Gemplus: Litigation update

As requested by Gemplus S.A., on April 2, 2004, the Aix-en-Provence Court of Appeal decided to suspend the decision of the Marseille Commercial Court rendered on March 18, 2004, that had ordered Gemplus S.A. to make a direct payment to the plaintiffs of damages of approximately 22 million euros, despite Gemplus S.A.s immediate appeal. The Court of Appeal also ordered Gemplus S.A. to make a cash deposit in the same amount into an escrow account as security pending the decision on the appeal on the merits. Following the recent decision of the Commercial Court, and based on the Companys analysis and advice of counsel, the Company decided to increase the provision made for this case in its first quarter 2003 (1.8 million euros) by an amount of 3.4 million euros. This results in a total provision for this case of 5.2 million euros in the Companys consolidated accounts at December 31, 2003. As a consequence, the operating results relating to the fiscal year and fourth quarter 2003 will show a decrease of 3.4 million euros compared to what was previously announced. This accounting treatment complies with IFRS(1) and Luxembourg GAAP(2). The latter recommends that, up to the sending of the annual accounts to the shareholders before the annual shareholders meeting, the consequences of an event subsequent to the close of a fiscal year should be integrated into the past fiscal year accounts. The financial statements including this change will be available on the Groups web site (www.gemplus.com) when the annual accounts are sent to shareholders for the annual shareholders meeting that will take place on April 27, 2004. The payment into the escrow account will be credited during the second quarter 2004 ending June, 30, 2004. This amount will be considered as restricted cash and, as such, will be booked in other current assets, as of the second quarter 2004. As previously reported, this lawsuit was commenced in 1997 relating to an alleged breach of a contract signed in 1992. The case involves a market segment which, from Gempluss point of view, has very little or no development potential, as confirmed by the lack of evolution in this segment to date. The conclusions of the experts report, on which the Marseille Commercial Court based its decision of March 18, 2004, are that the development potential of this segment is very significant. Gemplus S.A. contested the experts report as well as the related estimated damages and the merits of the case on various grounds, and immediately filed an appeal.