9 million in 2004. This decrease was mainly driven by lower restructuring expenses and no further goodwill amortization, compared to 2004. General and administrative expenses decreased in 2005, compared to 2004, mainly due to the reversal of a € 5.2 million provision for a legal action made in 2003.

     Operating expenses in our Identity and Security segment increased by 32% to € 41.3 million in 2005, compared to € 31.3 million in 2004. This increase was mainly caused by the consolidation of Setec, and was partly offset by the discontinuation of goodwill amortization in 2005. These increases in operating expenses included additional selling and marketing expenses associated with the growth of our sales.

Operating income (loss)

     In 2005, we significantly improved our operating income, which more than doubled to € 66.8 million, compared to € 26.3 million in 2004. Our operating margin improved to 7.1% of our 2005 total net sales, compared to 3.0% of our 2004 total net sales. This increase in our operating income of € 40.4 million in 2005, compared to 2004, reflects the overall growth in our business, the substantial progress in our gross margin, and a decrease in our operating expenses driven by lower restructuring costs and no further goodwill amortization.

     The following table breaks down our operating income among our reporting segments:

		(in millions of euros)
Years ended December 31		2005				2004				Change in operating income (loss)
Telecommunications			82.9				71.8				11.1
Financial Services			(1.3	)			(26.3	)			25.0
Identity and Security			(14.8	)			(19.2	)			4.4
Total			66.8				26.3				40.4

     The operating income in our Telecommunications segment increased by € 11.1 million to € 82.9 million in 2005, compared to € 71.8 million in 2004. This increase was mainly due to improved gross margin that we recorded for sales of our wireless products, and was partly offset by increased operating expenses.

     The operating loss in our Financial Services segment decreased by € 25.0 million to € 1.3 million in 2005, compared to € 26.3 million in 2004. Our Financial Services segment significantly improved its performance due to strong growth in microprocessor payment cards, additional savings in operating expenses, and the reversal of a € 5.2 million provision for a legal action.

     The operating loss of our Identity and Security segment decreased by € 4.4 million to € 14.8 million in 2005, compared to € 19.2 million in 2004.

Financial income (expense), net

     Our financial income (expense), net, increased to € 7.7 million in 2005, compared to € 5.7 million in 2004. Interest income on short-term investments increased to € 7.6 million in 2005, compared to € 7.4 million in 2004, due to a higher average effective rate of return.

Share of profit (loss) of associates

     In 2005, share of loss of associates amounted to € 0.5 million, compared to € 6.0 million in 2004. This decrease is due to the absence of impairment in 2005 and the impact of adopting IFRS 3, starting January 1, 2005. According to the provisions of IFRS 3, we discontinued the amortization of goodwill that amounted to € 3.5 million in 2004. In 2005, we also recorded a gain on disposal amounting to € 0.8 million.

Other non-operating income (loss), net

     In 2005, we recorded a net non-operating loss of € 2.3 million, compared to € 6.8 million in 2004. This loss included foreign exchange losses amounting to € 4.3 million in 2005, compared to € 5.9 in 2004, change in valuation allowance of available-for-sale financial assets amounted to a € 2.8 million loss, compared to € 0.9 million loss in 2004, and a gain on disposal of available-for-sale financial assets amounted to € 4.8 million in 2005, compared to zero in 2004. In 2004, an inactive company in which we were a shareholder was the target of a reverse takeover and was subsequently listed on a US regulated market. In 2005, we took advantage of the listing to sell this investment.

Income tax benefit (expense)

     We recorded an income tax benefit of € 19.8 million in 2005, which reflected a credit of € 26.9 million resulting primarily from the recognition of previously unrecognized deferred tax assets. Our 2005 profitability, for the second year in a row, led to the reassessment of the probability of the future use of these tax assets within a reasonable time frame, mainly in France and Germany. In 2004, we recorded an income tax expense of € 13.0 million, which included € 3.0 million relating to the discounting of a receivable resulting from a carry back of tax losses in France, € 1.6 million of additional provision for tax risk and a partial write-down of deferred tax assets.

Net income

     We significantly improved our net income to € 91.4 million in 2005, compared to € 6.3 million in 2004. This corresponds to a diluted net income per share attributable to equity holders of € 0.14, compared to € 0.01 in 2004.

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 33 to our Consolidated Financial Statements).

														(in millions of euros)
		2004				2003				% change				% change, currency adjusted
Years ended December 31						(Restated)
Telecommunications			641.8				542.5				18	%			24	%
Financial Services			182.2				168.2				8	%			12	%

														(in millions of euros)
		2004				2003				% change				% change, currency adjusted
Years ended December 31						(Restated)
Identity and Security			41.0				38.5				7	%			11	%
Total			865.0				749.2				15	%			20	%

     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.

														(in millions of euros)
Years ended December 31		2004				2003				% change				% change, currency adjusted
EMEA			443.1				407.7				9	%			8	%
Asia			194.3				171.9				13	%			22	%
Americas			227.6				169.6				34	%			48	%
Total			865.0				749.2				15	%			20	%

     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.

			2004					2003										% change
Years ended December 31		(in millions of euros)				(% of sales)				(in millions of euros)				(% of sales)				in gross profit
											(Restated)
Telecommunications			220.8				34.4	%			166.8				30.7	%			32	%
Financial Services			37.7				20.7	%			32.0				19.0	%			18	%
Identity and Security			12.0				29.4	%			8.5				22.2	%			41	%
Total			270.5				31.3	%			207.3				27.7	%			30	%

     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 following table breaks down our operating expenses in 2004 and 2003 by reporting segment:

			2004					2003										% change
Years ended December 31		(in millions of euros)				(% of sales)				(in millions of euros)				(% of sales)				in operating expenses
											(Restated)
Telecommunications			(149.0	)			23.2	%			(196.1	)			31.6	%			(24	%)
Financial Services			(63.9	)			35.1	%			(88.5	)			52.6	%			(28	%)
Identity and Security			(31.3	)			76.3	%			(56.4	)			146.5	%			(45	%)
Total			(244.2	)			28.2	%			(341.0	)			45.5	%			(28	%)

     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.

										(in millions of euros)
		2004				2003				Change in operating income (loss)
Years ended December 31						(Restated)
Telecommunications			71.8				(29.3	)			101.1
Financial Services			(26.3	)			(56.6	)			30.3
Identity and Security			(19.2	)			(47.9	)			28.7
Total			26.3				(133.8	)			160.1

     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.

LIQUIDITY AND CAPITAL RESOURCES

     Our financial position remained strong during the year 2005. Cash and cash equivalents were € 418.4 million at December 31, 2005, compared to € 388.4 million at December 31, 2004.

     Operating activities generated € 121.4 million of cash in 2005, compared to € 27.0 million in 2004. The cash generated by our operating activities in 2004 was affected by a cash outlay of € 34.9 million related to a tax assessment in France and by the settlement of € 22.0 million in an escrow account in relation to a legal action, which was released upon a successful outcome in 2005. The cash generated by our operating activities in 2005 was also affected by the payment of € 15.8 million in connection with our restructuring programs, compared to € 18.3 million in 2004.

     Net cash used in investing activities during the year 2005 was € 83.8 million, including a € 63.4 million net outflow related to the acquisition of Setec, compared to € 26.1 million used in the year 2004. In 2005, we used € 25.1 million for our capital expenditures, compared to € 22.9 million in 2004.

     Financing activities used € 8.3 million of cash during the year 2005, compared to € 3.4 million cash used in the year 2004.

     On February 28, 2006, our shareholders approved a distribution of reserves (share premium) of an amount of € 0.26 per share, subject to the satisfaction of conditions precedent relating to the completion of the proposed Combination with Axalto. The distribution was initiated on June 2, 2006. The total amount of the distribution will be approximately € 164.0 million, based on the number of shares currently outstanding, and would equal approximately € 185.0 million on a fully diluted basis.

     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.

     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 9 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) as adopted by the EU.

     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 represent 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 to our Consolidated Financial Statements.

Revenue recognition

     Revenues from product sales are recorded upon transfer of title and risk of loss provided that no significant obligations of 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. Impairment losses on goodwill are not reversed. 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 also 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 long-lived assets that are subject to amortization and 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). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

Inventory

     Our industry is highly competitive and influenced by rapid technological change, frequent new product developments, 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 using the first-in, first-out (FIFO) method. 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 investment 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 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.

Income taxes

     We estimate our income tax liability in each jurisdiction in which we do business. This requires that we estimate our actual current tax expense and evaluate temporary differences relating to items which are treated differently for tax and accounting purposes. These differences result in potential deferred tax assets and liabilities. Before we recognize a potential deferred tax asset, we must determine that it is more likely than not that the asset will be recovered from future taxable income within a reasonable time frame. The recognition of deferred tax assets is based on our estimates of taxable income by country.

     Significant management judgment is required in determining our provision for income taxes and our recognized deferred tax assets and liabilities.

Hedge accounting

     We enter into derivative transactions principally to minimize risks in relation to foreign currency transactions.

     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 for accounting purposes and, if so, on the nature 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 contract is calculated according to the following parameters communicated by our banks or official financial information providers: (i) spot foreign exchange rate at the date the valuation is performed; (ii) interest rate differential between the two currencies; (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 financial information providers or our banks, and using the following variables: (i) spot foreign exchange rate; (ii) option strike price; (iii) volatility; (iv) risk-free interest rate; and (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 impact on our reported results of any such rule changes which may be made in the future, or whether such rule changes would be retrospective, potentially requiring us to restate past reported results.

Market Risk

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

US GAAP Reconciliation

     We prepare our Consolidated Financial Statements in accordance with IFRS as adopted by the EU, which vary in certain significant respects from US GAAP. As a result, our net income and shareholders’ equity are different under US GAAP and under IFRS.

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

		Year ended December 31,
		2005				2004				2003
						Restated
		(in millions of euros)
IFRS net income (loss)			91.9				6.3				(159.0	)
Total differences between US GAAP and IFRS			(3.1	)			4.7				(22.7	)
US GAAP net income (loss)			88.8				11.0				(181.7	)

     Until December 31, 2004, one of the principal differences between US GAAP and IFRS resulted from the granting of share options to our executive officers and employees. In accordance with IFRS, the issuance of share options had no effect 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 was allocated to share capital and paid-in-capital. Under US 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 US GAAP resulted in a net compensation expense of € 7.0 million for the year ended December, 31, 2004 and € 6.4 million for the year ended December 31, 2003. As a result of the adoption of IFRS 2 starting January 1, 2005, we charge the cost of these transactions to the income statement. We measure the cost of services rendered by reference to the fair value of equity instruments granted (see Note 2.4 to our Consolidated Financial Statements).

     Until December 31, 2004, another significant difference affecting the determination of our net income under US GAAP compared with IFRS resulted from goodwill amortization. As a result of the adoption of SFAS 142 as of January 1, 2002, we no longer amortize goodwill under US GAAP, as opposed to IFRS where, until December 31, 2004, goodwill was (i) amortized on a straight-line basis over a period ranging from five to twenty years; and (ii) assessed for an indication of impairment at least at each balance sheet date. In accordance with the provisions of IFRS 3 “Business Combinations”, adopted as of January 1, 2005, (i) we discontinued amortization of goodwill from January 1, 2005; (ii) accumulated amortization as of January 1, 2005 has been eliminated with a corresponding decrease in the cost of goodwill; and (iii) from the year ended December 31, 2005, onwards, goodwill is tested annually for impairment, as well as when there are indications of impairment, i.e. whenever events or changes in circumstances indicate that the carrying value may not be recoverable (see Note 2.4 to our Consolidated Financial Statements).

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

						As of December 31,
		2005				2004				2003
						Restated
						(in millions of euros)
IFRS shareholders’ equity			837.7				721.3				707.1
Total differences between US GAAP and IFRS			(1.2	)			7.3				(7.0	)
US GAAP shareholders’ equity			836.5				728.6				700.1